Accounting theory

• Features of a computerised book-keeping package

  • Automated Data Entry
  • Data Storage and Retrieval
  • Customizable Reporting
  • Integration with Other Systems
• Automated Data Entry


  Computerised book-keeping packages typically offer the ability to automate data entry processes, reducing the need for manual data entry and minimizing the chances of human error
• Data Storage and Retrieval

  These packages provide a centralized database for storing financial information, allowing users to easily retrieve and access historical data for analysis, reporting, and auditing purposes
• Customizable Reporting


  Computerised book-keeping packages offer a variety of reporting options, including customizable financial statements, balance sheets, income statements, and cash flow statements, enabling better decision-making and financial analysis
• Integration with Other Systems


  Many computerised book-keeping packages are designed to integrate seamlessly with other software systems, such as payroll, inventory management, and customer relationship management (CRM) software, streamlining business processes, improving efficiency, and ensuring data consistency across different departments
• Disadvantages of a computerised system 


  • Initial Cost and Training
  • Security Concerns
  • Dependence on Technology
• Income Statement


  Provides a summary of a company's revenues, expenses, gains, and losses over a specific period, typically one fiscal year
• Statement of Financial Position


  Provides a snapshot of a company's financial position at a specific point in time, usually at the end of the fiscal year
• Closing Inventory Adjustment


  1. Determine the value of inventory on hand

  2. Adjust accounts to reflect true economic value
• Advantages of a Computerised System

  • Increased Efficiency
  • Improved Accuracy
  • Enhanced Reporting
  • Better Decision-Making
• Disadvantages of a Computerised System

  • Initial Cost and Learning Curve
  • Security Concerns
  • Dependence on Technology
• Main Features of a Computerised System

  • Automated Data Entry
  • Data Storage and Retrieval
  • Customizable Reporting
  • Integration with Other Systems
• Internal users of financial statements


  Individuals or groups within the organization who use financial information for decision-making and internal management purposes
• External users of financial statements


  Individuals or entities outside the organization who rely on financial statements to make decisions or judgments about the company
• Groups using annual financial statements

  • Investors/Shareholders
  • Creditors/Lenders
  • Management/Internal Users
• Return on Investment (ROI)

  Calculated as net income divided by total assets, ROI measures the company's ability to generate profit from its investments
• Price-to-Earnings (P/E) Ratio


  Calculated as market price per share divided by earnings per share, the P/E ratio helps investors assess the company's stock valuation relative to its earnings
• Debt-to-Equity Ratio


  Calculated as total debt divided by total equity, the debt-to-equity ratio measures the company's leverage and financial risk
• Interest Coverage Ratio


  Calculated as earnings before interest and taxes (EBIT) divided by interest expense, the interest coverage ratio indicates the company's ability to cover its interest payments with its earnings
• Gross Profit Margin


  Calculated as gross profit divided by revenue, the gross profit margin measures the company's profitability after accounting for the cost of goods sold
• Return on Assets (ROA)


  Calculated as net income divided by total assets, ROA measures the company's efficiency in generating profit from its assets
• Telephone Rental Paid in Advance

  1. Debit Prepaid Expenses

  2. Credit Telephone Expense
• Recognizing telephone rental paid in advance as a prepaid expense

  Reduces expenses in the current period, resulting in an increase in profit
• Depreciation of Non-current Assets

  1. Debit Depreciation Expense

  2. Credit Accumulated Depreciation
• Depreciation expense


  Reduces the net income reported in the income statement, resulting in a decrease in profit
• Customer (Trade Receivable) in Receivership


  1. Debit Bad Debt Expense

  2. Credit Trade Receivables
• Recognizing a bad debt expense

  Reduces the net income reported in the income statement, resulting in a decrease in profit
• Unpaid Debenture Interest


  1. Debit Interest Expense

  2. Credit Accrued Interest Payable
• Accruing for unpaid debenture interest

  Increases expenses in the current period, resulting in a decrease in profit
• Rent Received in Advance

  1. Credit Unearned Revenue

  2. Debit Rental Income
• Deferring the recognition of rent received in advance

  Has no effect on profit in the current period, as revenue is recognized when it is earned rather than when it is received
• Purpose and Audience of Financial Accounting

  To provide external stakeholders, such as investors, creditors, and regulatory authorities, with accurate and reliable financial information about the company's performance and financial position
• Purpose and Audience of Management Accounting

  To provide internal stakeholders, such as management, employees, and department heads, with relevant and timely financial information for planning, control, and decision-making purposes within the organization
• Scope and Detail of Financial Accounting

  Focuses on summarizing the overall financial performance and position of the company as a whole, presenting aggregated information about the company's revenues, expenses, assets, liabilities, and equity over a specific period
• Scope and Detail of Management Accounting

  Delves into specific areas of the business in greater detail to provide actionable insights for internal decision-making, using detailed cost and revenue data to prepare budgets, forecasts, variance analyses, and performance reports tailored to the needs of management
• Statement of Cash Flows (Financial Accounting)

  Summarizes the cash inflows and outflows of a company over a specific period, categorizing cash flows into operating, investing, and financing activities, providing external stakeholders with insights into how the company generates and uses cash, as well as its liquidity and cash flow management
• Cash Budget (Management Accounting)


  Involves projecting cash receipts and payments, such as sales revenue, expenses, capital expenditures, and financing activities, to ensure that the company maintains adequate liquidity to meet its short-term financial obligations and operational needs, helping management make informed decisions about cash management, working capital and investment priorities