USERS OF ACCOUNTING INFORMATION

1. Proprietors and business management

2. Tax and regulatory authorities- the government, through its
revenue collection agencies, usually require the relevant
information to ensure that tax has been calculated properly
and so that the organization in question has paid taxes
3. Investors- they are shareholders of companies whose interest
is to determine the amount of dividend and other incomes such
as bonuses they hope to get from their investments. They base
their judgment on information from the financial statements to
value their potential earnings in the firm
4. Debt providers- they are parties who have loaned the firm for a
long period of time. They are interested in the long-term
stability of the firm. They are interested in establishing whether
the firm has been operating profitability for a long period of
time so as to be able to repay both their loans and the interest
involved
5. Creditors- these are suppliers who advance credit on a short
term basis to the firm. They use the financial accounting
information to determine if the firm can generate enough cash
to repay the credit advances
6. Competitors- they use financial accounting information to
determine the performance of the firm. This enables them to
effectively manage their own business in order to remain
competitive on the market
THE ACCOUNTING EQUATION
We need to understand the following terms:i.

Capital

This the amount of resources invested in the business by the

owner. It may be in the form of cash or the monetary value of
other property. Any liability that the owner puts into business
reduces his capital by the amount of liability.
ii.

Assets

These are property belonging to business. They are of different

kinds and forms
a. Non-current assets
These are those assets that are acquired or created and held
permanently in the business, not for sale but for the purpose of
being used in the business. They create productive capacity in
the business. They can be further be divided into two main
categories:1) Tangible assets- these are non-current that one can
touch and see. They include machinery, building, land,
motor vehicle and furniture
2) Intangible assets- they are noncurrent assets that have
nobody texture but also assist in the earning capacity of
business. They include patents, copyrights, franchise,
goodwill etc
b. Current assets
They are property belonging to a business which is of a temporary
nature. They are completely changed in form or consumed by
use. They are also called floating or circulating assets as they
circulate and change from one form to another in the course of
trading. They are easily converted into cash and as such they
provide funds for the day to day running of the business. They
include: raw materials, finished goods, stock, cash, bank balance,
trade debtors etc
iii.

Liabilities

These are amounts of money for goods supplied or service

rendered on credit, for which the business has a legal obligation
to pay. They could also be loans advanced to business to be paid
at a later date. They are of two types:
a) Long-term liabilities

These are those claims for which payment is made at a later

date not within a year of incurring such liabilities. They
include:- loans to be paid within a period of five years. There
is often an annual charge payable at the end of each year on
such liabilities, called Interest. They also represent borrowed
or loan capital
b) Current liabilities
Are those claims which must be paid in full, within a short
period. Examples include: purchase of goods on credit
(creditors), interest on long term loans, bank overdraft,
unpaid salaries, outstanding rent, etc.
Accounting equation (balance sheet equation)
Capital= Assets- Liabilities
Capital is the excess of assets over liabilities
Example
On 1st jan 2004 Misati started business with the following
assets and liabilities.
Item
Assets
Cash on hand
Stock on hand
Furniture and
fittings
Machinery
Debtors
Liabilities
Creditors
Bank overdraft
Required
Calculate Misatis opening capital

Shs.
16,800
48,000
76,000
80,000
22,000
30,800
12,000

Solution:
Opening balance
Misati
Item
Assets
Cash on hand
Stock on hand
Furniture and
fittings
Machinery
Debtors
Total assets
Less: liabilities
Creditors
Bank overdraft
Total liabilities
Capital

Shs

Shs

16,800
48,000
76,000
80,000
22,000

30,800
12,000

242,8
00

(42,8
00)
200,0
00