This document provides an overview of accounting concepts and principles. It discusses what accounting involves, the accounting equation, key financial statements, and users of accounting information. It also explains the qualitative characteristics of understandability, relevance, reliability, and comparability that make accounting information useful. Transaction examples are provided to illustrate how the accounting equation and financial statements change based on business activities.

1. Frank Wood’s
Business Accounting 1
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2. After finishing this chapter, you should be able
to:
 Explain what accounting is about
 Briefly describe the history of accounting
 Explain the relationship between bookkeeping
and accounting
 List the main users of accounting information
and what accounting information they are
interested in
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3.  Present and explain the accounting equation
 Explain the relationship between the
accounting equation and the layout of the
statement of financial position (balance sheet)
 Explain the meaning of the terms assets,
capital, liabilities, accounts receivable
(debtors) and accounts payable (creditors)
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4.  Describe how accounting transactions affect
the items in the accounting equation
 Draw up statements of financial position after
different accounting transactions have
occurred
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5. Accounting can be defined as:
Accounting is the process of recording,
analyzing, summarizing and reporting
financial transactions of a business to users
of accounting information for decision
making purpose
 Balance sheet
 Income statement (Profit and Loss Statement)
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6.  Managers
 Owner(s) of the business
 Buyers (customers)
 The bank
 Tax inspectors
 Suppliers
 Investors
 Creditors
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7.  Source of document
 Books of original entry (day book)
 Ledger
 Trial Balance
 Financial Statements: Balance sheet, Income
statement, Cash flow statement, Statement of
change in Equity.
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Book
keeping

8.  ASSET: controlled by the entity, future
economic benefit
 LIBILITY: current obligations from past events
 CAPITAL/EQUITY: amount of capital invested
or owned by the owner
 REVENUE: inflow of cash or receivables from
normal business operations,
 EXPENSE: cost of operation to generate
revenue
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9. The IFAC Code states that a professional
accountant must comply with the following
fundamental principles:
 Integrity
 Objectivity
 Professional competence and due care
 Confidentiality
 Professional behaviour
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10. Resources supplied by the owner = Resources in
the business
Capital = Assets
But if someone else has provided some of the
assets:
Capital = Assets - Liabilities
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11. On 1 May 2018, B. Blake started in
business and deposited £60,000 into a
bank account opened specially for the
business
Statement of financial position as at 1 May
2018
Assets: Cash at bank £60,000
Capital £60,000
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12. On 3 May 2018, Blake buys a small shop for
£32,000, paying by cheque
Statement of financial position as at 3 May
2018
Assets £
Shop 32,000
Cash at bank 28,000
60,000
Capital 60,000
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13. On 6 May 2018, Blake buys some goods for £7,000
from Smith and agrees to pay for them some time
within the next two weeks
Statement of financial position as at 6 May 2018
Assets £
Shop 32,000
Inventory 7,000
Cash at bank 28,000
67,000
Less: Account payable (7,000)
60,000
Capital 60,000
The statement of financial position and
the effects of business transactions
(Continued)
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14. On 10 May 2018, goods which cost £600 were sold
to Brown for the same amount, the money to be paid
later
Statement of financial position as at 10 May 2018
Assets £
Shop 32,000
Inventory 6,400
Account receivable 600
Cash at bank 28,000
67,000
Less: Account payable (7,000)
60,000
Capital 60,000
The statement of financial position and
the effects of business transactions
(Continued)
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15. On 13 May 2018, goods which cost £400 were sold
to D. Daley for the same amount. Daley paid for
them immediately by cheque
Statement of financial position as at 13 May 2018
Assets £
Shop 32,000
Inventory 6,000
Account receivable 600
Cash at bank 28,400
67,000
Less: Account payable (7,000)
60,000
Capital 60,000
The statement of financial position and
the effects of business transactions
(Continued)
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16. On 15 May 2018, Blake pays a cheque for £3,000
to D. Smith in part payment of the amount owing
Statement of financial position as at 15 May 2018
Assets £
Shop 32,000
Inventory 6,000
Account receivable 600
Cash at bank 25,400
64,000
Less: Account payable (4,000)
60,000
Capital 60,000
The statement of financial position and
the effects of business transactions
(Continued)
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17. J. Brown, who owed Blake £600, makes a part
payment of £200 by cheque on 31 May 2018
Statement of financial position as at 31 May 2018
Assets £
Shop 32,000
Inventory 6,000
Account receivable 400
Cash at bank 25,600
64,000
Less: Account payable (4,000)
60,000
Capital 60,000
The statement of financial position and
the effects of business transactions
(Continued)
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18. Qualitative characteristics of accounting information
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19. There are four principal qualitative
characteristics:
 Understandability
 Relevance
 Reliability
 Comparability
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20. Information in financial statements
should be readily understandable by users.
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21.  Information in financial statements must be
relevant to users and influence their
economic decisions.
 That which is material is relevant and should
be included. Information is material if its
omission or misstatement could influence the
economic decisions of users.
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22. The information in the financial statements
must be reliable – free from error and bias,
and able to be depended upon:
 It must be a faithful representation of
transactions.
 Transactions must be accounted for and
presented in accordance with their substance,
not their legal form.
 Information must be free from bias.
 A degree of caution should be exercised
when making estimates.
 The information must be complete.
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23.  The measurement and display of the
financial effect of similar transactions and
other events must be done in a consistent
way throughout an entity and over time
for that entity, and in a consistent way for
different entities.
 Users must be informed of accounting
policies used and any changes.
 Financial statements must include
corresponding information for preceding
periods.
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