This document provides an overview of key accounting fundamentals including the purpose of financial statements, accounting concepts and principles, and the accounting equation. It discusses the cash flow statement, income statement, and balance sheet and how they are used to identify assets, liabilities, revenues and expenses. It also outlines the accounting process of identification, recording, and communication of financial information.

1. Fundamentals of
Accounting
Presented by: Robbia Gulnar

2. Content
• Discuss the purpose of the cash flow, profit & loss and the balance
sheet statements
• Explain the key terms use in accountancy
• Identify the thirteen accounting principles and how they each may
be breached
• List the six accounting concepts
• Outline the purpose of the classification system and its benefits
• Identify the relevant journals and ledgers when posting standard
transactions

3. What is accounting
• Accounting is a process of three activities
 Identification
 Recording
 Communication

4. Objectives of Accounting
• The goal of accounting is to ensure information provided to decision
makers is useful. To be useful information must be
 Relevance & Reliability
 Faithful representation
 Understandability
 Comparability
 Verifiability
 Timeliness

5. Financial Report
Financial
Statements
Statement
of financial
position
Statement
of Owner
Equity
Statement of
Cash Flows
Statement
of profit or
loss

6. Basic Accounting Equation
Liabilities
Owner
Equity
Assets

7. Balance Sheet
• The Statement of financial position/balance sheet
shows a business’s assets, liabilities, and equity
at a point in time.

8. Assets
• Economic resources that are owned or controlled by an enterprise as a result
of past transactions or events, and that are expected to have future economic
benefits.
• They are things of value used in carrying out such activities as production,
consumption, and exchange.
• Characterized as current and non-current

9. Liabilities
• Liabilities: are claims against assets.
• They are existing debts and obligations
• Have a known:
 Amount, Date to be paid, Person to whom
payment owed

10. Classification of terms for the
Balance Sheet
• Classification of items into current and non-current
sections helps assess liquidity. There are three criteria for
separating current from non-current assets:
 Time - How long before the asset is expected to be
converted into cash?
 Intention - Is it intended to convert the asset into cash
in the near future?
 Economic benefit - For how long will the asset continue
to earn revenue for the business?

11. Functional classification
• Functional classification refers to the manner in which expenses
are grouped in the Profit and Loss statement. The expenses are
classified according to the function they perform and usually
correspond to the cost centers of the firm.
• The advantages of functional classification include-
 the opportunity to delegate responsibility, for instance, the sales
manager is responsible for the sales department expenses
 the capacity to compare one cost center with another, with that of
similar firms, to benchmarks or with targets set by the firm
 to set limits on spending for particular cost centers
 decisions may be made on the basis of information provided, such
as considering whether an increase in advertising leads to an
increase in sales

12. The trial balance
• At the end of the accounting period ledger accounts are
closed off if they are revenue or expense items, and
balanced if assets, liabilities or owners equity items.
• There are two presentations of the trial balance: the pre-
trial balance and the post trial balance. The distinction
between the two is easily seen when preparing the '10
column worksheet', in a later slide slides. The post trial
balance occurs after balance day adjustments.

13. The trial Balance (Contd.)
• The purpose of the trial balance is to compile all the
ledger account totals and balances in order to confirm the
accuracy of the recording process. Assets and expenses
are listed in then debit column while revenue, liabilities
and owners equity items are shown in the credit column.
Negative items are also shown. Accumulated depreciation
of non-current assets is shown on the credit side and
drawings are shown on the debit side of the trial balance.
• It is possible for the trial balance to balance and yet be
incorrect. Recording errors will not necessarily be
detected by carrying out a trial balance.

14. continued
• Examples of errors not detected by a trial balance:
• a complete entry has been omitted from the ledger
• an amount has been placed in the wrong account. For example,
$300 paid wages should have been included as cleaning expense
• a compensating error has been made. For instance, both sales
and purchases have been overstated by $100
• a money amount has been listed incorrectly
• debit and credit entries have been reversed. A debtor has paid
us money, yet debtors are incorrectly debited and bank wrongly
credited

15. Preparation of Report
• The cash report, the Profit and Loss statement, and the
balance sheet are regarded as 'position
statements'. Position statements reflect:

16. Income Statement
• An income statement communicates information about
business’s financial performance by summarizing
revenues less expenses over a period of time.
• Income Statement Equation
• Revenues-Expenses=Profit/Loss