Week 2 lecture notes- Accounting equation
Assets must be owned by the firm. They can either be short-term and used for daily activities
(inventory and cash) or long-term (property, equipment, etc)
Liabilities are owed to others. If they are short-term, they could be overdraft or payables
that will be paid within a year. Long-term they last over a year e.g loans
The basic accounting equation is that assets=liabilities + capital
The balance sheet is also known as the statement of financial position. It must include a title
with the name of the business, type of statement and the date. One side has assets, and the
other side shows liabilities and capital. Items are listed in order of liquidity, from least liquid
to most liquid.
The income statement is also known as the statement of profit or loss. It takes cost of sales
from revenue in order to calculate a gross profit. Other expenses are deducted from the
gross profit to give the net profit for the year.
Businesses expenses appear in the income statement under one of three different headings.
Distribution costs are related to the selling and distribution of goods to customers. This
could be seller’s salaries, marketing costs and maintenance of delivery vans. Administrative
costs are related to management and administration of the business, for example,
manager’s salaries, rent and stationary. Finally finance costs is the interest paid on loans to
banks.
The result from the statement of profit of loss is added to the capital for the statement of
financial position. However, if owners make drawings of profit such as for a holiday, this is
deducted from capital in SFP and not in SPL.
The accounting process consists of recording transactions in the computerised accounting
system, analysing them in the ledger accounts and finally summarising them in the financial
statements.
Standing data is information that rarely changes, such as, names, addresses Vat registration
numbers and wage rates, etc. it is important that this information is accurate as it is used
frequently in the system.
Cloud accounting is the process of using the cloud to store all of the entity’s data. This is
useful because the data can be accessed on any computer however there is a risk of the data
being hacked, lost or damaged as well as the need for an internet connection.
A trade payable is a creditor who is a liability to the entity after a credit purchase was made
by the entity. On the other hand, a trade receivable is a debtor after making a purchase from
the entity and is therefore an asset of the entity.
A sales invoice is generated when goods are sold on credit. Similarly, a purchase invoice is
produced for purchases on credit. Credit notes are generated when goods are returned, or
customers are overcharged in order to update the accounting system. They need to include
the amount of sales, any VAT and any payments subsequently received.
VAT is a sales tax which is added onto many goods. Rates of tax are 20%, 5%, 0% or exempt.
Ultimately the customer is the one who pays VAT. The tax must be recorded on the invoices
so that entities know how much to sell products for and pay tax to the tax authority.
Petty cash is cash that is taken out to be used for little expenses such as stationary, coffee,
taxi fares etc. these don’t all need to be included in the financial statement so petty cash is
taken from the SFP and each little expense is recorded in the petty cash book.
The payroll is where wages and salaries are recorded for each employee then the total from
the payroll is taken from the accounting system. Gross pay is the total salary before
deductions. So net pay is the gross pay- pay as you earn insurance – employee’s national
Assets must be owned by the firm. They can either be short-term and used for daily activities
(inventory and cash) or long-term (property, equipment, etc)
Liabilities are owed to others. If they are short-term, they could be overdraft or payables
that will be paid within a year. Long-term they last over a year e.g loans
The basic accounting equation is that assets=liabilities + capital
The balance sheet is also known as the statement of financial position. It must include a title
with the name of the business, type of statement and the date. One side has assets, and the
other side shows liabilities and capital. Items are listed in order of liquidity, from least liquid
to most liquid.
The income statement is also known as the statement of profit or loss. It takes cost of sales
from revenue in order to calculate a gross profit. Other expenses are deducted from the
gross profit to give the net profit for the year.
Businesses expenses appear in the income statement under one of three different headings.
Distribution costs are related to the selling and distribution of goods to customers. This
could be seller’s salaries, marketing costs and maintenance of delivery vans. Administrative
costs are related to management and administration of the business, for example,
manager’s salaries, rent and stationary. Finally finance costs is the interest paid on loans to
banks.
The result from the statement of profit of loss is added to the capital for the statement of
financial position. However, if owners make drawings of profit such as for a holiday, this is
deducted from capital in SFP and not in SPL.
The accounting process consists of recording transactions in the computerised accounting
system, analysing them in the ledger accounts and finally summarising them in the financial
statements.
Standing data is information that rarely changes, such as, names, addresses Vat registration
numbers and wage rates, etc. it is important that this information is accurate as it is used
frequently in the system.
Cloud accounting is the process of using the cloud to store all of the entity’s data. This is
useful because the data can be accessed on any computer however there is a risk of the data
being hacked, lost or damaged as well as the need for an internet connection.
A trade payable is a creditor who is a liability to the entity after a credit purchase was made
by the entity. On the other hand, a trade receivable is a debtor after making a purchase from
the entity and is therefore an asset of the entity.
A sales invoice is generated when goods are sold on credit. Similarly, a purchase invoice is
produced for purchases on credit. Credit notes are generated when goods are returned, or
customers are overcharged in order to update the accounting system. They need to include
the amount of sales, any VAT and any payments subsequently received.
VAT is a sales tax which is added onto many goods. Rates of tax are 20%, 5%, 0% or exempt.
Ultimately the customer is the one who pays VAT. The tax must be recorded on the invoices
so that entities know how much to sell products for and pay tax to the tax authority.
Petty cash is cash that is taken out to be used for little expenses such as stationary, coffee,
taxi fares etc. these don’t all need to be included in the financial statement so petty cash is
taken from the SFP and each little expense is recorded in the petty cash book.
The payroll is where wages and salaries are recorded for each employee then the total from
the payroll is taken from the accounting system. Gross pay is the total salary before
deductions. So net pay is the gross pay- pay as you earn insurance – employee’s national
