CSEC Accounting

The Purpose of Accounting :

Definition of accounting

 Accounting is the process of classifying, summarizing, recording, interpreting and

communicating financial information.

Identifying: Establishing the essential characteristics or features of.

Classifying and summarizing: sorting out data in a useful order.

 To Classify - to arrange or place items into categories or groups.

 To Summarize – To create a short description that gives the main facts in a condensed
form.

Measuring: placing a value; assigning numbers; determining the size

Recording: make an official note of in writing, printing, or such.

Interpreting: explain the meaning of something in clear, understandable terms.

Communicating / Reporting: Presenting data to stakeholders like internal management and

external users.

The purpose of accounting

 The purpose of accounting is to provide information about an organization's financial

situation so that informed decisions can be made.

The Five classes/categories of Accounts :

ALICE: Assets, Liabilities, Income, Capital, and Expenses.

A – Assets

L – Liabilities

I – income / Revenues

C – Capital / Owner’s Equity E – Expenses

Assets

Assets are economic resources owned by a business that are used in its daily operations to
generate profit and benefit the business. Simply, they are a company’s resources i.e. things the
company owns.
Liabilities

Liabilities are economic resources borrowed by a business from a person or organization. They
are the debts of the business i.e. amounts the business owes.

Income

Income / revenues are amounts earned during the accounting period from the daily operations of
the business. Simply, they are what the business earns for providing goods and services.

Capital / Owner’s Equity

Capital is the economic resources that were contributed by the owner(s) of the business to the
business, either to start the business or to continue its operations.

Expenses

Expenses are the costs incurred by a business in its daily operations in earning income. In other
words, they are the cost of assets used by the business to generate revenues.

A company’s financial position

The financial position of a company is measured by:

1. Assets (what it owns)

2. Liabilities (what it owes to others)

3. Capital / Owner’s Equity

The Accounting Equation:

The Accounting Equation (also called the balance sheet equation.)

 The Accounting Equation is the basic equation of double-entry accounting that reflects
the relationship between a company's assets, liabilities, and equity.
 It shows how assets were financed: either by borrowing money from someone
(liability) or by paying your own money (ownership equity).
 It is expressed as:

Assets = Liabilities + Capital

The double entry system is a method used to record each transaction twice in the books as every
transaction affects two items.
 The Expanded Accounting Equation:

The expanded accounting equation includes two components of Closing Capital: Revenue
and Expenses

Revenue – Expenses = the business’ Profit or Loss

 If Revenues > Expenses, there is a Profit

 If Revenues < Expenses, there is a loss

The owner of the business also has the option to withdraw capital from the business for personal
use: Drawings

The expanded accounting equation is, therefore:

Assets = Liabilities + Capital + Revenues – Expenses – Drawings

Revenues increase Capital / Owner’s Equity

Expenses decrease Capital / Owner’s Equity

Drawings decrease Capital / Owner’s Equity

 The Accounting Cycle

The accounting cycle is a series of steps for recording each transaction in the accounting
process, which are repeated every accounting period.

NB. Journalizing and posting to ledgers are done through out the period, whereas the rest of the
cycle is done at the end of a period.

Categories and Types of Accounts

 Journals (Books of Original Entry)

Transaction Journal
ALL CASH / CHEQUE TRANSACTIONS
Capital: investment by owner Cash Book
Receipt from Loans and repayment of Loans Cash Book
Purchase / Sale of Fixed Assets for cash or cheque Cash Book
Purchase of Stock with cash or cheque (Cash Purchases) Cash Book
Sale of Stock for cash or cheque (Cash Sales) Cash Book
Payment of expenses e.g. rent, salaries, insurance, interest on loan, etc. Cash Book
Payment of creditors (suppliers) the amount owed to them Cash Book
Receipt of income/revenue e.g. interest received, rent received, etc. Cash Book
Receipt of cash/cheque from debtors (customers) the amount owed by them Cash Book
Drawings: money withdrawn from business for personal use Cash Book
Discounts Received and Discounts Allowed Cash Book

CREDIT TRANSACTIONS INVOLVING STOCK AND FIXED ASSETS

Purchase of Stock on credit (Credit Purchases) Purchases Journal
Sale of Stock on credit (Credit Sales) Sales Journal
Sales Returns / Returns Inwards Ret. Inwards Journal
Purchases Returns / Returns Outwards Ret. Outwards Journal
Purchase / Sale of Fixed Assets on credit General Journal
TRANSACTIONS ENTERED IN THE GENERAL JOURNAL

Transactions that are entered in the cash book are also entered in the GJ
Capital: investment by owner General Journal
Purchase / Sale of Fixed Assets for cash or cheque General Journal
Payment of expenses e.g. rent, salaries, insurance, and... General Journal
- Discounts Allowed General Journal
- Carriage Inwards and Outwards General Journal
Receipt of income/revenue e.g. interest received, rent received, and... General Journal
- Discounts Received General Journal
Payment of creditors (suppliers) the amount owed to them General Journal
Drawings: money withdrawn from business for personal use General Journal

Non Cash Transactions are entered in the GJ

Adjusting Entries
- Provision for Depreciation General Journal
- Bad Debts written off General Journal
- Provision for Bad Debts General Journal
- Prepayments and Accruals General Journal
OTHER ENTRIES OF THE BUSINESS
Opening Entries (list of opening balances of assets, liabilities and capital a/cs) General Journal
Correction of Errors General Journal
Closing Entries (list of closing balances of assets, liabilities and capital a/cs) General Journal
 The Journals

Sales Journal

Date Details Invoice # Folio Amount $

Year
date Debtor e.g. John Smith SL # X
Debtor e.g. Doe SL X
Jane
Debtor SL X
End of mth Transfer to Sales account GL XX

Purchases Journal

Date Details Invoice # Folio Amount $

Year
dt Creditor e.g. Will Browne PL # X
dt Creditor e.g. Alice Williams PL X
dt Creditor PL X
End of mth Transfer to Purchases account GL XX

Returns Inwards Journal

Date Details Invoice # Folio Amount $
Year
dt Debtor e.g. John Smith SL # X
dt Debtor e.g. Doe SL X
Jane
End of mth Transfer to Returns inwards account GL XX

Returns Outwards Journal

Date Details Invoice # Folio Amount $
Year
dt Creditor e.g. Will Browne PL # X
dt Creditor e.g. Alice Williams PL X
End of mth Transfer to Returns outwards account GL XX
 Cash Book

Date Details Folio Discount Cash Bank Date Details Folio Discount Cash Bank
Allowed Received
Year $ $ $ Year $ $ $
dt Balance b/d X X dt Purchases GL X
dt Capital GL X dt Motor Vehicle GL X
dt Sales GL X dt Creditor PL X X
dt Debtor SL X X dt Drawings GL X
dt Interest received GL X *dt Cash GL X
dt Loan GL X *dt Bank GL X
*dt Bank GL X dt Interest on Loan GL X
*dt Cash GL X dt Balance c/d X X
X XX XX X XX XX
dt Balance b/d X X

L e d g e r s (Double entry – T accounts)

A T -ACCOUNT is an individual record of business transactions that result in increases and

decreases in the specific asset, liability, or capital item.

An account consists of three parts:

- The Title/Name of the account

- The left side (known as debit / Dr)

- The right side (known as credit / Cr)

 Increases and decreases in assets, liabilities and capital are posted in the form of debits
and credits. Debit and credit, therefore, indicate on which side of a T account numbers
will be recorded.
 For some types of accounts debit means an increase in the account balance, while for
others debit means a decrease in the account balance, as seen below:

Category of Account Entry to Increase Entry to Decrease

Assets Debit Credit
Liabilities Credit Debit
Income/revenue Credit Debit
Capital Credit Debit
Expenses Debit Credit
 LEDGERS are books of final entry containing the T-accounts of the business in which
transactions are posted in the form of debit and credits.

Ledgers T--Accounts
Sales Ledger Debtor a/cs (personal accounts) e.g. John Smith
Purchases Creditor a/cs (personal accounts) e.g. Alice Williams
Ledger
General Ledger Real a/cs: assets, liabilities and capital e.g. Motor Vehicles, Stock, Loans etc.
Nominal a/cs: income and expense a/cs e.g. Rent, Discount Allowed, Interest
received

Account Ledger
Debtor a/cs (personal accounts) e.g. John Smith Sales Ledger
Creditor a/cs (personal accounts) e.g. Alice Williams Purchases Ledger
Sales , Purchases, Returns Inwards, Returns Outwards a/cs General Ledger
Fixed Asset a/cs (real accounts) e.g. Buildings, Motor Vehicles etc. General Ledger
Cash and Bank separate a/cs General Ledger
Liability a/cs e.g. Mortgage General Ledger
Capital a/c and Drawings a/c General Ledger
Revenue a/cs and Expense a/cs (nominal accounts) e.g. rent , salaries, etc General Ledger

DOUBLE ENTRY requires that for each transaction, the amount entered into the accounting
records is entered in at least two different accounts, with one account being debited and the
other credited. All debit amounts equal all credit amounts provided the double-entry accounting
was properly followed
 Final Accounts: Income Statement

Owner’s Name
Trading & Profit & Loss A/c for the ended
$ $ $
Sales X
Less: Sales Returns (X)
Net Sales X
LESS: COST OF GOODS SOLD:
Opening Stock X
Purchases X
Less: Purchases Returns (X)

X
Add: Carriage In X
Net Purchases X
Cost of Goods Available for sale X
Less: Closing Stock (X)
Cost of Goods Sold (X)
GROSS PROFIT (or GROSS LOSS) X or (X)
**Add: Rent Received X
Interest received X
Discount received X
Decrease in Provision for bad debts X
X
**Less: Expenses
Wages/salaries X
Utilities X
Increase in provision for bad debts X
Depreciation X
Bad debts expense X
Carriage Outwards X
Discount allowed X
Total expenses (X)
NET PROFIT (or NET LOSS) X or (X)

**These are a few examples, however the list can be exhaustive in reality

NB. This is an Income Statement for a sole trader.

For other types of businesses with more than one owner, an Appropriation a/c is prepared to
share out the net profit amongst the owners and calculate profit retained in business.

For Manufacturing Businesses, a Manufacturing a/c is prepared before the Trading & Profit
& Loss a/c

For Non profit organizations, an Income and Expenditure a/c is prepared instead of a
Trading and Profit and Loss a/c.
Final Accounts: Balance Sheet

Owner’s Name
Balance Sheet as at
FIXED ASSETS: COST $ ACC DEP. $ NBV $

Land & Buildings X (X) X

Plant & Machinery X (X) X
Fixtures & Fittings X (X) X
Motor Vehicles X (X) X
X (X) X
CURRENT ASSETS:
Stock X
Debtors X
Less: provision for bad debts (X)
Net debtors X
Prepaid expenses X
Revenues owing X
Bank X
Cash X
Total Current Assets X
LESS: CURRENT LIABILITIES

Creditors X
Accrued expenses X
Advanced revenues X
Bank overdraft X
Total Current Liabilities (X)
WORKING CAPITAL X
XX
FINANCED BY:
Opening Capital X
Add: Net Profit OR Less: Net Loss X OR (X)
X
Less: Drawings (X)
Closing Capital X
LONG-TERM LIABILITIES

Mortgage X
Bank Loan X
X
XX