Principales of Accounts 3rd year

• Capital


  Any money or other assets that are used to start up the business or that is used to operate the business during its operation, to keep it running successfully
• Accounting Balance Sheet Equation

  The relationship that exists among the assets, liabilities and capital of the business
• Components of the Accounting Equation

  • Assets
  • Liabilities
  • Capital
• The Accounting Equation


  1. Assets

  2. Liabilities + Capital

  3. Liabilities

  4. Assets - Capital

  5. Capital

  6. Assets - Liabilities
• If two of the components in the balance sheet equation are known, then by simple arithmetic the third can be calculated
• Accounting cycle


  A set of procedures for recording transactions during the accounting period
• Accounting period


  The period that is covered by the financial statements of the business (e.g. quarter, six months, year)
• Steps in the accounting cycle

  1. Journalize - use information from source documents to record entries in day books

  2. Post to ledger - transfer records in day books to double entry format in ledger

  3. Extract a trial balance

  4. Make adjusting and closing entries

  5. Prepare the final accounts of the business
• Book-keeping


  Records the financial transactions of the business
• Accounting


  Measures, interprets and reports the information from book-keeping so that users can make decisions
• Transactions are business deals that involve the exchange of goods/services for money (or for anything of value)
• Purposes of accounting records

  • Maintain financial control of the business
  • Establish the value of assets and liabilities
  • Provide financial information for users of financial statements
  • Determine the profitability of the business
• Users of financial statements

  • Owners
  • Shareholders
  • Management
  • Investors
  • Creditors
  • Government
  • Financial institutions
• Owners

  Need to know the performance and profitability of the business
• Shareholders

  Have provided funding for the business and are interested in its profitability and dividends
• Management

  Needs to make decisions based on the company's performance using the financial statements
• Investors


  View the financial statements to determine if the company is profitable enough to invest in
• Creditors and financial institutions

  Are interested in the financial statements to determine if the company can repay its debts
• Government


  Has interest in the financial statements because the taxes the company pays are a percentage of its profits
• Balance sheet


  A financial statement that lists the company's assets, liabilities and capital as at a particular date
• Assets


  The things a business owns, the resources of the business
• Liabilities


  The debts of the business
• Components of the balance sheet

  • Fixed assets
  • Current assets
  • Current liabilities
  • Long-term liabilities
• Fixed assets


  • Used to carry on the business
  • Not bought to be resold to customers
  • Expected to be in the business for more than one year
• Fixed assets


  • Computers
  • Equipment
  • Land and buildings
  • Furniture
• Current assets


  • Assets within the business that can be converted to cash within a short period
  • Change on a day-to-day basis
• Current assets


  • Cash
  • Bank account
  • Stock
  • Debtors
• Current liabilities


  • Debts of the business that must be paid within one year
• Current liabilities


  • Creditors (people the business owes for goods bought on credit)
• Long-term liabilities


  • Debts of the business that will take longer than one year to pay
• Long-term liabilities


  • Bank loans
  • Mortgages
• Working capital


  Calculation that determines if the business can repay its current liabilities (short term debts) as they fall due. Working Capital = Current Assets - Current Liabilities
• If working capital is positive, the business is solvent/liquid (can pay current liabilities as they fall due)
• If working capital is negative, the business is insolvent/not liquid (cannot pay current liabilities as they fall due and can become bankrupt)
• Simple balance sheet


  Lists assets on the left hand side and liabilities and capital on the right hand side
• Classified balance sheet


  Separates the components of the balance sheet into different categories with subtotals for each
• The accounting equation states that Assets = Liabilities + Capital
• Effect of transactions on the balance sheet

  1. Transactions that affect only assets (increase one, decrease another)

  2. Transactions that affect assets and liabilities/capital (both increase or both decrease)
• Real accounts


  Asset accounts of the business
• Personal accounts


  Debtor and creditor accounts of the business