FUNDAMENTAL ACCOUNTING 1&2

Understand the role of Accounting in business and develop an awareness of the

accounting profession??

Accounting is the process of measuring and summarizing business activities, interpreting

financial information, and communicating the results to management and other decision
makers1. Accounting plays a vital role in running a business because it helps you track income
and expenditures, ensure statutory compliance, and provide investors, management, and
government with quantitative financial information which can be used in making business
decisions1. Some of the roles of accounting in business are:

 Evaluating business performance: Accounting helps you determine how well your business is
performing by providing financial statements that reflect the results of operations and the
financial position of your business2.
 Creating a budget and plans: Accounting helps you create a budget and future projections
based on your historical financial data, which can help you allocate your resources and plan your
growth strategies1.
 Monitoring cash flow: Accounting helps you monitor the amount of cash coming in and going
out of your business, which is essential for maintaining liquidity and solvency2.
 Ensuring statutory compliance: Accounting helps you comply with the laws and regulations
that apply to your business, such as taxes, pensions, and audits 1.
 Fraud prevention and detection: Accounting helps you prevent and detect fraud by
implementing internal controls and auditing procedures that safeguard your assets and ensure the
accuracy of your records2.
 Improved payment cycles: Accounting helps you improve your payment cycles by managing
your accounts receivable and payable, which can improve your cash flow and customer
relationships2.

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 By developing an awareness of the accounting profession, you can understand the importance of
accounting in business and the skills and knowledge that accountants need to perform their roles
effectively. Some of the skills that accountants need are:

 Analytical skills: Accountants need to analyze financial data and interpret it for various
purposes, such as reporting, planning, forecasting, and decision making.
 Communication skills: Accountants need to communicate financial information clearly and
concisely to various audiences, such as managers, investors, regulators, and customers.
 Technical skills: Accountants need to use accounting software and tools to record, process, and
present financial information in a timely and accurate manner.
 Ethical skills: Accountants need to follow ethical standards and principles that guide their
professional conduct and ensure their integrity and credibility.

Accounting is a diverse and dynamic field that offers many opportunities for career advancement
and specialization. Some of the common areas of accounting are:

 Financial accounting: Financial accountants prepare financial statements and reports for
external users, such as shareholders, creditors, regulators, and tax authorities.
 Management accounting: Management accountants provide financial information and analysis
for internal users, such as managers, executives, and employees.
 Auditing: Auditors examine financial statements and records to verify their accuracy,
completeness, and compliance with accounting standards and regulations.
 Taxation: Tax accountants prepare tax returns and advise clients on tax planning and
compliance issues.
 Forensic accounting: Forensic accountants investigate financial frauds and disputes by using
accounting techniques and evidence.
 Government accounting: Government accountants work for public sector entities, such as
federal, state, or local governments, or non-profit organizations.

I hope this information helps you understand the role of accounting in business. If you have any
questions or need more information, please let me know. 

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 Understand the role of accounting in business,Explain the accounting equation and
its elements/??

The accounting equation is a basic principle of accounting and a fundamental element of the
balance sheet. The equation is as follows:

Assets = Liabilities + Shareholder’s Equity

This equation sets the foundation of double-entry accounting, also known as double-entry
bookkeeping, and highlights the structure of the balance sheet. Double-entry accounting is a
system where every transaction affects at least two accounts. For example, an increase in an asset
account can be matched by an equal increase to a related liability or shareholder’s equity account
such that the accounting equation stays in balance 1.

The elements of the accounting equation are:

 Assets: Assets are the valuable resources controlled by the company, such as cash, inventory,
property, plant, and equipment. Assets are reported on the left side of the balance sheet.
 Liabilities: Liabilities are the obligations or debts that the company owes to others, such as
accounts payable, loans, bonds, and taxes. Liabilities are reported on the right side of the balance
sheet.
 Shareholder’s Equity: Shareholder’s equity is the amount of money that the owners or
shareholders have invested in the company or have retained from its earnings. Shareholder’s
equity is also reported on the right side of the balance sheet and consists of two components:
common stock and retained earnings.

The accounting equation can be rearranged or expanded to show different relationships between
the elements. For example:

 Shareholder’s Equity = Assets - Liabilities: This shows that shareholder’s equity is equal to
the net assets or net worth of the company.

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 Assets = Liabilities + Common Stock + Retained Earnings: This shows that assets are
financed by either liabilities or equity.
 Assets - Liabilities = Common Stock + Retained Earnings - Dividends + Revenues -
Expenses: This shows that the change in net assets or net income is equal to the change in
equity.

The accounting equation helps to assess whether the business transactions carried out by the
company are being accurately reflected in its books and accounts. It also helps to prepare and
analyze the financial statements of the company.

Summarize and apply basic financial accounting terms, concepts, and principles/??

Financial accounting is a branch of accounting that involves recording, summarizing, and

reporting the transactions and events resulting from business operations over a period of time.
Financial accounting provides information to external users, such as investors, creditors,
regulators, and tax authorities, who are interested in the financial performance and position of a
company. Financial accounting follows a set of rules and standards that ensure the consistency,
comparability, and reliability of financial information.

Some of the basic financial accounting terms, concepts, and principles are:

 Revenues: Revenues are the inflows of money or other resources that a company earns from
selling its goods or services to customers. Revenues are reported on the income statement when
they are earned, regardless of when they are received. This is based on the revenue recognition
principle, which states that revenues should be recognized when the performance obligation is
satisfied and the payment is reasonably assured.
 Expenses: Expenses are the outflows of money or other resources that a company incurs from
producing or delivering its goods or services to customers. Expenses are reported on the income
statement when they are incurred, regardless of when they are paid. This is based on
the matching principle, which states that expenses should be matched with the revenues they
help generate in the same period.

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 Assets: Assets are the resources that a company owns or controls that provide future economic
benefits. Assets are reported on the balance sheet at their historical cost or fair value, depending
on the type of asset. This is based on the cost concept, which states that assets should be
recorded at their acquisition cost, unless there is evidence that they have changed in value.
Examples of assets include cash, accounts receivable, inventory, property, plant, and equipment.
 Liabilities: Liabilities are the obligations or debts that a company owes to others that result from
past transactions or events. Liabilities are reported on the balance sheet at their current or future
settlement amount, depending on the type of liability. Examples of liabilities include accounts
payable, loans, bonds, and taxes.
 Shareholder’s Equity: Shareholder’s equity is the residual interest or claim of the owners or
shareholders on the assets of the company after deducting its liabilities. Shareholder’s equity is
reported on the balance sheet and consists of two components: common stock and retained
earnings. Common stock represents the amount of money or other resources that shareholders
have invested in the company by purchasing its shares. Retained earnings represent the amount
of money that the company has accumulated from its net income over time, minus any dividends
paid to shareholders.
 Accrual basis of accounting: The accrual basis of accounting is a method of accounting that
records transactions and events when they occur, rather than when cash is exchanged. The
accrual basis of accounting follows the revenue recognition principle and the matching principle
and provides a more accurate picture of a company’s financial performance and position than the
cash basis of accounting.
 Going concern assumption: The going concern assumption is an accounting principle that
assumes that a company will continue to operate in the foreseeable future, unless there is
evidence to the contrary. The going concern assumption allows a company to defer some
expenses and recognize some revenues that would not be allowed if it were liquidating its assets.
The going concern assumption also affects how assets and liabilities are valued and reported on
the balance sheet.
 Consistency principle: The consistency principle is an accounting principle that requires a
company to use the same accounting methods and policies from period to period, unless there is
a valid reason to change them. The consistency principle enhances the comparability and

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 reliability of financial information by eliminating variations caused by changing accounting
methods.
 Materiality concept: The materiality concept is an accounting concept that states that only
information that is significant or relevant to users should be disclosed or reported in financial
statements. The materiality concept allows a company to ignore some accounting rules or
principles if their application would not affect users’ decisions or judgments. The materiality
concept also allows a company to simplify some accounting procedures or estimates if their
impact is immaterial.
 Full disclosure principle: The full disclosure principle is an accounting principle that requires a
company to provide all information that is necessary for users to understand its financial
statements and activities. The full disclosure principle ensures that users have access to all
relevant facts and figures that may affect their decisions or judgments. The full disclosure
principle may require a company to provide additional information in notes or footnotes to its
financial statements.
 Objectivity concept: The objectivity concept is an accounting concept that states that financial
information should be based on verifiable evidence or facts, rather than personal opinions or
biases. The objectivity concept enhances the reliability and credibility of financial information
by reducing the possibility of errors or manipulation. The objectivity concept may require a
company to use external sources or independent parties to verify or audit its financial
information.

Understand the steps in accounting cycles, know the rule of double entry systems, Complete
worksheets and prepare financial statements

To understand the steps in accounting cycles, know the rule of double entry systems, complete
worksheets and prepare financial statements, you need to learn the following concepts:

 Accounting cycle: The accounting cycle is the process of recording and processing all financial
transactions of a company, from when the transaction occurs, to its representation on the
financial statements, to closing the accounts. The accounting cycle consists of eight steps: 1)
transactions, 2) journal entries, 3) posting to the general ledger, 4) trial balance, 5) worksheet, 6)
adjusting entries, 7) financial statements, and 8) closing1.

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 Double entry system: The double entry system is a method of accounting that records every
transaction in at least two accounts: a debit and a credit. A debit refers to an increase in an asset
or a decrease in a liability or equity. A credit refers to a decrease in an asset or an increase in a
liability or equity. The total amount of debits must always equal the total amount of credits for
each transaction. The double entry system ensures that the accounting equation (Assets =
Liabilities + Equity) is always balanced2.
 Worksheet: A worksheet is an optional tool that helps bookkeepers and accountants prepare
financial statements. A worksheet consists of multiple columns that show the unadjusted trial
balance, the adjusting entries, the adjusted trial balance, and the income statement and balance
sheet accounts. A worksheet can help identify errors, make adjustments, and organize
information before preparing the financial statements 3.
 Financial statements: Financial statements are the documents that summarize and communicate
the financial information of a company to external users. The main financial statements are: 1)
the income statement, which shows the revenues and expenses and the net income or loss of a
company for a period of time, 2) the balance sheet, which shows the assets, liabilities, and equity
of a company at a point in time, 3) the statement of cash flows, which shows the inflows and
outflows of cash from operating, investing, and financing activities of a company for a period of
time, and 4) the statement of changes in equity, which shows the changes in the equity accounts
of a company for a period of time

Take a series of transactions through the accounting cycle

To take a series of transactions through the accounting cycle, you need to follow these steps:

1. Identify and analyze the transactions: For each transaction, you need to identify the accounts
involved and determine the amount of debit and credit for each account. You also need to record
the date and a brief description of the transaction.
2. Record the transactions in journal entries: For each transaction, you need to record a journal
entry in chronological order, showing the accounts, amounts, and sides of debit and credit. You
also need to write the date and a brief explanation of the transaction below the journal entry.

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3. Post the journal entries to the general ledger: For each journal entry, you need to post the debit
and credit amounts to the corresponding accounts in the general ledger. The general ledger is a
collection of all accounts that shows their balances and changes over time. You also need to
write the journal entry number next to each posting for reference.
4. Prepare an unadjusted trial balance: At the end of the accounting period, you need to prepare an
unadjusted trial balance, which is a list of all accounts and their balances from the general ledger.
The unadjusted trial balance helps to check if the total debits equal the total credits, which
indicates that the accounting equation is balanced.
5. Prepare adjusting entries and post them to the general ledger: Before preparing the financial
statements, you need to make some adjustments to reflect the accrual basis of accounting, which
recognizes revenues and expenses when they are earned or incurred, not when cash is exchanged.
Adjusting entries are journal entries that update the accounts for events that are not recorded by
regular transactions. Examples of adjusting entries include depreciation, accruals, deferrals, and
inventory adjustments. You need to post the adjusting entries to the general ledger as well.
6. Prepare an adjusted trial balance: After posting the adjusting entries, you need to prepare an
adjusted trial balance, which is a list of all accounts and their balances after adjustments. The
adjusted trial balance is used to prepare the financial statements.
7. Prepare financial statements: Using the information from the adjusted trial balance, you need to
prepare financial statements in a specific order: income statement, statement of changes in
equity, balance sheet, and statement of cash flows. The financial statements show the financial
performance and position of the company for a period of time or at a point in time.
8. Prepare closing entries and post them to the general ledger: After preparing the financial
statements, you need to close the temporary accounts (revenues, expenses, and dividends) and
transfer their balances to the permanent account (retained earnings). Closing entries are journal
entries that zero out the temporary accounts and update the retained earnings account. You need
to post the closing entries to the general ledger as well.
9. Prepare a post-closing trial balance: After posting the closing entries, you need to prepare a post-
closing trial balance, which is a list of all accounts and their balances after closing. The post-
closing trial balance only shows permanent accounts (assets, liabilities, and equity), as temporary
accounts have zero balances. The post-closing trial balance helps to verify that the total debits
equal the total credits and that all temporary accounts are closed.

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 This completes one accounting cycle. The process repeats itself for every accounting period until
the company ceases operations.

Understand the accounting for merchandizing businesses and its applications

To understand the accounting for merchandizing businesses and its applications, you need to
learn the following concepts:

 Merchandizing businesses: Merchandizing businesses are businesses that buy and sell goods
for a profit. They acquire merchandise from suppliers and resell it to customers. Examples of
merchandizing businesses include retail stores, wholesalers, and online sellers 1.
 Cost of merchandise sold: Cost of merchandise sold is the cost of the goods that a
merchandizing business sells to its customers. It includes the purchase price of the merchandise,
plus any freight-in or transportation costs paid by the buyer, minus any purchase discounts or
returns. Cost of merchandise sold is an expense that reduces the gross profit of a merchandizing
business1.
 Merchandise inventory: Merchandise inventory is the cost of the goods that a merchandizing
business has on hand and available for sale at any given time. It includes the cost of the
merchandise purchased from suppliers, plus any freight-in or transportation costs paid by the
buyer, minus any purchase discounts, returns, or allowances. Merchandise inventory is an asset
that represents the potential revenue of a merchandizing business 1.
 Perpetual invent A perpetual inventory system provides accurate and up-to-date information on
the inventory levels and cost of merchandise sold 2.
 Periodic inventory system: A periodic inventory system is a method of accounting for
merchandise inventory that does not keep a continuous record of the quantity and cost of each
item in stock. A periodic inventory system updates the merchandise inventory account only at
the end of an accounting period, based on a physical count and valuation of the inventory. A
periodic inventory system requires less record-keeping but provides less timely and accurate
information on the inventory levels and cost of merchandise sold 2.

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 Sales revenue: Sales revenue is the amount of money that a merchandizing business earns from
selling its

goods to customers. Sales revenue is reported on the income statement when it is earned,
regardless of when it is received. Sales revenue is affected by sales discounts, returns, and
allowances, which reduce the amount of money that customers pay or owe to the seller 1.

 Gross profit: Gross profit is the difference between sales revenue and cost of merchandise sold.
Gross profit measures how much a merchandizing business earns from selling its goods before
deducting any operating expenses. Gross profit is reported on the income statement and indicates
the profitability and efficiency of a merchandizing business

 Prepare financial statements

To prepare financial statements, you need to follow these steps:

1. Gather the accounting data: You need to collect all the relevant information from your
accounting records, such as the general ledger, the trial balance, and the adjusting entries. You
also need to have a clear understanding of the accounting principles and standards that apply to
your business and industry.
2. Prepare the income statement: The income statement shows the revenues and expenses and the
net income or loss of your business for a period of time, such as a month, a quarter, or a year. To
prepare the income statement, you need to list all your revenues and subtract all your expenses
from them. The result is your net income or loss. You also need to show any extraordinary items
or discontinued operations that affect your income statement 1.
3. Prepare the statement of changes in equity: The statement of changes in equity shows the
changes in the equity accounts of your business for a period of time. It includes the beginning
balance of equity, any additions or deductions from equity (such as net income or loss,
dividends, or stock issuances), and the ending balance of equity1.
4. Prepare the balance sheet: The balance sheet shows the assets, liabilities, and equity of your
business at a point in time, such as the end of a period. To prepare the balance sheet, you need to

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 list all your assets and their values on the left side, and all your liabilities and equity and their
values on the right side. The total assets must equal the total liabilities and equity. You also need
to classify your assets and liabilities into current and non-current categories 2.
5. Prepare the statement of cash flows: The statement of cash flows shows the inflows and outflows
of cash from operating, investing, and financing activities of your business for a period of time.
To prepare the statement of cash flows, you need to use either the direct method or the indirect
method. The direct method shows the actual cash receipts and payments from each activity. The
indirect method starts with the net income or loss from the income statement and adjusts it for
non-cash items and changes in working capital accounts. Both methods result in the same net
change in cash for the period. You also need to show any non-cash investing and financing
activities that affect your cash flows2.
6. Add notes and disclosures: Notes and disclosures are additional information that accompanies
your financial statements to provide more details, explanations, or clarifications about certain
items or transactions. Notes and disclosures may include accounting policies, assumptions,
estimates, contingencies, risks, segment information, related party transactions, subsequent
events, etc. Notes and disclosures help users understand your financial statements better and
make informed decisions

Compare the manual & computerized accounting systems

Manual and computerized accounting systems are two methods of recording and processing
financial transactions of a business. Both methods follow the same accounting principles and
concepts, but they differ in their mechanism and efficiency. Here are some of the main
similarities and differences between manual and computerized accounting systems:

 Recording: Manual accounting systems use pen and paper and require a lot of human effort to
record transactions. On the contrary, computerized accounting systems use accounting software
to record transactions electronically. Computerized accounting systems are faster, more accurate,
and less prone to errors than manual accounting systems 1.
 Calculation: Manual accounting systems involve manual calculations of various amounts, such
as totals, subtotals, balances, etc. This can be time-consuming and error-prone. Computerized

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 accounting systems perform all the calculations automatically and accurately, based on the data
entered. Only data input is required, and the software does the rest 1.
 Adjusting entries: Manual accounting systems allow adjusting entries to be made for
rectification of errors or adjustments of accounts. Computerized accounting systems do not allow
adjusting entries to be made, as they follow a strict sequence of steps and do not allow any
changes or modifications to the data once entered1.
 Backup: Manual accounting systems do not have any backup facility, as the records are stored in
physical form and can be lost, damaged, or destroyed by fire, theft, or natural
disasters. Computerized accounting systems have backup facilities, as the records are stored in
digital form and can be saved and copied to different devices or locations for safety and
security1.
 Trial balance: Manual accounting systems require the preparation of a trial balance at the end of
an accounting period or whenever necessary, to check if the total debits equal the total credits.
This can be a tedious and cumbersome task. Computerized accounting systems provide an instant
trial balance on a daily basis or whenever required, by simply clicking a button 2.
 Financial statements: Manual accounting systems require the preparation of financial
statements at the end of an accounting period or quarter, based on the trial balance and adjusting
entries. This can be a complex and lengthy process. Computerized accounting systems provide
financial statements at the click of a button, based on the updated data and calculations 2.
 Cost: Manual accounting systems have lower initial costs, as they do not require any special
equipment or software. However, they have higher operating costs, as they require more staff,
stationery, space, etc. Computerized accounting systems have higher initial costs, as they require
computers, software, training, etc. However, they have lower operating costs, as they require less
staff, stationery, space, etc3.
 Access: Manual accounting systems have limited access, as the records are available only to
those who have physical access to them. They also have limited security, as anyone who has
access can tamper with them. Computerized accounting systems have wider access, as the
records can be accessed from anywhere through the internet or network. They also have higher
security, as they can be protected by passwords or encryption

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 Understand internal control mechanisms over cash &receivables, Apply accounting principles
and control of cash and receivables

To understand internal control mechanisms over cash and receivables, you need to learn the
following concepts:

 Internal control: Internal control is a system of policies, procedures, and activities that are
designed to ensure the reliability, accuracy, and completeness of accounting information, as well
as the safeguarding of assets, the prevention and detection of errors and fraud, and the
compliance with laws and regulations1.
 Cash: Cash is the most liquid and valuable asset of a business, which includes currency, coins,
checks, money orders, bank deposits, and other forms of money that are readily available for
use. Cash is also the most vulnerable asset to theft, misappropriation, or misuse 2.
 Receivables: Receivables are amounts that a business expects to collect from its customers or
other parties for the sale of goods or services on credit. Receivables are also assets that need to
be protected from loss, theft, or uncollectibility3.
 Internal control over cash: Internal control over cash refers to the measures that a business
implements to ensure the proper handling, recording, and reporting of cash transactions and
balances. Some of the common internal control over cash are2:
o Segregation of duties: Different individuals should be assigned to handle cash receipts, cash
disbursements, cash reconciliation, and cash recording. This reduces the risk of errors or fraud by
one person.
o Authorization: Only authorized individuals should be allowed to approve cash transactions, sign
checks, access bank accounts, or make changes to cash records. This ensures that cash
transactions are valid and authorized.
o Documentation: All cash transactions should be supported by adequate and accurate documents,
such as invoices, receipts, vouchers, bank statements, etc. This provides evidence and audit trail
for cash transactions.
o Physical security: Cash and cash equivalents should be stored in a safe place, such as a locked
drawer, cabinet, or safe. Access to cash should be limited to authorized individuals only. Cash
should be deposited in the bank regularly and promptly. This prevents loss or theft of cash.

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o Reconciliation: Cash balances should be reconciled periodically with bank statements and
accounting records. Any discrepancies should be investigated and resolved timely. This ensures
that cash balances are accurate and complete.
o Monitoring: Cash activities and records should be reviewed and monitored by independent
individuals or external parties, such as supervisors, managers, auditors, etc. This provides
feedback and assurance on the effectiveness of internal control over cash.
 Internal control over receivables: Internal control over receivables refers to the measures that a
business implements to ensure the proper recognition, measurement, valuation, and collection of
receivables. Some of the common internal control over receivables are 3:
o Credit policy: A business should establish a clear and consistent credit policy that defines the
terms and conditions for granting credit to customers, such as credit limit, credit period, discount
policy, etc. This helps to minimize the risk of bad debts and improve cash flow.
o Aging analysis: A business should perform an aging analysis of receivables periodically to
classify them by their due dates and identify any overdue or doubtful accounts. This helps to
monitor the collectibility and quality of receivables.
o Allowance method: A business should use the allowance method to estimate and record an
allowance for doubtful accounts based on historical data or expected losses. This helps to reflect
the net realizable value of receivables in the financial statements.
o Write-off policy: A business should establish a write-off policy that defines the criteria and
procedures for writing off uncollectible accounts. This helps to remove irrecoverable receivables
from the accounting records.
o Collection policy: A business should establish a collection policy that defines the actions and
strategies for collecting overdue accounts from customers, such as sending reminders, making
phone calls, offering discounts or incentives, hiring collection agencies, taking legal actions, etc.
This helps to improve the recovery rate and reduce bad debts.
o Analyze, record and report transactions for businesses organized as partnerships, private limited
companies, and share companies

To analyze, record and report transactions for businesses organized as partnerships, private
limited companies, and share companies, you need to learn the following concepts:

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 Partnerships: Partnerships are businesses that are owned by two or more individuals who share
the profits and losses of the business. Partnerships are not separate legal entities from their
owners, and each partner has unlimited liability for the debts and obligations of the business.
Partnerships do not pay income tax as a business entity, but each partner reports their share of
income or loss on their personal tax return. Partnerships have a separate capital account for each
partner that shows their initial and subsequent contributions and withdrawals. Partnerships also
have a separate income summary account for each partner that shows their share of net income or
loss for the period1.
 Private limited companies: Private limited companies are businesses that are owned by one or
more shareholders who have limited liability for the debts and obligations of the business.
Private limited companies are separate legal entities from their owners, and they pay income tax
as a business entity. Private limited companies issue shares to their shareholders, but they cannot
offer them to the public or trade them on a stock exchange. Private limited companies have a
single capital account that shows the total amount of share capital contributed by the
shareholders. Private limited companies also have a retained earnings account that shows the
accumulated net income or loss of the business after paying dividends to the shareholders 2.
 Share companies: Share companies are businesses that are owned by many shareholders who
have limited liability for the debts and obligations of the business. Share companies are separate
legal entities from their owners, and they pay income tax as a business entity. Share companies
issue shares to their shareholders, and they can offer them to the public and trade them on a stock
exchange. Share companies have a single capital account that shows the total amount of share
capital contributed by the shareholders. Share companies also have a retained earnings account
that shows the accumulated net income or loss of the business after paying dividends to the
shareholders3.

To record and report transactions for these types of businesses, you need to follow these steps:

1. Identify and analyze the transactions: For each transaction, you need to identify the accounts
involved and determine the amount of debit and credit for each account. You also need to record
the date and a brief description of the transaction.

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2. Record the transactions in journal entries: For each transaction, you need to record a journal
entry in chronological order, showing the accounts, amounts, and sides of debit and credit. You
also need to write the date and a brief explanation of the transaction below the journal entry.
3. Post the journal entries to the general ledger: For each journal entry, you need to post the debit
and credit amounts to the corresponding accounts in the general ledger. The general ledger is a
collection of all accounts that shows their balances and changes over time. You also need to
write the journal entry number next to each posting for reference.
4. Prepare an unadjusted trial balance: At the end of the accounting period, you need to prepare an
unadjusted trial balance, which is a list of all accounts and their balances from the general ledger.
The unadjusted trial balance helps to check if the total debits equal the total credits, which
indicates that the accounting equation is balanced.
5. Prepare adjusting entries and post them to the general ledger: Before preparing the financial
statements, you need to make some adjustments to reflect any events or transactions that are not
recorded by regular transactions. Examples of adjusting entries include depreciation, accruals,
deferrals, inventory adjustments, etc. You need to post the adjusting entries to the general ledger
as well.
6. Prepare an adjusted trial balance: After posting the adjusting entries, you need to prepare an
adjusted trial balance, which is a list of all accounts and their balances after adjustments. The
adjusted trial balance is used to prepare the financial statements.
7. Prepare financial statements: Using the information from the adjusted trial balance, you need to
prepare financial statements in a specific order: income statement, statement of changes in equity
(or statement of partners’ equity), balance sheet, and statement of cash flows. The financial
statements show the financial performance and position of your business for a period of time or
at a point in time

 Explain & apply different inventory costing methods

To explain and apply different inventory costing methods, you need to learn the following
concepts:

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 Inventory: Inventory is the cost of the goods that a business has on hand and available for sale at
any given time. Inventory is an asset that represents the potential revenue of a
business. Inventory can be classified into three categories: raw materials, work in progress, and
finished goods1.
 Inventory costing: Inventory costing is the process of assigning costs to inventory items based
on the cost flow assumption that a business chooses. Inventory costing affects the cost of goods
sold (COGS), which is the cost of the goods that a business sells to its customers. COGS is an
expense that reduces the gross profit of a business 1.
 Cost flow assumption: A cost flow assumption is a method of accounting for inventory that
determines which costs are assigned to the inventory items sold and which costs remain in the
ending inventory. A cost flow assumption does not necessarily reflect the actual physical
movement of inventory items, but rather it is an artificial way of allocating costs. There are three
main cost flow assumptions: first-in, first-out (FIFO), last-in, first-out (LIFO), and weighted
average cost (WAC)1.
 First-in, first-out (FIFO): FIFO is a cost flow assumption that assigns the oldest costs to the
inventory items sold and the newest costs to the ending inventory. FIFO assumes that the first
items purchased or produced are the first items sold. FIFO results in a higher ending inventory
value and a lower COGS when costs are rising, and vice versa when costs are falling1. The
formula for FIFO is:
o COGS = cost of oldest inventory x quantity of inventory sold
o Ending inventory = cost of newest inventory x quantity of inventory on hand
 Last-in, first-out (LIFO): LIFO is a cost flow assumption that assigns the newest costs to the
inventory items sold and the oldest costs to the ending inventory. LIFO assumes that the last
items purchased or produced are the first items sold. LIFO results in a lower ending inventory
value and a higher COGS when costs are rising, and vice versa when costs are falling 1. The
formula for LIFO is:
o COGS = cost of newest inventory x quantity of inventory sold
o Ending inventory = cost of oldest inventory x quantity of inventory on hand
 Weighted average cost (WAC): WAC is a cost flow assumption that assigns an average cost to
each inventory item based on the total cost and quantity of inventory available for sale during the
period. WAC assumes that all items have the same unit cost regardless of when they were

17
 purchased or produced. WAC results in a middle-of-the-road ending inventory value and COGS
when costs are changing1. The formula for WAC is:
o Average unit cost = (beginning inventory cost + purchases cost) / (beginning inventory quantity
+ purchases quantity)
o COGS = average unit cost x quantity of inventory sold
o Ending inventory = average unit cost x quantity of inventory on hand
o

Utilize and identify the implication of the various methods of valuation in respect to accounts
and notes receivable, inventories, depreciation, tangible and intangible assets, and natural
resources.

To utilize and identify the implication of the various methods of valuation in respect to accounts
and notes receivable, inventories, depreciation, tangible and intangible assets, and natural
resources, you need to learn the following concepts:

 Accounts and notes receivable: Accounts and notes receivable are amounts that a business
expects to collect from its customers or other parties for the sale of goods or services on credit.
Accounts and notes receivable are valued at their net realizable value, which is the amount of
cash expected to be received in the future. Net realizable value is calculated by subtracting an
allowance for doubtful accounts from the gross receivables balance. The allowance for doubtful
accounts is an estimate of the uncollectible portion of receivables based on historical data or
expected losses. The valuation of accounts and notes receivable affects the amount of revenue
recognized and the quality of assets reported on the balance sheet 1.
 Inventories: Inventories are the cost of the goods that a business has on hand and available for
sale at any given time. Inventories are valued at the lower of cost or net realizable value, which is
the estimated selling price in the ordinary course of business less the estimated costs of
completion and disposal. Cost is determined using one of the cost flow assumptions: first-in,
first-out (FIFO), last-in, first-out (LIFO), or weighted average cost (WAC). The valuation of
inventories affects the amount of cost of goods sold recognized and the amount of current assets
reported on the balance sheet2.

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 Depreciation: Depreciation is the process of allocating the cost of a tangible asset over its useful
life in a systematic and rational manner. Depreciation reflects the wear and tear or obsolescence
of an asset due to its use or passage of time. Depreciation can be calculated using one of the
depreciation methods: straight-line, units-of-production, or double-declining-balance. The
valuation of depreciation affects the amount of expense recognized and the amount of non-
current assets reported on the balance sheet3.
 Tangible assets: Tangible assets are assets that have physical substance and can be seen or
touched. Examples of tangible assets include land, buildings, machinery, equipment, furniture,
vehicles, etc. Tangible assets are valued at their historical cost less accumulated depreciation and
impairment losses. Historical cost is the amount paid to acquire an asset and put it into use.
Accumulated depreciation is the total amount of depreciation expense recognized since the
acquisition of an asset. Impairment loss is the amount by which the carrying value of an asset
exceeds its recoverable amount. The valuation of tangible assets affects the amount of non-
current assets reported on the balance sheet.
 Intangible assets: Intangible assets are assets that lack physical substance but have economic
value based on their rights or privileges. Examples of intangible assets include patents,
trademarks, copyrights, goodwill, customer lists, etc. Intangible assets are valued at their
historical cost less accumulated amortization and impairment losses. Historical cost is the
amount paid to acquire an asset or develop it internally. Accumulated amortization is the total
amount of amortization expense recognized since the acquisition or development of an asset.
Amortization is similar to depreciation but applies to intangible assets. Impairment loss is similar
to depreciation but applies to intangible assets. The valuation of intangible assets affects the
amount of non-current assets reported on the balance sheet.
 Natural resources: Natural resources are assets that come from nature and can be depleted or
consumed over time. Examples of natural resources include oil, gas, coal, timber, minerals, etc.
Natural resources are valued at their historical cost less accumulated depletion and impairment
losses. Historical cost is similar to tangible assets but also includes exploration and development
costs. Accumulated depletion is similar to accumulated depreciation but applies to natural
resources. Depletion is similar to depreciation but applies to natural resources. Impairment loss is
similar to tangible assets but applies to natural resources. The valuation of natural resources
affects the amount of non-current assets reported on the balance sheet.

19
 Understand the accounting for PPE,intangible assets & Natural Resources

To understand the accounting for PPE, intangible assets and natural resources, you need to learn
the following concepts:

 PPE: PPE stands for property, plant and equipment, which are tangible assets that have physical
substance and are used in the operations of a business for more than one accounting period. PPE
are valued at their historical cost less accumulated depreciation and impairment losses. Historical
cost is the amount paid to acquire an asset and put it into use. Accumulated depreciation is the
total amount of depreciation expense recognized since the acquisition of an asset. Depreciation is
the process of allocating the cost of a tangible asset over its useful life in a systematic and
rational manner. Impairment loss is the amount by which the carrying value of an asset exceeds
its recoverable amount. The accounting for PPE involves recording the initial purchase,
recognizing depreciation expense, making adjustments for subsequent expenditures or disposals,
and testing for impairment if needed1.
 Intangible assets: Intangible assets are assets that lack physical substance but have economic
value based on their rights or privileges. Examples of intangible assets include patents,
trademarks, copyrights, goodwill, customer lists, etc. Intangible assets are valued at their
historical cost less accumulated amortization and impairment losses. Historical cost is the
amount paid to acquire an asset or develop it internally. Accumulated amortization is the total
amount of amortization expense recognized since the acquisition or development of an asset.
Amortization is similar to depreciation but applies to intangible assets. Impairment loss is similar
to depreciation but applies to intangible assets. The accounting for intangible assets involves
recording the initial purchase or development, recognizing amortization expense, making
adjustments for subsequent expenditures or disposals, and testing for impairment if needed 2.
 Natural resources: Natural resources are assets that come from nature and can be depleted or
consumed over time. Examples of natural resources include oil, gas, coal, timber, minerals, etc.
Natural resources are valued at their historical cost less accumulated depletion and impairment
losses. Historical cost is similar to tangible assets but also includes exploration and development
costs. Accumulated depletion is similar to accumulated depreciation but applies to natural
resources. Depletion is similar to depreciation but applies to natural resources. Impairment loss is
similar to tangible assets but applies to natural resources. The accounting for natural resources

20
 involves recording the initial acquisition or development, recognizing depletion expense, making
adjustments for subsequent expenditures or disposals, and testing for impairment if needed 3.

Internalize the current Ethiopian payroll systems

To internalize the current Ethiopian payroll systems, you need to familiarize yourself with the
following aspects:

 The legal and regulatory framework that governs the payroll systems in Ethiopia, such as the
Income Tax Proclamation No. 979/2016, the Pension Proclamation No. 714/2011, the Labour
Proclamation No. 1156/2019, and other relevant laws and regulations that affect the payroll
calculations and compliance.
 The payroll software and tools that are available and commonly used in Ethiopia, such as
Peachtree, QuickBooks, Sage, Tally, etc. These software and tools can help you automate and
simplify the payroll processes, such as generating payslips, reports, tax returns, pension
statements, etc.
 The payroll best practices and standards that are adopted and followed by the Ethiopian
employers and employees, such as maintaining accurate and complete payroll records, ensuring
timely and correct payments and deductions, complying with the tax and pension obligations,
communicating and resolving any payroll issues or disputes,

Understand the accounting for Partnership form of businesses in Ethiopia

To understand the accounting for partnership form of businesses in Ethiopia, you need to learn
the following concepts:

 Partnership: Partnership is a form of business organization that is owned by two or more

individuals who share the profits and losses of the business. Partnership is not a separate legal
entity from its owners, and each partner has unlimited liability for the debts and obligations of
the business. Partnership does not pay income tax as a business entity, but each partner reports
their share of income or loss on their personal tax return 1.
 Partnership agreement: Partnership agreement is a written or oral contract that specifies the
terms and conditions of the partnership, such as the name, purpose, duration, capital

21
 contributions, profit and loss sharing ratios, management responsibilities, admission and
withdrawal of partners, dissolution and liquidation procedures, etc. Partnership agreement is not
mandatory by law, but it is advisable to have one to avoid disputes and conflicts among
partners2.
 Partnership accounting: Partnership accounting is the process of recording and reporting the
financial transactions and events of the partnership. Partnership accounting involves maintaining
separate accounts for each partner’s capital, drawings, and income summary. Partnership
accounting also involves preparing financial statements for the partnership, such as statement of
financial position, statement of comprehensive income, statement of changes in equity, and
statement of cash flows3.
 Capital account: Capital account is an account that shows the initial and subsequent
contributions and withdrawals of each partner. Capital account is increased by capital
contributions and share of net income, and decreased by drawings and share of net loss. Capital
account can be maintained using either the fixed capital method or the fluctuating capital
method. Under the fixed capital method, capital account remains constant unless there is a
change in the partnership agreement. Under the fluctuating capital method, capital account
changes with each transaction that affects it 3.
 Drawings account: Drawings account is an account that shows the withdrawals of cash or other
assets by each partner for personal use. Drawings account is a contra account to capital account
and reduces the partner’s equity. Drawings account is closed to capital account at the end of the
accounting period3.
 Income summary account: Income summary account is an account that shows the share of net
income or net loss allocated to each partner based on their profit and loss sharing ratios. Income
summary account is closed to capital account at the end of the accounting period

Analyze the formation, operations & management procedures of share companies in Ethiopia

To analyze the formation, operations and management procedures of share companies in

Ethiopia, you need to learn the following concepts:

 Share company: Share company is a form of business organization that is owned by many
shareholders who have limited liability for the debts and obligations of the business. Share

22
 company is a separate legal entity from its owners, and it pays income tax as a business entity.
Share company issues shares to its shareholders, and it can offer them to the public and trade
them on a stock exchange. Share company is regulated by the Commercial Code of Ethiopia and
other relevant laws and regulations1.
 Formation of share company: Formation of share company involves several steps and
requirements, such as2:
o Preparing a memorandum of association that contains the essential information about the share
company, such as its name, purpose, duration, capital, number and value of shares, etc.
o Preparing articles of association that contain the detailed rules and regulations for the
management and operation of the share company, such as its organs, powers, duties, rights,
obligations, etc.
o Subscribing and paying up at least 25% of the nominal value of each share by the founders or
promoters who initiate the formation of the share company.
o Appointing an auditor who will examine and certify the accounts and documents related to the
formation of the share company.
o Registering the share company with the Ministry of Trade and Industry and obtaining a
certificate of incorporation that confirms its legal existence and status.
o Publishing a notice of incorporation in a newspaper or official gazette that announces the
formation of the share company to the public.
 Operations of share company: Operations of share company involve various activities and
transactions that are carried out by the share company in pursuit of its objectives and interests,
such as3:
o Raising capital by issuing shares or other securities to existing or new shareholders or investors.
o Conducting business by producing or providing goods or services to customers or clients in
exchange for revenue or income.
o Managing finances by recording, reporting, and controlling the inflows and outflows of money
and other resources in relation to the business activities.
o Paying taxes by calculating and remitting the income tax and other taxes that are due to the
government or other authorities based on the applicable laws and regulations.
o Distributing profits by declaring and paying dividends to shareholders or retaining earnings for
future growth or expansion.

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 Management procedures of share company: Management procedures of share company
involve various rules and processes that are followed by the organs and officers of the share
company in order to direct and control its operations and affairs, such as:
o Holding general meetings of shareholders who are the ultimate owners and decision-makers of
the share company. General meetings are convened at least once a year (annual general meeting)
or whenever necessary (extraordinary general meeting) to discuss and approve important matters
concerning the share company, such as its financial statements, dividends, appointments,
amendments, etc.
o Electing board of directors who are representatives of shareholders and responsible for
overseeing and supervising the management and performance of the share company. Board of
directors are elected by shareholders at general meetings for a fixed term (usually three years)
and can be re-elected or removed by shareholders. Board of directors meet regularly (at least
once every three months) to deliberate and decide on strategic issues affecting the share
company, such as its policies, plans, budgets, etc.
o Appointing managers who are employees or agents of the share company and responsible for
executing and implementing the decisions and directives of the board of directors. Managers are
appointed by board of directors based on their qualifications, skills, experience, etc. Managers
report to board of directors on their activities and results on a periodic basis (usually monthly or
quarterly).
o Overview of the organization, operations and liquidations of public enterprises in Ethiopia

To overview the organization, operations and liquidations of public enterprises in Ethiopia, you
need to learn the following concepts:

 Public enterprise: Public enterprise is a form of business organization that is owned and
controlled by the government or other public authorities for the purpose of providing
essential goods or services to the public or pursuing social or economic objectives. Public
enterprise can be classified into two types: public economic enterprise and public service
enterprise. Public economic enterprise is a public enterprise that operates on commercial
principles and competes with private enterprises in the market. Public service enterprise
is a public enterprise that provides public goods or services that are not profitable or
competitive, such as water, electricity, health, education, etc 1.

24
  Organization of public enterprise: Organization of public enterprise involves the
establishment, structure and governance of the public enterprise. Public enterprise can be
established by law, regulation or contract, depending on its legal form and status. Public
enterprise can adopt various legal forms, such as share company, corporation, agency,
authority, etc. Public enterprise can have different levels of autonomy and accountability,
depending on its relationship with the government or other public authorities. Public
enterprise can have different organs and officers, such as board of directors, general
manager, auditor, etc., who are responsible for managing and overseeing its affairs 2.
 Operations of public enterprise: Operations of public enterprise involve the activities
and transactions that are carried out by the public enterprise in pursuit of its objectives
and interests, such as3:
o Raising capital by receiving grants, subsidies, loans or guarantees from the
government or other sources.
o Conducting business by producing or providing goods or services to customers or
clients in exchange for revenue or income.
o Managing finances by recording, reporting and controlling the inflows and
outflows of money and other resources in relation to the business activities.
o Paying taxes by calculating and remitting the income tax and other taxes that are
due to the government or other authorities based on the applicable laws and
regulations.
o Distributing profits by retaining earnings for future growth or expansion or
transferring surplus to the government or other public authorities.
 Liquidation of public enterprise: Liquidation of public enterprise involves the
termination, dissolution and winding up of the public enterprise. Public enterprise can be
liquidated by law, regulation or contract, depending on its legal form and status. Public
enterprise can be liquidated voluntarily or involuntarily, depending on its financial
condition and performance. Public enterprise can be liquidated by selling its assets and
liabilities to another entity or by distributing them among its stakeholders. Public
enterprise can be liquidated by following the procedures and rules prescribed by the
relevant laws and regulations
o

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