ACCOUNTING SSS ONE

INRODUCTION TO ACCOUNTING

The language of business is accounting. Accounting can be divided into two sections:

1.      Bookkeeping;

2.      Accounting.

Bookkeeping is the systematic recording of transactions on a daily basis in the appropriate books. This is a process of detailed recording of all financial transactions of a business. It is an integral part of accounting. It is necessary for even the smallest business to make a record of every transaction which affects the business. If the records are not maintained, it is likely that something will be forgotten or over-looked. The basis of maintaining these detailed records is called BOOKKEEPING.

Accounting can be defined as “the process of identifying, recording, classifying, selecting, measuring, interpreting, and communicating financial data of an organization to enable users make decision. This uses the bookkeeping records to prepare financial statements at regular intervals.

Definition of terms

1. An Income Statement. This shows the calculation of the profit or loss earned by the business. It is drawn up periodically (often at yearly intervals). It was formally known as trading, profit and loss account.
2. Balance Sheet. This shows the financial position of a business at regular intervals. It also shows what the business owns, its assets; and what the business owes, its liabilities.
3. Financial Statements. It is a collective name for an income statement and a balance sheet. It was formally known as final accounts.

Reasons for preparing financial statements

a.       To measure the progress of the business. This is done by comparing the financial statements of one year with those of previous years, or with those of other similar businesses;

b.      To show the owner of the business what has happened during a certain period of time;

c.       It helps in monitoring the progress of the business;

d.      It measure the relationship between figures within a set of financial statements through the calculation of various accounting ratios;

e.       These are useful for comparison purposes;

f.       It show the future plans development of the business;

g.      It show the profit and loss of the business;

h.      For decision making.

NB: the above listed points are related to the importance of accounting.

Users of accounting information

The following make use of accounting figures, i.e. financial statement. These principal users are:

1. Managers. These are the day-to-day decision makers. They need to know how well things are progressing financially and about the financial status of the business.
2. Tax authorities. They need it to be able to calculate the taxes payable.
3. Owners. They want to be able to see whether or not the business is profitable. In addition they want to know what the financial resources of the business are.
4. The bank. If the owner wants to borrow money for use in the business, then the bank will need such information.
5. Investors. They want to know whether or not to invest their money in the business.
6. A prospective buyer. When the owner wants to sell a business the buyer will want to see such information.
7. A prospective partner. If the owner wants to share ownership with someone else, then the partner will want such information.

ASSETS, LIABILITIES AND CAPITAL

When a person decides to start a business he will have to provide the necessary funds (resources). This is often in the form of monetary funds, but may consists of buildings, motors, goods and so on. Any resources provided by the owner of the business are known as  capital. This represents the amount owed by the business to the owner of that business.

Once the business is formed and capital introduced, the business will own the money or other items provided by the owner. Things owned by the business (or owed to the business) are regarded as the resources of the business or the assets of the business.

However, other people may also provide assets to the business. The amount owed by the business to these people is known as liabilities.

THE ACCOUNTING EQUATION

This is also referred to as the balance sheet equation. Accounting equation is by adding up what the accounting records say belongs to a business and deducting what they say the business owes. The whole of financial statement is based upon this very simple idea.

Derivation of accounting equation

If a business is to be set up and start trading, it will need resources. Let’s assume first that it is the owner of the business who has supplied all of the resources. This can be shown as:

Resources supplied by the owner = Resources in the business

Note: The amount of the resources supplied by the owner is called capital. The actual resources that are then in the business are called assets. This means:

                                                            Capital = Assets …………….. eq. 1

Usually, people other than the owner have supplied some of the resources (assets) or amount borrowed in purchasing the resources, liabilities is the name given to the amounts owing to these people for these assets. This can be shown as:

                                                            Liabilities = Assets ………….. eq. 2

Since the owner of the business can supply the business resources and at the same time borrow money in supplying the resources. Thus, the combination of the two equation will give our accounting equation as follows:

                                                Assets = Capital + Liabilities.

NB: Capital is sometimes referred to as owner’s equity.

Example 1.1

2007

January   1   Tess set up a business to trade under the name of The Peps Shop. She opened a   business bank account and paid in $20000 as capital.

               2    The business purchased premises $15000 and paid by cheque.

               3    The business purchased goods $3000 on credit.

               4    The business sold goods at the cost price of $1000 on credit.

Show the accounting equation after each of the above transactions.

                                    Assets                                      =          Capital                +    Liabilities

January   1    Bank                               $20000                        $20000            Nil

January   2    Premises                         $15000                        $20000            Nil

                     Bank                               $  5000                                                                       

                                                            $20000                        $20000

January   3    Premises                         $15000                       

                     Inventory (stock)           $  3000

                     Bank                               $  5000                       

                                                            $23000                        $20000         Trading payable $3000

January   4    Premises                         $15000                       

                     Inventory (stock)           $  2000

                     Trade receivable             $  1000

                     Bank                               $  5000                        $20000         Trading payable $3000                                         $23000                                                                       

 

EXPLANATION

·         January 1         The assets of the business are equal to the capital of the business.

·               January 2      The money in the bank has decreased because a new asset has been bought. The total assets are equal to the capital.

·               January 3      Purchasing on credit means that the business does not pay immediately. A new asset inventory (stock) has been acquired, but the business has also acquired a liability as it owes money to the supplier ( who is known as a creditor). In a balance sheet this is described as a trade payable. The total assets are equal to the capital plus the liabilities.

·               January 4      Selling on credit means that the business does not immediately receive the money. The inventory has decreased but a new asset has been acquired in the form of money owing to the business by a customer (who is known as debtor). In the balance sheet this is described as a trade receivable. The total assets are equal to the capital plus the liabilities.

Test your understanding

1.      fill in the missing figures in the following table.

	Assets         $	Capital          $	Liabilities          $
(a)	35000	?	12500
(b)	?	44400	19300
(c)	67300	55000	?

 Compiled by: Akerele Adedayo E.

 Enquires contact:

 dedayo87@gmail.com

 08162875768, 08057415945

MANUFACTURING ACCOUNTS

Manufacturing of goods involves the transformation of raw materials into finished goods and it must be recorded. Therefore, manufacturing account is the final accounts of a business that manufactures goods.

Difference between manufacturing accounts and trading, profit and loss account

A manufacturing account shows the concern produces from raw materials or semi manufactured goods into finished goods and sells them. Whereas a trading account shows the concern buys from the finished goods and resale.

Manufacturing account is usually prepared by firms to show the cost of production and gross profit on manufacture when the market value is given. Whereas a trading account is prepared to show the gross profit on the finished goods.

Purpose of manufacturing account

1. To ascertain the cost of production;
2. To ascertain the amount of any profit on manufacturing process.

TERMINOLOGIES IN MANUFACTURING ACCOUNT

1. Cost of production. It is the sum of the cost of raw materials used, cost of carriage, prime cost and factory overheads. It is otherwise called cost of goods manufactured.

2. Prime cost. These are cost that can be traced to a particular production unit. It also consists of cost of raw materials consumed, direct wages, carriage inwards and other expenses directly concerned with the manufacturing process. Prime cost is otherwise called direct expenses and it includes direct materials, direct labour and direct expenses.

3. Factory overheads. These are expenses that do not necessarily vary with output; that is, they do not increase or decrease in direct proportion to the volume of goods produced. Factory overhead includes the indirect materials, indirect labour and indirect expenses. Examples; factory fuel, factory salaries, lighting, heating, depreciation on plant and machinery etc. It is otherwise known as overhead cost.

4. Work in progress. These are goods which the factory has not completed at the time of preparing the final accounts. That is, partly finished goods, semi manufactured goods or incomplete work at the end of a financial period.

5. Market price. This is the price the manufacturing department will charge (sell) to marketing department (as if the finished goods were bought from outside). Therefore, the goods produced are charged at market price.

Note:

a.       When goods produced at a cheaper rate and valued at market price, there will be gross profit on manufacture;

b.      If goods produced at a higher rate, there will be gross loss on manufacture;

c.       The gross profit on manufacture and gross on manufacture are chargeable to profit and loss account.

6. Stock. A manufacturing has three categories of stock which are valued at beginning and at the end of the operating year. They include:

a.       Stock of raw materials. These are the quantity of unused portion of raw materials bought;

b.      Stock of work in progress. It is the quantity of partly completed goods available;

c.       Stock of finished goods. It is the quantity of completed goods available for sales.

NB: The stock at the end of the operating year will be added and the addition will be taking to the balance sheet as stock under current asset. That is, the closing stock of raw materials + closing stock of work in progress + closing stock of finished goods = Stock.

Test your understanding

1. Explain the difference between direct factory wages and iindirect factory wages.
2. Give two examples of direct expenses.
3. For each of the following state whether it is direct material, direct labour, or a factory overhead of a clothing factory:

(a)    Electricity used in the factory

(b)   Purchase of suiting fabric

(c)    Wages of factory supervision

(d)   Wages of sewing machinists

(e)    Purchase of spare parts for machine

Compiled by: Akerele Adedayo E.

 Enquires contact:

 dedayo87@gmail.com

 08162875768, 08057415945