Tuesday, June 22, 2010

A SUMMARY OF ACCOUNTING THEORY

A SUMMARY OF ACCOUNTING THEORY

Accounting Equation -Assets - (Liabilities) = Equity

Owner's Equity - An amount of money own by the owner of the business (Capital + Net Profit - Drawings)

*Assets - Items owned by business (FA)+(CA)

*Expenses- Amount spent for business use eg, carriage outwards , business rates (electrical bills)

-Capital expenditure - Expenses spent on FA eg, machines

-Revenue expenditure - Expenses spent on recurring items eg, rent , decorations

*Liabilities - Amount of money owe by business (L-T-L)+ (CL)

*Accruals - Amount due but not paid of the accounting year

*Prepayments - Amount paid in advance but not due for the accounting year

*Trading Account- To find Gross profit

-Returns Inwards- Sales Returns
-Returns Outwards - Purchases Returns

*Profit and loss account - To find Net profit or Net Loss

-Revenue - Income generated by business eg, discounts received
-Cash discounts - Discount allowed or received to encourage early payment
-Trade discounts - Discount allowed or received to encourage bulk purchases

Net profit= Revenue -Expenses =$+(amount)
Net Loss= Revenue- Expenses =$-(amount)

*Balance Sheet - To show all assets , owner's Equity and liabilities of business at that accounting year

-Debtors/Acct Receivables - Debts owning by customers from Sales on Credit

-Creditors/Acct Payables -Debts owning by business from Purchases on Credit

*Trial Balance - To prove arithmetic accuracy of accounting entries


SOURCE DOCUMENTS

*Invoice - A reminder to buyer to pay for goods and services from seller of business

*Credit Note - A note to correct an overcharge in invoice

*Debit Note - A note to correct an undercharge in invoice

*Cheque Counterfoil - A record of amount paid on a numbered cheque to payee

*Receipt - A note to acknowledge amount received

*Payment Voucher - Evidence of payment to a person

*Bank statement - A summary of transactions of current bank account holder for the month
.
*Petty cash Voucher -A record of cash payments out of petty cash


COMMON TERMS USED
*Dishonoured Cheque - A cheque that is rejected by the bank , due to insufficient funds or because the cheque is not in order

*Bank Loan - An amount borrowed by a customer from the bank (L-T-L)

*Bank overdraft - A situation in which a current bank account holder have overdrawn an amount which is more than what he/she has in her bank account currently

*Uncredited deposits - Cheque deposits that have not been credited on the bank statement

*Unpresented Cheques - Cheques that have not been presented at the bank for payment

*Direct Credits - Amount received and is directly credited on bank statement eg, Dividends , Credit transfer

*Direct Debit - Amount paid and is directly debited on bank statement eg, Standing order ,GIRO , Dishonoured cheques , bank charges

*Imprest System - A petty cashier will always reimbursed the fixed amount of the petty cash back when there is a paid out ,thus he/she will always have the same amount to start with every month


ACCOUNTING CONCEPTS TO KNOW !
*Accounting Entity - Business is in separated unit with owner Bold

*Monetary - Only transactions with money value are recorded

*Historical cost - Transactions are recorded at cost

*Going concern - Business will continue to operate for an indefinite period

*Accounting period - The life span of a business in a fixed period of time

*Objectivity - Transactions must be factual , supported by document evidence

*Consistency -A method of recording adpoted must be used again after every period

*Prudence - The use of careful accounting practice, assets and profits cannot be overstated or understated

*Realisation - Revenue earned must be recognized

*Matching - Expenses incurred of the period must be matched against the Revenue in the same period


CORRECTIONS OF ERRORS(COE)
1) Error of omission - transactions not recorded in books

2) Error of commission - wrong person

3) Error of original Entry - Incorrect amount$ posted

4) Error of Principle -Wrong class of account , expenses treated as assets

5) Compensating Error- One side of Ledger compensated by errors of the same amount on the other side

6) Complete Reversal of Entries - Account should be debited but is credited (Vice versa)


PARTNERSHIP

*P&L appropriation - continue of Trading, Profit and loss account it shows the categories of the partners

*Interest on capital - Interest to be paid to partners for capital contributions

*Interest on drawings- Interest to be charged to partners for early withdrawals of profits from business

*Shares of Profit /Loss - An agreed ratio of amount to be shared by partners after accounting for interest on capital , partners salary /Bonus , interest on drawing .
HAPPY READING! =D

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