AFIN102: FINANCIAL ACCOUNTING

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AFIN102: FINANCIAL ACCOUNTING
UNIT 1
 INTRODUCTION TO ACCOUNTING
INTRODUCTION TO ACCOUNTING
Learning outcomes:
• Describe the purpose and aims of financial and management
accounting.
• Describe the different users of financial information.
• Describe the main types of business operating ‘for profit’ and
their accounting obligations.
 INTRODUCTION TO ACCOUNTING
What is Financial Accounting?
• The art of recording, classifying, summarizing and
communicating of financial information (in form of income
statement and balance sheet) to the users of such information to
help them make informed financial decisions.
Purpose of Financial Accounting
• A business should provide information about its resources and
activities because there are many groups of people who want or
need that information.
 INTRODUCTION TO ACCOUNTING
• Accounting information aids the efficient running of a business in
many ways.
• Indicates how successfully managers are performing.
Objectives and Scope of Accounting
• To keep systematic records.
• To ascertain profitability.
• To ascertain the financial position of the business.
• To assist in decision-making.
• To fulfill compliance of the law.
 INTRODUCTION TO ACCOUNTING
Users of Accounting Information and their interest
• Managers of the company (Board of directors) – efficiency,
performance and decision making.
• Shareholders of the company – performance and profitability.
• Trade contacts – purchases and sales.
• Lenders – loans and interest payments.
• Tax authorities – correct tax.
Users of Accounting Information and their interest
• Employees of the company – salaries, future of company.
 INTRODUCTION TO ACCOUNTING
• Financial analysts and advisers – client audience.
• Government and its agencies – national statistics, compliance.
• The public – local economy.
• Competitors – benchmarking.
Financial Accounting and Management Accounting
• Financial accounts: are produced to satisfy the information
requirements of external users.
 INTRODUCTION TO ACCOUNTING
• Management accounting seeks to provide financial information in
a form which can help decision-making in a business.
• Management accounts are produced for internal purposes-they
provide information to assist managers in the running of the
business.
Financial Accounting information
• Financial accounting comprises of two stages:
1. Book-keeping, which is the recording of day-to-day business
transactions; and
 INTRODUCTION TO ACCOUNTING
2. Preparation of accounts, which is the preparation of statements
from the book-keeping records.
• These statements summarizes the performance of the business
usually over the period of one year.
The Main Financial Statements or Reports
• The principle financial statements of a business are:
1. The statement of financial position (balance sheet) – records
assets and liabilities;
 INTRODUCTION TO ACCOUNTING
2. The income statement (trading ,profit and loss account) –
records incomes and expenditure; and
3. The cash flow statement – shows changes in then cash of the
business.
Classes of transactions
• Assets ‣ Control ‣ Past event ‣ Inflow of benefits.
• Liabilities ‣ Present obligation ‣ Past event ‣ Outflow of benefits.
• Equity (Capital) ‣ Money invested in the business by owners.
• Income ‣ Increase in asset ‣ Reduction in liability.
 INTRODUCTION TO ACCOUNTING
• Expense ‣ Reduction in asset ‣ Increase in liability.
Basic Forms of business entity's
1. Sole trader or sole proprietorship – Single owner, unlimited
liability.
2. Partnership – Two or more owners, unlimited liability.
3. Limited liability companies – has a separate legal existence
from that of its owners, hence personal liability is limited to capital
contribution.
4. Public entities – owned by government.
5. Not for Profit Organizations – created to provide a service
without profit motive.
 AFIN102: FINANCIAL ACCOUNTING
UNIT 2
ACCOUNTING CONCEPTS
Setting of Accounting Standards
 ACCOUNTING CONCEPTS
• Global Accounting Standards are issued by the International
Accounting Standards Committee (IASC) which was established
in 1973.
• The need for the IASC arose because of international investment,
the growth of multinational firms and the desire to have common
standards worldwide.
• The IASC became known as the International Accounting
Standards Board(IASB) under a restructuring in 2000.
Examples of Accounting Standards
International Accounting Standards (IAS)
 ACCOUNTING CONCEPTS
• Presentation of Financial Statements (IAS 1)
• Statement of cash flows (IAS 7)
• International Financial Reporting Standards (IFRS)
• Financial instruments (IFRS 9)
• Leases (IFRS 16)
Qualitative characteristics of financial information
• Relevance – information that makes a difference to decisions
made by users (nature and materiality).
 ACCOUNTING CONCEPTS
• Faithful information – complete (helps understand and includes
descriptions and explanations), neutral (no bias) and free from
error.
• Comparability – identify similarities/differences between entities
and year-on-year ๏ Verifiability – assures the information
represents the economic phenomena it represents.
Qualitative characteristics of financial information
• Timeliness – information is less useful the longer it takes to report it.
 ACCOUNTING CONCEPTS
• Understandability – user have a reasonable knowledge of business
and activities.
• Neutrality – information must be neutral, that is free from bias and
provided in an objective manner.
• Completeness – for information to be reliable it must be complete
within the bounds of materiality and cost.
Other factors
• a) Objectivity: Financial statements must represent faithfully the
effect of transactions and other events if either does so or could be
expected to do so it should be based on verifiable evidence.
 ACCOUNTING CONCEPTS
• b) Materiality: Information is material if its omission or misstatement
could influence the economic decisions of users taken on the basis of
its financial statements.
• c) Prudence: This is the inclusion of a degree of caution in the
exercise of the judgments needed in making the estimates required
under conditions of uncertainty so that assets or income are not
overstated and liabilities or expenses are not understated.
Fundamental concepts
• a) Going concern concept – The assumption is made that the
business entity will continue in existence for the foreseeable future.
 ACCOUNTING CONCEPTS
• b) Consistency concept – Once a business has decided which
accounting methods it is going to apply and how it is going to interpret
the various rules of accounting, it should be consistent in these
matters from year to year.
• c) Concept of prudence – The accountant should adopt procedures
which do not overstate or anticipate profits and do not understate
losses but which do provide for all potential losses.

Fundamental concepts
• d) Accruals concept – Revenues and costs are recognized as they
are earned or incurred, and not when the money is received or paid.
 ACCOUNTING CONCEPTS
• e) Materiality - If an item is ‘immaterial’, it may be that the costs of
recording it in a particular way outweigh any benefit of doing so.
• f) Historical cost concept – Items are stated in accounts at historical
cost i.e. at the amount which the business paid to acquire them.
Fundamental concepts
• g) Dual action
• Every transaction involves an act of giving and an act of receiving.
 ACCOUNTING CONCEPTS
• It is from this aspect of transactions that the double entry system
of bookkeeping was developed.
 AFIN102: FINANCIAL ACCOUNTING
UNIT 3
RECORDING FINANCIAL TRANSACTIONS
Learning outcomes
 RECORDING FINANCIAL TRANSACTIONS
• The accounting equation and double entry system of
accounting;
• Classification of accounting transaction;
• Documentation of business transactions and definitions; and
• Books of original entry and journals.

Accounting Equation
Assets = Capital + Liabilities
• Example:
 RECORDING FINANCIAL TRANSACTIONS
• On 1st January 2015, Mr. Chalwe Phiri started business with
K25,000. On the same day, he also received K10,000 from his
girlfriend as a loan. All the money was kept at the bank.
• Required: Show how this affects the accounting equation.
• Solution:
• Assets = Capital + Liabilities
• K35,000 = K25,000 + K10,000 (K35,000)

Introduction of Profit in the Accounting Equation

• Profits increase the capital of the business.
 RECORDING FINANCIAL TRANSACTIONS
• Example: on 1st July 2015 bought goods for K5,000 by cheque. And
on 3rd July he sold all the goods at K7,000 on cash.
• Required: Show how this transaction will affect the accounting
equation.
Solution
Assets = Capital + Liabilities
K30,000 (bank) K25,000 (original investment)
K 7,000 (cash) K 2,000 ( Retained profit)
K37,000 K27,000 + K10,000 (K37,000)
Introduction of Drawings in the Accounting Equation
• Drawings are amounts of money taken out of a business by its owners.
 RECORDING FINANCIAL TRANSACTIONS
• Example: On 1st September, withdrew K800 as drawings.
Solution
Assets = Capital + Liabilities
K30,000( bank) K25,000
k6,200 ( cash,k7000-800) K1,200 (retained profit, K2,000-800) + K10,000
= K36,200 = K36,200

THE DOUBLE ENTRY SYSTEM

• The double entry system simply requires that for every debit entry,
must a corresponding credit entry or vise versa. The rule states that
we debit the receiving side and credit the giving side with the same
value or amount.
 RECORDING FINANCIAL TRANSACTIONS
• The receiving side is called Debit (Dr) and the giving being called
Credit side (Cr).
• Therefore, the left hand side there will be the Debit side, while the right
hand side we will have the Credit Side.
 RECORDING FINANCIAL TRANSACTIONS
Summary of the Double Entry System
Rules of Debit and Credit under Double Entry System of Accounts
• The following rules of debit and credit are called the golden rules of accounts:
Classification of accounts Rules Effect
• Personal Accounts Receiver is Debited
Debtors & Suppliers Giver is Credited Debit = credit
• Real Accounts What Comes In Debited
Assets What Goes Out Credited Debit = credit
• Nominal Accounts Expenses are Debited
Expenses & Income Income is Credited Debit = credit TYPES
OF BUSINESS TRANSACTIONS
 RECORDING FINANCIAL TRANSACTIONS
• The word transaction simply means the exchange of values. It is the exchange or
transfer of goods, services or funds. The following are three main types of
transactions:
• Cash transaction: this is buying and selling of goods or services on cash;
• Bank transaction: the buying and selling of goods or service by cheque or electronic
transfer; and
• Credit transaction: the buying and selling of goods or services on credit i.e. payment
deferred to a later date.
• These three types of transactions are the ones we will meet and record in this course.
TYPES OF ACCOUNTABLE DOCUMENTS
• Quotation
 RECORDING FINANCIAL TRANSACTIONS
• Purchasing order
• Sales Order
• Goods Received Note
• Goods Dispatched Note
• Invoice
• Statement of Account
• Credit Note
• Debit Note
• Remittance Advice
• Receipt

BOOKS OF ORIGINAL ENTRY

• Sales day book(Sales journal): Used to record credit sales. It uses duplicate
invoice note.
 RECORDING FINANCIAL TRANSACTIONS
• Purchases day book (Purchases journal): Used to record credit purchases. It
uses original invoice note.
• Sales returns (Returns inwards Journal): For returns inwards or goods sold
on credit and have now been returned by the customer. It uses duplicate credit
note.
• Purchases returns( Returns outwards journal): For returns outwards or goods
returned by the business to its suppliers. It uses original credit note.
BOOKS OF ORIGINAL ENTRY
• The Cash book: For recording receipt and payments of cash, cheque and electronic
transfers.
 RECORDING FINANCIAL TRANSACTIONS
• Petty cash book: For recording cash transactions of small amount e.g. purchase of
stationery, postage, tax fares, refreshments etc. The petty cashier is given the starting
sum of cash known as float or imprest.

• General journal or Journal: Used to records transaction which can not be recorded
in the above books. It is used to record the double entries which do not arise from other
books of prime entry, e.g. if the errors have been made and need correction, the journal
would be used.

BOOKS OF ORIGINAL ENTRY

• The Cash book: For recording receipt and payments of cash, cheque and electronic
transfers.
 RECORDING FINANCIAL TRANSACTIONS
• Petty cash book: For recording cash transactions of small amount e.g. purchase of
stationery, postage, tax fares, refreshments etc. The petty cashier is given the starting
sum of cash known as float or imprest.

• General journal or Journal: Used to records transaction which can not be recorded
in the above books. It is used to record the double entries which do not arise from other
books of prime entry, e.g. if the errors have been made and need correction, the journal
would be used.
 AFIN102: FINANCIAL ACCOUNTING
UNIT 4
TYPES OF ACCOUNTS AND LEDGERS
TYPES OF ACCOUNTS AND LEDGERS
Learning outcomes
• Real, Nominal accounts, personal accounts;
• General Ledger: Income accounts, assets accounts, debtors
accounts, liability accounts, capital accounts; and
• Purchase ledger, sales ledgers, cash book.
TYPES OF ACCOUNTS AND LEDGERS
• The word accounts means “ history of.” it means a place where
all the information referring to a particular asset or liability, or to
capital, is recorded.
• The following are the types or classification of accounts:
• Personal Accounts:
• Accounts for debtors and creditors i.e. customers and suppliers.
• Examples are: Mwanza, David, George, Ram, or Shyam, ABC
Ltd, MC General Dealers, R. M Industries etc.
 TYPES OF ACCOUNTS AND LEDGERS
• Real Accounts:
• Accounts in which possessions or assets of a business are
recorded.
• Examples are: buildings, machinery, fixtures, inventory,
goodwill, patent, copyright etc.
• Nominal Accounts:
• Accounts in which expenses, losses, income and capital are
recorded.
• Examples are: rent account, salary account, electricity account,
interest received account, etc.
 TYPES OF ACCOUNTS AND LEDGERS
• TYPES OF LEDGER ACCOUNTS
• General Ledger (Nominal Ledger): The ledger book for
assets, liabilities, income, expenses, profit and loss. This leger
book consists of a large number of different accounts and each
account having its own name.
• Sales Ledger or Receivable Ledger or Debtor’s Ledger: This is
the ledger book for customers’ personal account.

• TYPES OF LEDGER ACCOUNTS

 TYPES OF ACCOUNTS AND LEDGERS
• Purchases Ledger or Payable Ledger or Creditor’s Ledger:
This is the ledger book for supplier’s personal account.
• *Cash Book: This is a special ledger book because the double
entry system can be completed with the cash book.
• Class Exercise 4.1 (Exercise 4 on the portal)
• EXERCISE 4.1
• On 1 January, Robert Phiri started a business with K2,500 in the bank
and K500 cash. The following transactions occurred:
• 2 January - He bought raw materials on credit for K700 from Martin
Banda.
• 3 January - He sold goods for K300 on credit to Godwin Zulu.
• 7 January - He sold goods for K1,100 to Lemon Kabwe on credit.
• 12 January - He bought equipment for K1,500, paying by cheque.
• 18 January - He paid wages of K50 by cheque.
• EXERCISE 4.1 cont’d
• 20 January - He bought raw materials for K350, paying by cheque. He
took K80 from the cash box for himself.
• 28 January - He paid Martin Banda K250 by cheque.
• 30 January - He transferred K200 cash into the bank from his cash box.

• Required:
• Record the above transactions in the ledger accounts.
OMEGA