Finance Basics Ch1,2

8/11/2019 Finance Basics Ch1,2

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Finance Basics

Introduction to Accounting Need for Accounting Meaning of Book-Keeping

Meaning of Accounting Attributes of Accounting Branches of Accounting Users of Accounting Information Accounting Cycle


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Finance Basics

Double Entry System Types of Accounting Rules of the Double Entry System (Debit and Credit)

Advantage of Double Entry System

Journal Meaning of Journal

Objectives of Journal Rules of Journalizing Miscellaneous Journal Entries


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Finance Basics

Ledger Meaning of Ledger Rules of the Double Entry System (Debit and Credit)

Advantage of Double Entry System

Journal Trial Balance Cash Book


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Finance Basics

Introduction to Accounting Need for Accounting

Accounting is the language of business.

Accounting in general communicates the results ofbusiness operations to various parties who areinterested in business.

The businessman is in need for accounting as he isinterested also to know the financial position of hisbusiness during a particular accounting period.

Even the head of the family is also needs accountingto manage the family income and necessary paymentduring a particular period.


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Finance Basics

Introduction to Accounting Meaning of Book-Keeping

Book-Keeping is mainly concerned with recordingof financial data relating to business operations ina significant and orderly manner.

It is a branch of knowledge which guides us howto keep a record of financial transaction.

The need of maintaining a record of income andexpenditure in a significant and systematicmanner has give a birth to the book-keeping.


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Finance Basics

Introduction to Accounting Meaning of Accounting

Accounting is a wider term and includes

recording, classifying and summarizing ofbusiness transactions of terms of money,Transactions and preparation of financial reports.


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Finance Basics

Introduction to Accounting Definitions of Accounting

Accounting is the process of recording,

classifying, summarizing, analyzing andinterpreting the financial transactions andcommunicating the results thereof to the personsinterested in such information.


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Finance Basics

Introduction to Accounting Attributes of Accounting

Attributes of Accounting

Recording

Classifying

Communication Summarizing

Financial Transactions

Analysis and Interpretation


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Finance Basics


1) Recording: Is the 1 st step in an accounting

Cycle, by recording the business transactions inbooks of original entry, i.e. Journal, where thetransactions of financial nature are recorded inan orderly manner. The journal provides a

completer record of all business transactions.


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2) Classifying: Classifying is the 2 nd stage of the

accounting Cycle. It is concerned with thesystematic analysis of business transactions ofsimilar nature at one place, done in a bookcalled Ledger. In this book, all transactions of

similar nature are entered on different pagesunder different account heads.Example: All transactions relating to cash and bank

are posted to cash and bank accounts.


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Finance Basics


3) Summarizing: The next stage is to present the

data in a manner which is useful to internal andexternal users of accounting information. Thispresentation is done by preparing trail balanceand final accounts with a view to ascertain profit

or loss made during a particular accountingperiod.


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4) Financial Transactions: Accounting records only

those transactions which are of financialcharacter, i.e. which can be expressed in termsof money.

For Example: unhealthy relations between the

employer and the employee cannot be recorded inbooks of accounts.


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5) Analysis and interpretation: The accounting

information must be analyzed and interpretedby calculating various ratios and percentages orby applying other techniques in order to judgethe past performance of the company and make

sound plans for the future.


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6) Communication: The results of analysis and

interpretation must be communicated to theparties who are to make decisions or form

judgments. This information is passed in theform of ratios, graphs, diagrams, fund flow

statements or income statements and balancesheet so that appropriate decisions may betaken at the right time.


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Finance Basics

Introduction to Accounting Objectives of Book-Keeping and Accounting:

1) To maintain systematic record.2) To ascertain the financial position of business.3) To ascertain the operational profit or loss.4) T facilitate rational decision-making.5) Knowledge of debtors and creditors.6) Knowledge of purchase and sales.

7) Knowledge of cash and bank balance.8) Knowledge of close and stock.9) Basis of income tax and sales tax.


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Finance Basics

Introduction to Accounting Advantage of Book-Keeping and Accounting:

1) Increase in memory power.2) Information regarding performance and position.3) Comparison.4) Helpful in tax assessment.5) Proof in the court.6) Business valuation.7) Helpful in raising loans.8) Helpful in insolvency.9) Assistance to various parties.10) Errors and frauds.11) Helpful in admission and retirement of a partner.


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Finance Basics

Introduction to Accounting Branches of Accounting

Accounting

FinancialAccounting

CostAccounting

ManagementAccounting


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Finance Basics


1) Financial Accounting: The main objective of this

form of accounting is to ascertain the financialposition of a business on a particular date andto provide the users with accounting informationlike shareholders, creditors, bankers, financial

institutions, etc.This objective is achieved by the preparation offinancial statement, i.e. trading and profit-ad-loss account and the balance sheet.


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2) Cost Accounting: The main aim of cost

accounting is to ascertain the cost per unit of aproduct or process and to control the cost. Thecost accountant is required to assemble andinterpret cost data for the use of management in

controlling current operations and in planningfor the future.


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3) Management Accounting: Its main objective is

to provide necessary information for themanagement for discharging its functions. Itassists the management in discharging itsvarious functions such as planning, control,

evaluation of performance and decision making.


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Main users of


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Business ManagementCustomers

Employees

Owners

Investors

GovernmentCreditors

Researchers

Main users ofaccountinginformationrelating tobusiness


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Finance Basics

Introduction to Accounting Accounting Cycle

Recording

Classifying

Summarizing

Analysis andInterpretation


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Finance Basics

Introduction to Accounting Accounting Cycle

An Accounting cycle is a complete sequence starting with therecording of transactions and ending with the preparation ofthe final accounts.

1. Recording: Record the transactions and events in the journal2. Classifying: Classify the transactions recorded in the journal

in their respective accounts in the ledger.3. Summarizing: Summarize the data by preparing a list (i.e.

trial balance) showing the balances of each and everyaccount to verify whether the sum of debit balances is equalto the sum of credit balances.

4. Analysis and interpretation : Trading and profit-and-loss a/cas well as balance sheet is prepared to analyze and interpretthe data.


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Finance Basics

Introduction to Accounting Questions

Fill in the blanks

1. Accounting is the .. of business 2. Accounting records only those transactions which

are of . Character. 3. Accounting can be useful only for recording

. Transactions


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Choose the correct answer

1. The basic function of financial accounting is to:a) Record all business transactionsb) Interpret the financial datac) Assist the management in performing functions effectively.


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1. The basic function of financial accounting is to:a) Record all business transactionsb) Interpret the financial datac) Assist the management in performing functions effectively.


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2. The main function of accounting is to:a) Record economic datab) Recoding and classifying business transactionsc) Provide the informational basis for actiond) Attain non-economic goals


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2. The main function of accounting is to:a) Record economic datab) Recoding and classifying business transactionsc) Provide the informational basis for actiond) Attain non-economic goals


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3. Management accounting provides invaluableservices to management in performing:a) All management functions.b) Coordinating management functionsc) Controlling functions


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3. Management accounting provides invaluableservices to management in performing:a) All management functions.b) Coordinating management functionsc) Controlling functions


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Finance Basics

Accounting Equation Introduction and Meaning

The recording of business transactions is entirely

based on Accounting Equation. Accounting Equation is based on the dual concept of Accounting.

Dual Concept states that every debit must have acorresponding credit and every credit must have adebit.

The total of the debit side must be equal to the total ofthe credit side.


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Accounting Equation states that at any point of timethe assets of a business must equal to the total ofowners equity, i.e. the capital and outsiders claim(liabilities)

The equation is based on the principle that accountingdeals with property, and the rights to property and thesum of properties owned is equal to the sum of rightsto the properties.

The properties owned by a business are called ASSETS and rights to properties are known asLIABILITIES or EQUITIES of the business


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Accounting Equation is an accounting formula expressingequivalence of assets and liabilities in every business

transaction, so the assets of a business are always equal tothe liabilities or capital: Assets = Liabilities + Capital

OrCapital = Assets Liabilities

OrLiabilities = Assets CapitalOr

Assets = Total equity


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Finance Basics

Accounting Equation Effects of Business Transactions on Accounting Equation

The following explain the effects of some businesstransactions on the accounting equation:

1. Commencement of business: Hamad started his businesswith capital of SAR 100,000

Balance Sheet of Hamad as on .

Assets (-) (SAR) Liabilities (=) (SAR) Proprietors claim orCapital (SAR)

Cash 100,000 Liabilities NIL Hamads Capital 100,000

Liabilities Amount (SAR) Assets Amount (SAR)

Hamads Capital 100,000 Cash 100,000


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Finance Basics

Accounting Equation Effects of Business Transactions on Accounting Equation

2. Purchase of an asset for CASH: Hamad purchased furniturefor cash SAR 10,000


Assets (-) SAR Liabilities (=) SAR Capital or P SAR

CashFurniture

90,00010,000

Liabilities NIL Capital 100,000

100,000 NIL 100,000


Hamads Capital 100,000 CashFurniture

90,00010,000

100,000 100,000


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Finance Basics

Accounting Equation Effects of Business Transactions on Accounting Equation3. Purchase of an asset on CREDIT: Hamad purchased an

asset of SAR 20,000 on credit from SBM


A (-) SAR L (=) SAR Capital or P SAR

Cash AssetFurniture

90,00020,00010,000

SBM 20,000 Capital 100,000

120,000 20,000 100,000


Hamads CapitalSBM

100,00020,000

CashFurniture

Asset

90,00010,00020,000

120,000 120,000


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Finance Basics

Accounting Equation Effects of Business Transactions on Accounting Equation4. Payment to SBM on Cash: Hamad paid SAR 5000 to SBM



Cash AssetFurniture

85,00020,00010,000

SBM 15,000 Capital 100,000

115,000 15,000 100,000

Liabilities Amount (SAR) Assets Amount (SAR)Hamads CapitalSBM

100,00015,000

CashFurniture

Asset

85,00010,00020,000

115,000 115,000


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Finance Basics

Accounting Equation Effects of Business Transactions on Accounting Equation5. Drawings for personal use: Hamad withdrew SAR 15,000 for

his personal use:



Cash AssetFurniture

70,00020,00010,000

SBM 15,000 Capital 85,000

100,000 15,000 85,000


Hamads CapitalSBM

85,00015,000

CashFurniture

Asset

70,00010,00020,000

100,000 100,000


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Finance Basics

Accounting Equation Effects of Business Transactions on Accounting Equation6. Salary paid 1000



Cash AssetFurniture

69,00020,00010,000


99,000 15,000 84,000

Liabilities Amount (SAR) Assets Amount (SAR)Hamads CapitalSBM

84,00015,000

CashFurniture

Asset

69,00010,00020,000

99,000 99,000


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Finance Basics

Accounting Equation Effects of Business Transactions on Accounting Equation7. Goods worth SAR 40,000 purchased for CASH



Cash AssetFurnitureStock

29,00020,00010,00040,000


99,000 15,000 84,000


Hamads CapitalSBM

84,00015,000

CashStockFurniture

Asset

29,00040,00010,00020,000

99,000 99,000


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Accounting Equation Effects of Business Transactions on Accounting Equation8. Goods worth SAR 40,000 sold for CASH for SAR 60,000



Cash AssetFurnitureStock

89,00020,00010,000

NIL

SBM 15,000 Capital 104,000

119,000 15,000 104,000


Hamads CapitalSBM

104,00015,000

CashFurniture

Asset

89,00010,00020,000

119,000 119,000


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Finance Basics

Accounting Equation Rules of Accounting Equation

1. Debit if increase in asset, and credit if decrease in

asset.2. Credit if increase in Capital, and debit if decrease inCapital.

3. Credit if increase in Liabilities, and debit if decreasein liabilities

4. Credit if there is increase in income, and debit ifdcrease in income.


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Finance Basics

Accounting Equation Rules of Accounting Equation Calculate total equity if:

1. Owners equity is SAR 60,000 2. Equity of creditors is SAR 50,0003. Revenues during that period is SAR 70,0004. Expenses during that period is SAR 65,0005. Also calculate owners revised equity.


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Accounting Equation Rules of Accounting Equation

SolutionEquity

Or Owners Equity So

So Revised Equity

Profit

Total Equity

= Asset - Liabilities

= Total Equity Creditors Equity

= Owners initial capital + Profit (Revenues Expenses) = 60,000 + 5000 (70,000 65,000)= 65,000

= Revenues Expenses

= 70,000 65,000 = 5000

= Owners revised equity + Outsiders equity = 65,000 + 50,000= 115,000


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Finance Basics

Accounting Equation Questions


1. Accounting Equation =a) A L = Pb) A = L - Pc) A = P - L


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1. Accounting Equation =a) A L = Pb) A = L - Pc) A = P - L


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2. Capital is equal toa) Assets + Liabilitiesb) Assets - Liabilitiesc) Assets + Cash in Bank


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3. In a business, total assets are SAR 100,000 whileliabilities are SAR 20,000. What will be its capital?a) 120,000b) 80,000c) 60,000


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3. In a business, total assets are SAR 100,000 whileliabilities are SAR 20,000. What will be its capital?a) 120,000b) 80,000c) 60,000


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4. In a business, total capital is SAR 60,000, itscreditors are for SAR 40,000. Its assets will bea) 100,000b) 60,000c) 40,000


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4. In a business, total capital is SAR 60,000, itscreditors are for SAR 40,000. Its assets will bea) 100,000b) 60,000c) 40,000


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5. Net worth is equal to:a) Capital + Assetsb) Capital - Assetsc) Assets - Liabilities


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6. Which is the correct equation?a) Assets = Capital + Liabilitiesb) Assets = Liabilities - Capitalc) Assets = Capital - Liabilities


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6. Which is the correct equation?a) Assets = Capital + Liabilitiesb) Assets = Liabilities - Capitalc) Assets = Capital - Liabilities

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Finance Basics Ch1,2