AccountingforDecisionmaking.docx

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