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_-Frank Wood’s Business Accounting 1 Twelfth Edition

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Frank Wood’sBusiness Accounting 1Twelfth Edition
Chapter 1The accounting equation and the statement of financial position
Learning objectives
After you have studied this chapter, you should beableto:Explain what accounting is aboutBriefly describe the history of accountingExplain the relationship between bookkeeping and accountingList the main users of accounting information and what accounting information they are interestedin
Learning objectives(Continued)
Present and explain the accountingequationExplain the relationship between the accounting equation and the layout of the statement of financial position (balancesheet)Explain the meaning of the terms assets, capital, liabilities, accounts receivable (debtors) and accounts payable (creditors)
Learning objectives(Continued)
Describe how accounting transactions affect the items in the accountingequationDraw up statements of financial position after different accounting transactions haveoccurred
What is accounting?
Accounting can be definedas:The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of thatinformation.
The history of accounting
Accounting has existed for at least 10,000 years, with early records indicating its use inMesopotamia.The “Pipe Roll” is the earliest system in England, which was an annual description of rents, fines and taxes due to theKing.Double entry bookkeeping was first used by an Italian firm in Southern France in1299.
Ethics
The IFAC Code states that a professional accountant must comply with the following fundamentalprinciples:IntegrityObjectivityProfessional competence and due careConfidentialityProfessionalbehaviour
What are the objectives of accounting?
Is the business making a profit or a loss?What is the business worth?What is a transaction worth?How much cash is in the business?How wealthy is the business?How much is the business owed?How much does the business owe?Keeping a financial check on activities.
What is bookkeeping?
Bookkeeping is the process of recordingdata relating to accounting transactionsin the accounting books.
Users of accounting information
ManagersOwner(s) of the businessA prospective buyerThe bankTax inspectorsA prospective partnerInvestorsCreditors
The accounting equation
Resources supplied by the owner = Resources in the businessCapital = AssetsBut if someone else has provided some of the assets:Capital = AssetsLiabilities
The statement of financial position and the effects of business transactions
On 1 May 2011,B.Blake started in business and deposited £60,000 into a bank account opened specially for thebusinessStatement of financial position as at 1 May 2011Assets: Cash at bank£60,000Capital£60,000
The statement of financial position and the effects of business transactions(Continued)
On 3 May 2011, Blake buys a small shop for £32,000, paying bychequeStatement of financial position as at 2May 2011Assets £Shop32,000Cash at bank28,00060,000Capital60,000
On 6 May 2011, Blake buys some goods for £7,000fromD.Smith and agrees to pay for them some time within the next twoweeksStatementof financial position as at 6 May 2011Assets £Shop32,000Inventory7,000Cash at bank28,00067,000Less: Accountpayable(7,000)60,000Capital60,000
The statement of financial position and the effects of business transactions (Continued)
On 10 May 2011, goods which cost £600 were sold toJ.Brown for the same amount, the money to be paidlaterStatement of financial position as at 10 May 2011Assets £Shop32,000Inventory6,400Account receivable600Cash at bank28,00067,000Less: Accountpayable(7,000)60,000Capital60,000
The statement of financial position and the effects of business transactions (Continued)
On 13 May 2011, goods which cost £400 were sold toD.Daley for the same amount. Daley paid for them immediately bychequeStatement of financial position as at 13 May 2011Assets £Shop32,000Inventory6,000Account receivable600Cash at bank28,40067,000Less: Accountpayable(7,000)60,000Capital60,000
The statement of financial position and the effects of business transactions (Continued)
On 15 May 2011, Blake pays a cheque for £3,000 toD.Smith in part payment of the amountowingStatement of financial position as at 15 May 2011Assets £Shop32,000Inventory6,000Account receivable600Cash at bank25,40064,000Less: Accountpayable(4,000)60,000Capital60,000
The statement of financial position and the effects of business transactions (Continued)
J.Brown, who owed Blake £600, makes a part payment of £200 by cheque on 31 May2011Statement of financial position asat 31May 2011Assets £Shop32,000Inventory6,000Account receivable400Cash at bank25,60064,000Less: Accountpayable(4,000)60,000Capital60,000
The statement of financial position and the effects of business transactions (Continued)
Learning outcomes
You should have nowlearnt:Accounting is concerned with the recording, classifying and summarising of data, and then communicating what has been learnt fromitAccounting has existed for at least 10,000 years but a formal, generally accepted method of recording accounting data has only been in existence for the last 500years
Learning outcomes(Continued)
It may not only be the owner of a business who will need the accounting information. It may need to be shown to others,e.g.the bank or the Inspector ofTaxes.Accounting information can help the owner(s) of a business to plan for thefuture.The accounting equation is:Capital = Assets−LiabilitiesThe twosides of the accounting equation arerepresentedby the two parts of the statement of financialposition.
Learning outcomes(Continued)
The total of one part of the statementof financialposition should always be equal to the total of the otherpart.Every transaction affects two items in the accounting equation.Sometimesthat may involve the same item being affected twice, once positively (going up) and once negatively (going down).Every transaction affects two items in the statement of financialposition.

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_-Frank Wood’s Business Accounting 1 Twelfth Edition