Introduction to Accounting
What is Accounting
A process of providing financial information required by the interested parties of a business for their decision
making.
Objectives of accounting
Main objective:
Providing information for decision making
Other objectives:
To know whether the business has earned an adequate profit
To know whether the financial position of the business is sound
To fulfil legal requirements
To minimize disadvantages arising through omission and commission of transactions, and to organize
financial activities
A transaction can be identified as an exchange of resources between a business and other parties. Following
accounting elements arise as a result of transactions.
• Assets
• Equity
• Liabilities
• Income and Expenses.
Assets
An asset is a resource controlled by the business as a result of a past transaction and from which future economic
benefits are expected to flow to the business.
The characteristics of Assets,
………………………………………………………………………………………………..
………………………………………………………………………………………………..
………………………………………………………………………………………………..
The assets that are expected to be used, sold or converted into cash within a short time period as 12 months in the
ordinary activities of a business are classified as current assets.
Eg:…………………………………………………………………………………………………..
All the assets that cannot be considered as current assets are considered as non-current assets.
Eg:…………………………………………………………………………………………………..
Liabilities
Liabilities are Payables of a business that had arose as a result of past transactions. The characteristics are,
• Arose as a result of a past transaction
• Outflow of economic resources when settlement is made
• Having a current obligation
The liabilities that should be settled within a short period of time as within 12 months are classified as current
liabilities.
Eg: ……………………………………………………………………………………….
All of the liabilities that cannot be considered as current liabilities are classified as non-current liabilities.
Eg: ……………………………………………………………………………………….
Equity
The value of assets that belongs to owners of the business is termed as equity.
Eg: A business has Rs. 500 000 worth of assets and a bank loan amounting to Rs. 200 000.
Equity = Assets - Liabilities
= Rs 500 000 - Rs 200 000
Equity = Rs. 300,000
Income and Expenses
Profit = Income – Expenses
Income can be defined as an increase in equity except due to the increases from capital introductions by owners.
Income belongs to the owners, so it is added to the equity.
Eg: ……………………………………………………………………………………….
Expenses can be defined as a reduction in equity except due to drawings. Expenses are deducted from the equity.
Eg: ……………………………………………………………………………………….
The difference between Income and Expenses is called Profit or loss.
Accounting Equation
1. Assets = Equity
2. Assets = Equity + Liabilities
Eg: Amal started a business investing Rs.500 000 in cash.
Assets = Equity
Rs. Rs.
…………… ………………..
Amal obtained a bank loan of Rs. 300 000.
Assets = Equity + Liabilities
Rs. Rs. Rs.
…………… = ………………..
…………….. = ……………. + …………………..
…………….. = ……………. + …………………..
Example :- Started a business to repair computers. The following transactions are given to you for the first month
of the business.
1. Invested Rs. 500 000 as the capital
2. Obtained a bank loan of Rs. 200 000
3. Deposited Rs. 100 000 in a fixed deposit account
4. Earned a cash income Rs. 60 000 from computer repairs
5. Paid Rs. 10 000 as the monthly rent of the business
6. Sathish withdrew Rs. 20 000 from the business for her private use
7. Purchased equipment at Rs. 100 000
8. Paid Rs. 5 000 of the telephone bill of the month
9. Sathish invested an additional capital of Rs. 50 000
10. Settled Rs. 20 000 of the bank loan
Assets = Equity + Liabilities
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Closing
balance = +
Example :- The following balances were extracted as at 01.08.20xx from Sandamini's business.
Assets - Rs. Furniture 300 000 Liabilities – Bank loan 300 000
Stocks 200 000 Creditors 100 000
Debtors 100 000
Cash 200 000
The following transactions occurred in the first week of August 2022.
1. Purchased goods at Rs. 100 000 to sell
2. Sold goods which were purchased at Rs. 100 000 for Rs. 125 000
3. Settled Rs. 50 000 of the bank loan
4. Paid Rs. 10 000 as salaries
5. Sandamini withdrew goods at a cost of Rs. 20 000 for her private use.
6. Purchased furniture at Rs. 50 000 for the use of the business
7. Purchased goods at Rs. 200 000 on credit basis.
8. Sold goods at Rs. 100 000 on credit basis. These goods had been purchased at Rs. 60 000
9. Received Rs. 80 000 from debtors
10. Paid Rs. 50 000 to creditors
Assets = Equity + Liability
Opening balances
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Closing balances
Situations that change the equity of a business
1. ……………………………………………………………..
2. ……………………………………………………………..
3. ……………………………………………………………..
4. ……………………………………………………………..
Drawings is withdrawal of money or other assets by the owner from the business for his personal use.
Example: Following are some details of Binuri’s business.
Capital as at 01/01/2024 358,500
Expenses for the year 128,300
Income for the year 254,620
Cash invested by owner -30/06/2024 75,000
Calculate the owners equity as at 31/12/2024
Answer
4/3-
4/5-
4/8/
4/10
4/11
4/17
4/19
4/23
4/28
14/30
