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 Finance Basics Accounting Equation Introduction and Meaning Effects of Business Transactions on Accounting Equation Purchase of an asset of credit Rules of Accounting Equation 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 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 Finance Basics Introduction to Accounting Need for Accounting Accounting is the language of business. Accounting in general communicates the results of business operations to various parties who are interested in business. The businessman is in need for accounting as he is interested also to know the financial position of his business during a particular accounting period. Even the head of the family is also needs accounting to manage the family income and necessary payment during a particular period. Finance Basics Introduction to Accounting Meaning of Book-Keeping Book-Keeping is mainly concerned with recording of financial data relating to business operations in a significant and orderly manner. It is a branch of knowledge which guides us how to keep a record of financial transaction. The need of maintaining a record of income and expenditure in a significant and systematic manner has give a birth to the book-keeping. Finance Basics Introduction to Accounting Meaning of Accounting Accounting is a wider term and includes recording, classifying and summarizing of business transactions of terms of money, Transactions and preparation of financial reports. Finance Basics Introduction to Accounting Definitions of Accounting Accounting is the process of recording, classifying, summarizing, analyzing and interpreting the financial transactions and communicating the results thereof to the persons interested in such information. Finance Basics Introduction to Accounting Attributes of Accounting Recording Classifying CommunicationSummarizing Financial Transactions Analysis and Interpretation Finance Basics Introduction to Accounting Attributes of Accounting 1)Recording: Is the 1 st step in an accounting Cycle, by recording the business transactions in books of original entry, i.e. Journal, where the transactions of financial nature are recorded in an orderly manner. The journal provides a completer record of all business transactions. Finance Basics Introduction to Accounting Attributes of Accounting 2)Classifying: Classifying is the 2 nd stage of the accounting Cycle. It is concerned with the systematic analysis of business transactions of similar nature at one place, done in a book called Ledger. In this book, all transactions of similar nature are entered on different pages under different account heads. Example: All transactions relating to cash and bank are posted to cash and bank accounts. Finance Basics Introduction to Accounting Attributes of Accounting 3)Summarizing: The next stage is to present the data in a manner which is useful to internal and external users of accounting information. This presentation is done by preparing trail balance and final accounts with a view to ascertain profit or loss made during a particular accounting period. Finance Basics Introduction to Accounting Attributes of Accounting 4)Financial Transactions: Accounting records only those transactions which are of financial character, i.e. which can be expressed in terms of money. For Example: unhealthy relations between the employer and the employee cannot be recorded in books of accounts. Finance Basics Introduction to Accounting Attributes of Accounting 5)Analysis and interpretation: The accounting information must be analyzed and interpreted by calculating various ratios and percentages or by applying other techniques in order to judge the past performance of the company and make sound plans for the future. Finance Basics Introduction to Accounting Attributes of Accounting 6)Communication: The results of analysis and interpretation must be communicated to the parties who are to make decisions or form judgments. This information is passed in the form of ratios, graphs, diagrams, fund flow statements or income statements and balance sheet so that appropriate decisions may be taken at the right time. 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. 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. Finance Basics Introduction to Accounting Branches of Accounting Accounting Financial Accounting Cost Accounting Management Accounting Finance Basics Introduction to Accounting Branches of Accounting 1)Financial Accounting: The main objective of this form of accounting is to ascertain the financial position of a business on a particular date and to provide the users with accounting information like shareholders, creditors, bankers, financial institutions, etc. This objective is achieved by the preparation of financial statement, i.e. trading and profit-ad- loss account and the balance sheet. Finance Basics Introduction to Accounting Branches of Accounting 2)Cost Accounting: The main aim of cost accounting is to ascertain the cost per unit of a product or process and to control the cost. The cost accountant is required to assemble and interpret cost data for the use of management in controlling current operations and in planning for the future. Finance Basics Introduction to Accounting Branches of Accounting 3)Management Accounting: Its main objective is to provide necessary information for the management for discharging its functions. It assists the management in discharging its various functions such as planning, control, evaluation of performance and decision making. Finance Basics Introduction to Accounting Users of Accounting Information Users Internal UsersExternal Users Owners Management Employees Creditors Investors Government Customers Researchers Foreigners Business Management Customers Employees Owners Investors Government Creditors Researchers Main users of accounting information relating to business Finance Basics Introduction to Accounting Accounting Cycle Recording Classifying Summarizing Analysis and Interpretation Finance Basics Introduction to Accounting Accounting Cycle An Accounting cycle is a complete sequence starting with the recording of transactions and ending with the preparation of the final accounts. 1.Recording: Record the transactions and events in the journal 2.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 every account to verify whether the sum of debit balances is equal to the sum of credit balances. 4.Analysis and interpretation: Trading and profit-and-loss a/c as well as balance sheet is prepared to analyze and interpret the data. 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 Finance Basics Introduction to Accounting Questions Fill in the blanks (Answers) 1.Accounting is the Language of business 2.Accounting records only those transactions which are of Financial Character. 3.Accounting can be useful only for recording business Transactions Finance Basics Introduction to Accounting Questions Choose the correct answer 1.The basic function of financial accounting is to: a)Record all business transactions b)Interpret the financial data c)Assist the management in performing functions effectively. Finance Basics Introduction to Accounting Questions Choose the correct answer 1.The basic function of financial accounting is to: a)Record all business transactions b)Interpret the financial data c)Assist the management in performing functions effectively. Finance Basics Introduction to Accounting Questions Choose the correct answer 2.The main function of accounting is to: a)Record economic data b)Recoding and classifying business transactions c)Provide the informational basis for action d)Attain non-economic goals Finance Basics Introduction to Accounting Questions Choose the correct answer 2.The main function of accounting is to: a)Record economic data b)Recoding and classifying business transactions c)Provide the informational basis for action d)Attain non-economic goals Finance Basics Introduction to Accounting Questions Choose the correct answer 3.Management accounting provides invaluable services to management in performing: a)All management functions. b)Coordinating management functions c)Controlling functions Finance Basics Introduction to Accounting Questions Choose the correct answer 3.Management accounting provides invaluable services to management in performing: a)All management functions. b)Coordinating management functions c)Controlling functions 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 a corresponding credit and every credit must have a debit. The total of the debit side must be equal to the total of the credit side. Finance Basics Accounting Equation Introduction and Meaning Accounting Equation states that at any point of time the assets of a business must equal to the total of owners equity, i.e. the capital and outsiders claim (liabilities) The equation is based on the principle that accounting deals with property, and the rights to property and the sum of properties owned is equal to the sum of rights to the properties. The properties owned by a business are called ASSETS and rights to properties are known as LIABILITIES or EQUITIES of the business Finance Basics Accounting Equation Introduction and Meaning Accounting Equation is an accounting formula expressing equivalence of assets and liabilities in every business transaction, so the assets of a business are always equal to the liabilities or capital: Assets = Liabilities + Capital Or Capital = Assets Liabilities Or Liabilities = Assets Capital Or Assets = Total equity Finance Basics Accounting Equation Effects of Business Transactions on Accounting Equation The following explain the effects of some business transactions on the accounting equation: 1.Commencement of business: Hamad started his business with capital of SAR 100,000 Balance Sheet of Hamad as on . Assets (-) (SAR)Liabilities (=) (SAR)Proprietors claim or Capital (SAR) Cash 100,000Liabilities NILHamads Capital 100,000 LiabilitiesAmount (SAR) AssetsAmount (SAR) Hamads Capital100,000Cash100,000 Finance Basics Accounting Equation Effects of Business Transactions on Accounting Equation 2.Purchase of an asset for CASH: Hamad purchased furniture for cash SAR 10,000 Balance Sheet of Hamad as on . Assets (-)SARLiabilities (=)SARCapital or PSAR Cash Furniture 90,000 10,000 LiabilitiesNILCapital100,000 NIL100,000 LiabilitiesAmount (SAR) AssetsAmount (SAR) Hamads Capital100,000Cash Furniture 90,000 10, ,000 Finance Basics Accounting Equation Effects of Business Transactions on Accounting Equation 3.Purchase of an asset on CREDIT: Hamad purchased an asset of SAR 20,000 on credit from SBM Balance Sheet of Hamad as on . A (-)SARL (=)SARCapital or PSAR Cash Asset Furniture 90,000 20,000 10,000 SBM20,000Capital100, ,00020,000100,000 LiabilitiesAmount (SAR) AssetsAmount (SAR) Hamads Capital SBM 100,000 20,000 Cash Furniture Asset 90,000 10,000 20, ,000 Finance Basics Accounting Equation Effects of Business Transactions on Accounting Equation 4.Payment to SBM on Cash: Hamad paid SAR 5000 to SBM Balance Sheet of Hamad as on . A (-)SARL (=)SARCapital or PSAR Cash Asset Furniture 85,000 20,000 10,000 SBM15,000Capital100, ,00015,000100,000 LiabilitiesAmount (SAR) AssetsAmount (SAR) Hamads Capital SBM 100,000 15,000 Cash Furniture Asset 85,000 10,000 20, ,000 Finance Basics Accounting Equation Effects of Business Transactions on Accounting Equation 5.Drawings for personal use: Hamad withdrew SAR 15,000 for his personal use: Balance Sheet of Hamad as on . A (-)SARL (=)SARCapital or PSAR Cash Asset Furniture 70,000 20,000 10,000 SBM15,000Capital85, ,00015,00085,000 LiabilitiesAmount (SAR) AssetsAmount (SAR) Hamads Capital SBM 85,000 15,000 Cash Furniture Asset 70,000 10,000 20, ,000 Finance Basics Accounting Equation Effects of Business Transactions on Accounting Equation 6.Salary paid 1000 Balance Sheet of Hamad as on . A (-)SARL (=)SARCapital or PSAR Cash Asset Furniture 69,000 20,000 10,000 SBM15,000Capital84,000 99,00015,00084,000 LiabilitiesAmount (SAR) AssetsAmount (SAR) Hamads Capital SBM 84,000 15,000 Cash Furniture Asset 69,000 10,000 20,000 99,000 Finance Basics Accounting Equation Effects of Business Transactions on Accounting Equation 7.Goods worth SAR 40,000 purchased for CASH Balance Sheet of Hamad as on . A (-)SARL (=)SARCapital or PSAR Cash Asset Furniture Stock 29,000 20,000 10,000 40,000 SBM15,000Capital84,000 99,00015,00084,000 LiabilitiesAmount (SAR) AssetsAmount (SAR) Hamads Capital SBM 84,000 15,000 Cash Stock Furniture Asset 29,000 40,000 10,000 20,000 99,000 Finance Basics Accounting Equation Effects of Business Transactions on Accounting Equation 8.Goods worth SAR 40,000 sold for CASH for SAR 60,000 Balance Sheet of Hamad as on . A (-)SARL (=)SARCapital or PSAR Cash Asset Furniture Stock 89,000 20,000 10,000 NIL SBM15,000Capital104, ,00015,000104,000 LiabilitiesAmount (SAR) AssetsAmount (SAR) Hamads Capital SBM 104,000 15,000 Cash Furniture Asset 89,000 10,000 20, ,000 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 in Capital. 3.Credit if increase in Liabilities, and debit if decrease in liabilities 4.Credit if there is increase in income, and debit if dcrease in income. 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 50,000 3.Revenues during that period is SAR 70,000 4.Expenses during that period is SAR 65,000 5.Also calculate owners revised equity. Finance Basics Accounting Equation Rules of Accounting Equation Solution Equity Or Owners Equity So So Revised Equity Profit Total Equity = Asset - Liabilities = Total Equity Creditors Equity = Owners initial capital + Profit (Revenues Expenses) = 60, (70,000 65,000) = 65,000 = Revenues Expenses = 70,000 65,000 = 5000 = Owners revised equity + Outsiders equity = 65, ,000 = 115,000 Finance Basics Accounting Equation Questions Choose the correct answer 1.Accounting Equation = a)A L = P b)A = L - P c)A = P - L Finance Basics Accounting Equation Questions Choose the correct answer 1.Accounting Equation = a)A L = P b)A = L - P c)A = P - L Finance Basics Accounting Equation Questions Choose the correct answer 2.Capital is equal to a)Assets + Liabilities b)Assets - Liabilities c)Assets + Cash in Bank Finance Basics Accounting Equation Questions Choose the correct answer 2.Capital is equal to a)Assets + Liabilities b)Assets - Liabilities c)Assets + Cash in Bank Finance Basics Accounting Equation Questions Choose the correct answer 3.In a business, total assets are SAR 100,000 while liabilities are SAR 20,000. What will be its capital? a)120,000 b)80,000 c)60,000 Finance Basics Accounting Equation Questions Choose the correct answer 3.In a business, total assets are SAR 100,000 while liabilities are SAR 20,000. What will be its capital? a)120,000 b)80,000 c)60,000 Finance Basics Accounting Equation Questions Choose the correct answer 4.In a business, total capital is SAR 60,000, its creditors are for SAR 40,000. Its assets will be a)100,000 b)60,000 c)40,000 Finance Basics Accounting Equation Questions Choose the correct answer 4.In a business, total capital is SAR 60,000, its creditors are for SAR 40,000. Its assets will be a)100,000 b)60,000 c)40,000 Finance Basics Accounting Equation Questions Choose the correct answer 5.Net worth is equal to: a)Capital + Assets b)Capital - Assets c)Assets - Liabilities Finance Basics Accounting Equation Questions Choose the correct answer 5.Net worth is equal to: a)Capital + Assets b)Capital - Assets c)Assets - Liabilities Finance Basics Accounting Equation Questions Choose the correct answer 6.Which is the correct equation? a)Assets = Capital + Liabilities b)Assets = Liabilities - Capital c)Assets = Capital - Liabilities Finance Basics Accounting Equation Questions Choose the correct answer 6.Which is the correct equation? a)Assets = Capital + Liabilities b)Assets = Liabilities - Capital c)Assets = Capital - Liabilities