POA (7087) Chapter 1-4 Notes

Chapter1Typesofbusiness ●Tradingbusiness:buygoodsfromsuppliertoselltocustomers ○E.g,Bookshops,Supermarkets ●ServiceBusiness:providesservicetocustomers ○E.g,Medicalservices,Cleaningservices,Bankingservices Formsofbusinessownership Soleproprietorship(SP),Limitedliabilitycompany(LLP),Privatelimites company(PLC) Features ●Ownership ●Accesstofunds ●Risk ●LevelofControl ●Lifespan ●Transferabilityofownership ●Formalitiesandprocedures Stakeholders →groupsofpeoplewhowillmakeuseofinformationaboutthebusiness tomakedecisions ●Owners&shareholders:Contributecapitalansexpectprofit distributioninreturn ○E.g,whethertocontinuetoinvestinthebusiness ●Managers:Workforbusiness,Devisestrategicplanstorun businesseffectively ○E.g,considerwaystoimproveperformanceofbusiness ●Employees:Workforbusiness,Performexecutiveduties ○considerworkingatthebusiness ●Lenders:Makemonetavailabletobusiness,Expectittobefully repaidwithinterest ○E.g,whethertograntloastothebusiness ●Suppliers:Supplygoodsand/orservicestobusiness ○E.g,whethertoselltobusinessoncredit ●Customers:Buygoodsand/orservicesfrombusiness ○E.g,whethertobuyfrombusiness ●Government:Enforcetaxregulations ○E.g,decidestheamountoftaxtocollect ●Competitors:sellsimilargoodsand/orservicesasthebusiness ○E.g,whethertheyarecomparabletocollectfrombusiness →Stakeholdersrelyonbothaccountinginformation(e.g,costof inventory)andnon-accountinginformation(e.g,consumerpreference) Rolesofaccounting Accountingisaninformationsystemthatprovidesaccountinginformation forstakeholderstomakeinformeddecisionsregardingthemanagementof resourcesandperformanceofbusiness. Rolesofaccountants Accountantsprepareandprovideaccountinginformationfor decision-making.Theysetupanaccountinginformationsystem(AIS)and becomestewardsofthebusiness. Professionalethics ➔Integrity ◆Tohaveintegrityistobestraightforwardandhonestinall professionalrelationships ➔Beingobjective ◆Tonotletbias,conflictofinterestortheundueinfluenceof othersoverridetheirprofessionaljudgement

Chapter2Transactions 1.Cashtransactions a.Paymentismadeatthesametimeorimmediatelyduringa cashsaleorpurchase 2.Credittransactions a.Paymentisdelayedorpostponedtoalaterdateduringa creditsaleorpurchase(Payable) AccountingEntityTheory –Theactivitiesofabusinessareseparatefromtheactionsofthe owner.Allbusinesstransactionsarerecordedfromthepointofviewof thebusiness MonetaryTheory –Onlybusinesstransactionsthatcanbemeasuredinmonetaryterms arerecorded Accountingcycle 1.Identifyandrecord a.Sourcedocuments→journal&ledgers 2.Adjust a.Ledger’sendingbalance→trialbalance b.Adjustingentriesrecorded→journal&ledger c.Accountsareadjustedatleastonceayear 3.Report a.Trialbalance→financialstatements b.Financialstatementsarepreparedatleastonceina financialyear 4.Close a.Income,expenses,incomesummary,drawingsand dividends→closed b.Accountsareclosedonceattheendofthefinancialyear AccountingInformationSystem BusinessusesAIStocollect,storeandprocessaccountingdata Sourcedocuments→Journals→Ledgers→Trialbalance→Financial statements Sourcedocuments →providesevidencetocapturetheoccurrenceofatransaction →containsthedetailsofabusinesstransactionthatareneededfor recording Types ●Reciept ○Acknowledgespaymentreceivedfromcustomers immediatelyafterthebusinesshassoldgoods/provided services ●Remittanceadvice ○Informscreditsupplierthatpaymentbychequehasbeen madeforaspecificinvoice ●Invoice ○Informscreditcustomeroftheamountowedafterthe businesshassoldgoods/providedservices ●Creditnote ○Reducestheamountowedbycreditcustomers ■Whowerepreviouslyoverrcharged ■Aftergoodswerereturned ●Debitnote ○Increasestheamountowedbycreditcustomers ■Whowerepreviouslyundercharged ●Paymentvoucher(reciept) ○Processpaymenttocreditsuppliers ■Mustbeapprovedbyauthorisedpersonnel ■Mustbereportedbyoriginalsupplier’sinvoice ●Bankstatment ○Checksandtalliesagainstthebusinessrecordsofitscash atbank HistoricalCostTheory –Transactionsshouldberecordedattheiroriginalcost ObjectivityTheory –Accountinginformationrecordedmustbesupportedbyreliableand verifiableevidencesothatfinancialstatementswillbefreefromopinions andbias

Chapter3ElementsofFinancialStatements Assets -OfficeEquipment -MotorVehicle -Fixtures&Fittings -TradeReceivable -Inventory -Cashatbank Liabilities -Mortgageloan -Tradepayable -Bankoverdraft (Creditedamountof CAB) -“_____”Payable Equity -Soleproprietorship →Capital →Drawings (contra-equity) →Profit/Loss -Privatelimitedcompany →ShareCapital →Retainedearnings →Dividends Income -Revenue →Salesrevenue →Servicefeerevenue -Other →Rentincome →Discountrecieved Expenses -Tradebusiness →Costofsales -Other →“____”Expense →Discountallowed BasicAccountingEquation Assets=Liabilities+Equity →Expandedequation a)Soleproprietorship i)Assets=Liabilities+Capital+(Income-Expense)- Drawings b)Privatelimitedcompany i)Assets=Liabilities+Sharecapital+(Income-Expense)- Dividends ●EachbusinesstransactionwillhaveatleastTWOeffectsonthe accountingequation ●Aftereachtransactionisrecorded,theaccountingequationmust remainbalanced Explainhowtheaccountingentitytheoryisappliedtoaccountfor capitalanddrawings. –Theaccountingentitytheorystatesthattheactivitiesofabusinessare separatefromtheactionsoftheowner,allbusinesstransactionsare recordedinthepointofviewofthebusiness –Capitalisthecontributionbyownerstothebusinessanddrawingsare withdrawalsmadebytheownerforpersonaluse

Chapter4Rulesofdouble-entryrecordingsystem 1.EachbusinesstransactionswillaffectatleastTWOaccounts 2.Atleastoneaccountwillbedebited 3.Atleastoneaccountwillbecredited Accounting Element Debit Credit Assets +Increase -Decrease Liabilities -Decrease +Increase Equity –Drawings -Decrease +Increase +Increase -Decrease Income -Decrease +Increase Expense +Increase -Decrease JournalEntries Format: Journal DateParticulars DebitCredit YYYY $ $ MMMDDDebitedAccount XX -CreditedAccount XX Narrationtodescribetransaction LedgerEntries Format: NameofAccount DateParticulars DebitCreditBalance YYYY $$ $ MMMDDBalanceb/d XXDr MMMDD XX XXDr MMMDD- XXXXDr MMMDDBalanceb/d XXDr Discounts TradeDiscount →areductiontothelistprice →Invoiceprice=Listprice-TD ●Encouragescustomertobuyinbulk ●Encouragespatronageandloyalty CashDiscount →areductiontotheinvoiced price →Amount=Invoiceprice-CD →Recordedas‘discountallowed’ or‘discountreceived’ ●Encouragescredit customertopayearly DiscountAllowed(Expense) →giventocreditcustomerswho payearly →Decreasesprofit DiscountReceived(Income) →receivedwhenbusinesspays early →Increasesprofit