Accounting and finance

1. ACCOUNTING
AND FINANCE
SECTION 1: BASICS OF ACCOUNTING
2023 TRAINNGS

2. SECTION LEARNING
OUT COME
By the end of this section You will be able to:
1.Define Accounting, Finance, Assets, Liabilities
and Capital
2. Use accounting Equation
3. Prepare financial statements
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3. Welcome to Accounting And Finance
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4. Slide Title
• Some students enter
accounting programs with
little technical knowledge —
and that is OK. This module is
an easy-to-use resource for
developing the vocabulary
accounting professionals use.
• It can also be used to:
 check icon Gauge interest in
a potential accounting career
before applying to programs
 check icon Build familiarity
with accounting essentials
prior to commencing studies
 check icon Refresh
knowledge gained in an
accounting program
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5. INTRODUCTION TO ACCOUNTING AND FINANCE
• Accounting is the process of tracking and recording financial activity. People and businesses use the principles
of accounting to assess their financial health and performance. Accounting also serves as a useful way for
people and companies to honor their tax obligations.
• The history of accounting dates back to ancient times. In the modern world, it is most closely associated with
businesses' financial reporting. However, everyone can benefit from a knowledge of accounting basics.
• General accounting knowledge can be important for individual income-earners during tax season.
• Accounting Period: An accounting period defines the length of time covered by a financial statement or
operation. Examples of commonly used accounting periods include fiscal years, calendar years, and three-
month calendar quarters. Some organizations also use monthly periods.
• Each accounting period covers one complete accounting cycle. An accounting cycle is an eight-step
system accountants use to track transactions during a particular period.
• Accounts Payable
• Accounts payable (AP) tracks money owed to creditors. Examples include bank loans, unpaid bills and
invoices, debts to suppliers or vendors, and credit card or line of credit debts.
• Rarely, the term "trade payables" is used in place of "accounts payable."
• Accounts payable belong to a larger class of accounting entries known as liabilities.
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6. • Accounts Receivable
• Accounts receivable ( AR) tracks the money owed to a person or business by its debtors. It is the functional
opposite of accounts payable.
• Accounts receivable are sometimes called "trade receivables." In most cases, accounts receivable derive from
products or services supplied on credit or without an upfront payment. Accountants track accounts receivable
money as assets.
• Accrual Basis Accounting (or simply "accrual accounting") records revenue- and expense-related items when they
first occur. For example, a customer purchases a k2,000 product on credit.
• Accrual accounting recognizes that k2,000 in revenue on the date of the purchase. The method contrasts with
cash basis accounting, which would record the k2,000 in revenue only after the money is actually received.
• In general, large businesses and publicly traded companies favor accrual accounting. Small businesses and
individuals tend to use cash basis accounting.
• Accruals : Revenues and expenses recognized by a company but not yet recorded in their accounts are known as
accruals (ACCR). By definition, accruals occur before an exchange of money resolves the transaction.
• For example, a company that hired an external consultant would recognize the cost of that consultation in an
accrual. That cost would be recognized regardless of whether or not the consultant had invoiced the company
for their services. Accounts payable and accounts receivable are accrual types.
• Others include accrued costs (costs incurred but not resolved during a particular accounting period) and accrued
expenses (expenses or liabilities incurred but not resolved during a particular accounting period).
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7. • Assets
• Assets are items of value, or resources that a business owns or controls. More technical and precise
definitions specify two technicalities: First, assets result from past business activities.
• Second, they will or are expected to generate future economic value. Assets come in many types and
classes.
• Types include current and noncurrent, operating and non-operating, physical, and intangible.
• Classes include broad categories such as cash and equivalents, equities, commodities, real estate,
intellectual property, and fixed income, among others.
• Balance Sheet
• A balance sheet (or "statement of financial position") is a standard financial statement. It specifies
the business' current state regarding its assets, liabilities, and owners' equity.
• Some sources abbreviate the term as BAL SH.
• Accountants use multiple formats when creating balance sheets: classified, common size,
comparative, and vertical balance sheets. Each format presents information as line items that
combine to provide a snapshot summary of the company's financial position.
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8. • Capital
• In common usage, capital (abbreviated "CAP.") refers to any asset or resource a business can use to generate
revenue. A second definition considers capital the level of owner investment in the business.
• The latter sense of the term adjusts these investments for any gains or losses the owner(s) have already
realized.
• Accountants recognize various subcategories of capital. Working capital defines the sum that remains after
subtracting current liabilities from current assets.
• Equity capital specifies the money paid into a business by investors in exchange for stock in the company. Debt
capital covers money obtained through credit instruments such as loans.
• Cash Basis Accounting
• Cash basis accounting records revenues and expenses when the money involved in each transaction officially
changes hands. It contrasts with accrual basis accounting.
• Accrual accounting recognizes revenues and expenses when they occur without regard to whether the
associated funds have been exchanged.
• Cash Flow
• Cash flow (CF) describes the balance of cash that moves into and out of a company during a specified
accounting period.
• Accountants track CF on the cash flow statement.
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9. • In its most basic sense, accounting describes the process of tracking an individual or
company's monetary transactions.
• Accountants record and analyze these transactions to generate an overall picture of
their employer's financial health.
• Basic accounting concepts used in the business world cover revenues, expenses,
assets, and liabilities. These elements are tracked and recorded in documents including
balance sheets, income statements, and cash flow statements.
• Introduction to accounting frequently identifies assets, liabilities, and capital as the
field's three fundamental concepts.
• Assets describe an individual or company's holdings of financial value. Liabilities are
debts and unpaid expenses. Capital describes the money the entity has on hand.
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10. Preparing Financial Statements – without Numbers
• All business activities fall into two broad categories, subjective and objective.
• The subjective group is what most of us think of as business and includes things like leadership, sales,
marketing, customer satisfaction, quality and so on.
• They are subjective because there are infinite approaches to each and only fuzzy definitions of
success.
• To show what I mean, imagine that you and your sales manager disagree on how sales are going. He
feels “good” about sales, you don’t. Who is right is a matter of opinion - unless one of you brings data
to support your position, in which case you have crossed over to the objective side.
• The objective side of business involves numbers. Numbers are the score, and are as close as we can
get to facts. They provide feedback on what you’ve done and, more importantly, they provide
guidance for future decisions.
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11. • Financial numbers are reported in three standard reports: The Income Statement (also known as the Profit
and Loss Statement), the Balance Sheet, and the Statement of Cash Flows.
• There are three reports because that’s how many it takes to answer the five critical questions of business:
“Are we making money?; “What do we own?,” “What do we owe?,” “What's our net worth?” and “Where
did our cash go?”
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12. • Answers to those five questions tell us (almost) everything we need to know about how our businesses
have performed, and, more importantly, give us important insights into managing our businesses for the
future.
• 1. The Income Statement - “Are We Making Money?"
• I have never met a small business owner who hadn’t at least attempted to create an Income Statement.
The attempt might be scribbles on a napkin, entries in an Excel spreadsheet, a collection of bank
statements showing deposits and withdrawals, or a proper report prepared by our accountants.
• Regardless of how we do it, we all seem to understand the need to compare income to expense.
• I list the Income Statement first because above all else, we must know if we are making money. A business
might survive temporarily on money supplied by the owners or banks, but sustainability ultimately depends
on making money. The Income Statement tells us.
• The Income Statement is a period statement, which means it tells us whether or not we made money over
a specific period of time, usually a month or a year.
• The Income Statement compares income from sales during a period to expenses for the same period. If a
business has more income than expense, it is making money (profit).
• If it has more expense than income, it is losing money (a loss). The famous “bottom line” is found on the
Income Statement and answers the question: “Did we make money in this period?”
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13. • 2. The Balance Sheet - “What Do We Own?” “What Do We Owe?” And “What’s Our Net Worth?”
• Most business owners I’ve met have produced at least the occasional Balance Sheet, usually because a
bank asked them to. The Balance Sheet is less intuitive than the Income Statement, but it is not hard to
understand.
• Unlike the Income Statement that shows what happened over a specific period of time, the Balance Sheet
is a “snapshot” report that shows the overall condition of a business as of a particular date.
• The report is a list of what a business owns and what it owes. The underlying idea is that everything a
business owns, its “assets,” is owed to someone. If the obligation is to a non-owner, such as a bank or a
supplier, it is called a liability. If the obligation is to an owner, it is called equity.
• Because everything is owed to someone, total assets must always equal the combined total of liabilities
and equity, in other words, the two totals must “balance.”
• When liabilities are subtracted from assets, the remainder is owners’ equity, or “net worth.” Net worth
comes after liabilities both in priority and on the Balance Sheet because owners get paid last. (Welcome to
business!)
• Net worth is the ultimate score that tells us the cumulative effect of everything that’s happened since the
business began.
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14. 3. The Statement Of Cash Flows - “Where Did Our Cash Go?”
• I don’t recall ever meeting a small business owner who had even heard of a Statement of Cash
Flows, let alone understood it.
• It is worth the small effort required to understand because it provides crucial information about the
most critical resource in business: Cash.
• Cash is critical because most businesses can survive surprisingly long periods without sales or profits,
but none can make it past Friday’s payroll without cash.
• Like the Income Statement, the Statement of Cash Flows is a period statement. It uses information
from the other two reports to tell us where our cash came from and where it went over a specific
period of time.
• The report answers the question I’ve been asked countless times: “They say I’m making money, so
why don’t I have any?”
• The report begins with an opening cash balance, shows which activities added cash and which
consumed it, and ends with the current cash balance.
• The chief benefit of the report is that once we know what’s happening to our cash, we can do
something about it. The report is not immediately intuitive, at least not in my experience, but it is
not difficult once explained.
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15. Preparing Financial Statements – With Numbers
• The three core financial statements are
• 1) the income statement,
• 2) the balance sheet, and
• 3) the cash flow statement.
• These three financial statements are intricately linked to one another.
• Analyzing these three financial statements is one of the key steps when creating a financial model. By
following the steps below, you’ll be able to connect the three statements on your own.
• 1. Income Statement
• Often, the first place an investor or analyst will look is the income statement. The income
statement shows the performance of the business throughout each period, displaying sales revenue at
the very top. The statement then deducts the cost of goods sold (COGS) to find gross profit.
• From there, gross profit is impacted by other operating expenses and income, depending on the nature of
the business, to reach net income at the bottom – “the bottom line” for the business.
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16. • 2. Balance Sheet
• The balance sheet displays the company’s assets, liabilities, and shareholders’ equity at a point in time.
The two sides of the balance sheet must balance: assets must equal liabilities plus equity.
• The asset section begins with cash and equivalents, which should equal the balance found at the end of
the cash flow statement.
• The balance sheet then displays the ending balance in each major account from period to period. Net
income from the income statement flows into the balance sheet as a change in retained
earnings (adjusted for payment of dividends).
• Key features:
• Shows the financial position of a business
• Expressed as a “snapshot” or financial picture of the company at a specified point in time (i.e., as of
December 31, 2021)
• Has three sections: assets, liabilities, and shareholders equity
• Assets = Liabilities + Shareholders Equity
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17. 3. Cash Flow Statement
• The cash flow statement then takes net income and adjusts it for any non-cash expenses. Then cash inflows
and outflows are calculated using changes in the balance sheet. The cash flow statement displays the change
in cash per period, as well as the beginning and ending balance of cash.
Key features
• Shows the increases and decreases in cash
• Expressed over a period of time (i.e., 1 year, 1 quarter, Year-to-Date, etc.)
• Undoes accrual accounting principles to show pure cash movements
• Has three sections: cash from operations, cash used in investing and cash from financing
• Shows the net change in the cash balance from the start to the end of the period
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18. • As explained above, each of the three financial statements has an interplay of information. Financial
models use the trends in the relationship of information within these statements, as well as the
trend between periods in historical data to forecast future performance.
• The preparation and presentation of this information can become quite complicated. In general,
however, the following steps are followed to create a financial model.
• Line items for each of the core statements are created. It provides the overall format and skeleton
that the financial model will follow
• Historical numbers are placed in each of the line items
• At this point, the creator of the model will often check to make sure that each of the core
statements reconciles with the data in the other. For example, the ending balance of cash calculated
in the cash flow statement must equal the cash account in the balance sheet
• An assumptions section is prepared within the sheet to analyze the trend in each line item of the
core statements between periods
• Assumptions from existing historical data are then used to create forecasted assumptions for the
same line items. The forecasted section of each core statement will use the forecasted assumptions
to populate values for each line item. Since the analyst or user has analyzed past trends in creating
the forecasted assumptions, the populated values should follow historical trends
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19. 1.3. Accounting Equation
• The accounting equation represents the relationship between the assets, liabilities and capital of a business
and it is fundamental to the application of double entry bookkeeping where every transaction has a dual
effect on the financial statements.
• The purpose of this section is to consider the fundamentals of the accounting equation and to demonstrate
how it works when applied to various transactions.
• In its simplest form, the accounting equation can be shown as follows:
• Capital = Assets – Liabilities
• Capital can be defined as being the residual interest in the assets of a business after deducting all of its
liabilities (i.e what would be left if the business sold all of its assets and settled all of its liabilities). In the
case of a limited liability company, capital would be referred to as ‘Equity’.
• Capital essentially represents how much the owners have invested into the business along with any
accumulated retained profits or losses.
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20. • The accounting equation can also be rearranged in several ways, including:
• Assets = Capital + Liabilities
• In this format, the formula more clearly shows how the assets controlled by the business have been funded.
That is, through investment from the owners (capital) or by amounts owed to creditors (liabilities). You may
also notice two other interesting points regarding the formula being laid out in this way:
• It reflects the format of the statement of financial position (.ie assets are presented first and the total assets
figure balances with the total amount of equity and liabilities); and
• It more clearly reflects the fact that total debits will always equal total credits (i.e Assets (Dr) = Capital (Cr) +
Liabilities (Cr))
•
• Poll; What about drawings, income and expenses?
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21. • Drawings are amounts taken out of the business by the business owner. They will therefore result in a
reduction in capital.
• Income and expenses relate to the entity’s financial performance. Individual transactions which result in
income and expenses being recorded will ultimately result in a profit or loss for the period. The term capital
includes the capital introduced by the business owner plus or minus any profits or losses made by the
business. Profits retained in the business will increase capital and losses will decrease capital. The
accounting equation will always balance because the dual aspect of accounting for income and expenses
will result in equal increases or decreases to assets or liabilities.
• The accounting equation can be expanded to incorporate the impact of drawings and profit (ie income less
expenses):
• Assets = Capital introduced + (Income – Expenses) – Drawings + Liabilities
• aking time to learn the accounting equation and to recognise the dual aspect of every transaction will help
you to understand the fundamentals of accounting.
• If you are unsure about what accounts will be affected by a particular transaction, it can sometimes be
helpful to think about just one of the accounts which might be affected, for example cash (asset), and then
use your knowledge of the accounting equation to work out the other one.
• Whatever happens, the transaction will always result in the accounting equation balancing.
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22. 1.4. Golden Rules of Accounting
• Accounting rules refer to the set of regulations to follow while recording day-to-day transactions for
accurate accounting process. These guidelines help keep the accounting format uniform and help
businesses have their data stored and presented in a proper structure. This makes locating information
and retrieving the required accounting information easier, saving a lot of time.
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23. • Golden accounting rules, these revolve around two accounting concepts – debit and credit. In
a double-entry accounting system, both these sides are equally and oppositely affected.
• A debit is an entry made on the left side of an account, while credit is an entry made on the right
side. The former witnesses an increase in an asset or expense account while a decrease in revenue,
liability, and equity accounts. Credits, on the other hand, are complete opposites, i.e., a decrease in
an asset or expense account while an increase in revenue, liability, and equity accounts.
• Before elaborating on the accounting rules, it is vital to explore the types of accounts that build the
foundation of these golden guidelines. These include real accounts, personal accounts, and nominal
accounts.
• A real account is a general ledger account involving data related to assets and liability. These accounts
do not close at the end of the year and are carried forward. A bank account is a form of a real
account.
• Next is the personal account, which is a personal depository for individuals, companies, and other
associations. A creditor account is an example of this type of account.
• On the other hand, there is a nominal account, the third type of account. It is related to recording all
income, gains, losses, and expenses.
• An interest account is an example of this form of account.
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24. • Rule No. 1
• The first applies or is linked to personal accounts. The personal accounting rules say:
• Debit the receiver
• Credit the giver
• Rule No. 2
• The second one applies or is linked to real accounts. The real accounting rules state:
• Debit what comes in
• Credit what goes out
• Rule No. 3
• The third rule is for the nominal accounts. The nominal accounting guideline says:
• Debit all expenses and losses
• Credit all incomes and gains
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25. • While traditional rules revolved around three accounts – real, personal, and nominal, the modern version
classifies the accounts into six types, making the transactions split into these categories, affecting the debit and
credit sides.
• These accounts include asset, liability, revenue, expense, capital, and withdrawal.
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ACCOUNT TYPE DEBIT CREDIT
Asset Increases Decreases
Liability Decreases Increases
Revenue Decreases Increases
Expense Increases Decreases
Capital Decreases Increases
Withdrawal Increases Decreases

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• Example 1 – Golden Rules
• X purchases machinery using cash. Two accounts are involved in this transaction – an asset (machinery)
account and a cash account, which fall under the real account. Therefore, the journal entry will be made based
on the following rule:
• Debit – What Comes IN – Machinery (asset)
• Credit – What Goes OUT – Cash
• Journal Entry

27. • Example 2 – Modern Rules
• Let us consider a different scenario for the same example and assume X purchases the machinery using a bank
loan. Here, the machinery is an asset, and a loan is a liability. Thus, the journal entry will follow the modern law
of accounting:
• Modern Rule
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28. • One of the major objectives of following these rules is to offer organizations around the world a uniform format
to define and store transactions, making it easier for businesses to have a ready reference available for
effective decision making.
• In addition, these guidelines let users know how to treat their accounts and financial information. Of course,
uniformity and consistency are maintained while recording transactional data.
• The uniform structure makes the financial data presentable, making it easy to read and understand. As a result,
any mistake or error is quickly identified and rectified.
QUESTIONS
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