1 Topic 1: Introduction to Financial Accounting Learning outcomes • What is a business? • Business transactions • Asset and Liabilities and Capital • Accounting Principles and Characteristics • Accounting Equation • Financial Statements What is a business? The purpose of a business is to make a profit for its owner(s) Profit = income less expenditure A business is a separate entity from its owner Every financial transaction has a dual effect Double entry bookkeeping accounts for the dual aspect of financial transactions What is a business ? A business of whatever size or nature exists to make a profit. Types of business entity Sole traders – refers to ownership, sole traders can have employees Partnerships – two or more people working together to earn profits Limited liability company – owners have liability limited to the amount they pay for their shares A limited liability company has a separate legal identity from its owners
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Transcript
1
Topic 1:
Introduction to Financial Accounting
Learning outcomes
• What is a business?
• Business transactions
• Asset and Liabilities and Capital
• Accounting Principles and Characteristics
• Accounting Equation
• Financial Statements
What is a business?
The purpose of a business is to make a profit for its owner(s)
Profit = income less expenditure
A business is a separate entity from its owner
Every financial transaction has a dual effect
Double entry bookkeeping accounts for the dual aspect of financial transactions
What is a business ?
A business of whatever size or nature exists to make a profit.
Types of business entity
Sole traders – refers to ownership, sole traders can have employees
Partnerships – two or more people working together to earn profits
Limited liability company – owners have liability limited to the amount they pay for their shares
A limited liability company has a separate legal identity from its owners
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Business Transactions
Wherever property changes hands there has been a business transaction.
A cash transaction is where the buyer pays cash to the seller when goods are transferred.
A credit transaction is a sale or purchase which occurs earlier than cash is received or paid.
Assets and liabilities 1
Assets are items of value which a business owns or has the use of.
Assets are categorised as either non-current or current.
• Non-current assets are those acquired for us over more than one accounting period, e.g.
land and buildings, machinery, computers and vehicles.
• Current assets are those owned by the business with the intention of turning them into
cash, e.g. inventory and receivables.
Liabilities represent amounts that are owed by the business.
Liabilities are categorised as either non-current or current.
• Non-current liabilities are those that are not payable within one year, e.g. mortgages, a 5
year bank loan, amounts used in respect of hire purchase agreements.
• Current liabilities are those that are payable within one year, e.g. amounts owed to
suppliers, overdrafts repayable on demand.
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The Accounting Equation
The purpose of a business is to make a profit (excess of income over expenditure) for its owner.
Under the business entity concept, the assets and liabilities of a business must be kept separate