CSEC Principles of Accounts Revision Course

20/4/20

Everything Accounting (Basic)

Accounting is a big deal. That’s why accountants are paid high salaries. It’s not
the complete reason why accountants are paid high on the income scale.
Accounting and Economics (or as some would call it Principles of Business) go
hand in hand and terms from both areas can be used where necessary, so having
a business, even a basic background of knowledge can be very rewarding. If
you’re not a business student and are just doing accounts, these terms may be
new to you and may require explanation and stuff, of course, that’s why, we’re
here to help.

What is Accounting?

Accounting refers to the recording, summarizing, analysing and communicating

of financial data.

Users of Accounting Information

 Owner (Internal user)

 Investors (External user)
 Government (External user)
 Financial Institutions (External user)
 Manager and Supervisors (Internal user)
 Employees (Internal user)

(Accounting Tip: Brainstorming is the best way to analyse data efficiently, for
example: opening late leads to an increase of sales.)

Traditional and emerging careers in accounting

 Financial Analyst
 Bursar
 Payroll Clerk
 Accountant
 Financial Controller
 Forensic Accountant
  Auditors
 Teacher/ Lecturer

Ethical issues in accounting are the failure to meet the rules and regulations in
accounting or the violation of the rules and regulations. For example: pressure
to manipulate figures, sins of omission, declaring income to a third
party/outside party (which is by the way  supposed to be kept confidential and
can be illegal), failure to pay interest, etc.

In life there is a code of conduct which helps us to determine whether our

actions are right or wrong. This code of conduct is known as ethics. In the
business world, the accountant is expected to be competent in the execution of
his or her duties (meaning giving the best on the job). The behaviour of the
accountant is judged by the integrity, objectivity and independence.

Integrity – honesty, forthright and confidentiality

Objectivity – records must be linked to evidence

Independence – supervisors must monitor employee’s records and their work in

general to ensure they aren’t manipulating figures, omitting and doing other
mistakes in their freedom due to ignorance by superior management.

Dishonest and illegal practices in accounting will bring the accountant under
scrutiny and will make his records unreliable. Whenever accountants deviate
from professional standards, the penalty can range from suspension of practice,
fines to even imprisonment.

Accounting Concepts and Conventions

Accounting concepts refer to the guidelines and procedures that are used by
accountants to record and present financial information.

Major accounting principles

1. Going concern – this assumes that the life of the business is indefinite.
2. Consistency – transactions of a similar nature must be treated in the same
way.
3. Monetary concept/ Money Measurement – only transactions that can be
expressed in monetary terms must be recorded.
 4. Prudence – cautious accounting principles’ application to prevent
overstatement of profits.
5. Business Entity/ Separate Entity – the financial affairs of the business
should be kept separately from personal affairs of the owner.
6. Dual Aspect/Double Entry – each transaction has two aspects represented
by debit and credit.
7. Cost Concept – Transactions must be recorded at their cost price to the
business.

Accounting cycle

The accounting cycle refers to the specific steps that are followed in completing
the accounting process. The length of the cycle depends on the nature of the
business.

Final Account Prep. Source Documents

Making adjustments Posting to Journals/ Journalizing

Extracting Trial Balance

Post transactions to ledger

Those desiring to become chartered certified accountants may take up the

ACCA accountants’ examinations which is a minimum of 14 exams done 4
times in a year. It’s a ten years course however it is to prepare you for the
practical work world. There are 9 fundamental exams, and 3 professional exams
+ 2 optional exams from four choices. It takes 2-3 years to qualify and there is
practical experience which is rewarding. It is definitely recommended to do the
ACCA course if you desire to become an accountant.

Technology plays an immense role in accounting. Technology allows for easier

recording of transactions, extensive research for brainstorming, and quicker
access to accounts or easy bank accessibility, easy document scanning and
signing. Technology can connect accountants over a simple conference call.
Modern day accounting utilizes different accounting softwares for recording
information such as:

1. Quickbooks
2. Microsoft Dynamics
3. GnuCash
4. AME Accounting
5. Oracle Enterprise Resource Planning Cloud
6. Freshbooks
7. Sage 50 Cloud
8. Free Agent
9. Zoho Books
10.Xero

Advantages of Tech in Accounting

a. Speed
b. Backup (automated accounting – prevention of data loss)

Disadvantages of Tech in Accounting

a. Security and Performance (unsecure for cyber security issues)

b. Implementation (difficult to set up accounting software)

Let’s help you get familiar with the business side now.

Forms of Businesses

a. Sole Traders/ Sole Proprietorship – one owner who takes complete

control
b. Partnership – 2-20 persons own and control the business (general/active
and sleeping/silent/dormant partners)
c. Companies/Corporations – shareholders (capital is generated through sale
of shares)
Ordinary and Preference shareholders run the business.
Ordinary operate and receive dividend after dividends have been paid to
preference shareholders who have fixed dividends.
d. Co-operatives – shareholders (provide goods and services for its owners)
 Not driven by profit motive and members of a cooperative society are also
the customers

e. Non-profit organizations
Churches
Schools
Charitable organizations

Common Financial Statements prepared by Businesses/Organizations

Income Statement

Income and Expenditure Accounts

Cash Flow Statements

Balance Sheets

Trading, Profit and Loss Statements

Bank Reconciliation Statements

Balance Sheets and its equation

A balance sheet is a financial statement which shows the status of a business at

a specific date. It has three major components:

a. Assets
b. Liabilities
c. Capital

Assets are items owned by the business. There are two types of assets:

a. Fixed
b. Current

Liabilities refer to debts owed by the business. There are two types of liabilities:

a. Current
b. Long term
Capital refers to resources invested in the business by the owner.

a. Debt
b. Equity
c. Trading
d. Working

Balance Sheet Equation:

Assets = Capital + Liabilities

Capital = Assets – Liabilities

Liabilities = Assets – Capital

Exercise

Assets ($) Liabilities ($) Capital ($)

18760 8440 10320
27465 9315 18150
40320 14220 26100
34650 6600 28050
54600 13800 40800
23450 16150 7300
83500 32130 51370
45000 18400 26600
41180 27600 13580
91870 46170 45700

Above are worked questions. In an exam, you will be given two of the three and
will be asked to find the third one using the balance sheet equation. You can
pretend one of the figures is missing under any column for one row. Use the
equation and see if you get the same figure you covered manually or using a
calculator.

Let’s classify some of the following items into assets, capital and liabilities (be
specific by stating whether it is current or fixed, current or long term and
working, trading, debt or equity).
Exercise

Land (Fixed Asset)

Vehicle (Fixed Asset)

Stock (Current Asset)

Bank overdraft (Current Liability)

Equipment (Fixed Asset)

Cash in hand (Current Asset)

Bank loan for 4 years (Long term Liability)

Debtors (Current Asset)

Creditors (Current Liability)

Machinery (Fixed Asset)

Rent owing (Current Liability)

Furniture (Fixed Asset)

Mortgage (Current Liability)

Bank (Current Asset)

Loan from Joshikah (3 months) – (Current Liability)

Items can be classified as a current liability if the owing period is less than one
year or an operating cycle.

Items can be classified as a long term liability if the owing period is more than
one year or an operating cycle.

Debtors - persons who owe the business.

Creditors – persons whom the business owes.

A mortgage is a loan from a bank or other financial institution that helps a

borrower purchase a home.
 Classification of Accounts

There are three main categories of accounts:

a. Real
b. Personal
c. Nominal

Real accounts refer to asset accounts.

Personal accounts refer to accounts of debtors and creditors.

Nominal accounts refer to accounts of expenses and revenue.

Capital can be used interchangeably for “owner’s equity”.

With the balance sheet in mind, there are two ways of doing the Balance Sheet
(formats):

a. Horizontal
b. Vertical

Assets in the balance sheet are usually arranged in either of the following
orders:

a. Order of Permanence
b. Order of Liquidity

A financial year is otherwise known as a fiscal year and is any annual period at
the end of which a firm’s accounts are closed. It lasts for 12 consecutive months
(52 weeks). If a fiscal year started on September 28, 2018 it will end on
September 28, 2019.
 In the next lesson, we will look at some balance sheets done using the
horizontal format. The vertical format will be covered later down in the revision
course.