Accounting and Bookkeeping
Accounting is collecting, recording, analysing and summarising, and communicating the
financial information.
Bookkeeping is recording of financial information.
Accounting is periodic job whereas Bookkeeping is everyday job
Accounting is all about financial information representing the accounting concept called “Money
Measurement Concept” which states accounting will only include monetary items. Non-
Monetary items are not part of accounting.
Accounting Equation
Accounting Equation is a simple mathematical idea based on which whole financial accounting
stands on. It states the following
Assets = Liabilities + Capital
Because, all the assets are either bought using borrowed money or owners’ own money or blend
of both or using one of them.
Accounting Equation alternatively stated as:
Liabilities = Assets – Capital
Capital = Assets – Liabilities
Assets, Liabilities, and Capital
Assets are the resources owned by the business, e.g. land, building/premises, machinery,
computer, motor vehicles, furniture and fixtures, inventory, trade receivables, cash at bank, cash
in hand etc.
Liabilities are the debts or loans of the business, e.g. bank overdraft, trade payables, mortgage,
bank loans, debentures etc.
Capital is the money invested by the owner of the business using his or her own resources, e.g.
invested cash into the business, owner brought his vehicle into the business, owner paid
business expenses using his private money etc.
Drawings is the money withdrawn or goods taken by the owner for his personal use.
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Practice Questions
Q.1
State which of the following is an asset, liability or a capital?
Items Assets Liabilities Capital
Office Equipment
Receivables
Bank Balance
Payables
Motor Vehicles
Inventory of goods
Loan from Mr. Y
Investment by owner
Q.2
Complete the following table
Items Assets Liabilities Capital
(i) 50000 10000 ……..
(ii) 60000 …….. 45000
(iii) …….. 5000 50000
(iv) 40000 …….. 40000
(v) …….. 20000 20000
(vi) 60000 4000 ……..
Q.3
A sole trader has the following items among its assets, liabilities and capital at the end of
January 2007
Items $
Cash 22000
Inventory 28000
Receivables 21000
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Items $
Machines 20000
Payables 21000
Bank Loan 10000
Capital 60000
The following transactions occurred during the following month.
i. Purchase inventory for cash $2000
ii. Sold a machine for $3000 on credit
iii. Bought two machines on credit for $5000
iv. Repaid part of bank loan $4000
v. Received $2000 from a receivable
vi. Returned machine with purchase price of $1000 and amount was adjusted against the
amount owed
vii. The owner withdrew $1000 in cash for his personal use.
Show the effect of above transactions on assets, liabilities and capita in the form of
accounting equation
Items Assets Liabilities Capital
Cash
Inventory
Receivables
Machines
Payables
Bank Loan
Capital
Machines
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Transactions
These are the identifiable monetary statements between two parties. Transactions can be:
Cash transactions where goods or services are exchanged against money; and
Credit transactions where goods or services are exchanged against a later payment promises.
Every transaction effects dual sides according to accounting concept called “Duality” which states
that whenever a transaction occurs it effects either assets, or both assets, and liabilities, or
assets and capital etc.
Look at the transactions below:
Transactions Effects on
Assets Liabilities Capital
Henry starts off with a trading business by putting his
$50 000 savings in the business bank account.
Henry got an opportunity to have a financing from ABC
Bank to purchase office furniture costing $10 000.
Henry bought premises $ 20 000 paying by
cheque.
Henry brought his personal vehicle costing $4 000
within the business
Some inventory of goods was purchased on credit
from a supplier D. Ingram for $3 000.
Henry paid $1 000 to D. Ingram by cheque. This would
reduce bank balance (asset) and capital investment of
the owner.
