2. Basic Accounting Concepts
• Financial accounting is based upon the
accounting equation.
Assets = Liabilities + Owners' Equity
• The balance sheet is an expanded
expression of the accounting equation.
3. • Assets are valuable resources that are owned by a
firm.
– They represent probable future economic benefits
and arise as the result of past transactions or
events.
• Liabilities are present obligations of the firm.
– They are probable future sacrifices of economic
benefits which arise as the result of past
transactions or events.
• Owners' equity represents the owners' residual
interest in the assets of the business.
– Residual interest is another name for owners'
equity.
Basic Accounting Concepts
4. Withdrawal by Owner
• A withdrawal by owner is treated
exactly the opposite of a contribution
by the owner.
5. Underlying Accounting
concepts
• The historical cost concept
• The money measurement concept
• The business entity concept
• The dual aspect concept
• The time interval concept
6. Fundamental accounting
concepts
• Going concern: Under UK accounting
standards, the going concern concept
implies that the business will continue to
operate for the foreseeable future.
– Examples:
• If the business is going to close down in the near
future;
• l where shortage of cash makes it almost certain
that the business will have to cease trading.
7. Fundamental accounting
concepts
• Prudence: The accountant should always exercise
caution when dealing with uncertainty while, at the
same time, ensuring that the financial statements
are neutral – that gains and losses are neither
overstated nor understated – and this is known as
prudence.
8. Fundamental accounting
concepts
• The accruals concept: The accruals concept
says that net profit is the difference between
revenues and the expenses incurred in
generating those revenues, i.e.
Revenues − Expenses = Net Profit
9. Fundamental accounting
concepts
• Separate determination: In determining the
aggregate amount of each asset or liability, the
amount of each individual asset or liability should
be determined separately from all other assets and
liabilities.
10. Types of Financial Statements.
• Income Statement:
Income Statement, also known as the
Profit and Loss Statement, reports the
company's financial performance in terms
of net profit or loss over a specified
period. Income Statement is composed of
the following two elements.
– Revenue
– Expense
11. Types of Financial Statements.
• Balance sheet: Presents the financial
position of an entity at a given date. It is
comprised of the following three
elements:
– Assets
– Liabilities
– Equity
12. Types of Financial Statements.
• Cash Flow Statement: presents the movement in
cash and bank balances over a period. The
movement in cash flows is classified into the
following segments
– Operating Activities: Represents the cash flow from
primary activities of a business.
– Investing Activities: Represents cash flow from the
purchase and sale of assets other than inventories.
– Financing Activities: Represents cash flow generated
or spent on raising and repaying share capital and debt
together with the payments of interest and dividends.
13. Types of Financial Statements.
• Statement of Changes in Equity: Statement of
Changes in Equity, also known as the Statement
of Retained Earnings, details the movement in
owners' equity over a period. The movement in
owners' equity is derived from the following
components
– Net Profit or loss during the period as reported in the
income statement.
– Share capital issued or repaid during the
period
– Dividend payments
– Gains or losses recognized directly in equity
(e.g. revaluation surpluses)
– Effects of a change in accounting policy or
correction of accounting error.
14. Accounting Standards in Pakistan
• The Institute of Chartered Accountants of Pakistan
(ICAP) is the accounting standards-setting body in
Pakistan. It works closely with State Bank of
Pakistan and Securities and Exchange Commission
of Pakistan (SECP), which is the regulator of
corporate sector. Section 234 of the Companies
Ordinance 1984 laid down the basic requirements
for preparation and submission of financial
statements. In recent years, Pakistan has made
significant progress in adopting and implementing
International Financial Reporting Standards (IFRS)
15. Accounting Standards Using
Internationally
• GAAP - Generally Accepted Accounting Principles: Also called
GAAP or US GAAP, are the generally accepted accounting
principles adopted by the U.S. Securities and Exchange
Commission (SEC).
• PCG - Plan Comptable General: is the first electronic accounts
in France. His computer concept, structure and features are
designed to facilitate learning and the use of all of the generally
accepted accounting.
• GoB - German Financial Accounting and Reporting: Also
Called German GAAP partly unwritten rules
for bookkeeping and accounting, arising primarily from science
and practice, the jurisprudence and recommendations of
business associations.
16. Accounting Standards Using
Internationally
• RAP or RAS: Russian Accounting Principles (RAP) or Russian
Accounting Standards (RAS), refer to the body of regulatory
documents concerning financial accounting and reporting
standards in the Russian Federation.
• Chinese Accounting Standards: are the accounting rules used in
mainland China. As of February 2010, the Chinese accounting
standard systems is composed of Basic Standard, 38 specific
standards and application guidance.
• UK GAAP, is the overall body of regulation establishing how
company accounts must be prepared in the United Kingdom.
This includes not only accounting standards, but also UK
company law.
17. Accounting Standards Using
Internationally
• International Financial Reporting
Standards - IFRS: are designed as a
common global language for business
affairs so that company accounts are
understandable and comparable across
international boundaries.
Countries Adoption of IFRS:
Australia, Brazil, Canada, European-Union, India,
Japan, Nepal, Pakistan, Russia, Singapore,
South Africa, Taiwan, Turkey.