Basics of Accounting. Terminology, definition of Statements and examples of double entry in terms of commercial Bank.

1. ACCOUNTING
BASICS OF THE “LANGUAGE OF BUSINESS”

2. DEFINITION
It is a systematic process of identifying, recording, measuring, classifying,
verifying, summarizing, interpreting and communicating financial information.
WHY ACCOUNTING
• Systematic record of business transactions.
• Protecting the property of the business.
• Communicating results to the interested parties.
• Compliance with legal requirements.

3. BASIC ACCOUNTING TERMINOLOGY
Capital (Equity) – The amount which the proprietor has invested in the
firm or can claim from the firm.
For the firm it is a liability towards the owner.
Liability – The amount that is due to be paid to any person or
institution other than owner.
 Long-term liabilities – payable after a long term (generally more than a
year). E.g.: Long-term loans, etc.
 Current liabilities – payable in near future (generally within one year). E.g.:
Bank overdrafts, bills payable, etc.

4. BASIC ACCOUNTING TERMINOLOGY
Assets – Things that are resources owned by a company and which
have future economic value that can be measured and can be
expressed monetarily.
Current assets – cash and other assets that are expected to be converted to
cash within a year.
 Cash, marketable securities, short-term investments, etc.
Non-current (Fixed) assets – Asset that is not likely to turn to unrestricted
cash within one year of the balance sheet date.
 Tangible (Land, Building, Equipment, etc.); Intangible (Software, Licensing
agreements, etc.)

5. BASIC ACCOUNTING TERMINOLOGY
• Revenue – Income for period.
• Loss – Excess of Expenses over Revenue.
• Profit – Excess of Revenue over Expenses.
• Expenses – Costs of running the business during the same period.

6. ACCOUNTING METHODS
• Cash Basis - method of recording accounting transactions for revenue
and expenses only when the corresponding cash is received or
payments are made. Cash method is not acceptable under generally
accepted accounting principles or international financial reporting
standards.
• Accrual Basis - method of recording accounting transactions for
revenue when earned and expenses when incurred. A key advantage
of the accrual basis is that it matches revenues with related expenses,
so that the complete impact of a business transaction can be seen
within a single reporting period.

7. FINANCIAL STATEMENTS
• Statement of Financial Position (Balance Sheet) - list of all the assets owned and all the
liabilities owed by a business as at a particular date. The format of the statement of
financial position follows the basic accounting equation, which states that:
Assets = Liabilities + Equity
• Statement of Profit or Loss (Income Statement) - record of revenue generated and expenditure
incurred over a given period. The statement shows whether the business has had more revenue
than expenditure (a profit) or vice versa (loss).
• Statement of Changes in Equity - reconciliation of the beginning and ending balances in
a company’s equity during a reporting period.
• Statement of Cash Flows – describes the cash flows into and out of the business.
Focuses on such types of activities as operations, investments and financing, which use
and create cash. It is especially useful when there is a divergence between the amount
of profits reported and the amount of net cash flow generated by operations.

8. DOUBLE ENTRY
• The double-entry book-keeping system is based on the principle that
for every business transaction that takes place two entries must be
made in the accounts: a debit entry, showing goods or value coming
into the business, & a corresponding credit entry, showing goods or
value going out of the business.

9. DOUBLE ENTRY
Debit
1. Increase in asset accounts
2. Increase in expense accounts
3. Decrease in liability accounts
4. Decrease in equity accounts
5. Decrease in revenue accounts
Credit
1. Decrease in asset accounts
2. Decrease in expense accounts
3. Increase in liability accounts
4. Increase in equity accounts
5. Increase in revenue accounts

10. DOUBLE ENTRY in terms of Banks
• Cash transactions
• Withdraw
• Deposit
• Exchange

11. DOUBLE ENTRY in terms of Banks
• Cash transactions
• Withdraw
• Deposit
• Exchange
Dr – Customer account
Cr – Cash

12. DOUBLE ENTRY in terms of Banks
• Cash transactions
• Withdraw
• Deposit
• Exchange
Dr – Cash
Cr – Customer account

13. DOUBLE ENTRY in terms of Banks
• Cash transactions
• Withdraw
• Deposit
• Exchange
Dr – Cash AZN
Cr – Cash USD
Cr – PL (profit – difference
between transaction rate
and CB rate)

14. DOUBLE ENTRY in terms of Banks
• Fund Transfer
Dr – Customer account
(Sender)
Cr – Customer account
(Beneficiary)
Cr – PL (commission income)

15. DOUBLE ENTRY in terms of Banks
• Loans to customers
• Disbursement
• Interest accrual
• Repayment
• Loans from Financial Institutions
• Disbursement
• Interest payable
• Repayment

16. DOUBLE ENTRY in terms of Banks
• Loans to customers
• Disbursement
• Interest accrual
• Repayment
• Loans from Financial Institutions
• Disbursement
• Interest payable
• Repayment
Dr – Loan owed by customer
Cr – Customer account

17. DOUBLE ENTRY in terms of Banks
• Loans to customers
• Disbursement
• Interest accrual
• Repayment
• Loans from Financial Institutions
• Disbursement
• Interest payable
• Repayment
Dr – Interest accrual (assets)
Cr – PL (interest income)

18. DOUBLE ENTRY in terms of Banks
• Loans to customers
• Disbursement
• Interest accrual
• Repayment
• Loans from Financial Institutions
• Disbursement
• Interest payable
• Repayment
Dr – Customer account
Cr – Loan owed to customer
Cr – Interest accrual
(receiveble)

19. DOUBLE ENTRY in terms of Banks
• Loans to customers
• Disbursement
• Interest accrual
• Repayment
• Loans from Financial Institutions
• Disbursement
• Interest Payable
• Repayment
Dr – Correspondent account
Cr – Loan due to FI

20. DOUBLE ENTRY in terms of Banks
• Loans to customers
• Disbursement
• Interest accrual
• Repayment
• Loans from Financial Institutions
• Disbursement
• Interest payable
• Repayment
Dr – PL (Interest expense)
Cr – Interest payable
(liabilities)

21. DOUBLE ENTRY in terms of Banks
• Loans to customers
• Disbursement
• Interest accrual
• Repayment
• Loans from Financial Institutions
• Disbursement
• Interest payable
• Repayment
Dr – Loan due to FI
Dr – Interest payable
(liabilities)
Cr – Correspondent account