Topic 1 of 6 · Form 3
Fundamentals of accounting
Book-keeping records financial transactions; accounting summarises, analyses and communicates them. Users: owners, managers, lenders, suppliers, employees, tax authorities and potential investors.
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Purpose
Book-keeping records financial transactions; accounting summarises, analyses and communicates them. Users: owners, managers, lenders, suppliers, employees, tax authorities and potential investors.
The accounting equation
Assets = Capital + Liabilities (Assets − Liabilities = Capital). Every transaction keeps the equation in balance.
Worked example: Capital US$15 000; liabilities US$6 000. Find total assets.
15 000 + 6 000 = US$21 000
Accounting principles
Business entity, consistency, duality, going concern, historical cost, matching (accruals), materiality, money measurement, prudence, realisation.
Policies
Comparability, relevance, reliability and understandability; international accounting standards.
Profit and loss
Profit increases capital; losses and drawings decrease it.
Check yourself
- State the accounting equation.
- Which principle says the owner's personal transactions are separate from the business?
- Give one effect of drawings on the accounting equation.
Show answers
- Assets = Capital + Liabilities.
- Business entity.
- Assets (e.g. cash) decrease and capital decreases by the same amount.
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