1. What is Accounting?

• Definition: Accounting is the process of keeping track of money in a business — what comes in, what goes out, and what’s left.

• Simple idea: It’s like keeping a diary of all the money activities of a business.

• Example: Imagine you open a small coffee shop called Sunny Café. You sell coffee and snacks, pay rent, buy milk and sugar, and maybe borrow money from the bank. Accounting helps you keep track of all this.

2. Why Do We Need Accounting?

3. Key Words in Accounting

Term	Meaning	Sunny Café Example
Transaction	Any money activity	Buying milk for €20
Assets	What the business owns	Coffee machine, cash in till
Liabilities	What the business owes	Loan from the bank
Equity (Capital)	Owner’s share in the business	You invest €5,000 to start Sunny Café
Revenue (Income)	Money earned from sales	Selling a cappuccino for €3
Expense	Costs to run the business	Paying €800 rent

4. The Accounting Equation

The whole subject of accounting is built on one simple rule:

Assets = Liabilities + Equity

• Assets: Things Sunny Café owns (cash, coffee machine, stock).

• Liabilities: Things Sunny Café owes (loan, unpaid bills).

• Equity: What belongs to the owner (your investment + profits).

Example:

You invest €5,000 cash to start Sunny Café.

• Assets = €5,000 (Cash)

• Liabilities = €0

• Equity = €5,000

5. The Double‑Entry System: Debits and Credits

Every transaction has two sides:

• One side receives value → Debit (Dr)

• One side gives value → Credit (Cr)

This is called the double‑entry system. It keeps the accounting equation balanced.

Example:

Sunny Café buys a coffee machine for €1,000 cash.

• Coffee Machine (receives value) → Debit €1,000

• Cash (gives value) → Credit €1,000

6. How Debits and Credits Work

Sunny Cafe it approached bank to for a loan of 5000 EUR so that i can buy furniture.

Sunny Cafe

1. AIB Bank granted the loan at an interest rate of 10% per year.

At the time of loan

Dr. Cash 5000

Cr. Loan Payable 5000

Interest Payable

Dr. Interest expense 500

Cr. Accrued Payable 500

1. When funiture is bought worth 5000 from IKEA

Dr. Furniture (Fixed Assets) 5000

Cr. Cash 5000

1. Hired a worker for painting work and to set up the furntiture in the Cafe, Sunny Cafe paid the worker 80 for this.

   Dr. Wage 80

   Cr. Cash 80

2. Sunny Cafe hired a Barista with a salary of 2500 per month. Salary is to be paid at the end of the month.

   Dr. Salary 2500

   Cr. Accounts Payable 2500

3. Sunny Cafe purchased stock worth of 1000

   Dr. Stock/Purchases 1000

   Cr. Cash 1000

4. Customer A came in to the Cafe and purchase a coffee for 7.

   Dr. Cash 7

   Cr. Sales 7

Let's assume the stock consumed was worth 5

Dr. Cost of Sales 5

Cr. Stock 5

1. New Sales to a corporate client (ICD). ICD will pay for the coffee in 1 months time. Transaction price was 500

   Dr. Accounts Receivable 500

   Cr. Sales 500

   Let's assume the stock consumed was worth 200

   Dr. Cost of Sales 200

   Cr. Stock 200

2. ICD did not pay Sunny Cafe. Sunny Cafe has to record a provision for bad debt.

   Dr. Bad Debt expense 500

   Cr. Accounts Receivables 500 (Provision for receivables 500)

3. Owner invested 1000 in the Sunny Cafe business

   Dr. Cash/Bank 1000

   Cr. Capital 1000

4. Owner withdraw 200 from the business

   Dr. Drawing/Capital 200

   Cr. Cash/Bank 200

7. Journal Entry Examples (Sunny Café)

8. The Accounting Cycle (Step by Step)

Here’s how Sunny Café’s transactions become financial statements:

1. Transaction occurs → Sell coffee for €3.

2. Journal entry → Dr Cash €3, Cr Sales €3.

3. Ledger accounts → Update Cash account and Sales account.

4. Trial balance → Check that total debits = total credits.

5. Financial statements → Prepare Income Statement (profit) and Balance Sheet (assets, liabilities, equity).

🔄 The Accounting Cycle (Made Simple)

The accounting cycle is just the step‑by‑step process that turns everyday business activities into financial statements. Think of it as a journey:

Step 1: A Transaction Happens

• A business event involving money.

• Sunny Café example: You sell a cappuccino for €3 cash.

Step 2: Record in the Journal

• Every transaction is written down as a journal entry using debits and credits.

• Sunny Café example:

• Dr Cash €3 (cash increases)

• Cr Sales Revenue €3 (income increases)

Step 3: Post to the Ledger

• The journal entries are sorted into accounts (like Cash, Sales, Rent, Coffee Machine).

• This is like organizing your diary into separate folders.

• Sunny Café example:

• Cash account shows +€3

• Sales account shows +€3

Step 4: Prepare a Trial Balance

• At the end of the period, add up all debits and credits.

• Check that Total Debits = Total Credits.

• If they don’t match, there’s an error.

• Sunny Café example:

• Cash (Dr) €3

• Sales (Cr) €3

• Debits = Credits ✔

Step 5: Adjusting Entries

• Some things aren’t recorded daily but must be added at the end of the period.

• Examples: unpaid bills, depreciation of equipment, prepaid rent.

• Sunny Café example: You owe €100 electricity bill not yet paid → record as an expense and a liability.

Step 6: Prepare Adjusted Trial Balance

• After adjustments, check again that Debits = Credits.

• This ensures the accounts are ready for financial statements.

Step 7: Prepare Financial Statements

• Now we can create the main reports:

  1. Income Statement → shows profit or loss (Revenue – Expenses).

  2. Balance Sheet → shows Assets, Liabilities, and Equity.

  3. (Later: Cash Flow Statement).

• Sunny Café example:

• Income Statement: Sales €3 – Rent €800 – Electricity €100 = Loss €897

• Balance Sheet: Assets (Cash, Coffee Machine) = Liabilities (Loan, Bills) + Equity

Step 8: Closing Entries

• At the end of the year, revenue and expense accounts are closed (reset to zero) so the new year starts fresh.

• Profits or losses are transferred to Equity.

• Sunny Café example: The €897 loss reduces the owner’s equity.

Step 9: Start Again

• The cycle repeats for the next accounting period.

🌟 Understanding Key Accounting Concepts (Sunny Café Example)

Accounting is not just about recording money when it moves. It’s about showing the true picture of a business in the right period. To do this, we use four important ideas:

1. Accruals (Expenses or income used now, but cash comes later)

• Meaning: Record costs or income in the period they happen, even if money hasn’t been paid or received yet.

• Sunny Café Example:

• In June, Sunny Café uses electricity worth €100.

• The bill will only arrive in July.

• We still record €100 as a June expense, because that’s when the electricity was used.

Entry (June):

• Dr Electricity Expense €100

• Cr Electricity Payable €100

2. Prepayments (Cash paid now, benefit later)

• Meaning: Sometimes we pay in advance for something that covers future months. Only part belongs to this period.

• Sunny Café Example:

• In January, Sunny Café pays €1,200 for 12 months of insurance.

• Each month, only €100 is an expense. The rest is a prepaid asset.

Entry (January):

• Dr Prepaid Insurance €1,200

• Cr Cash €1,200

At the end of January (1 month used):

• Dr Insurance Expense €100

• Cr Prepaid Insurance €100

3. Capitalisation (Big purchases treated as assets)

Sunny Cafe would need a coffee machine to operate its business.

First year of the Cafe,

Year 1. start of the business, they purchased coffee machine that is expected to be used for next 5 years

Dr. Fixed Assets (Coffee Machine) 10,000 (Balance Sheet)

Cr. Cash 10,000

Slowly record the expense in the next five year (10,000/5 = EUR 2000)

Y1 2,000 depreciation expense

Y2 2,000 depreciation expense

Y3 2,000 depreciation expense

Y4 2,000 depreciation expense

Y5 2,000 depreciation expense

---------

10,000

--------

• Meaning: If something will benefit the business for years, we don’t expense it all at once. We record it as an asset and spread the cost over time.

• Sunny Café Example:

• Sunny Café buys a coffee machine for €5,000.

• Instead of recording €5,000 as an expense in one day, we capitalise it as an asset.

• Each year, we charge part of its cost (depreciation) to the Income Statement.

Entry (Purchase):

• Dr Coffee Machine €5,000

• Cr Cash €5,000

Entry (Yearly Depreciation, €1,000):

• Dr Depreciation Expense €1,000

• Cr Accumulated Depreciation €1,000

4. Charging to the Income Statement (Showing the right costs and income)/ Revenue Expenditure

Hired a barista to make coffee and pay him a salary of 3000 per month

Dr. Salary expense 3000 (Profit and Loss/ Income Statement)

Cr. Cash 3000

• Meaning: The Income Statement shows this period’s performance. That means:

  • Include this period’s revenue.

  • Include this period’s expenses (whether paid or not).

• Sunny Café Example (March):

• Sales: €3,000

• Rent Expense: €800

• Insurance Expense: €100 (from prepayment)

• Electricity Expense: €100 (from accrual)

• Depreciation: €1,000 (from capitalisation)

Income Statement (March):

• Revenue: €3,000

• Expenses: Rent €800 + Insurance €100 + Electricity €100 + Depreciation €1,000 = €2,000

• Profit = €1,000

✅ How They Fit Together

• Accruals → Add expenses/income used now, cash later.

• Prepayments → Remove costs paid now but belonging to the future.

• Capitalisation → Spread big costs over many years.

• Charging to Income Statement → Only this period’s revenue and expenses are shown, giving a fair profit figure.

📊 Summary Table of Key Concepts

☕ Sunny Café Practice Exercise

Instructions

For each transaction below, decide:

1. Is it an Accrual, Prepayment, Capitalisation, or Direct Expense?

2. Which accounts would be Debited and Credited?

Transactions

Sunny Café pays €1,200 in January for 12 months of insurance.

• What type of adjustment is this?

• How should it be recorded in January?

At the end of June, Sunny Café has used €150 of electricity, but the bill will only arrive in July.

• What type of adjustment is this?

• How should it be recorded in June?

Sunny Café buys a new coffee machine for €6,000, expected to last 6 years.

• Should this be treated as an expense or an asset?

• How should it be recorded at purchase, and what happens each year?

Sunny Café pays €500 for coffee beans in cash, which will be used up this month.

• Should this be capitalised, prepaid, or expensed immediately?

• How should it be recorded?

Sunny Café earns €2,000 in sales during March, all in cash.

• How is this recorded in the Income Statement?

• Which accounts are affected?

✅ Answer Guide

🌳 Decision Tree: How to Classify a Transaction

Step 1: Ask → Has cash been paid or received yet?

• Yes → Go to Step 2.

• No → Go to Step 3.

Step 2: If cash has been paid/received

• Does the payment cover future months/years?

  • ✅ Yes → Prepayment

  • Example: Sunny Café pays €1,200 for 12 months of insurance in January.

• Is it a big purchase that will last for years (like equipment)?

  • ✅ Yes → Capitalisation

  • Example: Sunny Café buys a €6,000 coffee machine.

• Otherwise → Direct Expense

• Example: Sunny Café pays €500 for coffee beans used this month.

Step 3: If cash has NOT been paid/received yet

• Did the business already use the service or earn the income?

  • ✅ Yes → Accrual

  • Example: Sunny Café used €150 electricity in June, bill comes in July.

• If not yet used/earned → It’s not recorded as an expense or income yet.

✅ Quick Visual Flow (Text)Transaction

├── Cash paid/received?

│ ├── Yes →

│ │ ├── Covers future months? → Prepayment

│ │ ├── Big purchase lasting years? → Capitalisation

│ │ └── Used immediately? → Direct Expense

│

└── No →

├── Service already used / income earned? → Accrual

└── Not yet used/earned → Wait until it happens

🌟 Key Reminders

• Accrual = Used now, pay/receive later.

• Prepayment = Pay now, use later.

• Capitalisation = Big asset, spread cost over years.

• Direct Expense = Pay now, use now.

☕ Sunny Café Case Study: One Week of Transactions

Background

Sunny Café is a small coffee shop. During the first week of April, the following transactions take place:

Transactions

1. April 1 – The owner pays €1,200 for a 12‑month insurance policy.

2. April 2 – Sunny Café buys a new coffee grinder for €2,400, expected to last 4 years.

3. April 3 – Sunny Café pays €600 cash for coffee beans that will be used this month.

4. April 4 – Sunny Café sells €1,500 worth of coffee and snacks, all in cash.

5. April 5 – Sunny Café pays €800 rent for April.

6. April 6 – At the end of the week, Sunny Café has used €120 of electricity, but the bill will arrive next month.

📝 Task

For each transaction:

1. Decide if it is an Accrual, Prepayment, Capitalisation, or Direct Expense/Income.

2. Write the journal entry (Debit and Credit).

☕ Sunny Café – Accounting Worksheet (Week 1 of April)

Instructions

For each transaction below:

1. Decide whether it is an Accrual, Prepayment, Capitalisation, Direct Expense, or Income.

2. Write the correct Journal Entry (Debit and Credit).

Transactions

1. April 1 – Sunny Café pays €1,200 for a 12‑month insurance policy.

• Concept: __________________________

• Journal Entry:

• Dr __________________ €________

• Cr __________________ €________

2. April 2 – Sunny Café buys a new coffee grinder for €2,400, expected to last 4 years.

• Concept: __________________________

• Journal Entry:

• Dr __________________ €________

• Cr __________________ €________

3. April 3 – Sunny Café pays €600 cash for coffee beans that will be used this month.

• Concept: __________________________

• Journal Entry:

• Dr __________________ €________

• Cr __________________ €________

4. April 4 – Sunny Café sells €1,500 worth of coffee and snacks, all in cash.

• Concept: __________________________

• Journal Entry:

• Dr __________________ €________

• Cr __________________ €________

5. April 5 – Sunny Café pays €800 rent for April.

• Concept: __________________________

• Journal Entry:

• Dr __________________ €________

• Cr __________________ €________

6. April 6 – At the end of the week, Sunny Café has used €120 of electricity, but the bill will arrive next month.

• Concept: __________________________

• Journal Entry:

• Dr __________________ €________

• Cr __________________ €________

✍️ Extension Task

Using the above transactions, prepare a mini Income Statement for the first week of April:

• Revenue: __________________________

• Expenses: __________________________

• Profit/Loss: _______________________