Unit 1Unit 1 Basic principles of Accounting

1 Basic principles ofAccountingWhat is Accounting ? Accounting is concerned with two separatebut COMPLEMENTARY business activities: The detailed recording of all the financial transactions of thebusiness (called bookkeeping). The preparation of periodic statements (or accounts) whichsummarise the detailed information, so that the financialperformance of a business can be of the financial details follows certain procedures andthese records bookkeeping s end product become the rawmaterial for the production of the final accounts of the module deals primarily with the first of these two aspectsof Accounting , covering in depth the purposes and conventions ofaccounting, the sources and recording of information and theways in which records are verified.

2 However, as the subject istreated in an INTEGRATEDway over three modules, reference willsometimes be made in this module to topics dealt with fully inModules 2 and unit is divided into five sections:Section 1: introduction to AccountingSection 2: The Accounting equationSection 3: The double entry systemSection 4: The LedgersSection 5: The Trial BalanceUnit 1 unit 1 GlossaryCOMPLEMENTARY each activitydepends on the otherINTEGRATED treated as a combinedwhole Cambridge University University Press978-0-521-68074-5 - NSSC Accounting Module 1 Hansie HendricksExcerptMore information2 NSSC AccountingSection 1 introduction to AccountingBy the end of this section, you should be able to.

3 Explain the meaning of the term Accounting explain the objectives of Accounting explain the importance of Accounting information to various users identify the branches of Accounting explain the principles of business entity and money measurement andillustrate with examples discuss ethics in the job, the combating of fraud, and financial riskmanagement explain the application of computers in Accounting records and theirusefulness in business situations explain the advantages of a computerised system vs. a manual system ofAccounting explain the application and advantages of computers as a tool forcommunication technologyThe term AccountingAccounting is termed as the analysis, classification andrecording of financial transactions, and the ascertainment ofhow such transactions affect the performance and financialposition of a is therefore concerned with: recording of data classification and summary of data communicating what has been learned from the of AccountingThe following are some of the objectives that you should achievewhile studying this subject.

4 Use the Accounting rules or concepts to analyse case studiesand real business events interpret and evaluate Accounting statements, systems andreports providing a means of developing a critical and analyticalapproach to quantative problems apply numeric skills required for Accounting use Accounting to assist in decisionmaking and describe the impact of computers on Accounting . Cambridge University University Press978-0-521-68074-5 - NSSC Accounting Module 1 Hansie HendricksExcerptMore information3 Module 1 unit 1 Recording financial informationWho needs financial information?

5 The day-to-day records of financial transactions are a vital part ofrunning any kind of business. Of course individuals also havesome financial records. Payslips show wages received like theKumalo family in the picture below, bills show a person sspending, and regular statements tell customers how much they have in the bank. So not only can the Kumalo's gain a clearpicture of their present financial position, they can also use suchinformation to plan for the future to see if they can afford afamily vacation or, perhaps next year, a new information for businessesBusinesses operate in a similar way to the Kumalo's, but withmore formal systems for recording and using their financialinformation.

6 Even in a small business the owner could notremember the details of every transaction, so some form of recordis development of monetary systems (gradually replacingdirect exchange, known as barter) allowed the results of tradeand commerce to be measured more exactly, but FORMAL recording methods followed only slowly. By the end of thefifteenth century, however,DOUBLE ENTRY BOOKKEEPING hadbecome an established method of recording and remains thebasis of today s Accounting nature of the financial records kept will depend on thetype of business being considered. For example, the owner of aretail shop will need details of daily sales receipts, assistants wages and other expenses such as rent and business, on the other hand, will include records ofits raw material purchases, finished product sales.

7 Equipment andmachinery and a detailed analysis of its following an agreedmethodDOUBLE ENTRY BOOKKEEPING a system of recording financialinformation which recognises thatthere are two aspects to everybusiness transaction Cambridge University University Press978-0-521-68074-5 - NSSC Accounting Module 1 Hansie HendricksExcerptMore informationBut remember: Whatever the size and type of business, theprinciples of the system are the same:Importance of Accounting to various informationusersInformation needs to be communicated to interested parties. Nobusiness can operate in isolation.

8 It needs other people andbusinesses to operate. Let us look at each of the external andinternal users of the data and how the books of the business willbe important to users Owner: The owner obviously needs to see whether his/herinvestment has made a profit or a AccountingRecording the day-to-dayfinancial transactions Enabling preparation ofperiodic financial summariesand interpretation of itBOOKKEEPINGACCOUNTING Cambridge University University Press978-0-521-68074-5 - NSSC Accounting Module 1 Hansie HendricksExcerptMore information5 Module 1 unit 1 Employees: As the employees are working for the business, theyhave a direct interest in the financial affairs of the users Banks and other financial institutions: They will beinterested in whether the business will be able to repay loans, orwhether its financial position is sound when loans are requested.

9 Potential investors/Prospective buyers of the business:They want to see whether their investment will be worthwhileand will also be interested in the progress the business has made,or whether the business is making a profit. The government (Receiver of Revenue): The government willneed bank statements in order to calculate the taxes that thebusiness needs to pay, namely VAT and tax on profits. Customers and suppliers: They want to ensure that a businessis solvent prior to entering a trading relationship. This includesactual and potential customers and suppliers. The local community: They may be concerned about the effectsof redundancy, closing down of factories, etc.

10 Business competitors: They measure their own performanceagainst that of their rivals. Economic analysts: They attempt to establish trends by ananalysis of the results of particular businesses. Members of the general public: They may require informationrelating to environmental, ecological or other attitudes revealedin annual company reports. Future partners: They want to see whether their investmentwill be worthwhile and will also be interested in the progress thebusiness has made, or whether the business is making a financial information the key questionsIt is essential to know two things about a business1Is it making a PROFIT?