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Introduction to bookkeeping and accounting
Introduction to bookkeeping and accounting

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2.7 Summary

  • Accounting records are the day-to-day records of all financial transactions and other relevant financial information concerning a business.
  • Financial statements are summaries of accounting records to satisfy the relevant financial information needs of stakeholders of a business.
  • The owner(s) of a business is (are) the main stakeholder(s) in a business but there are a number of other stakeholders.
  • In accounting terms, the business is a separate entity from its owner(s) even if the business is owned by a sole trader with unlimited liability for the debts of the business.
  • In accounting terms, the business is a separate entity from its owner(s) even if the business is owned by a sole trader with unlimited liability for the debts of the business.
  • Liabilities are debts owed by the business.
  • Capital is the owner’s investment in the enterprise.
  • The vertical balance sheet of a business reflects the accounting equation: Assets – Liabilities = Capital.
  • Financial transactions have two aspects which must be equal to keep the accounting equation in balance.
  • Financial transactions are recorded by debits and credits in the ledger accounts (also known as T-accounts).
  • Assets are represented by debit balances while liabilities and capital are represented by credit balances.
  • The following rules apply to asset, liability and capital accounts.
Figure 20
  • To calculate the balance in an asset account we calculate the excess of debits over credits to get the net debit balance.
  • To calculate the balance in a liability or capital account we calculate the excess of credits over debits to get the net credit balance
  • The balance carried down figure within an asset account is always on the credit side of the account and is brought down as a debit balance.
  • The balance carried down figure within a liability or capital account is always on the debit side of the account and is brought down as a credit balance.