FINANCIAL ACCOUNT 101

THE ACCOUNTING EQUATION & INTRODUCTION TO THE BOOKS OF ACCOUNT.

Hey Guys, Happy Eid-El-Kabir Celebration. Today is a new day and we are going to have fun on the above mentioned Topics.

THE ACCOUNTING EQUATION.

The Accounting Equation is the Fundamental Equation of the entire financial account. In order words, it the beginning of all equations in account as a whole, the Foundation.

1.     Assets are properties of a business. They are things owned by a business and are expected to be of Future Benefit. For example, Motor Van, Furniture & Fitting, Stock etc.

2.     Capital is the Total amount invested by the owner of a business. It is the Net Worth of a business.

3.     Liabilities are amounts of money owed by a business to outsiders. For example, Bank Overdraft, Creditors etc.

Therefore, the account equation is:

Assets= Capital + Liabilities

Example 1:

                    

Assets	Liabilities	Capital
a)      450,000	?	200,000
b)          ?	150,000	80,000
c)       270,000	60,000	?
d)      130,000	?	100,000

       a)     Assets= Capital + Liabilities

       450,000= 200,000 + L

               L= 450,000 - 200,000

                 =250,000

      b)    Assets= Capital + Liabilities

         A         = 80,000 + 150,000

         A          = 230,000

     c)     Assets= Capital + Liabilities

     270,000= C   + 60,000

               C= 270,000 – 60,000

               C = 210,000

      d)    Assets= Capital + Liabilities

     130,000= 100,000 + L

              L= 130,000 – 100,000

              L= 30,000

So, that is it for accounting equation. It is easy you can try some on your own.

 INTRODUCTION TO THE BOOKS OF ACCOUNT.

 Journal is a book of primary entry into which Transactions are entered on a daily basis, classified into debit and credit sides and finally posted to the Ledger. It’s the First book where day-to-day transactions are recorded before being transferred to the Ledger.

Transaction can be defined as the exchange of goods and services for money. It can be divided into two namely:

1.      Cash Transaction is when cash is immediately exchanged for goods and services.

2.      Credit Transaction is when goods are exchanged without immediate payment.

SOURCE DOCUMENTS.

All entries into these books must be supported by documentary evidence. Therefore, these books provide detail information for the preparation of the books of account.

1.     Invoice- sets out Full Details of Goods sent by a Supplier to Buyer stating Quantity, Price, Discount Given & Terms of Agreement.

2.     Credit Note- is a document sent by a seller to his customers for reduction in the amount owed by him. It may be because of goods damaged or overcharge of some goods.

3.     Debit Note- is a document sent by a seller to a buyer to correct an undercharge of goods.

4.     Petty Cash Voucher- covers payments credited to the petty cash book.

5.     Statement of Accounts- is a document sent by a seller to a buyer at regular intervals showing the debit and credit of the account. It’s like a summary of the entire Transactions of a period sometimes a month. For example, the Statements sent by Banks to their customers telling them of their account balance and stating the Transactions undergone in the past month.

There are two Books of Account that are necessary in the recording of Financial Transactions and they are:

1.     Subsidiary Books.

2.     Principal Books.

SUBSIDIARY BOOKS.

 They are books of original entries in which Transactions are initially recorded before being transferred to the Ledger. This is not part of the Double Entry System.

CLASSIFICATION OF SUBSIDIARY BOOKS:

1.     Sales Day Book.

2.     Purchases Day Book.

3.     Return Inwards Journal.

4.     Return Outwards Journal.

5.     Cash Book.

6.     Journal Proper.

7.     Petty Cash Book.

8.     Bills Book.

SALES DAY BOOK.

It is a book used for recording goods sold on credit to customers. Cash Sales and Sales of Fixed Assets must not be recorded in this book. Total of Sales Day Book will be transferred to the Credit Side of Sales Account in the Ledger and the Personal Account to the Debit Side of the Ledger. It looks like this.

Date	Particulars	F	Details	Total

                    PURCHASES DAY BOOK.

It is a Book used for recording all the goods purchased on credit from the supplier. Purchases of Fixed Assets and Cash Purchases are not recorded. Total of Purchases Day Book will be posted to the Debit Side of the Purchases Account Ledger, and the Supplier’s Account to the Credit Side of the Ledger. It is the opposite of the Sales Day Book and it looks like this.

Date	Particulars	F	Details	Total

This concludes our session today, hope you enjoyed it. Please do practice on your own as this would help you fully understand it. Until we meet again, remain ever blessed.