poa lecture 1

8/13/2019 POA Lecture 1

1/15

Lecture 1 lntroduction

University Of London

Pri nciples Of Accounting

Lecture NotesLecture 1

Topics Coveredlntroduction To AccountingForms of Business OrganisationBasic Accounting Terms

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Lecture 1 - lntroductionThe objective of any business is the maximisation of owners'wealth.This may take the form of the maximisation of profits or maximisation ofmarket share or revenue. /Defi nition of Accounting Reucrl &- exFn$SAccounting can be defined as the process of identifirir*g, measuping; recordingand communicating economic information about the-busln"s "iitity to theusers of the information. Accounting is concerned with the provision ofinformation about the(financial positiof,, performance and changes in financialposition of an enterprise that\ useful to a wide range of potlntial users inmaking economic decisions. \ ha\antcsh.c+

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Lecture I - lntroductionThe Users of Accounting lnformationThe users of the information are varied and they are also usually thestakeholders of the organisation. The stakeholders refer the various groups ofpeople who have a vested interest in the orginisation.These include:U.)ho a{no rtsss { qa((},fitnd rrfiyn,,otcn .. Owners: lnterested in profit ariO financial stability.\Slrarcholalcq. Creditors: lnterested in ability to repay loan.(t,cr rtt)''Banks. Employees: concern about bonus and job security dependent on profit andfinancial stability.. Government: Collection of taxes which is dependent on profits.. Management: Similar interest to that of owners.Drrc{ssThe type of accounting information that is provided generally falls into twocategory. These two category include:tttha+ rs lfp/1{[4rn(C bcilr.fi jt-e, X.+9pn o[ Creo ma4tManagement Accou ntin g Versud Fi nancial AYcou ntingManaqement Accou ntinq frrte/nqtl Financial Accountinq1. Analyse information with the aim of

( influencinq future behavior) q BJ ,r:trnaBased on historical cost(pasttransactions)

2. Not leqal requirements Reouired bv law3. No need to conform to regulatoryrequirements Need to conform to regulatoryrequirements for example theCompanies Act.4. Focus on internal managementneeds Focus mainly on external users needsfor examole shareholders

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Lecture 1 - lntroductionFunctions of AccountingIt is generally accepted that accounting should serve the following functions:l. Recording & Glassification : accounting systems supply a means ofrecording and classifying data so as to enabte the-production oi summarizedfinancial statements relating to the entity's results and current state of affairs.Records also enable one-off requests for data to be complied with.

P' lrts .2. Measuring: accounting tries to assist in the measurement of the\(economic results)of the entity's activities, usually with a view to sharing outthe results among the various interested parties (e.g. government (tales),employees (wages), shareholders (dividends). 3 Ft rcrcral 5141srFff}+3. Stewardship: accounting provides a record of how the funds entrustedto managers have been used by them, and to what ends.Vlaryklrfr+ icrortvra (Braffi,nd ),4. Monitoring/ pldnnlng and control: accounting should providesufficient information on the results of past activities to enaSle management tomonitor the results and take action if necessary, and to formulate plans for thefuture.5. Performance evaluation and compensation. Accounting systemsprovide information on the performance of different individuals ariO jarts otthe business in order to determine how much managers and employeesshould be rewarded.

accounting should assist .investors.. forheir{limited resources\ \$rftL-t\tr.)' \-cap{t\7- Gommunication: accounting should communicate information to bothinternal and external users. (Finaniial statements are lhe mair\ tools used toachieve this function for external users.) Swnal rl9c E$evr'nl Ute.s- - -' -}4a(gew^d.+ -gnflrcu.tJcnThese functions are interlinked to some extent. Their; TieiY tifiportance is amatter of opinion and point of view. The recording function is'pernaps theearliest function which people recognise. withoJt it, none of the otherfunctions would be possible. The stewardship and measurement functionsdeveloped when the rise of the joint stock companies increased the splitbetween ownership and control of resources (i.e. between shareholders onthe one hand and management on the otherj. These functions have beendisplaced in importance by the last three funciions listed above which haveincreased in prominence as accounting has been recognised as a socialscience and a branch of applied economics.

6. lnformation For Decisions:example, in deciding how to allocate

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Lecture 1 - lntroduction

Business structure operating in today s environment can generally take one ofthree forms:tl Sole proPrietor -t-tf/s41-19ne ll. PartnerShipS lnrfc*,.r-\ prsol. CompanySole proprietor/ Partnership ) no e{f,cs.vc to {p deblcSole proprietorThis refers to business that is owned by single owner who is entitled to all theprofits and is responsible for all the losses.PartnershipsRefers to the ownership structure involving two or more persons carrying outa business in common with a view of making profitsAdvantages of a Sole proprietor/ Partnership. EasV to start and administer -Tncrl^c tax ilrrE. Flexibility in the running of the business as the owner/partners do not haveto consult others in making decisionsDisadvantages include. Unlimited liability: The owner/partners are personally liable for all the debtsof the business. Lack of sources of capital and expertise: The sources of capital are usuallyrestricted to the owners/partners savings and monies raised from familiesand friends.This form of ownership is usually restricted to very small(micro) business.kv:cnal Assct- E\amlc:tlooseCqrsSnAregRf,nc fcls

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Lecture 1 - lntroductionCompanyA registered company is a body of persons granted a charter legallyrecognising them as a separate legal entity having their own rights, privilegesand liabilities distinct from those of their members.The owners of the company are the shareholders or stockholders.The Advantages of a CompanySeparate Legal Entity. A company is a separate legal entity, has most of therights of a person except those of veting and marrying.Limited Liability. Because a company is a separate legal entity, companycreditors can satisfy their claims only against the assets of the company, notagainst the personal property of the shareholders of the company.-)_sss oqlg c+ncr .lv*n fUprtal .Ease of Capital Generation. lt is easy for a company to raise capital as itcan sell shares to wide groups of shareholders.Gontinuous Existence. As the company is a separate legal entity it is notaffected by the death of its shareholder and enjoys perpetual life.The Disadvantages of a Company

(AqM) Extensive Government Resur tion. &:iln:.?tlt , the extensivegovernment laws. Meeting these laws may be expensive.Separation of Ownership and Control. The separation of ownership andcontrol has disadvantages as sometimes directors makes decisions that arenot for the good for the shareholders as a whole.J' pu..t t Jttlare eY(es{lva b,rurcs ,

'Arrrql Qereral tvreeh$ (Aht4l

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Lecture 1 - lntroductionThe Basic Financial StatementsThe two basic financial statements, which you need to be familiar with at thisstage, are the lncome Statement (Also known as Statement of FinancialPerformance or Profit and Loss Statement) the Statement of FinancialPosition (also known as balance sheet).Example of a lncome Statement Format of a sole trader(Service Entity)

ttt\nb MNG tnc.:

^ 1- ' . ......... ............-. . -(Di Revenue

Office ExpensesBerrl-

1 D-eppci-q_tjo-nf-piotit ioi th; Vd;

,lQRrvrnuo/s*ltr

lncome Statement - lir^orrval forf,yrnane,For the Year ended 31 December 20X0

10,000000

Elewnrts \S Expnvs

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Lecture 1 - lntroductionExampte of alstater?ilitH"cial Positiodpf a sole trader[4Na.he-Statement of Financial PositionAs at 31 December 20X0

AssetsNon Gurrent AssetsMotor VehiclesTotal Non- Current Assets

esh oft_ Bank) _ j 3,p9"0_i 2n nnn--3.&333---; --nventorv: 110,000

4g_Jg9 e jOfotelr

F_lcncnrt IIO\rt 'ttt"

-oxn3lEal lsct -&l bqi"|lrfter " qrr$Nyr-cwvrrr-r habtlrirr,l- rnyc har Lrro,C*rn+r .rE{rll*rcr _ lgtar

Credit-o-1_s n g1gs-t P-3yab-l g _-+- 51trn'1 tTotal Current LiabilitiesNon Current LiabilitiesTotal Liabilities

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Lecture 1 - lntroductionBasic Accounting TermsThe following are the basic accounting terms that you must be familiar with:Assets:

;u o^avdriP' This refers resources controlled by the business that yields futureeconomic benefits.' Generally refers to resources owned by the business that have value' Example include land, building, Cash at hpnk, tracle nehrnrs(Liabilities (Dcfisd ll*, l,rxrvresr) ':eltgorlr u^ creJ*

. Present Obligations of the business to others.. Examples include Bank Loans. trade Creditors.Assets and liabilities can be divided into current non-current.Current Assets t\*'; fisrts1' Current assets lre either cash or any other asset that can be convertedinto cash within one year from the date of the Statement of financialposition. fs+cc61. Examples of current assets areCurrent Liabilities

' Obligations that are due within one year from the date of the Financialposition.. lncludes \Brnr rs.tRevenues/ Sales. Earnings of the business that result from its operations. Refers to the inflow of future economic benefits. Revenues increase the owners equity in the businessExpenses. Costs that is incurred in earning the revenues. Refers to the consumption of future economic benefits. Examples of expenses include rent. utilities, salaries ete.. Expenses reduce the owners equity in the business. Profit for a given period = Revenue less Expenses

T.Gde Crcaro{s +P4*q,-t tr^ole pctot^

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Lecture 1 - lntroductionOwners Equity

. Refers to the capital provided by the owners as well as the residualinterest in the business, this is the accumulated profits in the business.t Rden pvol* acco,nl. Refers to the residual interest in the assets after the liabilities havebeen deducted. (Eq,uity = Assets L-ess Liabilities)\Nq+wyii^.. Capital refers to the amount invested in the business by the ownersand drawings refer to the amounts withdrawn by the owners forpersonal use.

. Drawings as used in the context of accounting refer to the withdrawalby the owner of any asset of the business for personal use.

. The value of the Owners Equity at any point in time is equal to:Capital contributed + Retained EarningVqofttsLecture lllustration 1Classify the following items into their correct category as eitherAssets(A), I iab ility(L), revenues(R), expenses(E) or equ ity( EQ).

Items Categorya) Premises -Larut /Brldrnt ib) Creditors Lc) Stocks *d) Motor vehicles Ae) Loan from Star bank Ln Machinerv Ao) Retained Earninqs qh) Debtors A) Bank A) Sales R,k) Bank Overdraft Ll) Marketable Securities ["i" fr{xfi {m) Debenture Pavable En) lnsurance Lo) Rent Ep) Land +o) Caoital EQr) lnterest oavable L

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Lecture 1 - lntroductionJournal EntryThe basic Journal Entry is done in the following format:Date Account Name Debit ($) Credit($)The Accounting Equation & The statement of financial positionAll financial transactions involve a dual aspect. The following relationship isdeveloped for the Balance sheet:Asset = Liabilities + Equity (capital)After a period of trading the equity at the year- end equal:

r q/,nfricit$ri[*qaCdpital at the start of the Period+lnjections of new capitalO'a*ings + o'rrrri txtr'lrc'{'*ti\++Profits{Losses)

Profit for the period = Revenues (Sales) Less Expenses

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Lecture 1 - lntroductionRecord ing Fi nancial TransactionsPoints to Remember:

. The sole purpose of recording the financial transactions is to preparethe financial statements

Basic Recording Rules:1. EAGH TRANSACTION HAs TWO EFFECTdtDouble Entry).

TOTAL OF DEBITS (LEFT SIDE) = TOTAL OF CREDITS (RIGHT SIDE)Double entry recording rules:1. Each transaction has two effects (duality).TOTAL OF DEBITS (LEFT SIDE) = TOTAL OF CREDITS (RIGHT SIDE)

. I-TO INCREASE TO DECREASECREDIT TO INC, TO DEC,DEBITHINT

CREDIT DEBIT

ADJUST THE BANK ACCOUNT FIRST.. BANK lN = DEBIT BANK. BANK OUT = CREDIT BANKREMEMBER: DEBIT DOES NOT MEAN INCREASE

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Lecture 1 - lntroductionLecture lllustration 2Jennifer Tan opened an Accounting practice on 1 January of the current year.The following transactions occurred in January.1. Jennifer opened a special cheque account at the ba_nk, investing$q,000 in her practice.-Capfia\2. Purchased Office Furniture for $2,500 on credit.

3. Paid rent fo.r January $SOO.\g1s .r**' raavneA - u*k


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poa lecture 1

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