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Accounting concepts and an

intro to Book Keeping

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Learning outcomes
To be introduced to the idea of a virtual

framework for accounting

To comprehend the rules within which the
profession has to work
An introduction to the idea of accounting as
a system

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Accounting Rules
Please note that these rules have been established by

accountants over a long period of time.

You might find them called other things such as
regulations, conventions, concepts, policies, principles.
Whatever they are called they underpin the processes
which lead to final financial statements
The adoption of accounting principles and policies is
covered by the IAS8.
The main rules under thee headings,
boundary rules,
measurement rules and
ethical rules.

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Boundary Rules
These refer to what should and should not

be recorded in the accounts, and they limit

what is and is not reported.
Entity
Periodicity
Going concern
Quantitative

Lets look at each one in turn

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Entity:
Data collected should be restricted to the

entity, this can be difficult for a small entity

as it might be hard to distinguish between
the affairs of the entity and the owner.
An example might be charging household
bills, the accountant will have to distinguish
between what has been used for the
business and what has been used privately.

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Periodicity:
Most entities have an unlimited life, so the

accountant has to decide when reports are

drawn up. This will usually be every year.
This can be problematic as the business
keeps on going, so this can be quite
arbitrary, as things are still going on when
the accounts are drawn up.
This leads to a need for what is known as
accounting adjustments.

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Going Concern:
This assumes that the business will keep

going for the foreseeable future, this has to

be right as if the business is about to close
down, different valuations might apply

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Quantitative;
Accountants should limit the data collected

to matters which are easily quantifiable. For

example you cannot measure experience
and skills.

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Apply the boundary rules to the

following examples
Al Station starts a new business selling

timeshares. He wants to charge dog food

for his pet Spot, to his sole traders account.
Can he? If not why not?
Al wants to charge the entity 10,000 for
his extensive experience selling timeshare
flats in Majorca. Can he?
A tax bill arrives which Al cannot afford to
pay, and his Jeep is repossessed. He tells
the tax man that he paid 12,000 for the
jeep,, and will knock this off his tax bill.
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Al 2
After bankruptcy, Al starts up a security

firm called Als Agents.

He buys two trained Dobermans Fido and
Spot. They cost 500 each and are 1,000
to train. Can he charge this to the entity?
He buys a years worth of dog food from
Woofalot. Three months later at the end of
April he asks the accountant to close the
accounts for the first year and to charge all
the food to the one year. Can he do this?
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Measurement rules:
These rules determine what should be kept

in the accounting system and how this

should be recorded.
Money measurement
Historic Cost
Realisation
Matching
Dual aspect
Materiality

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Money measurement:
Things are measured in money as it allows us to

fair comparisons between different types of

assets
Historic cost:
Transactions are recorded at their initial value

or historic cost, however inflation tends to over

value profit, especially if it is high.
Attempts have been made to make
adjustments for this, but as it varies and goes
up and down, none of the methods has stayed
in place for too long.
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Realisation:
It is difficult to determine when, for

example a sale should be recorded, is it

when the sale is made or when the cash
received?
Accountants tend to treat these
transactions, as when the cash is received,
or when they are fairly sure it will be
received.
This also needs to be considered for when
the entity is making a purchase.
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Matching:
Also known as the accruals principle has a

very close link with the realisation rule.

When drawing up final accounts you have
consider accrued expenses and prepayments,
and the effects they have on the accounts.
An accrual is an amount owing at the end of a
financial period for something that has been
used such as electricity of wages.
A prepayment is the opposite, something that
has been paid for and not yet used.
Sometimes, estimations have to be made.
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Dual aspect:
When a transaction takes place, there is a

twofold effect. Something is given, and

something else received. This has led to a
system called double-entry book keeping
which has been is use for several centuries.
These days most organisations use a
computerised system such as Sage or Mind
Your Own Books (MYOB).

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Examples
Al asks if he can revalue Spot and Fido to

2,000, as they are such good guard dogs.

Al is due 5,000 for providing security for Big
Jays leaving party. Jay is currently in
Majorca. He asks if he can buy a new Jeep
with this.
At the end of the accounting period, he has
used 3 months worth of dog food he has paid
12,000 for how will he account for this?
Jay receives 1,500 of the cash that Jay
owes, What account(s) will he record this in?
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Ethical Rules
These are things we need to consider when

we apply the rules, they are covered by

IAS8: Accounting policies, changes in
accounting, estimates and errors, which
states that accounts must be:
Relevant
Reliable
Comparable

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Relevance:
Entities need to provide useful information

to users of accounts, however, there is

almost a limitless supply which they could
provide, what is included in accounts needs
to be kept to a reasonable amount.

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Reliability:
For financial information to be reliable it

must meet the following five criteria:

Sustainability: it must reflect what has taken

place
Neutrality: It must be free from bias
Error-free: it must be free from errors
Complete: it must include all significant
information
Prudence: it must have been prepared with a
degree of caution

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Comparability:
information contained in financial

statements are only useful if they

understood by the people who receive
them. But they should not be over
simplified, so those using the accounts
need to have reasonable knowledge of
accounting, and have studied it with
reasonable diligence.

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This is a book/ledger/account
Blame Pacioli!
See History
Entities have to keep financial records, as

this is a legal requirement, see

http://www.hmrc.gov.uk/factsheet/record-ke
eping.pdf

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Entities have to keep financial records, as this is a

legal requirement, see

http://www.hmrc.gov.uk/factsheet/record-keeping.pd
f
. The main advantages are:
keep track of your expenses
ask for a bank loan or credit if you need to
see quickly what you are owed by others and how
much you owe them
save time and accountancy costs
pay the correct amount of tax
receive the correct amount of benefits or credits
avoid paying any extra tax or penalties.
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Other issues
The most important aspect which is often

overlooked is an entities need to look after its

cash, and inventory, in case of fraud or theft.
Organisations need to be vigilant to avoid this.
This link gives one example of the importance
accountants give to keeping good bank and cash
records.
To be able to do this an entity needs to establish
and maintain an accounting system, this will
enable it to achieve all the objectives above. Can
you think of any other expressions for the
accounting system?
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The System
To learn how to learn accounting techniques, it

can help to break down the problem into parts, as

this makes it less confusing.
Many people perceive accounting to be hard to
understand as much new terminology is used, but
it is much simpler if you break it down.
One of the first things learnt on most introductory
course is what is called double entry book
keeping which is a way of keeping records.
This is part of a bigger system which starts with a
transaction and finishes up with the final
accounts..
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Dual Aspect
Financial accounting systems were started up in

Western Europe in the 15th Century, and the

invention of double entry is accredited to Luca
Pacioli, a Venitian monk, see
http://aaahq.org/southwest/pacioli.htm . The reason
for this was worldwide trading which was taking
place at the time,
Merchants needed to keep a record of what they
were owed and who owed them what.
The modern terminology for this is receivables
(debtors) and payables (creditors). They also need
to know how much inventory (stock) that they had
in their warehouses
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These days the majority of organisations

use a system such as Sage, or if a smaller

organisation Excel.
However a more traditional method used in
text books is called T-accounts, this will be
used in conjunction with other guidance in
this session.
But please remember all you are doing are
adding and subtracting! The next section
will break down the system into its parts,
and we will examine in part in turn.
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The Equation

A + eX = L + E + R

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Or simply put
Asset
What the entity owns

Expenses
Day to day running costs be careful the purchase

of non-current assets which last more than a year is

not classed an expenses
Liability

What the entity owes

Equity
What funds the entity

Revenue
Funds into the organisation from sales and fees
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A simple method
If the left hand side

of the equation
increases
Add it to the

account total

If the left hand side of the equation

increases

Subtract from the

account total
If it decreases

If it decreases
Subtract from the

Add it to the

account total

account total

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But before we do this, you need to understand the terms debit

and credit, abbreviated to Dr and Cr. This is the core of the double
entry system, and if you understand this, everything follows!
So why two entries?
Think about the last time you bought a cup of coffee, what
happened? You make a purchase, and for that you gave the
person who brewed the coffee some money (even if it was on a
card)
There was an exchange, two things happened. Two things happen
in every transaction, something is given, and something received.
So both of these happenings have to be recorded in the accounts.
Think of some other transaction which might occur in an
organisation.

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Identify some transactions

Setting up the business with a cheque paid

into the bank

Making a cash sale
Buying ingredients with cash
Paying some cash wages
Buying a van for deliveries with cash
What accounts might you record these in?
dont forget to keep it simple!

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How do we know what to Debit and

what to credit?
An easy rule to remember is:
Debit the account that receives
Credit the account that gives

Or just remember that when you put

money in the bank you debit the bank

Take money out of the bank you credit the
bank
Dont forget that it is your account of the
bank and not the banks account of you or
your entity
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The accounting equation

Another good way of remembering is by

using the accounting equations

Assets = Liabilities +Equity
This is the basis of the Statement of
Financial Position
We can also consider the extended
accounting Equation

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How can I use this for book

keeping?
If an asset or expense increases
Its a debit

If an asset or expenses decreases

Its a credit

If a liability, equity or revenue increases

Its a credit

If a liability, equity or revenue decreases

Its a debit!

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Step by Step dont rush

Identify the transaction, and what is

happening
Identify the two accounts which it will be
recorded in
Decide which one will be debited and which
one credited

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Which account do I debit and which account

to I credit in the following transactions?
Why?
Making a cash sale
Paying a parking expense with cash
Making a cash sale of goods
Paying cash into the bank
Buying a van for the business

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