Accounting basics

1. Joel Mcicia
Mubas, August 2021

2.  It is obvious that the central pillar of a business is
finance (profit making) as the core issue. Thus any
manager ought to be very versed with its basics.
 Accounting can be defined as ‘the process of:
i. identifying,
ii. measuring, and
iii. communicating
economic information to permit informed judgments
and decisions by users of the information
- Frank Wood

3. Possible users of accounting information include:
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
Owner(s) of the business. They want to be able
to see whether or not the business is profitable. In
addition: to know what the financial resources of
the business are.
Prospective buyer. When the owner wants to sell
a business the buyer will want to see such
information

4. The bank. If the owner wants to borrow money for
use in the business, then the bank will need such
information
Tax inspectors. They need it to be able to calculate
the taxes payable
A prospective partner. If the owner wants to
share ownership with someone else, then the
would-be partner will want such information
Investors, either existing ones or potential ones.
They want to know whether or not to invest their
money in the business.

5.  Assets = Capital + Liabilities
Meaning in a layman’s language:
(whatever is in the business= what you personally
invested + what you owe other people)

6. Basic Financial Statements you must understand
are:
A. Income Statement (formerly Trading Profit
and Loss Account/ simply P&L Account)
B. Statement of Financial Position (Balance
Sheet)
C. Statement of Cash flow

7. The purpose of this is to know if the business is
making profit or not (names of items in the statement
depend on the business in question)
Sales (good sold that were purchased for the purpose
of reselling)
Cost of goods sold: (the price it had cost you to
produce the goods that have been sold)
Closing Stock: Goods not yet sold
Expenses: expenditures that have drawn money out
of the business
Drawings: money used from the business for personal
use. Charged as a reduction of capital in the Balance
sheet

12. Returns Inwards: Goods that have been
returned by customers to us (for some reasons,
size, type, faults etc.). They reduce our sales.
Returns Outwards: Goods returned after we
bought them. They reduce our purchases.
Carriage Inwards: what suppliers charge us for
bringing goods to us. It increases the purchase
cost.
Carriage Outwards: is an expense as we use it
to send goods out to customers

13.  Opening Stock: (its from last year) Add it to
cost of Goods Sold this financial year.
 Reduce it by closing stock of this year.
 Closing stock is reflected in the balance sheet
as a current asset.

14.  Shows the companies position of assets.
 The categories are fixed assets (long term
assets not easily turned into liquidity/ money)
and Current Assets (short term assets)
 Other items are self explanatory

17. Need for cash flow statements
For any business it is important to ensure that:
 Sufficient profits are made to finance the business
activities.
 Sufficient cash funds are available as and when
needed.

18.  We ascertain the amount of profits in a profit and
loss account. We also show what the assets,
capital and liabilities are at a given date by
drawing up a balance sheet. Although the balance
sheet shows the cash balance at a given date, it
does not show us how we have used our cash
funds during the accounting period.
 What we really need, to help throw some light on
to the cash situation, is some form of statement
which shows us exactly where the cash has come
from during the year, and exactly what we have
done with it. The statement that fulfills these
needs is called a cash flow statement.

20. Coming next is Financial Ratio Analysis
Thank you for your Attention.
May the Lord richly Bless you.