> > > > > > > >LECTURE 1

Understanding
Financial Accounting
(Revision Session)

By: Ms. Pakeezah Butt

To explain concept, importance and types of accounting,
and identify the three basic activities involving accounting.

To identify usage of Financial accounting and give a brief

introduction of financial statements.

To outline the steps in accounting cycle, and explain major

account heads used in accounting.

Explain Debit Credit rules and practice of journal entries.

To revise basic concepts of Financial Accounting.

• Accounting is famously known as the
"language of business".

"the art of identifying, recording,

classifying and summarizing
monetary transactions and
interpreting the results thereof."
 Identifying
a transaction has been taken place

 Recording
to put the transaction to writing in books of accounts

 Classification
grouping of transactions of one nature at same place

 Summarizing
presenting the classified data in a useful manner

 Records only monetary transactions

 Summarized data is interpreted in a manner that can make a meaningful

judgment about the financial conditions and profitability of the business
• Financing activities provide necessary funds to
start a business and expand it after it begins
operating.
• Investing activities provide purchase of valuable
assets required to run business, acquire or
invest in other business for strategic reasons .
• Operating activities focus on manufacturing and
selling goods & services.
• Main types of Accounting:
– Financial Accounting (producing information for external use in
form of FS)
– Management Accounting (producing information for internal
use in the form budgets and forecasts)
– Governmental/Public Accounting (produces information
relating to financial position and performance of the public sector
institutions)
– Tax Accounting (refers to accounting for tax related matters)
– Project Accounting (refers to the use of accounting system to
track the financial progress of a project through frequent financial
report)
• The primary objective of financial accounting is
the preparation of financial statements to
support decision making.
• Depicts company's
o operating performance over a particular
period (income statement, cash flow
statement, statement of changes in equity)
o financial position at a specific point in time
(balance sheet)
Management
Need information for planning, policy making & control

Employees
Need information relating to stability of the business to
provide employment and promotion opportunities

Customers
Need information relating to long-tem stability of the
business

Investors
Need information to make the investment decisions
Lenders
Need information to determine the credit rating, risk
and interest rate of loans

Trade Creditors
Need information to access the ability to repay the
amounts owed to them

Government
Need information to evaluate tax liabilities and
formulation of economic plan
 Analyze transaction (look at source document)
 Journalize (record transactions in journal applying rules of double-
entry accounting)
 Posting (transferring information from the journal to the ledger)
 Prepare unadjusted trial balance (prepared before the adjusting
entries to verify company’s debits equals to credits)
 Make adjusting entries (made at end of the accounting time period)
 Prepare adjusted trial balance (prepared after the adjusting entries
to verify company’s debits equals to credits)
 Prepare financial statements (prepared in a very specific order:
income statement, statement of changes in owner’s equity, balance
sheet, and then statement of cash flows)
 Closing (record closing entries)
 Cash
Accounts Notes
Receivable Receivable
Resources
owned or
Vehicles controlled
by a Land
company

Store Buildings
Supplies
Equipment
Accounts Notes
Payable Payable

Present
obligations
of business
Taxes Wages
Payable Payable
Contributed Retained
Capital Earnings

Owner’s
claim on
assets

Dividends
• Two of the most familiar accounting terms are
“debits and credits.”

• Debit (from the Latin word debere) means

“left.” It is often abbreviated as “dr.”

• Credit (from the Latin word credere) means

“right.” It is often abbreviated as “cr.”
 Normal
Increase Decrease Balance
Assets DR CR DR
Liabilities CR DR CR
Owners’ equity CR DR CR
Revenues CR DR CR
Expenses DR CR DR
Loss DR CR DR
Examples:
i. The owner starts the business with $10,000 in cash.
ii. A vehicle is bought for $50,000 from Mr. A and payment
was made in cash.
iii. Bought office machinery for $100,000 and payment was
made by cheque.
iv. Bought building on credit from Mr. B amounting to $25,000.
v. Made purchases for cash $12,000.
vi. a. Purchases were made on credit for $20,000.
b. Made cash payment of $18,000 and discount received
$2000.
vii. Goods were sold amounting to $50,000 on cash.
viii. a. Sold goods for $25,000 on credit to Mr. A.
b. Received cash $20,000 from Mr. A and discount
allowed $5000.
ix. Motor expense $20,000. Half of which were paid by
cheque and remaining payment was made in cash.
x. Business earned commission $500.
xi. Made interest payment of $2000 in cash.
xii. Owner withdrew $200 from the business for private use.
xiii. Owner took inventory amounting to $700 from business
for his personal use.
QUESTIONS