Chapter 1

Book-keeping and Accounting

Book-keeping is the systematic recording of the daily financial
transactions of a business. It is the first stage in the accounting
cycle.

Accounting is the process by which specific procedures of

recording, classifying, summarizing, analyzing, and interpreting
the financial transactions of the business.

An accountant is expected to prepare financial statements,

interpret their effect on business affairs, and use this
information to make a premise for decision-making in the
financial planning of a business.

The difference between accounting and bookkeeping.

Bookkeeping involves record keeping that records all the
business transactions while
Accounting uses the information from bookkeeping to prepare,
analyze and interpret financial statements

The accounting cycle

Journalizing- record transactions in the books of original entry
Posting to the ledger- transfer all the debit and credit entries
from the books of original entry to the ledger
Trial balance- making a list of all the debit or credit balance in
the ledger
Adjusting and closing entries-according to the coaching
principles adjustments, must be made to certain accounts to
allow for accruals prepayments before the final accounts are
prepared
Final accounts -separation of the trading and profit and loss
account and balance sheet.
The purpose of Bookkeeping and Accounting
To ascertain profit- this is the main purpose of having a
business, to calculate accurate figures you would need all the
daily records of the business transactions. (A business person
would need to know all the financial information like income)

To ascertain the value of assets and liabilities- it is important to

know the daily transactions so that at any time the value of
each asset or liability could be determined.

To provide financial information about the business- financial

statements are important to the owner but also to investors,
shareholders, and even the government. Investors would only
invest in a financially stable company. Shareholders would be
interested in the dividends they expect to receive out of profits.
The government would be interested in the financial statements
so they can be sure of the amount of taxes you would need to
pay. Management could also use financial statements to
evaluate the company’s performance financially.

To maintain proper financial control of a business- since the

main purpose of a business is to maximize profit control should
be exercised when dealing with expenses and revenue of the
business. To guarantee this control, accountants would need to
use certain methods which along with the financial statements
could determine whether the business is operating efficiently or
not and what steps could be taken to maintain or increase its
efficiency.

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Users of financial information
The owner
Shareholders
Sponsorers
Customers
Banks and financial institutions

Careers in Accounting
- Taxation
- Auditing
- Forensic accounting
- Consultancy
- Insolvency
- Corporate finance

Many people enter an initial job at an entry level position and

start their career with on-the-job training:
Accounts clerk
Accounts assistant
Book-keeper
Payroll clerk
The Bookkeeper
➔ Duties and Responsibilities
- Balancing accounts
- Preparing trial balances
- Preparing reports
- Inventory records
- Contributing to team effort

➔ Skills required
- Expertise in bookkeeping skills and techniques
- IT skills
- Analytical skills
- Interpersonal skills

➔ Qualities required
- Integrity
- Honesty
- Reliability
- Confidentiality
- Accuracy
- Thoroughness
- Attention to detail
- Keeping up to date

The Accountant
★ Duties and responsibilities
- Preparing financial statements
- Preparing reviews and budgets
- Working with auditors
- Preparing tax assessments

★ Skills required
- Expertise in accounting skills and techniques
- Expertise in IT
- Analytical skills
- Leadership skills
- Communication skills

★ Qualities required
- Integrity
- Honesty
- Reliability
- Confidentiality
- Accuracy
- Thoroughness
- Attention to detail
- Determination to keep up to date
(same as bookkeeper)

Career examples
Traditional Roles for Bookkeeper
Accounts receivable clerk- keeps records of the amounts owed
by each credit customer and may follow up overdue accounts.

Payroll clerk- keeps records of the wages and salaries to be

paid to employees, ensuring the accuracy of the amounts paid
and that payments are made on time.

Emerging Roles for the Bookkeeper

Bookkeeping software specialist- highly skilled in the use of
sophisticated software packages which are used to record
business transactions.

Payroll software operator- expert in the use of up-to-date

software packages that are used to record details of each
employee’s pay, tax deductions, etc.
Traditional Roles for the accountant
Accounts Manager- leads the accounts department of an
organization and prepares financial information for executives
on recent performance and for forecasting purposes.

Tax accountant- could work in a large organization, or work in a

self-employed capacity preparing tax returns and giving advice
on taxation issues to local clients

Internal Auditor: whose job it is to provide an objective

assessment of an organization's financial systems and controls

Emerging roles for accountant

Environmental Accountant- a specialist in ensuring a business
is environmentally responsible and profitable

E-Commerce specialist- has expertise in internet regulations

and can initiate and manage e-commerce projects

Accounting software developer- researches and creates

programs that meet the complex needs of particular
organizations

Forensic Accounting - uncovering financial fraud and putting

the perpetrators in prison is a day's work for a forensic
accountant.

Showbiz Accounting - providing financial services to studios,

production companies, artists, and technicians.
This job would deal with the traditional areas of tax, audit, and
financial analysis,
Professional Ethics
Ethics is described as the morals that govern human behavior.

Professional ethics is a code of behavior considered for a

specific group or profession.

Ethics are influenced by factors such as :

Culture- what is immoral or illegal in some cultures is
acceptable in others

Law- illegal behavior is unethical even when the law differs in

different countries, a company’s code states that an employee
must abide by local laws

Consequences- individuals react to ethical and unethical

behavior based on the consequences

Code of ethics- when there is a code of ethics, behaviors are

judged based on code

This resulted in the Internal Federation of Accountants (IFAC) through its

committee issuing the ‘Code of Ethics for Professional Accounting’ in 2001.
This code aims to strengthen the worldwide accountancy profession.
Recently the code had been revised and was carried out by the
International Ethics Standard Board for Accountants(IESBA) to enhance
high-quality ethical standards.

You would be expected to comply with your professional body’s

code of ethics and in many cases, you are given training.

Fundamental Principles of ethical behavior from the IESBA

code of ethics
Integrity - straightforward and honest in business relationships

Objectivity - not allowing bias conflict of interest or undue

influence to override professional judgment
Professional competence and due care - the accountant's duty
is to maintain professional knowledge and skill and keep a
breast of new developments in the field.

Confidentiality - keeping financial and business relationships

private and not disclosing information to 3rd parties without
authority.

Professional behavior - complying to set rules and regulations

and avoiding any conduct that discredits the profession.

★ Application of the ethical principles to be adhered in

workplace
- treat people with respect and courtesy
- act responsibly and honestly
- ensure confidentiality
- be accountable for your actions
- be trustworthy
- apply technical skills and competence
- comply with legal requirements and organisation laws and
regulations
- avoid conflicts of interest.

★ Inappropriate applications of the ethical principles

- causing conflict
- not working in the best interest of your employer
- being dishonest and untrustworthy
- disregarding confidentiality
- undermining colleagues
- intimidating or harassment of colleagues to gain an
advantage in a particular area
- accepting bribes or gifts in return for a favour.
When working in a financial environment employees should
comply wit the following
Appropriate application of accounting principles
- Competency - individuals must be competent and skilled in
performing their specific job.
- Willingness - individuals should act as willing members of a
team.
-Communication - individuals must be able to communicate
within the team environment.
- Continuous training - individuals should undertake training to
improve and update skills.
- Confidentiality - individuals must ensure confidentiality at all
times.
- Openness - individuals should be open about their actions.
This includes providing full and complete information and
reasoning behind a particular decision.
- Trust - individuals must rely on information given by
colleagues and trust their judgements.
- Honesty - individuals should be honest and avoid telling lies.
When there is honesty individuals will be trusted and respected.
- Accountability - individuals must understand their
responsibility and must be held accountable.

Meanwhile some unacceptable behavior include

Inappropriate application of accounting
- fraudulent financial reporting
- tax evasion
- theft of inventory
.- failure to record all sales (especially cash sales)
- misappropriation of funds (stealing funds/embezzlement)
- entering non-existent employees on the payroll (also called
"ghost' employees)
Results of inappropriate application of accounting principles
- loss of trust and integrity by your peers
- termination of employment
- disciplinary action by the professional body
- inability to gain further employment
- prosecution leading to fines, imprisonment, and a criminal
record
- application for future financial loans rejected.

Accounting Concept and conventions

Accounting concepts are principles set to maintain good work
ethics.

Accounting conventions are a set of practices that have been

established over time.

Fundamental concepts of accounting

Going Concern- assumes that the business has a long life and is
expected to continue operating into the foreseeable future.

Separate entity/business entity concept- the business is

separate from its owner.

Consistency- uniformity in accounting principles from year to

year(any changes should be disclosed). This ensures that
accounting information is easily comparable over time

Conservatism- taking a position not to overstate profits or

understate losses, expenses, or liabilities.

Accrual- when in an enterprise both cash and credit

transactions are made

Historical cost/cost concept- this states that all fixed assets

must be valued at the original cost price.
Money measurement- only transactions in the form of money is
recorded

Dual Aspect/ Double entry- for every debit there is an equal and
corresponding credit

Accounting Period/Periodicity- the period covered by the

financial statement of a business usually a year.

COMPUTERS IN ACCOUNTING

Chapter 2
The balance sheet is a financial statement that lists the assets,
liabilities and capital of the business as at a particular date.

Assets
Assets are things a business owns, such as cash, stock,
furniture, etc.
They are divided into 2 categories: current and fixed assets.

Current assets include cash and other assets that can be

converted into cash quickly (a short time during the normal
operations of business). This period is usually one year. They are
referred to as circulating assets because with the occurrence of
daily transactions, their value tends to change from day to day.

Fixed assets are assets that are used to carry on the business.
They weren't purchased to be resold to customers but instead to
increase or help the profit of the business. When they become
obsolete or old, they are replaced. Examples: cars, computers,
machinery, etc.

The distinction between current and fixed assets

The type of assets tends to differ from business to business.
For example, A grocer’s current assets would include a stock
that would range from food to liquor to household items while
his fixed assets would be carts, scales, and cash registers.
The same couldn’t be said for a flower shop owner whose
current assets would be flowers and floral arrangements and
whose fixed assets may be a cooler or cash register.

Liabilities
Liabilities are debts of the business. Any money owed is a
liability.
There are divided into 2 categories- current and long term

Current liabilities are debts that can be repaid within a year, for
example, the amount owing to trade creditors for goods bought
on credit and bank overdrafts.
Long-term liabilities are debts that can't be repaid within a year
for example bank loans.

Capital
Capital is cash and other assets that are invested in the
business by the owner either to start or during the life of the
business. It is considered a special type of liability. It’s a loan
from the owner to the business so the money is owed to the
owner. This arises from the fact that for accounting purposes a
business is regarded as being entirely separate from its owner
and hence the business activities are not related to the
personal activities of the owner.

Format of the balance sheet

The balance sheet must have a heading that states the
following:
-The name of the business or its proprietor
-The words ‘Balance Sheet’
-The date on which the balance sheet was made
For example:
Benjie’s Auto World
Balance sheet
As at 31 December 1988

On the balance sheet, the assets are listed on the left-hand

side, and the liabilities and capital are on the right-hand side. It
should be neatly presented so that subtotals for current assets,
fixed assets, current liabilities, and long-term liabilities. The
totals on both sides of the balance sheet must be equal and
written on the same line.

The Balance Sheet Equation

It is also knowns as the accounting equation or book-keeping
equation. It expresses arithmetically the relationship between
assets, liabilities, and capital.
The balance sheet equation is:
assets= liabilities + capital
A = L + C
You will notice that both sides of the balance sheet must always
be equal- that is, they must balance. The reason for this is that
the assets have been obtained by using the capital invested by
the owner and by incurring liabilities. Hence the assets must
always be equal to liabilities and capital.
The different ways the equation could be written
Assets = liabilities + capital
Capital = assets - liabilities
Liabilities = assets - capital