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The first article in this site is basically about the definition and importance of
accountancy, its purpose and its role. We will now go further to discuss what the
actual accounts look like and what they are based on.
But before we do so, one must realize the distinction between the preparation of the
final accounts and the bookkeeping process. The bookkeeping process is the
steppingstone of accounting, as it is the process by which the transactions are
recorded in the business, and the preparation of the final accounts begins from there.
Therefore one must learn the mechanics of bookkeeping first, and this is the aim of
the following article.
Setting up a business
Okay, suppose we are required to set up a business, the first thing that we need to do
is to take a loan from the bank, or to save enough money before we actually buy any
premises or whatever.
Well, the money we raised through a loan or through any other way is called the
Capital. The premises that we have purchased is called an Asset, the loan from the
bank is called a Liability.
Capital, Assets and Liabilities are the basis of accounting and they form the
Assets = Capital + Liabilities
So basically, an asset is what a business owns, and a liability is what a business owes
(in this case to the bank), and capital is the investment of money with the intention of
earning a return.
Strictly, capital is the money owed to the proprietor of the business, due to the ‘entity
concept’, which basically means that the business is considered distinct from the
owner, i.e. it is considered as a separate entity. Therefore, it isn’t surprising when we
say ‘the business decided to do this’ rather than the owner or the manager.
Okay, now the company is set up, we bought premises or most likely rented it or
leased it. Now we need to purchase some furniture, maybe a teller, and most
importantly goods to sell!
Well, any expenses in relation to assets such as premises, furniture or teller machines
are referred to as Capital Expenditure which results in the purchase or improvement
of fixed assets, which are assets that will provide benefits to the business in more than
one accounting period, and which are not acquired with a view to being resold in the
normal course of trade.
On the other hand, the expenditure incurred in relation to the purchase of goods is
referred to as Revenue expenditure, which is expenditure incurred for the purpose of
the trade of the business, such as selling and distribution expenses, administration
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