Key Concepts

Habari! Welcome to the Foundations of Accounting!

Ever thought about starting your own business? Maybe a small duka, selling cool phone accessories, or even a chicken farm? It's exciting! But how do you know if you are making a profit or a loss? How do you keep track of all the money coming in and going out? That's where accounting comes in. It's the language of business!

But before we can speak this language, we need to learn its basic rules, or what we call Key Concepts. Think of them as the grammar of accounting. They make sure everyone, from a small kiosk owner in Kisumu to a big company like Safaricom in Nairobi, is playing by the same rules. Let's dive in!

1. The Business Entity Concept

This is rule number one and it's super important! This concept says that the business is completely separate from its owner. The business is its own "person" in the eyes of accounting. All the transactions of the business must be kept separate from the personal transactions of the owner.

Kenyan Example: Imagine Mama Benta runs a successful vegetable stall (kibanda). She uses the money from her sales to buy more stock and pay her suppliers. That's business money. When she takes some money from the stall's cash box to pay for her child's school fees, this is not a business expense. It's a withdrawal (drawings). The kibanda is separate from Mama Benta's household finances. Sawa?

Image Suggestion: An illustration with a clear line down the middle. On the left, a vibrant Kenyan duka with a sign "Wanjiku's Wonders Shop," showing stock on shelves and a cash box. On the right, a warm home scene with Wanjiku and her family eating a meal. The line signifies the separation between business and personal life.

2. The Money Measurement Concept

This concept is simple: in accounting, we only record things that can be expressed in terms of money. In our case, that's the mighty Kenyan Shilling (Ksh). If you can't put a shilling value on it, it doesn't go into the accounting books.

Kenyan Example: A cyber cafe owns three computers worth Ksh 90,000. We can record this. The cyber cafe also has a very skilled and friendly manager who keeps customers happy. While this is very valuable, we cannot put a price on 'friendliness' or 'skill' in the account books. We only record the manager's salary, which is a specific amount of money.

3. The Going Concern Concept

This is the assumption that a business will continue to operate for the foreseeable future. We don't start a business expecting it to close down next month! This allows us to make long-term plans and investments, like buying equipment that will last for years.

Kenyan Example: When Kenya Airways buys a new aeroplane, they record it as a long-term asset. They do this because they assume the airline will still be flying passengers for many years to come. They don't treat the multi-billion shilling plane as an expense for just one year.

4. The Duality (or Dual Aspect) Concept

This is the heart of modern accounting! It states that every single business transaction has two effects. For every "give," there is a "take." This keeps the accounting world in balance. This concept is represented by the fundamental Accounting Equation.

For every transaction, the equation MUST always be balanced:

Assets = Liabilities + Capital (Owner's Equity)

• Assets: Things the business OWNS (e.g., cash, computers, delivery motorbike).
• Liabilities: What the business OWES to others (e.g., a loan from a bank, money owed to suppliers).
• Capital: What the business OWES to the owner (the owner's investment).

Kenyan Example: James starts a boda boda business. He uses Ksh 30,000 of his own savings and gets a loan of Ksh 70,000 from a SACCO to buy a motorbike worth Ksh 100,000.

Let's see the two effects:

1. The business gets an asset: A motorbike worth Ksh 100,000.
2. The business now has obligations: It owes the SACCO (a liability) Ksh 70,000, and it owes James (capital) his initial Ksh 30,000.

Let's check our equation:

Assets      = Liabilities + Capital
Ksh 100,000 = Ksh 70,000  + Ksh 30,000
Ksh 100,000 = Ksh 100,000  <-- It's balanced! Perfect!

We often use 'T-accounts' to see these two sides. Here's a simple diagram showing how the motorbike purchase would look:

        Motorbike Account (Asset)
    ---------------------------------
    Debit (Increase) | Credit (Decrease)
    Ksh 100,000      |
                     |

        Loan Account (Liability)
    ---------------------------------
    Debit (Decrease) | Credit (Increase)
                     | Ksh 70,000
                     |

        Capital Account (Capital)
    ---------------------------------
    Debit (Decrease) | Credit (Increase)
                     | Ksh 30,000
                     |

5. The Historical Cost Concept

This concept states that we should record an asset at its original purchase price, and we don't change it even if its market value goes up or down. This makes the information reliable and verifiable because we have a receipt for the original cost!

Kenyan Example: A school in Nakuru bought a piece of land (shamba) in 2010 for Ksh 800,000 to build a new playground. Today, that land might be worth Ksh 5,000,000! However, in the school's accounting books, the land will still be recorded at its historical cost of Ksh 800,000.

Let's Recap!

Wow, that was a lot, but you did great! These concepts are the pillars that hold up the entire world of accounting. Let's remember the key ideas:

• Business Entity: The business and owner are two separate people.
• Money Measurement: If you can't count it in Shillings, you can't put it in the books.
• Going Concern: We assume the business is here to stay!
• Duality: Every transaction has two sides, keeping the Accounting Equation balanced.
• Historical Cost: We record things at the price we paid for them.

Keep these concepts in mind as we continue our journey. They will guide every step we take in understanding how to account for any business, big or small. You're building a strong foundation for your future success! Keep up the great work!