1.

Definition of Accounting:

Accounting is the process of identifying, measuring and communicating economic

information to permit informed and decisions

2. Types of decision

 Operating (profit, revenue, loss, expense)

 Investment (long term asset, non - current asset)
 Financing (non-current liability, saving fund ……?)
 Dividend (cash, stock)

3. Uses of accounting information (SLICEGP)

 S = Stockholder
 L = Leaders
 I = Investor
 C = Creditors
 E = Employee
 G = Government & authority
 P = Public

4. Quality character of accounting information (URRC)

 Understandability
 Relevant
 Reliability
 Comparability

5. Function of the accounting

 Identifying
 Measuring
 Communicating
 Decision

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6. Definition of Assets:

An asset is a resource controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity.

7. Characteristic of Assets

 Control by the entity

 Past events
 Future economic benefits are

8. Types of entity

(9) Basic Accounting Equation: A (Assets) = L (Liability) + OE (owner’s Equity)

(10) Basic Elements of Accounting:

The Five Elements

 Assets
 Liabilities
 Owner's Equity
 Revenue
 Expenses

The first three elements - asset, Liability and Owner's Equity forms the Accounting
equation and is represented on the Statement of Financial Position.

The other two elements - Revenue and Expenses are represented on the Statement of
Financial Performance.

Assets: anything owned by the business is asset Assets are future economic benefits
controlled by the entity as a result of past transactions or other past events. Assets should be
recognized (recorded) in the Statement of Financial Position only if:

 It is probable that future economic benefits embodied in the asset will eventuate.
 The asset possesses a cost or other value that can be reliably measured.

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This means:

 The business has ownership on 'something'

 That ownership must have come about by a transaction or other event.
 That 'something' will give financial or other benefits in future.
 That benefit is likely to come out in end.
 Can put a $ value on it reliably.

 Examples: Cash at Bank, Debtors, Stock, Accrued Revenue, Equipment,

Prepayments, Land & Buildings, etc.

Liabilities

 Whatever a business owes others.

Liabilities are future sacrifices of economic benefit that the entity is presently obliged to
make to other entities as a result of past transactions or events. It should be recognized in the
Statement of Financial Position if and only if:

 It is probable that the future sacrifice of economic benefit will be required

 The amount of the liability can be measured reliably.

Means:

 sacrifices (payments) of economic benefit (asset)

 Obliged (required) to make to some one
 Due to past transaction or event.
 Simply, an obligation to pay someone by some asset (usually cash) because you owe
them due to some past dealings.

Examples:

Creditors, Bank Loans, Accrued Expenses, Mortgage, Bank Overdraft

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Owner's Equity

 The owner's share in the business.

 SAC definition:
 Residual interest in the assets of the entity after the deduction of liabilities.

OE = A - L

Whatever is left after all liabilities are paid?

Revenue are inflows or other enhancements, or savings in cash flow, of future economic
benefits in the form of increases in assets or reductions in liabilities of the entity, other than
those relating to contributions by owners that result in increase in equity during the
reporting period. Revenue should be recognized in the operating (performance) Statement
when and only when:

 It is probable that the inflow or other enhancement or savings in outflows of future

economic benefit has occurred.
 That it can be measured reliably

This means:

 some form of asset is coming in (except owners contribution)

 that will increase the assets of the business or
 reduce the liabilities and
 Result in increase in OE.

Examples of Revenue

Cash sales, Credit Sales, Interest Received, Discount Received, Stock Gain, Commission
Received, and Profit on Sale of Non-Current Asset

 Top of Form
 Bottom of Form

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Expenses Definition: Expenses are consumption's or losses of future economic benefits in
the form of reductions in assets or increases in liabilities, other than those relating to
distributions to owners that result in decrease in equity. Recognized when and only when: it
is probable that consumption or loss of economic benefits resulting in reduction in assets and
or liabilities has occurred and that it can be measured reliably.

 It simply means: Asset has been consumed/sacrificed/eaten/chewed up/used up -

which has led to reductions in Assets and or increase in liabilities with a net effect of
reducing OE but which are not Drawings by the owner.
 Or anything that reduces OE but NOT Drawings.

Examples: Wages, COGS, Rent, Stock Loss, Loss on Sale of NCA, discount given,
insurance etc.

11. Rules of Debit (Dr.) and Credit (Cr.)

 Personal Account
Debit the receiver
Credit the giver
 Impersonal Account (Real Account/Assets Account)
Debit what comes in
Credit what goes out
 Nominal Account
Debit all expenses and losses
Credit all incomes and gains
12. Component of annual report

Components of
companys Annual
report

Management Financial Statement

Chairman/ M.D
Auditor's Report Discussion Analysis IAS-1
Report
report BAS-1

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13. Classification of Accounts

14. Accounting Process

15. Compete sate of Financial Statement

Financial
Statement

statement of statement of cash Notes

financial position statement of financial flow
statement of changing (Explanation)
(Asset, Liablity and performance ISA-7,BAS-7
an equity
Owner's Equity) (Revenue, Profit, (Operating,
(Right of the owner)
Expence,loss and EPS) Financing and
Investing)

16. Measurement of Financial statements

a) Historical cost. (Actual cost of Assets and Liabilities)

b) Current cost (Immediate purchase cost)
c) Resizable value / statement value( Value Exchange )
d) Book Value / Written Down Value/ Carried Amount

Cost------------------------------------- 5000 tk
(-) Accumulated Depreciation ------ 2500 tk (five year deprecation)
----------------------------------------------------------
Book Value/ Carried Amount = 2500 tk

e) Present value ( without discounting)

f) Future value (with discounting)

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17. Component of Balance sheet

18. Component of Income Statement

Revenue
Revenue is the money an entity receives from the sale of goods or services. Other terms
frequently used for revenue are sales, net sales, or sale revenue. It is also referred to as the
“top line” because revenues are reported at the top of the income statement.

Cost of Goods Sold

Cost of goods sold are the direct costs of producing the goods being offered by the entity?
This would include the materials, labor, and other resources required for production.

Gross Profit
Gross profit is the difference between the revenue received for the product less the cost of
goods sold.

Operating Expenses
Operating expenses are the amount an entity expends to maintain and operate the general
business. Operating expenses include research and development, marketing, general and
administrative, amortization of intangible assets (i.e. patents, good will, etc.), etc.

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In addition, when an entity purchases a capital asset, such as a building or equipment, they
expense a portion of the asset over a number of years; this is called depreciation.
Depreciation expense is an accounting expense that is deducted from net income.

Operating Income
Operating income is equal to revenues minus cost of goods sold and operating expenses. In
other words, it measures the profits or losses of the day to day operations of the
business. Another name for Operating Income is Earnings before Interest and Taxes (EBIT).

Other Income/Expenses
To obtain net income, further adjustments must be made to account for interest income and
expense, income tax expenses, and other extraordinary and miscellaneous items.

Profits
Revenues minus all expenses equal net income (profits or losses). Profits are also referred to
as net income or the “bottom line” because profits are reported at the bottom of the income
statement. Some analysts call these “accounting profits” because they include non-cash
accounting entries such as depreciation and amortization.

Income Statement Format

Revenue
– Cost of Goods Sold Expense
--------------------------------------------
= Gross Profit (or Loss)
– Operating Expenses (R&D, selling & adm, depreciation, etc.)
-----------------------------------------------------------------------------
= Operating Income
Other Income/Expenses
+ Investment income
– Interest Expense
– Taxes
+/- Non Recurring Events (Extraordinary items)
-------------------------------------------------------------------------------
= Profit or Net Income
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19. Classification of cash flow statement.

Cash flows are classified as operating, investing, or financing activities on the statement of
cash flows, depending on the nature of the transaction. Each of these three classifications is
defined as follows.

 Operating activities include cash activities related to net income. For example, cash
generated from the sale of goods (revenue) and cash paid for merchandise (expense) are
operating activities because revenues and expenses are included in net income.
 Investing activities include cash activities related to noncurrent assets. Noncurrent assets
include (1) long-term investments; (2) property, plant, and equipment; and (3) the
principal amount of loans made to other entities. For example, cash generated from the
sale of land and cash paid for an investment in another company are included in this
category. (Note that interest received from loans is included in operating activities.)

 Financing activities include cash activities related to noncurrent liabilities and

owners’ equity. Noncurrent liabilities and owners’ equity items include (1) the principal
amount of long-term debt, (2) stock sales and repurchases, and (3) dividend payments.
(Note that interest paid on long-term debt is included in operating activities.)

20. What is a Cash Flow Statement?

In financial accounting, a Cash Flow Statement, also known as Statement of Cash Flow, is
a financial statement that shows how changes in balance sheet accounts and income affect
cash and cash equivalents, and breaks the analysis down to operating, investing, and
financing activities. Essentially, the cash flow statement is concerned with the flow of cash in
and out of the business. The statement captures both the current operating results and the
accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows
is useful in determining the short-term viability of a company, particularly its ability to pay
bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard
that deals with cash flow statements.

The statement of cash flows is divided into three sections:

A. Financing activities
B. Operating activities
C. Investing activities

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A. Cash flow from financing activities (CFF)
CFF is cash flow that comes into play from generating or letting cash through the issuance of
additional equity, short or long-term debt for the firm's operations. This covers:

(a) Cash inflow (+)

 Sale of equity securities

 Issuance of debt securities

(b) Cash outflow (-)

 Dividends to shareholders
 Redemption of long-term debt
 Redemption of capital stock
 Reporting Noncash Investing and Financing Transactions Data for the Statement of
cash flows(SOCF) is derived from three places:
 Comparative balance sheets
 Current income statements
 Selected transaction data

B. Cash Flow from Operating Activities (CFO)

CFO is cash flow that comes into play from regular operations such as revenues and cash
operating expenses net of taxes. This category covers:

(a) Cash inflow (+)

 Revenue from sale of goods and services

 Dividends (from equities of other entities)
 Interest (from debt instruments of other entities)

(b) Cash outflow (-)

 Payments to lenders
 Payments to employees
 Payments to suppliers
 Payments to government

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  Payments for other expenses

C. Cash Flow from Investing Activities (CFI)

CFI is cash flow that comes to play through investment activities such as the acquisition or
disposition of current and fixed assets. This category covers:

(a) Cash inflow (+)

 Sale of property, plant and equipment

 Sale of debt or equity securities (other entities)
 Collection of principal on loans to other entities
(b) Cash outflow (-)

 Purchase of property, plant and equipment

 Purchase of debt or equity securities (other entities)
 Lending to other entities

Definition of Loss: a loss, it has a responsibility to report that loss to the federal government
and to its owners. Most people have an instinctive understanding of what a financial loss is;
anytime you receive less for something than what you spent to acquire it, you have sustained
a loss. However, it is important not to just recognize that a loss has occurred, but to be able to
classify it and report it for financial reporting and tax purposes.

Definition of Gain: Gain is one of the harder terms to define, mainly because it’s used in a
lot more places than just the audio world. Quite simply it means an increase in some kind of
value. So for example, you can have a power gain, voltage gain, or current gain; and they all
increase those respective values. Typically when referring to gain, we refer to transmission
gain, which is the increase in the power of the signal. This increase is almost always
expressed in DB. This could be the increase in the raw signal from your guitar or microphone
before it goes into any of the other electronic components.

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What is the comprehensive income?

Comprehensive income is defined by the Financial Accounting Standards Board, or FASB,

as “the change in equity of a business enterprise during a period from transactions and other
events and circumstances from no owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to owners.”

Comprehensive income is the sum of net income and other items that must bypass the income
statement because they have not been realized, including items like an unrealized holding
gain or loss from available for sale securities and foreign currency translation gains or losses.
These items are not part of net income, yet are important enough to be included in
comprehensive income, giving the user a bigger, more comprehensive picture of the
organization as a whole.

Items included in comprehensive income, but not net income are reported under the
accumulated other comprehensive income section of shareholder's equity.

How does it differ from the operating income?

Operating income is a more widely used financial metric than EBITDA. There are two
primary reasons for this: simplicity of calculation and perceived reliability. Adjusting for
depreciation can take a long time, especially when several different kinds of capital assets
need to be accounted for. This makes EBITDA somewhat onerous to figure out.

Using common income statement categories, operating income is calculated by subtracting

operating expenses and depreciation and amortization from gross income.

Depreciation treatment can be done using several methods, all of which have different
strengths and weaknesses. By not taking out depreciation from the earnings numbers, a
company is theoretically able to dress up its numbers to impress investors. The interpretation
of EBITDA is not clearly defined. This leads most experienced analysts and investors to take
EBITDA with a grain of salt.

The Securities and Exchange Commission warns against directly comparing EBIT and
operating income, since EBIT makes adjustments for items that are not included in operating

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income. Instead, it recommends using the net income as presented in the statement of
operations under generally accepted accounting principles to reconcile EBIT.

Operating income is necessary to calculate operating margin, which describes the operating
efficiency and profitability of a firm and is extremely useful in comparing companies in the
same industry.

Discuss the role of accounting in creating the process for values and accountability?

Principles followed in accepting virtues and rejecting vices in order to uphold and develop
peace and stability of individuals, society and state as a whole may be called values.
Accepting of good rejecting of bad is the act of values.

Accounting creates values by maintaining transparency of accounts. Since man lives in the
society, he has got a social life.

For leading a social life he has to perform financial and material transactions daily. For
carrying out these transactions successfully the existence of a sound environment is
necessary.

In the process of keeping accounts of these transactions certain rules and regulations and
provisions of law are to be followed.

The role of accounting in creating values is stated below:

 Religious bindings
 Economy and saving tendency
 Self-confidence and self-reliance
 Carefulness in paying loan
 Discouraging black marketing
 Discouraging fraud and forgery
 Discouraging hoarding

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