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
Introduction to Accounting Attributes of Accounting
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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Finance Basics
Introduction to Accounting Attributes of Accounting
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
Introduction to Accounting Attributes of Accounting
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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Finance Basics
Introduction to Accounting Attributes of Accounting
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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Finance Basics
Introduction to Accounting Attributes of Accounting
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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Finance Basics
Introduction to Accounting Attributes of Accounting
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
Introduction to Accounting Branches of Accounting
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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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 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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Finance Basics
Introduction to Accounting Branches of Accounting
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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Finance Basics
Introduction to Accounting Questions
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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Finance Basics
Introduction to Accounting Questions
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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Finance Basics
Introduction to Accounting Questions
Choose the correct answer
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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Finance Basics
Introduction to Accounting Questions
Choose the correct answer
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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Finance Basics
Introduction to Accounting Questions
Choose the correct answer
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
Introduction to Accounting Questions
Choose the correct answer
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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Finance Basics
Accounting Equation Introduction and Meaning
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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Finance Basics
Accounting Equation Introduction and Meaning
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
Balance Sheet of Hamad as on .
Assets (-) SAR Liabilities (=) SAR Capital or P SAR
CashFurniture
90,00010,000
Liabilities NIL Capital 100,000
100,000 NIL 100,000
Liabilities Amount (SAR) Assets Amount (SAR)
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
Balance Sheet of Hamad as on .
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
Liabilities Amount (SAR) Assets Amount (SAR)
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
Balance Sheet of Hamad as on .
A (-) SAR L (=) SAR Capital or P SAR
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:
Balance Sheet of Hamad as on .
A (-) SAR L (=) SAR Capital or P SAR
Cash AssetFurniture
70,00020,00010,000
SBM 15,000 Capital 85,000
100,000 15,000 85,000
Liabilities Amount (SAR) Assets Amount (SAR)
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
Balance Sheet of Hamad as on .
A (-) SAR L (=) SAR Capital or P SAR
Cash AssetFurniture
69,00020,00010,000
SBM 15,000 Capital 84,000
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
Balance Sheet of Hamad as on .
A (-) SAR L (=) SAR Capital or P SAR
Cash AssetFurnitureStock
29,00020,00010,00040,000
SBM 15,000 Capital 84,000
99,000 15,000 84,000
Liabilities Amount (SAR) Assets Amount (SAR)
Hamads CapitalSBM
84,00015,000
CashStockFurniture
Asset
29,00040,00010,00020,000
99,000 99,000
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Finance Basics
Accounting Equation Effects of Business Transactions on Accounting Equation8. Goods worth SAR 40,000 sold for CASH for SAR 60,000
Balance Sheet of Hamad as on .
A (-) SAR L (=) SAR Capital or P SAR
Cash AssetFurnitureStock
89,00020,00010,000
NIL
SBM 15,000 Capital 104,000
119,000 15,000 104,000
Liabilities Amount (SAR) Assets Amount (SAR)
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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Finance Basics
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
Choose the correct answer
1. Accounting Equation =a) A L = Pb) A = L - Pc) A = P - L
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Finance Basics
Accounting Equation Questions
Choose the correct answer
1. Accounting Equation =a) A L = Pb) A = L - Pc) A = P - L
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Finance Basics
Accounting Equation Questions
Choose the correct answer
2. Capital is equal toa) Assets + Liabilitiesb) Assets - Liabilitiesc) Assets + Cash in Bank
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Finance Basics
Accounting Equation Questions
Choose the correct answer
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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Finance Basics
Accounting Equation Questions
Choose the correct answer
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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Finance Basics
Accounting Equation Questions
Choose the correct answer
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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Finance Basics
Accounting Equation Questions
Choose the correct answer
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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Finance Basics
Accounting Equation Questions
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5. Net worth is equal to:a) Capital + Assetsb) Capital - Assetsc) Assets - Liabilities
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Accounting Equation Questions
Choose the correct answer
6. Which is the correct equation?a) Assets = Capital + Liabilitiesb) Assets = Liabilities - Capitalc) Assets = Capital - Liabilities
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Finance Basics
Accounting Equation Questions
Choose the correct answer
6. Which is the correct equation?a) Assets = Capital + Liabilitiesb) Assets = Liabilities - Capitalc) Assets = Capital - Liabilities