N4 Introductory Financial Accounting | Student Book 1.1 The concept of accountancy


As human beings, in order to survive and meet our daily needs, we have to do something to generate income. This is one of the reasons why people start businesses/enterprises. There are many millions of transactions that take place every day around the world. We rely on the business world to provide the things we need in return for money.


This is where accounting comes in. Accounting records business transactions. By recording the transactions of a business, information is obtained on where the business is making money on what the business spends money and how much money the business is left with.


Accounting is an information system that involves: • recording transactions • providing information • managing the business financially.


Accounting is the language of the business community. A study of Accounting will give you the knowledge to plan and make sound financial decisions.


1.2 Capital for a new business


When an entrepreneur/owner wants to start a business, then they need to invest in the business. The owner can invest an amount of money. This money that the owner starts a business with is called start-up capital. This money becomes the business’s money and needs to be put into a bank account in the business name.


The owner can also contribute land and buildings, equipment or vehicles as capital. Capital is therefore whatever the owner invests in a business.


Everything that the owner invests will increase the equity of the owner in the business. Equity is the financial value of the owner’s interest in the business, e.g. what the business is worth to them.


Sometimes entrepreneurs do not have enough money to invest into a business for capital and then need to borrow money from family, friends or financial institutions – this is called borrowed capital.


1.3 The profit motive


Most businesses/enterprises are formed with the main purpose of making a profit. The important thing that a successful business needs to do, is to control its money. Businesses need to know where money comes from and where is it going to.


In order to make a profit, a business must operate and earn money. This money earned is called an income. In order to earn money, it is necessary to first spend money on day-to-day necessities for the business to operate efficiently for example, telephone, wages, electricity, internet fees, etc. These are called expenses.


Profit is the money that is made from the income of a business after all expenses have been paid. To determine the profit a business makes, we need to know how much income has been


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