Financial Accounting/Session 3

 INTRODUCTION TO DOUBLE-ENTRY BOOKKEEPING 

Knowledge Base 1
After this chapter you should be able to explain your understanding of:
 * the term accounting and its use
 * how various transactions affect the principal items in the accounting equation
 * the history of accounting
 * the relationship between accounting and bookkeeping
 * relationships between the equation and article positions of the balance sheet
 * how to present and explain the accounting equation
 * who the users of accounting are and what information they may be interested in
 * capital, assets, debtors, liabilities and creditors and their differences

 THE ACCOUNTING EQUATION AND BALANCE SHEET 

In simple terms the accounting equation will help you determine what transactions need to be placed where in the bookkeeping records using the old double entry system. Many people refer to them as “T” accounts, which graphically shows what the “books” look like on paper. As time has progressed, we have devised more inventive and invaluable tools to maintain the accounting systems and bookkeeping records methods. However, no method would be useful without a sound knowledge and understanding of the accounting equation or balance sheets. Accounting has been described as a method of quantifying and communicating economic information to allow informed decisions to be made by its users based on available information. This all amounts to what value of currency units are placed in various columns to balance the monetary transactions of trade and arranging the order of the transactions in such a way that they make sense to decision makers. By the same token, they should represent an honest and true statement of standing as at the time they were recorded. Accounting is not mathematics. Just because you can perform integral calculus, does not mean you are an accountant, and just because you master the Reducing Balance Method does not mean you are a mathematician. Accounting and Maths are two separate disciplines, although being a bit of a mathematician does help in accounting practice too. So long as you can perform the the four primaries of Maths (add, subtract, multiply and divide) without a “Japanese Brain” - a calculator, then you are sure to manage the basics with ease.