Introduction to Accounting

What accounting is and who uses it, the qualities of useful information, the basic terms (assets, liabilities, capital, drawings), and trade and cash discount.

Key ideas

• Accounting identifies, measures in money, records and communicates the economic events of a business to the people who use the information.
• Book keeping is only the recording; accounting also classifies, summarises, analyses and reports the results.
• Owners and management use accounts inside the business; banks, suppliers, investors, employees and the tax authorities use them from outside.
• Useful accounting information is reliable, relevant, understandable and comparable.
• Assets are what the business owns, liabilities what it owes to outsiders, capital what the owner has invested, and drawings what the owner takes out for personal use.
• Current assets (stock, debtors, cash, bank) turn into cash within a year; non-current assets (land, buildings, machinery, furniture, vehicles) are kept for long-term use.
• Trade discount is a cut in the list price and is never recorded; cash discount is allowed for prompt payment and is recorded as discount allowed or received.

Remember

Watch out

• Working the cash discount on the list price instead of on the amount after trade discount.
• Recording trade discount in the books.
• Treating drawings as a business expense: they reduce capital, not profit.
• Forgetting to add back drawings when finding profit from opening and closing capital.

Worked example