Financial accounting

A R Usmani

Skardu Gilgit-Baltistan

[email protected]

1 Financial Accounting for BSCS…… Prepared by Abdur-Rehman

Accounting

Definition.

Accounting is derived from the word account which means recording.

Accounting is a language of business through which two business persons are

communicate with each other.

Accounting is a system of recording information about business then that information is

presented to various people to keep them a future decision making.

Accounting is recording, classifying and analysis of business information.

Accounting is the backbone of any business.

Definition of Accounting by different peoples.

Various persons defined accounting as language.

Economist defined the accounting is information related to income

Manager of any organization defined accounting is a recording technique and these

information is helpful for future decision making.

Middle manager defined accounting is.

Labors defined accounting through which we earn income.

Government defined accounting is helpful for tax generation.

AIS

Accounting Information System

The systematic recording reporting and analysis of financial transaction of business as

known as Accounting.

Financial Transaction.

The information related to money as known as financial information.


The person who is in charge of accounting called accountant.

Need of Accounting.

Transaction take place regularly in the business. It is impossible for any person to keep

all the transaction in memory so systematic record is compulsory for every business

organization.

Accounting is beneficial for tax calculation.

Accounting is information about profit and loss.

It helps annoying the result of a business in term of profit and loss.

AIS (Accounting Information System).

Accounting information system is a system of collection and storage of financial data that is used

by decision makers and accounting system is generally computer base system for tracking

accounting activities. Computer has keen relationship with accounting because accounting is

now a computerized system not a manual system.

Component of AIS.

People (User of Accounting)

People is basically the user professional who used the information related to finance (Money).

This person is known as accountant or consultant.

Procedure (Method)

There are lot of method that are used for storing the information and recording the information in

accounting the method or procedure is known as financial statement.

Data.


Data contains in AIS means the financial information on which accountant actually works.

e.g.

Costumer billing.

Tax information.

Software

Software in AIS is a computer program used to share, collect and store the data for future

processing. It also helps out the companies to organize their financial information.

Information Technology Infrastructure.

(Big Name of Hardware)

This name the hardware used to operate the AIS.

e.g.

Personal computer.

Server.

Printer.

Scanner etc.

Information.

In accounting there are two type of information.

Financial Information.

Non-Financial Information.

Financial Information.

The information that can be measured in money is known as financial information.

e.g.

A truck loaded with the vegetable of Rs. 5000 rupees. Here Rs. 5000 is financial

information.


Non-Financial Information.

The information that cannot be measured in money called Non-Financial information.

e.g.

Accident of workers during working hours.

Financial Information

Transection Events

Transection.

Transection is the financial information in which our will is involved.

e.g.

Purchase of furniture.

Purchase of Car etc.

Event.

It is the financial information in which our willingness is not involved.

e.g.

You delivered a truck of cotton and accident occurred with the truck. That information

can be measured in the form of money but our willingness is involved.

Transection.

Cash transection Credit transection

Cash Transection.

Cash Transection is that in which cash is paid on the spot known as cash transection.

In cash transection. Present is involved.


e.g.

If you buy something and paid the whole price of it and there are no remaining dealing. It

is cash transection.

Credit Transection.

Settlement of cash in future is known as credit transection.

In credit transection. Future is involved.

e.g.

I will pay the cash of amount Rs 1000 rupees after a weak. Then this sort of information

is known as credit transection.

Types of Accounting.

Tax Accounting Management Accounting Financial Accounting

What is tax?

Tax is the fee charged by the government on the product, income or any business activity.

Tax Accounting.

The method of accounting that focuses on the tax issues. This branch of accounting includes all

the activities related to the tax return to the government. It also helps the business in planning to

future tax obligation.

Obligation.

Written promise that is made by any business for the tax payment.

Management Accounting.


Management accounting provides information related to the internal environment specifically

about employees. This branch of accounting has complete information about employees working

in any organization.

Financial Accounting.

Financial accounting is very important branch or type of accounting which provides information

about the financial condition of any organization. It contains all the information related to

finance (money).

Deference between Tax, Management and Financial Accounting

Tax Accounting Management Accounting Financial Accounting

User Government Internal employees External users

Purpose of

Information

Gather to information

related to tax

Gather of internal information Gather of external

information

Time Past + Future Present + Past Present + Past + Future

Note! Definition of these three type of accounting is also their differences.

Business

Definition.

A business is any activity (entity) which base on the idea of earning profit.

Or

Business is an entity carried out with the extension of earning profit.

Type of Business.

1. Sole proprietorship or Sole.

2. Partnership or Proprietorship.


3. Company or Corporation.

Sole= Single owner.

Partnership= 2 to 20 owner.

Company= 20 to 50 owner.

Sole Proprietorship or Sole.

A business owned and operated by a single person is known as sole proprietorship or simply

sole.

Advantages of Sole.

Owner make all the decision.

Owner received all the profit.

Disadvantages of Sole.

Owner has the difficulty in the payment of liabilities, because there are no other

person to pay.

If loss occur in business it is very difficult to cover the loss by single person.

It is difficult to raise the capital for starting any business.

Sole limits skills and creativity in the business.

Proprietorship or Partnership.

When a business has 2 to 20 owners then that business is known as Partnership or proprietorship.

Advantages of Partnership.

It creates more skill and knowledge in the business information.

Partnership is helpful in sharing of losses.

Partnership is also helpful for raising capital.

Disadvantages of Partnership.

Partnership may need to disagreement in decision. Some person are not willing their

share in loss.

The value of tax is more as compare to sole proprietorship.


Types of Partnership.

1. General Partnership.

2. Limited partnership.

3. Joint venture.

4. Strategic alliance.

General Partnership.

A partnership in which all the partners has equal authority in decision and equal

distribution of profit and loss. All the partners have full responsibility for the

management of the organization.

Limited Partnership.

A partnership in which the partner have limited authority and responsibility to their investment.

This is known as limited partnership.

Joint Venture.

This is the type of partnership in which two business joins to complete a specific project. This

type of partnership ends after a specified time period.

Strategic Alliance.

A type of partnership in which two businesses works together without time specification or

simply working without ending.

Company or Corporation.

Company or corporation is the highest level of business. The range of owner is 20 to 50.

Advantages of Company.

Very easy to raise capital.


A lot of skills and creativity is there in corporation because of maximum people.

Disadvantages of Company.

Corporation to pay double tax.

Lack of loyal person.

Fundamental characteristics of Financial Accounting.

General Purpose.

Financial accounting prepared financial statement and it is very helpful to show

the financial condition of any organization.

Financial information are that is record by financial accounting is reliable because

it is the whole information system through which we record, classify and report

the financial information in a systematic way.

Reliable information.

Those information in which there is no error called reliable information.

Comparability.

Accounting information about any organization is very helpful in order to compare financial

condition of your organization to that organization.

Financial principles.

Those principles that is used to generate profit by any organization is known as financial

principles.

Main Accounting

Accounting cycle.


Accounting cycle is the process by which accountant prepare financial statement for any

business or organization with the specification of date.

Or

The accounting cycle is sequence of activities beginning with the occurrence of transaction then

after that will analysis this transaction this transaction in tabular form and after we make T-

Account (Ledger) for more clarification of these transaction.

At the end we will check the balance.

Steps in Accounting Cycle.

1. Identification of transaction.

Amount.

Date specify.

Unite for money Description.

e.g.

Description: ABC company purchase equipment of amount Rs 50000 on 02 may 2014.

Amount= 5000 Rs.

Date= 02 may 2014.

2. Analysis of Transaction.


Determine which transaction is occur and how that transaction effects in your business

(Either positive or negative) and of how much amount.

3. Make General Journal.

Record occurrence of these transaction in chronological order.

Or

Record the transaction in sequence.

4. T-Account / Ledger.

To distribute those transaction that we have recorded in tabular form, into different T-

Accounts is known as T-Account or Ledger.

Ledger contains information of each and every account separately.

5. Balance Sheet.

At the end we will discuss balance sheet whose contains information of whole transaction in

a balance form.

Accounting Equation

Asset = Liabilities + owner equity (capital)

A=L+OE.

Asset.

Assets are economic resources of an organization that are having monetary importance.

Assets are thing used by any organization in its operation and activities.

e.g.

A departmental store owns truck. This truck provides benefit for delivery different items to

departmental store. So this truck is asset.


Main Types of Asset

Fixed Asset Current Asset

Fixed Asset. (More than one year)

These are the assets held by the business on a long term basis.

e.g.

Land, Furniture, Building, Machinery, Motor vehicles etc.

Current Asset (Within one year)

Those assets held on shorter basis.

e.g.

Cash, Account receivable etc.

There are some other types of asset.

Tangible Asset.

Those asset that can be touch or they have sort of existence.

e.g.

Cash, Land, Furniture etc.

Intangible Asset.

Those asset that cannot be touch. These assets has imaginary feelings.

e.g.

Brand Name, Slogans, logo etc.


Liability.

These are the obligation or debt that an enterprise must pay.

e.g.

Organization ABC purchase goods for Rs 10,000 on credit for a period of month from Fast Food

Products Company on 21 June 2013.

Types of Liability

Long term liability Short term liability

Long Term Liability.

Long term liabilities are those liabilities that are payable for a long time period. Minimum

duration is one year.

e.g.

Bank loans

Short Term Liabilities.

The obligation that are payable within one year.

e.g.

Bills payable.

Account payable.

Equity / Capital.

Owner equity or capital represents the investment of the owner in the business.

Types/Shapes/Forms of owner equity.


1. Withdrawal.

2. Revenue.

3. Expenses.

Withdrawal.

Withdrawal represent cash removed from the business for personal use, withdrawal has a

negative effect on owner equity.

e.g.

The owner XYZ invested the amount of Rs 20,000 in his business. After a month owner

withdraw amount of Rs 5000 rupees for his personal use.

Solution.

Capital=20,000

Withdrawal=5000

Effect on the business, 20,000-5000=15,000

Because the owner removed the amount of Rs 5000 for his personal use.

Revenue.

Revenue means inflow of money into business, and revenue has positive effect in owner equity.

Expenses.

Expenses also represent outflow of the money and has the negative effect on the capital.

Equation balance. (A=L+OE)

A=Assets.

L=Liabilities.

OE=Owner equity

A=L + Capital – Withdrawal + Revenue – Expenses.

The equation must be balance, in other word the total of the all asset (Current + Fixed) must be

equal to the total of liabilities and owner equity (Capital).


Fundamental Concept of Accounting Equation

Show that the accounting equation is satisfied after taking into consideration each of the

following transaction in book of Accounting by Mr. ML.

a) Started business with the capital of Rs. 100,000 rupees.

b) Mr. ML bought the furniture for Rs. 25000 rupees.

c) Mr. ML bought goods for the cash of Rs. 20,000 rupees.

d) Mr. ML bought goods from Mr. X on credit of amount 5000 rupees.

e) Mr. ML sold goods to Mr. Y on credit of amount 800 rupees.

Solution.

Asset = Liabilities + Capital / owner equity.

a. Cash, 100,000 = 0 + 100,000

100,000 = 100,000

b. Cash, 75000 = 0 + 100,000

Furniture, 25000.

100,000 = 100,000

c. Cash, 55000 = 0 + 100,000

Furniture, 25000.

Goods, 20000.

100,000 = 100,000

d. Cash, 55000 = 5000 + 100,000

Furniture, 25000.

Goods, 20000+5000

=25000.

105000 = 105000

e. Cash, 55000 = 5000 + 105000


Account

Receivable, 800

Furniture, 25000

Goods, 25000-800

=24200.

105000 = 105000

Example.

If the company XYZ has the following given amount.

Cash = Rs. 22000 rupees

Net payable = Rs. 30,000 rupees

Capital = Rs. 80,000 rupees

Building = Rs. 36000 rupees

Land = Rs. 52000 rupees

Solution.

Asset = Liabilities + Capital

Cash, 22000 = Notes payable, 30,000 + 80,000

Building, 36000.

Land, 52000.

110,000 = 110,000

Financial Statement.

Balance Sheet.

Format.

Company name

Financial statement


(Balance sheet, Journal etc.)

Date

Asset Liabilities and Capital

Current asset. Short term liabilities.

Cash amount Notes payable amount

Ac Receivable amount Ac Payable amount

(Etc.) … (Etc.) …

Total amount Total amount

Fixed Asset

Land amount Owner’s Capital amount

Furniture amount

Equipment amount

Grand Total Grand Total

Examples of Balance Sheet.

Example 2.

Banners by George

Balance sheet

May 15, 2014



Cash 18150 Notes payable 97500

Ac Receivable 28350 Ac Payable 21900

46500 119400

Fixed Asset

Land 135000 George’s Capital 182200

Building 105000


Equipment 15100

301600 301600

Example 2. (Without individual total)

John and Sons

Balance sheet

May 15, 2014


Current asset: Short term liabilities:



Supplies 7000 Interest payable 5000

Fixed Asset:

Auto mobile 96000 Mr. John’s Capital 48000

163000 163000

Example 3.

XYZ

Balance sheet

10 May 2013






Supplies 4440

Fixed Asset Capital 84090

Land 55000

Building 45500

Equipment 38000

172090 172090

Example 4.

Qureshi Company.

a. You have to prepare balance sheet dated 16 May 2013 using below details.

Notes payable 13000

Ac payable 3700

Cash 14100

Supplies 14800

Equipment 8500

Ac receivable 6200

Salaries payable 3200

Qureshi’s capital 23700.

b. You must collect current and fixed assets and short and long term liabilities.

Solution:

Qureshi Company

Balance sheet

16 May 2013





Ac Receivable 6200 Salaries payable 3200

Supplies 14800 account payable 3700

35100 19900

Fixed Asset

Equipment 8500 Qureshi’s Capital 23700

43600 43600

Total of current assets = 35100

Total of liabilities = 19900

Example 5.

XYZ

Balance sheet

30th

Sept 2013



Cash 9200 Account payable 14000

Ac Receivable 800 Notes payable 29000

Supplies 400

10400 43000

Fixed Asset

Land 68000 Capital 149400

Building 52000

Equipment 62000

192400 192400


Education

Financial accounting