Accounting Principles Notes

Accounting Equations & Principles

• Accounting is the systematic process of recording, reporting, and analyzing financial transactions of a business.
• The primary purpose is to provide financial information to stakeholders such as investors, creditors, and management for decision-making.

Objectives of Accounting

• To record financial transactions systematically.
• To ascertain the profit or loss of a business.
• To determine the financial position of a business.
• To provide information to stakeholders for decision-making.

Basic Concepts

• Assets: Resources owned by the business that create value.
  • Increase assets = inflow of money.
  • Decrease assets = outflow of money.
• Liabilities: Business obligations (money owed).
• Capital: Money invested into the business.

Double Entry Accounting System

• Every debit has a credit.
• Both sides (Debit and Credit) must always balance.

Debit and Credit Rules

• Assets:
  • To increase Assets: Debit
  • To decrease Assets: Credit
• Liabilities:
  • To increase Liabilities: Credit
  • To decrease Liabilities: Debit
• Capital:
  • To increase Capital: Credit
  • To decrease Capital: Debit

Practice Examples (KFC)

• Example 1: KFC has $2M$ in its bank account.
  • KFC spent $500K$ in staff uniforms.
  • KFC spent $200K$ in office expenses.
  • What are the accounting entries?
• Example 2: KFC made $1M$ in sales in May 2024.
  • $450K$ was in cash.
  • $250K$ was in credit cards.
  • $100K$ was in linx cards.
  • $200K$ is still owed by corporate clients.
  • What are the accounting entries?
• Example 3: KFC invests in a new outlet at Brentwood Mall.
  • Invested $500K$ in renovations.
  • Paid 20 vendors via cheque totaling the $500k$.
  • What are the accounting entries?
• Example 4: KFC has a debt of $1M$.
  • They pay $50k$ towards the principal each month.
  • What are the accounting entries?
• After all of the transactions above, what are the balances in each account at the end of the period?

Chart of Accounts

• A listing of all accounts used in the general ledger of an organization.
• Organized by account type (Assets, Liabilities, Equity, Revenues, Expenses).

Account Examples

• Assets: One Dollar (Currency).
• Expenses: Salaries, Employer NIS Portion (2/3), Rent, Utilities, Vehicle Expense, Training, Office Expense.
• Equity: Capital, Retained Earnings, Shares
• Revenue: Sales, Other Income, Bank Interest Income, Rental Income
• Liabilities: Loans, Higher Purchase Agreements, Mortgages Payable

Conclusion

• The Chart of Accounts is an INDEX of ALL the accounts found in a business General Ledger.
• They are grouped into categories.