The Nature Of ing And ing Equation L1 554u4c

Introduction to ing

Unit 1 : The Nature of ing and ing Equation

Objectives 

After you have studied this chapter, you should: Know what ing is Know who are the main s of ing information Understand what is meant by assets, liabilities and capital Understand the ing equation Common ing terminology Types of business Types of financial statements

What is ing? ing

is the language of

business.  ing

can be defined as “the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by s of information.

ing is the art of recording, classifying, and summarising money transactions and events

The history of ing ing

began because people

needed to 

qRecord business transactions qKnow if they were being financially successful qKnow how much they owned and how much they owed 

q

ing comprises 4 main activities Recording Classifying Summarising:

(when preparing The Profit and Loss , and The Balance Sheet) Interpretation 

The branches of ing

What is bookkeeping? Bookkeeping

is the process of recording data relating to ing transactions in the ing books. Bookkeeping is the mechanical task involving the collection of basic financial data. These data are entered in special records known as books of and then extracted in the form of a trial balance.

The purpose of ing It

is to provide information to the management by using the data recorded by book-keeping and converting it into financial statements. ØBalance sheet ØProfit and loss ØCash flow statement

Types of business

The main s of ing information

The objectives of financial statements Provide

information on the financial position of the business at the start of the period. Provide information on the financial of the business at the end of the period. • Show the analysis of the changes during the period. The financial stability of the business. • Indicate the future prospects of the

s of financial statements Internal

groups The management and the employees Employees; their interest: üEmployment stability üWage negotiation Management; their interest: üall aspects (Performance) 

s of financial statements External groups Investors Lenders Suppliers Customers Government General Public

The ing Equation: qResources supplied by the owner = Resources in the business qCapital = Assets qCapital = Assets – Liabilities qAssets = Capital + Liabilities qResources: what they are= Resources: who supplied them  (Assets) (Capital+ Liabilities )

The ing Equation: 

The concept of a Balance Sheet is based on the ing equation, which is:

se ts = Lia b ilitie s + O w n e r’ s

equ

Terminology Business

entity. The owner is separate from the business as such we record business transactions in the business books. Any transactions carried out by the owner outside of the business are not reflected in the books of the business. 

Business

transaction. Any event that affects the business e.g. purchase of goods for resale, payment of business expenses, etc. Business transaction can be for cash or on credit. Cash transaction means that cash was paid or received in exchange for goods and services. Credit transaction means that goods or services were rendered or received for which the payment will be received/paid later.

Terminology Capital.

Any value introduced by the owner into the business. This value can be represented by cash and assets.

 Drawings.

Any value withdrawn by the owner from the business for personal use. This value can be cash and goods.



Terminology Debtors.

Customers to whom goods have been sold or services have been provided for which they not yet paid. Creditor. Suppliers from whom the business have purchased goods or acquired services for the business has not yet paid. Trading ing. This is a statement which is used to compute gross profit . 

Terminology  Profit

and loss This is a statement used for computing net profit.

 Balance

sheet. A statement which shows what a business owes and own at a particular point of time.



Assets Assets.

Any item of value owned and used by the business to carry out its trade. They can be subdivided into a) Current Assets, fluctuating day to day b) Fixed assets, used by the business over a long period of time .

Liabilities. These

are amounts owed by the business to outsiders. They can be subdivided into a) Short term liabilities .  b)  

Long term liabilities.