Chapter 1

An introduction to
business and accounting
1.1. Accounting
 Accounting information is needed by business of all types and
sizes including , sole traders, partnerships and companies. It is also
needed by entities that exist for a reason other than making a profit.
Such not-for-profit entities include charities, societies and government
departments.
This text will explain bookkeeping for a business but remember
that much of what is covered would also be relevant to other types of
entity.
 1.2.User of Accounting information
• Internally user , providing management with information needed to
run the entity.
Example: manager , officer, employee.
• Externally user, providing information for other interested parties to
understand the position and performance of an entity.
For example: shareholders , investor , tax authorities, customer ,
supplier , creditor .ect
 1.3. Type of Business
Accounting information is needed by business of all types and sizes
include :

• Sole traders,
• Partnerships and
• Limited Liabilities Companies.
 1.4. Bookkeeping
• Bookkeeping is a component of accounting
✓first step in an accounting process.
✓maintaining a record of all transactions entered into by a business.
✓The bookkeeping system is used to record the financial transactions of the
entity using a technique called double entry bookkeeping
• Functions of a bookkeeper:
✓Producing sales invoices
✓Recording financial transactions
✓posting debits and credits
✓Maintaining and balancing the general ledgers
✓Complying with controls set up to ensure
✓Preparing a trial balance
 Attributes of an effective bookkeeper
• Responsibility
bookkeepers is very important and must be carried out properly.
• Accuracy
bookkeepers to ensure the accurate recording and processing of transaction.
• Ethics
✓The international Federation of Accountants (IFAC) publishes the
“Handbook of the International Code of Ethics for Professional
Accountants” (the code).
✓KICPAA subscribes to this code which requires that professional
accountants must comply with several fundamental principles. These are
also relevant to bookkeepers.
2. BUSINESS TRANSACTIONS (cont’)
2. BUSINESS TRANSACTIONS (cont’)
 2. BUSINESS TRANSACTIONS (cont’)
▪ Simple or complex

✓For example, the sale of For example, the sale of a Samsung Galaxy phone by a
retailer to a customer for cash is a simple transaction.

✓If the same sale is made on credit (where the customer does not pay
immediately) the transaction is more complex.
 2.BUSINESS TRANSACTIONS (cont’)
▪ One-off transactions and ongoing transactions
Many transactions might occur on a single occasion. However, there are
some relationships which lead to a series of transactions of an ongoing
nature.
Example : a person buying a Samsung Galaxy would need a contract with a
mobile phone network
 3.The difference between capital transactions and
revenue transactions

▪ Capital expenditure is expenditure made to acquire or improve long term assets that are
used by the business: include : Purchase PPE ,Installation costs ,Improvements and
additions to existing, To pay fees associated with raising long term finance. We record as
‘non-current asset’

▪ Revenue expenditure is expenditure on day-to-day operating expenses

Example : Purchase of goods mean for resale, Purchase of raw materials and components
used to manufacture goods, Running costs of a business, Repair non-current assets, Costs of
administering a business. We record as EXPENSE
 4.Revenue income and capital receipts

• Revenue income is income arising from the normal operations of a business from
its investments. Examples include:
✓Revenue from the sale of goods
✓Commissions and fees received and receivable
✓Interest received and receivable from savings
✓Rent received and receivable
• Capital receipts are receipts of ‘long term’ income, such as money from a bank
loan, or new money invested by the business owners (which is called ‘capital’).
Practice: A business entity borrows 1,000,000 KHR from a bank for five years and
pays interest of 80,000 KHR on the loan for the first year.
Loan: 1mKHR is capital receipts because it is long term liabilities.
80,000 KHR interest is an expense
 5.FINANCIAL STATEMENTS

• The accounting system provides the data that is used to prepare the
financial statements of the entity at the end of each financial year.
❖A statement of financial position (formerly called a balance sheet)
reports the financial position of an entity as at a point in time, usually
the end of a financial year. The financial position of an entity is shown
by its assets, liabilities and equity (owners’ capital)
❖A statement of profit or loss (showing the financial performance of the
entity over that period). The statement of profit or loss show
revenue , expenses and profit or loss.
 5.1. Statement of financial position

Assets are classified as current or non-current:

▪ A current asset is expected to give a benefit in the next 12 months (at
most).
Example : cash , account receivable, note receivable, supplies,
inventory, prepaid expenses etc.
▪ A non-current assets is assets that will provide a benefit in periods longer
than 12 months (often many years)
Example : land, building , equipment , goodwill , license etc.
 5.1.Statement of financial position

Liabilities are classified as current or non-current

▪ A Current liabilities will be paid in the next 12 months.
▪ Non-current liability is liabilities that will be paid after more than 12
months.
 5.1. statement of financial position

Expenses Drawing

Equity
Revenue Capital

Net profit = Closing net assets – Opening net assets + Drawing – Capital introduce
 Statement of Profit or loss
❖ Income consists of:
▪ Revenue from the sale of goods or services
▪ Other items of income such as interest received from investments
▪ Gains from disposing of non-current assets for more than the amount at
which they are carried in the records (carrying amount
❖ Expenses consist of:
▪ Expenses arising in the ordinary course of activities
▪ Losses arising from disasters
❖ Gross profit is the sales revenue minus the cost of sales in the period,
❖ Net profit (or loss) is the profit after all other income and all other expenses
for the period
Statement of Profit or loss
 Gross profit and Net profit
• Gross profit = Sales – Cost of goods sold
• Net profit = Gross profit – Operation expenses
✓Operation expenses include : rent expense, salaries expenses,
depreciation expenses, interest expenses ..etc
Test 1
We have accounts in company UEF bellow:
Cash ,Accounts Receivable, Allowance for Doubtful Accounts, Interest
Receivable, Inventory ,Supplies, Prepaid Insurance, Prepaid Rent, Land,
Equipment, Accumulated Depreciation— Equipment, Buildings Accumulated
Depreciation— Buildings, Copyrights, Goodwill, Patent. Notes Payable
,Accounts Payable, Unearned Service Revenue, Salaries and Wages Payable
,Unearned Rent Revenue, Interest Payable, Dividends Payable, Income Taxes
Payable, Bonds Payable ,Discount on Bonds Payable, Premium on Bonds,
Payable Mortgage Payable, Owner’s Capital, Owner’s Drawings , Retained
Earnings, Service Revenue, Sales Revenue , Gain on Disposal of Plant Assets,
Expense, Amortization Expense, Bad Debt Expense, Cost of Goods Sold,
Depreciation Expense, Freight-Out, Income Tax Expense, Insurance Expense,
Interest Expense, Loss on Disposal of Plant Assets, Maintenance and Repairs
Expense ,Rent Expense, Salaries and Wages Expense, Supplies Expense,
Utilities Expense .
Require classifies these account about to table below:
 Asset Liabilities Equity Revenue Expense
Non current asset Non Current liabilities Owner’s Equity Revenue Expenses

Current asset Current liabilities

Accounting Equation

Asset = Liabilities + Equity

Asset = liabilities + Capital - Drawing + revenue – expense

Note:
▪ All the transaction effect on accounting equation but it still balance.
▪ If its effect both side , its increase both side or decrease both side
▪ If its effect one side , its increase one and other one decrease.
 Analysis transaction of business
1. The company pays cash to buy an asset for 65,000 KHRm
2. The company buys an asset on credit for 55,000 KHRm.
3. The company borrows 100,000 KHRm
4. The company pays 1,000 KHRm to one of its creditors
5. The company sells goods which cost it 5,000 KHRm for cash of 7,000 KHRm

Assets Equity Liabilities

Cash (65,000) asset (65,000)

1
2
3
4
5
Practice 1
 Assets Equity Liabilities

5
 Assets Equity Liabilities

5
Practice 2
 Assets Equity Liabilities

5
Practice 4
Practice 5
Practice 6
Practice 7
Thank