Financial Accounting

1. Financial Accounting and Information
Systems

2. Session Objectives
• Importance of Understanding Accounting
• Participants Introduction
• Course Introduction
• Forms of Businesses
• Regulatory Environment & Accounting Compliance: Role of
IASB, SECP, FBR, ICAP, ICMAP & PSX.
• Accounting Equation.

3. Scenario
• You get an order for 20 units of your product in January.
You purchased raw materials in February. You
manufactured the product in March. You delivered the
product in April. The customer pays you in May.
• Which month you earned income?
• What if half the money is paid in advance in January?
Importance of Understanding Accounting

4. Scenario
• If company purchases land for Rs. 30,000,000/- the
company initially reports it in its accounting records at
30,000,000. But what does company do if, by the end
of the next year, the land has increased in value to
40,000,000?
• At what amount the company will record the land?
Importance of Understanding Accounting

5. • You partnered with Fazal by investing Rs.50,000 for a
cattle. He has to take care of cattle in his village. Profit
sharing is agreed at 50/50. He constructed a shad area
with Rs.15,000 and bought a for Rs.35,000. Later
he sold the goat for Rs.40,000.
• How should Rs 30,000 be divided among you and Fazal?
Scenario Importance of Understanding Accounting

6. Participants’ Introduction
Not much no introduce but,
This is Danish Iqbal
Faculty member here at IBA

7. • Name
• Academic Profile
• Experience Profile
• Accounting knowhow (1 to 5) ?
• Target Career
Participants’ Introduction

8. Accounting sense can help
• General management
• Marketing
• Finance
• Supply Chain.
• HR
• Engineers
Importance of Understanding Accounting

9. Accounting sense can help
•In writing checks
•In signing and approving bills
•When you write numbers
•When you present information
Importance of Understanding Accounting

10. Course Introduction
Reference to Course Outline

11. Forms of Businesses

12. Forms of Business
NGO’s
Commercial Non Commercial
Sole Proprietorship
Trust
Partnership
Company
Company (Sec 42)

13. DEFINITIONS
Sole
Proprietorship
General
Partnership
Corporation
Any Business
Owned and
Operated by an
Individual
Two or More
Persons
Operating a
Business for a
Profit/Non Profit
(AOP)
(clubs,welfare)
Legislatively
Created and
Regulated
Governance,
Ownership and
Financial
Structure
Forms of Businesses

14. FORMATION
Sole
Proprietorship
General
Partnership
Corporation
No Formalities or
Legal
Documentation;
May be Implied
from Conduct or
Actions
Written or Oral
Agreement or
May be Implied
from Conduct or
Actions
Many legal
formalities
Forms of Businesses

15. GOVERNING DOCUMENTS
Sole
Proprietorshi
p
General
Partnership
Corporation
None Required
None Required;
Most have
Agreement
specifying Rights,
Duties and
Obligations
Articles of
Incorporation
create
Corporation;
Bylaws prescribe
its Operation
Forms of Businesses

16. NATURE OF OWNERSHIP
Sole
Proprietorship
General
Partnership
Corporation
Wholly Owned
by Single
Individual
For Contribution,
Partner receives
Proportionate
Share of
Profits/Losses and
Partnership
Property
Residual
Claim on
Corporate Equity
and Right to Vote
for Directors and
Essential
Governance
Forms of Businesses

17. LIABILITY
Sole
Proprietorship
General Partnership Corporation
Sole Proprietor
Personally
Liable for All
Debts and
Obligations
Partners are Jointly and
Severally Liable for all
Partnership Obligations, in
Contract.
Limited Liability partnership
can also be formed and
registered through SECP
Shareholder’s Liability
limited to Extent of
Capital Contribution
[Limited Liability]
Forms of Businesses

18. TAXATION
Sole Proprietorship General Partnership Corporation
Not a Taxable Entity;
Income (Loss) passes
through to Sole
Proprietor
Partnership not a Taxable
Entity; Allocations of
Income and Loss will be
carried out.
Partnership (AOP) are
taxable and separate
slabs are applicable
Corporation taxed as
Separate Entity and
Dividends/Capital Gains
also Taxed [Double
Taxation]
Forms of Businesses

19. MANAGEMENT
Sole
Proprietorship
General Partnership Corporation
Sole Proprietor has
Complete
Management
Control
All Partners have
Equal/Variable Rights
in Partnership’s
Management and
Conduct
Managed by
Board of Directors
elected by
Shareholders; Board
may Delegate Authority
to Appointed Officers
Forms of Businesses

20. TRANSFER OWNERSHIP INTERESTS
Sole Proprietorship
General
Partnership
Corporation
Sole Proprietorship not
Transferable; Property
and Products are
Transferable
Limited Right of
Transfer subject to
Consent by all
Partners
Freely Transferable
through Formal (PSX).
Transfer of shares in Pvt
Limited are subject to
some specified
conditions.
Forms of Businesses

21. WITHDRAWAL OF OWNER
Sole
Proprietorship
General Partnership Corporation
Terminates Sole
Proprietorship
Partner Death or
Withdrawal may
Terminate Partnership
Corporation has
Unlimited Life.
Corporation may have
finite life created for
specific projects like
special purpose
vehicles (SPV).
Forms of Businesses

22. Forms of Business
Company
SMC
1 member
KK Consultant (SMC-
Pvt.) Limited

23. Forms of Business
Company
Private Ltd.
limits owner liability
to their shares
Rainbow Textile
(Pvt.) Ltd.
2 - 50 members
restricts shareholders
from publicly trading
shares

24. Forms of Business
Company
Public Ltd
3 - unlimited
members
Gul Ahmed
Textile Mills Limited

25. Forms of Business
Company
Listed Unlisted
Listed in PSX Not Listed in PSX

26. Forms of Business
SMC Private Limited Public Limited
1. Limited By Shares.
2. Limited By Guarantee.
3. Unlimited.

27. Company
Private Ltd.
Commercial
SMC Public Ltd.
1 member 2 – 50 members
3 – unlimited
members
Listed Unlisted
1. Limited By Shares.
2. Limited By Guarantee.
3. Unlimited.

28. Regulatory Environment & Accounting Compliance:
• International Accounting Standard
Board [IASB]
• Develops Standards (IFRS/IAS)

29. Regulatory Environment & Accounting Compliance:
Securities and Exchange Commission of
Pakistan [SECP]:
• Regulates incorporated businesses and
their financial reporting and accounting
compliance requirements
• Adopts IFRS for compliance

30. Regulatory Environment & Accounting Compliance:
Federal Board of Revenue [FBR]:
• Oversees compliance to tax laws
and related accounting issues for
tax purposes

31. Regulatory Environment & Accounting Compliance:
Institute of Chartered Accountants of
Pakistan [ICAP]:
• Works as advisory to SECP for
accounting related regulations
• Suggest IFRS for compliance or
develop native standards
• Regulates Auditors’ code of conduct

32. Regulatory Environment & Accounting Compliance:
Institute of Cost & Management
Accountants of Pakistan [ICMAP]
• Works as advisory to SECP for
development of cost accounting
related compliance and cost audits
• Regulates code of conduct for CMAs

33. Regulatory Environment & Accounting Compliance:
Pakistan Stock Exchange [PSX]
• Regulated partially compliance
requirements for listed companies

34. How boring could accounting possibly be?

35. The Origins of Accounting
• Accounting has been around for thousands of years
• Some of the earliest forms of writing are accounting records
etched on clay tablets
• The Akkadian word for these tablets was “tuppum”

36. Early Accounting Technologies
• As accounting became more complicated, people developed counting
instruments
• The Romans used an abacus, a device that allowed you to slide little pebbles
(“calculi”) to make computations
• The Incas used a system of knots (“quipus”)

37. Most Significant Innovation
• Double-entry Accounting
• No one knows who invented it
• Luca Pacioli, an Italian monk, discussed it in a textbook in 1494
• It is the basis for Financial Accounting
Double-entry accounting uses a system
of debits and credits which we will
discuss extensively later in this course

38. Identification
Select economic events
(transactions)
Recording
Record, classify,
and summarize
Accounti
ng
Reports
SOFTBYTE
Annual Report
Prepare
accounting reports
Analyse and interpret
for users
Communication
THE ACCOUNTING PROCESS

39. Accounting
1. Includes bookkeeping
2. Also includes much more
Bookkeeping
1. Involves only the recording of economic
events
2. Is just one part of accounting
BOOKKEEPING DISTINGUISHED
FROM ACCOUNTING

40. What is Accounting?
Accounting is:
identifying, recording, and communicating the
economic events [transactions] of an organization
to interested users
Two assumptions follow from this definition
- Money Unit Assumption
- Economic Entity Assumption

41. Management
There are two broad
groups of users of
financial information:
internal users and
external users.
Human
Resources
FBR
Labor
Unions
SECP
Marketing
Finance
Investors
Creditors
Interested Users?
Customers
Internal Users
External
Users

42. Transaction
A Transaction is an exchange of economic resources
Transactions are a business’s economic events recorded by
accountants.
May be external or internal.
Not all activities represent transactions.
Each transaction has a dual effect on the accounting
equation.

43. Monetary Unit Assumption – include in the
accounting records only transaction data that can be
expressed in terms of money.
Economic Entity Assumption – requires that
activities of the entity be kept separate and distinct
from the activities of its owner and all other economic
entities.
Assumptions

44. Combining the activities of Kellogg and General
Mills would violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.
Assumptions
Review Question

45. A business organized as a separate legal entity
under state law having ownership divided into
shares of stock is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.
Forms of Business Ownership
Review Question

46. Q1-15: Are the following events recorded in the accounting
records?
Event
Supplies are
purchased
on account.
Criterion Is the financial position (assets, liabilities, or
owner’s equity) of the company changed?
An employee
is hired.
Owner
withdraws
cash for
personal use.
Record/
Don’t Record
Transactions (Question?)

47. Assets Liabilities
Owner’s
Equity
= +
Provides the underlying framework for recording and
summarizing economic events.
The Basic Accounting Equation
Resources a business controls.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
Assets Resources

48. Assets Liabilities
Owner’s
Equity
= +
Provides the underlying framework for recording and
summarizing economic events.
The Basic Accounting Equation
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
Liabilities Sources

49. Assets Liabilities
Owner’s
Equity
= +
Provides the underlying framework for recording and
summarizing economic events.
The Basic Accounting Equation
Ownership claim on total assets.
Referred to as residual equity (residual interest).
Capital, Drawings, etc. (Proprietorship or
Partnership).
Owner’s Equity Sources

50. Owners’ Equity
Revenues are the increases in owners’ equity due to doing
business
Revenues result from business activities entered into for
the purpose of earning income.
Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.
Illustration 1-6

51. Owners’ Equity
Expenses are the reduction in owners’ equity due to doing
business
Expenses are the cost of assets consumed or services used
in the process of earning revenue.
Common expenses are: salaries expense, rent expense,
utilities expense, tax expense, etc.
Illustration 1-6

52. INCREASES AND DECREASES IN OWNER’S
EQUITY
Investments
by Owner
Revenues
Withdrawals
by Owner
Expenses
INCREASES DECREASES
Owner’s
Equity

53. Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
Financial Statements
Review Question

54. Which of the following financial statements is
prepared as of a specific date?
a. Balance sheet.
b. Income statement.
c. Owner's equity statement.
d. Statement of cash flows.
Financial Statements
Review Question

55. Transaction (1). Investment By Owner. Ray Neal decides to
open a computer programming service which he names Softbyte.
On September 1, 2010, he invests $15,000 cash. The effect of
this transaction on the basic equation is:
Transactions Analysis

56. Transaction (2). Purchase of Equipment for Cash. Softbyte
purchases computer equipment for $7,000 cash.
Transactions Analysis

57. Transactions Analysis
Transaction (3). Purchase of Supplies on Credit. Softbyte
purchases for $1,600 from Acme Supply Company computer
paper and other supplies expected to last several months.

58. Transactions Analysis
Transaction (4). Services Provided for Cash. Softbyte
receives $1,200 cash from customers for programming
services it has provided.

59. Transactions Analysis
Transaction (5). Purchase of Advertising on Credit.
Softbyte receives a bill for $250 from the Daily News for
advertising but postpones payment until a later date.

60. Transactions Analysis
Transaction (6). Services Provided for Cash and Credit.
Softbyte provides $3,500 of programming services for
customers. The company receives cash of $1,500 from
customers, and it bills the balance of $2,000 on account.

61. Transactions Analysis
Transaction (7). Payment of Expenses. Softbyte pays the
following Expenses in cash for September: store rent $600,
salaries of employees $900, and utilities $200.

62. Transactions Analysis
Transaction (8). Payment of Accounts Payable. Softbyte
pays its $250 Daily News bill in cash.

63. Transactions Analysis
Transaction (9). Receipt of Cash on Account. Softbyte
receives $600 in cash from customers who had been billed
for services [in Transaction (6)].

64. Transactions Analysis
Transaction (10). Withdrawal of Cash by Owner. Ray Neal
withdraws $1,300 in cash from the business for his personal
use.

65. Transactions Analysis
Summary of Transactions
Illustration 1-8
Tabular summary of
Softbyte transactions

66. The Financial Statements
Balance
Sheet
A = L + SE
Balance
Sheet
A = L + SE
Statement of Cash Flows
Change in Cash
Statement of Stockholders’
Equity
Change in Stockholders’ Equity
Accounts
Income Statement
Revenue – Expenses = Net
Income
12/31/2010 12/31/2011
Point in time Point in time
Period of time
Notes to the financial statements
1/1/2011 to 12/31/2011

67. Financial Statements from BAE
A = L + C – D + Profit / Loss
•A = L + updated C (owners’ equity)
Owners’ Equity Statement

68. Financial Statements Income Statement
Reports the revenues and expenses for a specific period of time.
Net income – revenues exceed expenses.
Net loss – expenses exceed revenues.
Illustration 1-9
Financial statements and
their interrelationships

69. Financial Statements from BAE
A = L + updated Capital
Statement of Financial Position
(Balance Sheet)

70. Financial Statements Net income is needed to determine the
ending balance in owner’s equity.
Illustration 1-9
Financial statements and
their interrelationships

71. Financial Statements
Statement indicates the reasons why
owner’s equity has increased or
decreased during the period.
Owner’s Equity Statement
Illustration 1-9
Financial statements and
their interrelationships

72. Financial
Statements
The ending
balance in
owner’s equity is
needed in
preparing the
balance sheet
Illustration 1-9
Financial statements and
their interrelationships

73. Financial Statements Balance Sheet
Illustration 1-9
Financial statements and
their interrelationships

74. Discussion Question
Q1-19: “A company’s net income appears directly on
the income statement and the owner’s equity
statement, and it is included indirectly in the
company’s balance sheet.” Do you agree? Explain.
Financial Statements

75. Financial Statements
Information for a specific period of time.
Answers the following:
1. Where did cash come from?
2. What was cash used for?
3. What was the change in the cash balance?
Statement of Cash Flows

76. Financial Statements Statement of Cash Flows
Illustration 1-9
Financial statements and
their interrelationships

77. Financial
Statements
Illustration 1-9
Financial statements and
their interrelationships

78. Practice
• The company is started when Karen Bradley and Kathy Drake file articles of incorporation with the state to obtain a charter.
Each invests $50,000 in the business. In return, each receives 5,000 shares of capital stock.
• The company buys a piece of property for $200,000. The seller agrees to accept a five-year promissory note. The note is given
by the health club to the seller and is a written promise to repay the principal amount of the loan at the end of five years. The
property consists of land valued at $50,000 and a newly constructed building valued at $150,000.
• Karen and Kathy contact an equipment supplier and buy $20,000 of exercise equipment: treadmills, barbells, and stationary
bicycles. The supplier agrees to accept payment in full in 30 days.
• The owners open their doors for business. During January, they sell 300 monthly club memberships for $50 each, or a total of
$15,000. The members have until the 10th of the following month to pay.
• In addition to memberships, Glengarry sells court time. Court fees are paid at the time of use and amount to $5,000 for the
first month
• The cost of utilities for the first month is $3,000. Glengarry pays this amount in cash.
• Even though the January monthly memberships are not due until the 10th of the following month, some of the members pay
their bills by the end of January. The amount received from members in payment of their accounts is $4,000.
• At the end of the month, Karen and Kathy, acting on behalf of Glengarry Health Club, decide to pay a dividend of $2,000 in
total on the shares of stock.
• (a) Prepare a tabular summary of the transactions.
• (b) Prepare the income statement, owner’s equity statement, and balance sheet at July 31.

80. Summary of the Rules for Increasing and Decreasing
Accounts

81. Journal Entries

82. Journal Entries

83. Journal Entries

84. T Account / Ledger

85. T Account / Ledger

86. T Account / Ledger

87. T Account / Ledger

88. Trial Balance

89. Income Statement

90. Balance Sheet

91. Determining Normal Account Balances

92. Practice
• Joan Robinson opens her own law office on July 1, 2010. During the first month of
• operations, the following transactions occurred.
• 1. Joan invested $11,000 in cash in the law practice.
• 2. Paid $800 for July rent on office space.
• 3. Purchased office equipment on account $3,000.
• 4. Provided legal services to clients for cash $1,500.
• 5. Borrowed $700 cash from a bank on a note payable.
• 6. Performed legal services for client on account $2,000.
• 7. Paid monthly expenses: salaries $500, utilities $300, and telephone $100.
• 8. Joan withdraws $1,000 cash for personal use.
• Instructions
• (a) Prepare a tabular summary of the transactions.
• (b) Prepare the income statement, owner’s equity statement, and balance sheet at July 31 for Joan
Robinson, Attorney.

93. Accounting Equation

94. Accounting Equation

95. Accounting Equation

96. Thank You