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Principles of accounting

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Introduction

PART A Introduction A sole trader is a form of business with only one owner. The owner usually manages the business with the help of family members or a few paid employees. The owner contributes all the capital and takes all the profits and bears all the losses. The relationship between the total assets, owner's equity and liabilities of a sole trader is expressed very clearly in the accounting equation that is Assets = Owner's equity + Liabilities. Accouonting Entity concept According to the accounting entity concept, the business is regarded as an accounting entity to itself, separate and distinct from its owner. Thus from the viewpoint of the business, any capital contributed by the owner is something that the business owes the owner. It is called owner's equity as distinguished from liabilities which represent the debts that the business owes the other parties. The owner's equity represents the owner's financial interest in the business. From the business point of view, the owner's equity is a liability. In the course of business' operations, the individual elements in the accounting equation, that is the owner's equity, assets and liabilities in the accounting equation will change, as new transactions take place. Increase in the owner's equity can be brought about by additional to capital and net profit from the year's business activities. ...read more.

Middle

The business may use funds borrowed from the sources outside the business. These outside sources or external creditors have a claim on the assets of the business. Liabilities are classified according to their period of repayment. They are as follows: Long-term liabilities- These are debts of the business which have a repayment period of more than one accounting period, e.g. loans and mortgages. Current liabilities- These are short-term debts of the business that are usually settled within one accounting period, e.g. creditors and bank overdrafts. Capital When a proprietor invests in his business, he credits the Capital Account. Profits, since they increase capital, are credited, while drawings from capital are debited to the account as they decrease capital. EXAMPLE: Nat is a sole trader. The following Trial Balance was extracted from his books on 31 December 2005. Debit ($) Credit($) Debtors 380 Drawings 1000 Cash in hand 30 Cash at bank 420 Fixtures and fittings 1180 Stock, 1 January 2005 805 Purchase 4200 Carriage inwards 40 Rent and rates 820 Light and water 90 Miscellaneous expenses 130 Returns outwards 30 Capital 2055 Creditors 515 Sales 6450 Discount received 45 _____ 9095 9095 The following adjustments have to be taken into consideration before preparing the final accounts: 1. ...read more.

Conclusion

However, the business may have to take this important information into consideration when making business decisions. Objectivity There must always be objective verifiable evidence for reporting any accounting information. The evidence that a business transaction has taken place and the details pertaining to that transaction are contained in a source document. Source documents are examples of objective evidence of transactions that have taken place. These documents include receipts, invoices, cheques and vouchers. Each source document initiates the process of recording a transaction and all accounting entries are supported by these source documents. It is this desire for objectivity that also explains why historical cost rather than current market value forms the basis of valuation of assets. The cost price of the purchase of an asset can be objectively verified through the documentary evidence of its purchase, either in the form of an invoice (in the case of a credit purchase) or a receipt (in the case of a cash purchase). Conclusion Although not every business compiles its records in exactly the same way, all business organizations observe the general accounting principles, adapting them to the special requirements of each business. The difference between the accounts of these three types of business organizations (sole proprietorship, partnership, a company) lies in the recording of the owner's capital and the distribution of profits. The keeping of other accounts remains the same. 1 ...read more.

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