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1. Demonstrate Understanding of accounting principles and policies

APPLY FUNDAMENTALS OF ACCOUNTING – SUMMARY NOTES

1. Understanding Accounting Principles and Policies

1.1 Nature and Purpose of Accounting

Accounting is the process of recording, classifying, summarizing, and interpreting financial transactions.
Purpose:

  • To provide financial information

  • To aid decision-making

  • To determine profit or loss

  • To show financial position

  • To assist planning and control

1.2 Users of Accounting Information

  • Owners – profit, capital, financial status

  • Managers – performance and decision making

  • Investors – returns and financial stability

  • Creditors/Suppliers – creditworthiness

  • Government – taxes and regulation

  • Employees – job security, wages

  • General public – company’s contribution

1.3 Qualities of Accounting Information

  • Relevance

  • Reliability/Accuracy

  • Comparability

  • Consistency

  • Understandability

  • Timeliness

1.4 Accounting Concepts/Principles

  • Business Entity

  • Going Concern

  • Accruals/Matching

  • Cost Principle

  • Materiality

  • Prudence/Conservatism

  • Dual Aspect

  • Revenue Recognition

1.5 Accounting Standards

Standards provide guidelines for preparing financial statements, e.g.:

  • IFRS (International Financial Reporting Standards)

  • IAS (International Accounting Standards)

1.6 Accounting Equation

Assets=Capital+Liabilities\text{Assets} = \text{Capital} + \text{Liabilities}

2. Apply Double Entry Concept

2.1 Source Documents

Original documents showing transactions, e.g.:

  • Receipts

  • Invoices

  • Credit notes

  • Debit notes

  • Cheque counterfoils

  • Bank statements

2.2 Books of Original Entry

  • Sales Journal

  • Purchases Journal

  • Cash Book

  • Sales Return Journal

  • Purchases Return Journal

  • General Journal

  • Petty Cash Book

2.3 Double Entry System

Every transaction has two effects:

  • Debit (Dr) – receiving value

  • Credit (Cr) – giving value

Example:
Bought goods on credit:

  • Dr Purchases

  • Cr Accounts Payable

2.4 Trial Balance and Basic Financial Statements

Trial Balance lists all ledger balances to check accuracy.
Basic statements:

  • Income Statement (profit or loss)

  • Statement of Financial Position (assets, liabilities, capital)

2.5 Computerized Accounting Systems

Examples: QuickBooks, Sage, Tally, ERP software.
Used for automated posting, reporting, reconciliation.

3. Classify Capital, Liabilities and Assets

3.1 Accrued and Prepaid Expenses

  • Accrued expenses: incurred but not yet paid

  • Prepaid expenses: paid in advance

3.2 Accounting for Revenue

Revenue is recognized when earned, not when received.

3.3 Accounts Receivable & Bad Debts

  • Accounts Receivable: customers owing money

  • Bad Debts: uncollectible debts

  • Allowance for Doubtful Debts: estimate of future uncollectible debts

3.4 Property, Plant & Equipment

Assets used in the business long-term.
Accounting includes:

  • Cost

  • Depreciation

  • Disposal

3.5 Inventory Valuation

Common methods:

  • FIFO

  • Weighted Average Cost

  • Specific Identification

3.6 Accounting for Cash and Bank

Includes:

  • Cashbook

  • Petty cash

  • Bank reconciliation

3.7 Accounts Payable

Money owed to suppliers.
Control account summarizes all suppliers.

4. Correct Accounting Errors and Suspense Accounts

4.1 Errors Detectable by Trial Balance

These cause imbalance:

  • Single entry

  • Wrong amount on one side

  • Arithmetic errors

  • Posting errors

4.2 Errors Causing Trial Balance Not to Balance

  • Entering only one side

  • Unequal debits and credits

4.3 Errors Not Affecting the Trial Balance

  • Error of commission

  • Error of omission

  • Error of original entry

  • Error of principle

  • Compensating errors

4.4 Procedures of Correcting Errors

Use:

  • Journal entries

  • Adjustments in ledger

  • Re-stating balances

4.5 Errors Corrected by Suspense Account

Suspense accounts temporarily hold differences until errors are corrected.

4.6 Preparation of Suspense Account

Debit or credit the difference, then clear once all errors are fixed.

5. Prepare Sole Trader Statements

5.1 Sources of Capital

  • Owner contributions

  • Loans

  • Retained profits

5.2 Sole Trader Income Statement

Shows profit or loss for the period.

5.3 Statement of Financial Position

Shows:

  • Assets

  • Liabilities

  • Capital

6. Prepare Partnership Statements

6.1 Partnership Agreement Contents

  • Capital contribution

  • Profit-sharing ratio

  • Duties and responsibilities

  • Interest on drawings

  • Interest on capital

  • Salaries to partners

6.2 Current and Capital Accounts

Capital accounts may be fixed or fluctuating.
Current accounts record drawings, interest, and share of profit.

6.3 Partnership Income Statement

Prepared like that of a sole trader.

6.4 Appropriation Account

Distributes profit/loss among partners.

6.5 Statement of Financial Position

Shows capital balances for all partners.

7. Prepare Company Statements

7.1 Types of Share Capital

  • Ordinary shares

  • Preference shares

7.2 Types of Reserves

  • General reserve

  • Retained earnings

  • Share premium

  • Revaluation reserve

7.3 Issue of Shares

  • At par

  • At premium

  • At discount (rare/regulated)

7.4 Rights Issue & Bonus Issue

  • Rights issue: offered to existing shareholders at a discount

  • Bonus issue: free shares issued from reserves

7.5 Provisions and Reserves

Provisions: liabilities of uncertain amount (e.g., warranty).
Reserves: profits retained for business use.

7.6 Income Tax

Calculated as per tax guidelines.

7.7 Presentation of Company Financial Statements

Includes:

  • Statement of Profit or Loss

  • Statement of Financial Position

  • Statement of Changes in Equity

  • Notes to accounts