Master the
Language of Business.

What is Accounting?

Accounting is the process of identifying, recording, classifying, summarising and communicating financial information to users.

• Financial accounting: prepares statements for external users.
• Management accounting: supports internal planning and decisions.
• Users: owners, managers, lenders, investors, suppliers and tax authorities.

The Accounting Equation

The equation expresses the relationship between what a business owns, what it owes and the owner's residual interest.

Example: assets £20,000 and liabilities £7,000 means equity is £13,000.

Debits and Credits

Each transaction has equal debit and credit entries. Debit does not automatically mean an increase, and credit does not automatically mean a decrease.

Double-Entry Bookkeeping

Every transaction affects at least two accounts. Total debits must equal total credits.

• Owner invests cash: Dr Cash, Cr Capital.
• Rent paid: Dr Rent expense, Cr Cash.
• Credit sale: Dr Trade receivables, Cr Sales revenue.
• Customer pays a debt: Dr Cash, Cr Trade receivables.

Journals, Ledgers and Trial Balance

The journal records transactions chronologically; the ledger groups transactions by account. A trial balance lists ledger balances to check debit-credit equality.

• Sales journal: credit sales of goods.
• Purchases journal: credit purchases of goods for resale.
• Cash book: cash and bank transactions.
• General journal: selected adjustments and non-routine entries.

Income Statement

The income statement reports financial performance over a period.

Cost of sales for a trading business is commonly calculated as opening inventory + purchases and related costs − closing inventory, subject to the relevant syllabus and adjustments.

Statement of Financial Position

This statement shows assets, liabilities and equity at a specific date.

• Current assets: inventory, receivables, cash.
• Non-current assets: equipment, buildings, vehicles.
• Current liabilities: trade payables and short-term obligations.
• Non-current liabilities: long-term loans.

Accruals, Prepayments and Depreciation

Accrual accounting recognises income when earned and expenses when incurred, rather than relying only on cash movement.

• Accrued expense: expense incurred but not yet paid.
• Prepayment: payment made for a future accounting period.
• Depreciation: allocates the depreciable amount of a tangible non-current asset over its useful life.
• Irrecoverable debt: an amount that is not expected to be collected.

Accounting Ratios

Interpret ratios using context, previous years, industry comparisons and the limitations of the available data.

Cash Flow and Internal Control

Profit and cash flow are not the same. A credit sale can generate revenue before the customer pays.

• Operating activities: cash flows from principal business activities.
• Investing activities: acquisition and disposal of long-term assets and investments.
• Financing activities: borrowings, repayments and owner financing.
• Internal controls: authorisation, segregation of duties, reconciliations and secure record keeping.