Accounting

and

Financial
Management

Introduction to Accounting

Accounting & Financial Management

2

Introduction

to

Accounting

Accounting An Information Process Users of Accounting Information GAAP The Accounting Equation Double Entry System

Accounting...

is the language of business.

Accounting The Language of Business

Accounting is the information system that...

measures business activities,

processes data into reports, and communicates results to decision makers.
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Definitions of Accounting
The process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information.
American Accounting Association (AAA)

A service activity whose function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.
American Institute of Certified Public Accountants (AICPA)

Accounting as an Aid to Decision Making

Accounting helps in decision making by showing where and when money has been spent, by evaluating performance, and by showing the implications of choosing one plan instead of another. Fundamental relationships in the decision-making process:
Event Accountants analysis and recording

Financial statements

Users

Accounting An Information Process

Identification of Users

Accounting An Information Process

Identification of Users

User Information Needs

Accounting An Information Process

Identification of Users

User Information Needs

Accounting System

10

Accounting An Information Process

Identification of Users

User Information Needs

Economic Data and Activities

Accounting System

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Accounting An Information Process

Identification of Users

User Information Needs

Economic Data and Activities

Accounting System

Reports

12

Accounting An Information Process

Identification of Users

User Information Needs

Economic Data and Activities

Accounting System

Reports

User Decisions

13

The Flow of Accounting Information

1. Business transactions occur

2. Businesses prepare reports to Show the results of their operations

3. People make decisions.

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Users of Accounting Information

Individuals

Government regulatory agencies

Businesses Investors and creditors

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Taxing authorities Nonprofit organizations

Users of Accounting Information

investors creditors regulators customers competitors

Financial Accounting
EXTERNAL USERS

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Users of Accounting Information investors creditors regulators customers competitors

Financial Accounting
EXTERNAL USERS

Financial Accounting
INTERNAL USERS
owners managers employees

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Users of Accounting Information Users of Accounting Information

External users make decisions about the entity.

Internal users make decisions for the entity.

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The Accounting Equation

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The Accounting Equation

Assets

Liabilities + Owners Equity

Economic Resources

Claims to Economic Resources

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The Basic Accounting Equation

Accounting data is represented by the following relationship among the assets, liabilities and owners equity of a business:
Assets = Liabilities + Owners Equity

The equation must be in balance after every recorded transaction in the system.

Business Transactions
a. Sachin deposits RS 25,000 in a bank account for ABC Ltd
ASSETS LIABILITIES

OWNERS EQUITY

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Business Transactions
a. Sachin deposits RS 25,000 in a bank account for ABC Ltd.
ASSETS LIABILITIES

Cash 25,000

OWNERS EQUITY

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Business Transactions
a. Sachin deposits RS 25,000 in a bank account for ABC Ltd.
ASSETS LIABILITIES

Cash 25,000

OWNERS EQUITY Sachin, Capital 25,000

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Business Transactions
b. ABC Ltd. buys land for Rs 20,000.

ASSETS

LIABILITIES

OWNERS EQUITY

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Business Transactions
b. ABC Ltd. buys land for Rs 20,000.

ASSETS Cash (20,000)

LIABILITIES

OWNERS EQUITY

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Business Transactions
b. ABC Ltd buys land for RS 20,000.

ASSETS Cash (20,000)

LIABILITIES

=
Land 20,000

OWNERS EQUITY

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Transaction Summary
ASSETS
LIABILITIES Accts. Payable 400

Cash Purchases Land

6,700 550 20,000

OWNERS EQUITY Sachin, Capital Sachin, Drawing Fees Earned Wages Expense Rent Expense Commission Misc. Expense 25,000 (2,000) 7,500 (2,125) (800) (450) (275)

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Role of Accounting
Good managers plan for the future. They develop a budget. A budget is a formal plan stated in monetary terms.
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Role of Accounting
Accounting helps banks decide to whom they will lend money.

Accounting provides information that helps investors pick stocks.

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Role of Accounting

Consulting

Assurance services including auditing

Tax accounting

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Generally Accepted Accounting Principles

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Full Disclosure Principle

Illustration 1-14

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Revenue Principle
I plan to have you make my travel arrangements. Air & Sea Travel, Inc. March 12 Air & Sea Travel, Inc. April 2

Situation 1 No transaction has occurred. Do Not Record Revenue

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Situation 2 The client has taken a trip arranged by Air & Sea Travel. Record Revenue

The Double Entry System

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Double-Entry Accounting
Double-entry accounting is based on a simple concept: each party in a business transaction will receive something and give something in return. In bookkeeping terms, what is received is a debit and what is given is a credit. The T account is a representation of a scale or balance. Scale or Balance T account Left Side Receive DEBIT Receive DEBIT Give CREDIT Right Side Give CREDIT

Luca Pacioli Developer of Double-Entry Accounting

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The Double-Entry system

The Double Entry System

The system records the two-sided effect of transactions

Transaction
Bought furniture for cash Took a loan in cash

Two-sided effect
Decrease in one asset Increase in another asset Increase in an asset Increase in a liability

The Double Entry System

Note that the accounting equation equality is maintained after recording each transaction.

Business Transactions
Entry A. Amit deposits Rs25,000 in a bank account for XYZ Ltd..
receive Debit

Amit (investor)

XYZ Ltd (investee)

give give Credit Credit

Journal
Date Description Debit Credit

11/1

39

Business Transactions
Entry A. Amit deposits Rs25,000 in a bank account for XYZ Ltd.. Cash Amit (investor)

receive Debit

XYZ Ltd.(investee)

give give Credit Credit

l Journal
Date Description Debit Credit

11/1

Cash

25,000

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Business Transactions
Entry A. Amit deposits Rs 25,000 in a bank account for XYZ Ltd.. Cash Amit (investor)

A promise to the owner XYZ Ltd.(investee)

give give Credit Credit

receive Debit

Journal
Date Description Debit Credit

11/1

Cash Amit, Capital

25,000 25,000

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Business Transactions
Entry B. XYZ Ltd. buys land for Rs20,000. Land Owner (seller)

receive Debit

XYZ Ltd(buyer)

give give Credit Credit

Journal
Date Description Debit Credit

11/5

42

Business Transactions
Entry H. Amit withdraws Rs 2,000 in cash. Reduction in obligation Amit (payee)

Cash

receive Debit

XYZ Ltd. (payor)

give give Credit Credit

Journal
Date Description Debit Credit

11/30

Amit, Drawing Cash

2,000 2,000

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The Recording Process

The sequence of steps in recording transactions:
Transactions Documentation Journal

Financial Statements

Trial Balance

Ledger

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Journal, Ledger, Trial Balance

1. Transactions are analyzed and recorded in journal.

Documents Journal

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Journal, Ledger, Trial Balance

1. Transactions are analyzed and recorded in journal.

Documents Journal

2. Transactions are posted from journal to ledger.

Journal Ledger

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Journal, Ledger, Trial Balance

1. Transactions are analyzed and recorded in journal.

Documents Journal

2. Transactions are posted from journal to ledger.

Journal Ledger

3. Trial balance is prepared.

Trial Balance

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Manual Accounting Cycle

1. Transactions are analyzed and recorded in journal.
Documents
Journal

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Manual Accounting Cycle

1. Transactions are analyzed and recorded in journal.
Documents
Journal

2. Transactions are posted from journal to ledger.

Journal Ledger

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Manual Accounting Cycle

1. Transactions are analyzed and recorded in journal.
Documents
Journal

2. Transactions are posted from journal to ledger.

Journal Ledger

3. Trial balance is prepared, Trial balance

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Manual Accounting Cycle

1. Transactions are analyzed and recorded in journal.
Documents
Journal

2. Transactions are posted from journal to ledger.

Journal Ledger

3. Trial balance is prepared,

4. Financial statements are prepared and distributed.

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IS

SOE

BS

Financial Statements

Computerized Accounting Cycle

1. Transactions are analyzed and entered in the computer.
Documents
Computer

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Computerized Accounting Cycle

1. Transactions are analyzed and entered in the computer.
Documents
Computer

2. Preliminary reports are analyzed, adjustments are prepared and entered in the computer.

Computer Reports

Computer

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Computerized Accounting Cycle

1. Transactions are analyzed and entered in the computer.
Documents
Computer

2. Preliminary reports are analyzed, adjustments are prepared and entered in the computer.

Computer Reports

Computer

3. Financial statements are printed and distributed.

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Computerized Accounting Cycle

1. Transactions are analyzed and entered in the computer.
Documents
Computer

2. Preliminary reports are analyzed, adjustments are prepared and entered in the computer.

Computer Reports

Computer

3. Financial statements are printed and distributed.

4. Reports are analyzed and interpreted for decisionmaking purposes.
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IS

SOE

BS

SCF

Financial Statements

Posting Debit
Date
April 2

Cash Account
Ref. Particulars Amount Date Ref Particulars
1 To G. Cap 30,000

Credit
Amount

Insert the number of the journal page.

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Recording and Posting an Entry

Journal
L.F.
Date Description Debit Credit
Page 1

12/1

Prepaid Insurance Cash

2,400 2,400

1. Analyze and record the transaction as shown. 2. Post the debit side of the transaction.

3. Post the credit side of the transaction.

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Recording and Posting an Entry

Journal
L.f
Date Description Debit Credit
Page 1

12/1

Prepaid Insurance Cash

15

2,400 2,400

Ledger Prepaid Insurance Account Dr. Cr.

Date

Particulars Fol Amt. Date

Particulars Fol Amt.

12/1

. To Cash 1

. 2400

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Recording and Posting an Entry

Journal
Date Description L.f. Debit
Page 1

Credit

12/1 1

Prepaid Insurance Cash 4

15 11

2,400

2,400
3

Ledger Prepaid insurance Account

Page No.15

Dr.

Cr.

Date

Particulars Fol. Amt. Date

Particulars Fol. Amt.

12/1
59

To Cash

2400

TRIAL BALANCE

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Correcting Errors
Three Types of Errors
Journal Entry 1. incorrect 2. correct Ledger Posting not posted incorrectly posted

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Correcting Errors
Three Types of Errors
Journal Entry Ledger Posting

1. incorrect 2. correct incorrect

not posted incorrectly posted

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Subsidiary Books
Cash Cash transactions All subsidiary books combined make up the ledger.

Accounts Payable

Ledger

liability accounts
Purchase Book

Credit purchases
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Special Journals
SELLING

BUYING

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Special Journals
SELLING

Rendering of services on account

recorded in

Sales Book

BUYING

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Special Journals
SELLING

Rendering of services on account

Sales Book recorded in Receipt of cash from any source

recorded in
BUYING

Cash Book

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Special Journals
SELLING

Rendering of services on account

Sales Book recorded in Receipt of cash from any source

recorded in
BUYING

Cash Book

Purchase of items on account recorded in

Purchases Book

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The Sales Journal

Sales Journal
Invoice Date No. Particulars Details

Page 35
Amount

3/2 3/6 3/18 3/27

615 616 617 618

MyMusicClub.com RapZone.com Web Cantina MyMusicClub.com Totals

2,200 1,750 2,650 3,000 9,600

All sales on credit are recorded in this journal. Each sales invoice is listed in numerical order. This journal is often referred to as an invoice register.

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The Purchases Journal

Purchases Journal
Date Particulars Details

Page 11

Amount

3/3 3/7 3/19 3/27

Howard Supplies Donnelly Supplies Donnelly Supplies Howard Supplies Totals

600 420 1,450 960 3,430

All purchases on account are recorded in this journal.

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Cash journals Single column Cash Book = Simple cash Book Double column Cash Book = Cash Book with bank column Triple column Cash Book =Cash Book with Bank & Discount Column Petty Cash Book = Record small cash payouts
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The Financial Statements

The financial statements are a picture of the company in financial terms. Each financial statement relates to a specific date or covers a particular period.

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Information Reported on the Financial Statements

Question
1. How well did the company perform (or operate) during the period?

Answer
Revenues Direct Expenses Gross income (Gross loss)

Financial Statement
Trading Account

1. How well did the company perform (or operate) during the period?
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Gross Profit Indirect Expenses Net income (Net loss)

Profit and Loss Account

Information Reported on the Financial Statements

Question
3. What is the companys financial position at the end of the period?

Answer
Assets = Liabilities + Owners equity

Financial Statement
Balance sheet

4. How much cash did the company generate and spend during the period?

Operating cash flows Investing cash flows Financing cash flows Increase or decrease in cash

Statement of cash flows

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Income Statement
The income statement, reports the companys revenues, expenses, and net income or net loss for the period.

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Introduction to the Income Statement

The income statement is a financial tool that provides information about a companys past performance.

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The Income Statement

Revenues

Expenses

Net income (or Net loss)

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Income Statement Format

Sales revenues Selling and Cost of goods sold administrative = Gross profit expenses Add: Other revenues and gains Less: Other expenses and losses
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Operating income