AccountingforDecisionmaking.docx
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AccountingforDecisionmaking
-AccountingforDecisionmaking
1.The3activitiesofaccountingare:
i.Howprofitable
ii.Howmuchdoweowe?
iii.Howmuchareweowed?
2.Twodifferenttypesofaccounting
i.Internal–ManagementAccounts
ii.External–FinancialAccounts
3.Whatarethe4ethicalrulesofAccounting?
i.PRUDENCE.IfthereisdoubtastohowaparticulartransactionshouldbetreatedthenfutureincomeshouldbeUNDERESTIMATEDandfuturecostsOVERESTIMATED
ii.CONSISTENCY.Donotchangeyouraccountingrulesunlessthereisamajorreasonfordoingso.
iii.OBJECTIVE.Personalprejudiceshouldbeavoided
iv.RELEVANCE.Accountingstatementsshouldnotincludeirrelevantinformationbutonlyinformationthatgivesatrueandfairpictureofwhathasbeenhappening.
4.Whatarethe4BoundaryRules
i.ENTiTY.Restricttheaccountstotheentityitself.Excludeanyinformationnotrelatingtotheentity.
ii.Periodicity.Accountsshouldbepreparedafteradefinedperiodandthisperiodshouldbemeasuredonaregularbasis
iii.GoingConcern.Preparetheaccountsonthepresumptionthatthebusinesswillbecontinuingintothefuture.
iv.Quantitative.Onlymeasurethosethingsthatcanbeeasilyquantified
5.Whatarethe6measurementrules.
i.MONEYMEASUREMENT.Datamustbetranslatedintomonetarytermsbeforeitcanbeincluded.
ii.HISTORICCOST.Datashouldberecordedattheirhistoriccost–attheiroriginalpurchasepriceorsellingprice.
iii.REALISATION.TransactionsshouldbeenteredintotheaccountswhentheLEGALTITLEchangesfromonepartytoanother.NOTwhenthemoneychangeshands.
iv.MATCHING.Cashreceivedandcashpaidshouldbeadjustedtoreflecttheeconomicactivitythathastakenplaceduringthatperiod.
v.DUALASPECT(DOUBLEENTRYBOOKKEEPING)AlltransactionsshouldberecordedinsuchawayastoshowBOTHtheRECEIVINGandtheGIVINGeffectofeachtransaction.
vi.MATERIALITY.YoushouldNOTapplytheaccountingrulesrigidlytoverysmalltransactions.
6.Describethe3typesofbusinessownership
i.SoleTrader.Onlyoneindividualownstheentity
ii.Partnerships.Thereareatleast2ownerstothebusiness.
iii.Company–Thecompanyhasaseparateexistencefromtheowners.ThemostcommonformofcompanyisaLIMITEDLIABILITYCOMPANY.Individualsareonlyliablefortheamountofcapitaltheyhaveputintothebusiness.
Whichaccountingrulewouldyouadopt:
i.Electricityconsumedinperiod1andpaidforinperiod2.
ii.Equipmentoriginallyboughtfor$10,000whichisnowworth$20,000.
iii.Thecompany’sgoodrelationshipwithit’sstaff.
iv.Acustomerwhomightgobankruptowingthecompany$5,000.
v.Aproposedchangeinthemethodofvaluingstock.
STOCKINSTOCKOUT
Date
.202010units@$10/unit
15unitsat$88units
20unitsat$126units
.30unitsat$15
25units
Howmuchandwhatisthevalueofthestockonthe。
2020?
FirstinFirstout
10@10–8@10=2@10
2@10+4units@8=52
11@8+14@12=256
36unitsleft
6@12+30@15=$522
Averagevalue
Stockremaining=75–39=36
Valueofstock=
100+120+240+450=910/75==12
36x12=$432
WhatismeantbyDoubleEntryBook–keeping?
Isbasedonthedualaspectrule..arecognitionthateverytransactionhasatwofoldeffect.Everytransactionshouldshowboththegivingandreceivingofeverytransaction
Whatisthebasicaccountingequation?
Assets=Capital+Liabilities
Whatare
Assets.ThesearepossessionsOWNEDbythecompany.Theyincludephysicalassetssuchasproperty,machinery,cashandbankbalances.Theyalsoincludeintangibleassetssuchascopyrightandpatentsrights
Capital.Theamountwhichhasbeeninvestedintheentitybytheowners.Thereforethisistheamountowedbytheentitytotheowners.
Liabilities.AretheoppositeofAssets.Theyincludeloans,bankoverdrafts,creditors.moneyowedtosuppliers)
Sparrowputsin$10,000incashtostartabusiness-SPAR
Assets=Capital+Liabilities
10,000=10,000+0
CashAccount.CapitalAccount
Sparputs$8000intoabankaccount
Cash–2000+=capital-10,000
Bank–8000
Sparborrows1500cashfromMonica
Cash3500=capital10,000+Liabilities1500
Bank8000
Herearesomecommonkindsofaccounts.Whataretheyfor;
CapitalAccount.
+-Recordswhattheownerhascontributedtotheentityoutofhisownpersonalfunds.Itisthereforewhatthecompanyowestheowner.
Cashatbank.Recordswhatmoneyisheldbythebank..Recordsbothmoneycominginandmoneygoingout.
Creditors.RecordswhattheentityowestosuppliersDebtorsAccount.Recordswhatisowedtotheentitybycustomers
PurchasesAccount.Recordspurchasesmadebythecompany.Oftenseparatepurchasesaccountswillbesetupfordifferenttypesofpurchases.–VanAccount,StationaryAccount,EntertainmentAccount.
SalesAccount.Recordsthevalueofgoodssoldtocustomers.Itincludescash,chequeandcreditsales.
StockAccount.Includesthevalueofallstockwhichhasnotbeensoldattheendofaparticularperiod..ThisisreferredtoasCLOSINGSTOCK.ThisthenbecomesOPENINGSTOCKatthebeginningofthenextperiod.
Whatisthesimplerulethatshouldbefollowedwhenenteringatransactionintoanaccount?
DEBITTHEACCOUNTWHICHRECEIVES
CREDITTHEACCOUNTTHATGIVES
Theownercontributessomecashtothebusiness
Debit:
cashAccount
Credit:
OwnerscapitalAccount
Somecashinthetillispaidintothebankaccount
Debit;BankAccount
CreditcashAccount
Avanisboughtandpaidforbyachequefromthebank
Debit:
VanAccount
Credit:
bankAccount
Somegoodsarepurchasedforbycash
DebitGoodspurchasedaccount
CreditCash
SomegoodsarepurchasedoncredittermsfromRichardRoman
Debit:
Purchasesaccount
Credit:
RichardAccount
Somegoodsaresoldforcash
DebitcashAccount
CreditSalesAccount
ForeveryCREDITtheremustbeaDEBITandforeveryDEBITtheremustbeaCREDIT
EXAMPLE
14.ThefollowingrelatestoJoeSmithwhostartedanewbusinesson1January2001
1.1.01Joestartedthebusinesswith$5000incash
2.1.01Hepaid$3000intoabusinessbankaccount
5.1.01Heboughtavanfor$2000payingbycheque
7.1.01heboughtsomegoodspaying$1000incash
9.1.01Joesoldsomeofthegoods,receiving$1500incash
EntertheabovetransactionsintoJoe’sLedgerAccounts
Joe’ssimplebookofaccounts
DebitCredit$5000CashAccount$3000
$1500$1000Capitalaccount5000
$3000Bankaccount$2000
$2000Vanaccount
$1000Purchasesaccount
SalesAccount$1500
__________
1250012500
Cash2500
Capital5000
Bank1000
Van2000
Purchases1000
Sales1500
65006500
Recordingdata–keylearningpoints
1.Theaccountingequationisrepresentedbytheformula:
ASSETS=CAPITAL+LIABILITIES
2.Anaccountisanexplanation,arecord,orahistoryofaparticularevent
3.Alltransactionshaveatwofoldeffect–thereisagivingandreceiving.
3.Adoubleentrysystemrecordsthattwofoldeffect
4.ADEBITmeansatransactionisreceivedintoanaccount
5.ACREDITmeansthatatransactionisgivenbyanaccount
1.Debitsareenteredonthelefthandoftheaccount
2.Creditsareenteredontherighthandoftheaccount
3.Foreverydebitentrytheremustbeacreditentry
4.Ifindoubtcreateanewaccount
5.Accountsarebalancedperiodically
6.Theaccuracyoftheaccountsistestedbypreparingtrialbalances
CHAPTER4–TradingEntityAccounts
20.ATrialbalancehastwoimportantfunctions:
i.Itallowstheaccuracyofthebookkeepingtobechecked
ii.ITPROVIDESTHEBASICDATAFORTHEPREPERATIONOFTHEFINANCIALACCOUNTS
ii21.Mostprofitmakingorganizationsusuallyprepare:
i.ProfitandLossAccount
ii.BalanceSheet
22.TheProfitandLossAccounthelpsanswerthequestionhowmuchprofitorlosshasthebusinessmadeandtheBalanceSheethelpsanswerthequestionhowmuchareweowedandhowmuchdoweowe?
WhatdoAccountantsmeanbyprofit?
23.AccountantsclassifyCostsinto
CapitalExpenditurecapitalexpenditureisexpenditurethatislikelytoprovideabenefittothebusinessovermorethanoneaccountingperiod(usuallyatleastoneyear)
Examplesofcapitalexpenditure:
buildingafactory.Buyingmachinery
Revenueexpenditure:
expenditurethatislikelytoprovideabenefitforjustoneaccountingperiod
Examplesofrevenueexpenditure:
Advertising.Telephonecosts.Rent.
Preparationofbasicfinancialaccounts
Oncethetrialbalancehasbeencompiled,thenextstepistoprepareatradingaccountandtheprofitandlossaccount.Inordertodosoalltherevenueincomeandexpenditureitemsareextractedfromthetrialbalance.Therearetwomainstagestogothroughinordertocompiletheaccounts
Anillustrativeexample:
ThefollowingtrialbalancehasbeenextractedfromBush’sbooksofaccountasat30June2001
NameofAccountDrCr
Bank5000
Capital(asatIJuly2000)11,000
Cash1000
Drawings8000
Motorvehicleatcost6000
Motorvehicleexpenses(R)2000
Officeexpenses(R)3000
Purchases(R)30000
Tradecreditors4000
Tradedebtors10000
Sales(R)50000
______________
6500065000
(R)=Revenueitems.
iii.Required:
prepareBush’stradingandprofitandlossaccountfortheyearto30June2001
iv.Prepareabalancesheetasattime
CHAPTER5.INTERPRETINGACCOUNTS
Whatarethefourmaintechniquesforanalyzingaccounts?
I.HORIZONTAL。
Analysingtheaccountsoveraselectedperiodoftimetolookatthelongertermtrend.Forinstance:
Howhasthesaleslevelbeenchangingoverthelast5years?
IiTRENDANALYSIS.Similartothehorizontalanalysisbutyoutakethefirstyearasabaseyearandmarkthatas100andchangeallotherfigurestorelatetothisbas