Topic 7: Introduction to Accounting
Objectives:
 What is bookkeeping?
 What is accounting?
 Objectives of accounting
 Difference between accounting and bookkeeping
 Important users of accounting
 Accounting Equation
Introduction
Accounting is often called the "language of business." It involves recording, summarizing, and
reporting financial transactions to help people understand the financial health of a business or
organization. In simpler terms, accounting tells us how much money is coming in, how much is
going out, and what is left over. This information is crucial for making smart business decisions.
What is Bookkeeping?
Bookkeeping is a part of accounting that focuses on the day-to-day tasks of recording financial
transactions. This includes keeping track of sales, purchases, receipts, and payments. Think of
bookkeeping as the foundation of accounting—it's the detailed record-keeping that helps
≈accountants create financial reports.
What is accounting?
Accounting is using bookkeeping records to prepare financial statements and to help in decision
making.
Objectives of Accounting
The main objectives of accounting include:
1. Recording Transactions: Keeping a detailed record of all financial activities.
2. Summarizing Data: Organizing and summarizing the recorded transactions to make sense
of the data.
3. Reporting Financial Performance: Preparing financial statements that show how well a
business is doing.
4. Assisting Decision-Making: Providing valuable information to help managers and
stakeholders make informed decisions.
Difference Between Accounting and Bookkeeping
While bookkeeping and accounting are closely related, they are not the same:
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Bookkeeping: Involves the routine task of recording daily financial transactions.
Bookkeepers ensure that every transaction is accurately logged in the right accounts.
Accounting: Involves analyzing and interpreting the data collected by bookkeepers.
Accountants use this information to prepare financial statements, analyze business
performance, and provide insights for decision-making.
In short, bookkeeping is like collecting ingredients for a recipe, while accounting is like cooking
and presenting the dish.
Important Users of Accounting
Different people and groups use accounting information for various reasons:
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Business Owners: To understand profits, losses, and cash flow.
Managers: To make decisions about spending, budgeting, and planning for the future.
Investors: To evaluate whether to invest in a company based on its financial performance.
Creditors: To determine whether to lend money to a business.
Government: To collect taxes and ensure businesses comply with regulations.
The Accounting Equation
At the heart of accounting is the accounting equation:
Assets = Liabilities + Capital
This equation represents the relationship between what a business owns (assets), what it owes
(liabilities), and the owner’s interest in the business (equity).
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Assets: Everything a business owns that has value, like cash, inventory, and equipment.
Liabilities: What a business owes to others, such as loans and unpaid bills.
Capital: The total of resources invested into the business by its owner.
This equation must always be balanced, meaning that the total assets will always equal the total
liabilities plus the owner’s equity.
Types of Assets
Non- Current Assets: Assets that have a long life and benefits of which are not exhausted within
one year. Example: Building, Equipment, furniture, fixtures and fittings, Motor Van, goodwill
(intangible asset), etc.
Current Assets: Assets that have a short life and benefit of which are exhausted within one year.
Example Cash, bank, inventory
Types of Liabilities
Current liabilities: Liabilities that have to be paid within one year. Example: Trade payables.
Non-current liabilities: That do not have to be paid within one year. Example; bank loan.
Key Terms:
Transaction: Transaction refers to any event which is measurable in terms of money and which
changes the financial position of a business concern.
Asset: Resources owned by the business
Current Asset: Assets that have a short life and benefit of which are exhausted within one year.
Non-Current Asset: Assets that have a long life and benefits of which are not exhausted within one
year.
Capital: The total of resources invested into the business by its owner.
Liability: Resources that are owed by the business
Current Liability: Liabilities that have to be paid within one year.
Non-Current Liability: Liabilities that do not have to be paid within one year.
Inventory: Goods unsold and retained with the business.