Introduction and basic terms
- Accounting is a system comprising the following elements: In summary Accounting is the process of identifying, measuring and communicating business information to assist users in making informed, useful decisions.
- Only monetary transactions are recorded in accounting using the historical and monetary principles.
- This simply means that only transactions that can be recorded in monetary terms are recorded and this is done on a historical basis i.e. we only record those amounts that we actually expended or received.
- Capital-any resources; monetary or otherwise used by the business to start a business.
- In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset.
- There are two classes of assets namely:
- Non Current assets-these are assets held by a business for more than one accounting period e.g. motor vehicles, buildings. Non-current assets are sometimes known as Fixed Assets.
- Current assets-assets-held by a business for less than one accounting period .They can easily be converted into cash e.g cash ,bank,debtors and inventory.
- At times a business may have assets that may be classified as intangible assets for example goodwill. These assets and their nature will be examined in the relevant topic.
- Present obligations resulting from past events, the settlement of which leads to decreases in economic benefits. Liabilities,therefore represent amounts that the entity/business owes to outside parties or debts of the business which it has to settle at some future point in time.
- There are two classes of liabilities namely:
- Current liabilities– these are liabilities which have a repayment date of less than one year.e.g creditors
- Non current liabilities-these are liabilities which have a repayment date of more than one accounting period.e.g loans and debentures. Usually an accounting period lasts for one year although companies have different policies so customarily non current liabilities are those that have a payment date of more than one year.
Other important accounting terms and their definitions
- Purchases-goods bought for resale.
- Sales-goods sold by a business which were originally bought with the intention of reselling them.
- Drawings-Goods or money taken out of the business by the owner for private purposes.
- Returns inwards/Sales Returns-goods returned to the business by its customers.
- Returns outwards/purchases returns-goods returned by the business to its suppliers.
NB You will learn more accounting terms as you progress with the course and each term will be defined when it is introduced for the first time.