INTRODUCTION TO FINANCIAL ACCOUNTING

1. INTRODUCTION TO
FINANCIAL ACCOUNTING
Lecture 01
Numl Quetta 2024
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2. Course Outline
• This course is aimed at people with no or limited prior accounting
knowledge and provides an understanding of how financial statements are
prepared for various types of organizations.
• This course presents the fundamentals of financial accounting theory and
practice at the introductory level.
• It considers basic accounting principles, their application in modern
business organizations and the preparation of business records and
financial statements.
• Consideration will be given to accounting techniques and the formulation
of financial reports; however, the course will focus on understanding
accounting policies, their rationale and the implications for users of the
financial accounting information.
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3. TOPICSCOVERED
• Meaning of Accounting
• Difference between Book Keeping and Accounting
• Is accounting an art or science
• Objectives of Financial Accounting
• Branches of Accounting
• Nature of Accounts with examples
• Double Entry System and its rules with examples
• Accounting Concepts
• Accounting Conventions
• Uses of Financial Accounting
• Users of Accounting Information
• Advantages of Accounting
• Limitations of Financial Accounting
• Important Terms for Reference 2
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4. Definitionof Accounting
• Art of recording and classifying the business transactions and events
which includes – receipt and payment of cash, purchase and sale of goods
on credit etc
• “Accounting is the process of recording financial transactions pertaining
to a business.”
• The accounting process includes summarizing, analyzing, and reporting
these transactions to oversight agencies, regulators, and tax collection
entities.
• The transactions must be in monetary terms.
• It’s a chronological record of business transactions.
• Historical Basis
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5. DifferencebetweenBook KeepingandAccounting
BASIS FOR COMPARISON BOOKKEEPING ACCOUNTING
Meaning Bookkeeping is an activity of recording the
financial transactions of the company in a
systematic manner.
Accounting is an orderly recording and
reporting of the financial affairs of an
organization for a particular period.
What is it? It is the subset of accounting. It is regarded as the language of
business.
Decision Making On the basis of bookkeeping records,
decisions cannot be taken.
Decisions can be taken on the basis of
accounting records
Preparation of Financial Statements Not done in the bookkeeping process Part of Accounting Process
Tools Journal and Ledgers Balance Sheet, Profit & Loss Account and
Cash Flow Statement
Methods / Sub-fields Single Entry System of Bookkeeping and
Double Entry System of Bookkeeping
Financial Accounting, Cost Accounting,
Management Accounting, Human
Resource Accounting, Social Responsibility
Accounting.
Determination of Financial Position Bookkeeping does not reflect the
financial position of an organization.
Accounting clearly shows the financial
position of the entity.
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6. Accounting as science and art
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• As science
- An accountant finalizes the economic results by identifying, analyzing,
classifying using the method of double-entry bookkeeping accounting system.
- So, Accounting is a science that includes comprises of rules,
principles, concepts, conventions and standards in science.
• As Art
- it presents the financial findings by following and implementing a
universally accepted method (GAAP).
- the established rules and principles of accountingis applied in
bookkeeping process of and economic entity
Lec 1: Introduction to Financial Accounting

7. Objectives of Financial Accounting
• To know the results of business – via profit and loss account or income and
expenditure account
• To ascertain the financial position of the business – the extent of assets and
liabilities at any point of time through preparation of balance sheet
• To ensure control over the assets – important in prevention of
frauds, misappropriation and losses
• To facilitate proper management of cash – surplus fund can be used in profitable
ventures and deficiency of cash can be overcome by preparing for funds from bankers
etc
• To provide requisite information – information to the govt and tax authorities with
great ease, as and when needed 6
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8. Branches of Accounting
Basis Financial
Accounting
CostAccounting Management
Accounting
Objects Record transactions &
determine financial
position & profit or loss.
Ascertainment, allocation,
accumulation and accounting for
cost
To assist the
Management in decision-
making & policy
formulation.
Nature Concerned
historical data.
with Concerned with both past and
present recorded (historical in
nature).
Deals with projection of
data for the future
(futuristic in nature)
Principle
Followed
Governed
GAAP
by Certain
followed
costs.
for
principles
recording
No set principles are
followed in it.
Data
used
Qualitative aspects are
not recorded
Only quantitative aspect is
recorded.
Uses both
Quantitative and qualitative
concepts.
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9. Branches of Accounting
Basis Financial
Accounting
CostAccounting Management
Accounting
Reporting
frequency
Generally at end of
year
As & when desired by
management
As & when desired by
management
Publication Published in case of
companies
NOT published NOT published
Information
recorded
Monetary
transactions
ONLY
Both monetary and non-
monetary information.
Both monetary and non-
monetary information
Forms of
Account
Accounts are
prepared to meet the
legal
requirements.
These are generally kept
Voluntarily to meet the
requirements of the
management.
These are generally kept
Voluntarily to meet
the requirements8 of the
management.
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10. NATUREOF ACCOUNTS
Personal Account Real Account Nominal Account
The elements or accounts which
represent persons and
organisations.
The elements or accounts which
represent tangible or intangible
aspects or helps the organisation
to earn profit
The elements or accounts which
represent expenses, losses,
incomes, gains.
• Mrs. Vimla a/c - representing
Mrs. Vimla a person.
• M/s Bharat & Co a/c -
representing M/s Bharat & Co,
an organisation.
• Capital a/c - representing the
owner of the business, a
person or organisation.
• Bank a/c - representing Bank,
an organisation.
• Cash a/c - representing cash
which is tangible.
• Goods/Stock a/c -
representing Stock which
is tangible.
• Furniture a/c - representing
Furniture which is tangible.
• Goodwill
• Salaries a/c - representing
expenditure on account of
salaries, an expense.
• Interest received a/c -
representing income on
account of interest, an
income.
• Loss on sale of Asset a/c
- representing the loss
incurred on sale of assets, a
loss.
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11. Accounting Concepts
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• Business Entity Concept
- Business is established to achieve an economic goal
- Accounting Equation
- Assets = Liabilities + Owner’s Equity
• Money Measuring Concept
- All the events and transactions are recorded in the terms of money
- Does not take care of the effects of inflation because it
assumes stable value for measuring
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12. Accounting Concepts
• Going Concern Concept
- It assumes that business will exist for a longer period of time
- It supports the concept of valuing the assets at historical cost or replacement cost
• Dual Aspect Concept
- Every transaction has two aspects – giving certain benefits and receiving certain
benefits
• Periodicity Concept
- Business is segmented into different periods (accounting periods) and accordingly
the result of each period is ascertained e.g. Income statement (profit and loss),
balance sheet (financial position)
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13. Accounting Concepts
• Historical Cost Concept
- Transactions are recorded wrt the respective amounts involved.
- Does not take in account the inflation rate and depreciation rates
• Matching Concept
- All the costs should be associated to a particular period should be compared with
revenues associated with that period to obtain net income
- It necessitates adjustments for outstanding expenses, prepaid expenses, etc
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14. Accounting Concepts
• Realisation Concept
- Recognises revenue when sale is made
• Accrual Concept
- Revenue is recognised on its realisation
- Cost is recognised when it is incurred and not when the payment is made
• Objective Evidence Concept
- Accounting must be based on objective evidence – every transaction should be supported by
verifiable document and free from biasness
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15. Accounting Conventions
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• Consistency
- Companies should choose the most suitable accounting methods and
treatments, and consistently apply them in every period
- Changes are permitted only when the new method is considered better and can
reflect the true and fair view of the financial position of the company
- The change and its effect on profits should be disclosed in the financial statements
Lec 1: Introduction to Financial Accounting
• Disclosure
- Financial statements should be prepared to reflect a true and fair view of the
financial position and performance of the enterprise
- All material and relevant information must be disclosed in the
financial statements

16. Uses of FinancialAccounting
• Ascertaining the operation profit or
loss
• Ascertaining the financial position of
the business
• Keeping systematic records
• Protecting and controlling business
properties
• Facilitating rational decision-making
• Planning and control operations.
• Compliance with the legal
requirements
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• Making information available to various
groups and users at a particular time.
• Evidence in court in case of dispute
• Substitute of memory
• Settlement of taxation liability
• Comparative study
• Sale of business
• The amount ,size and causes of increase
or decrease of capital

17. Users of Accounting Information – Internal
• Owners
- They provide funds for the operations of a business
- Interested in knowing how profitably the business operations have been carried out
and how the capital is deployed in the form of assets and liabilities
• Management
- As the management is answerable to the owners, they need up to date information
which helps them in various facets of management like planning, decision making and
controlling
• Employees
- They need this information to analyse the which firm they are serving and how the
bonus and incentives would be paid to them
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18. Users of Accounting Information - External
• Prospective Investors
- they are the potential investors
- By reviewing the past and present performance of the business, they decide to invest
their money
• Creditors
- Included supplier of goods and services on credit and others lending money
- their welfare is closely related to the progress of the business as they
can analyse the paying off capacity of the business
• Government
- Its needs information for taxation and other purposes e.g. sales tax, income tax, excise
duty etc.
• Consumers
- To analyse the exercise better control over cost of production and this
inturn improves the image and reputation of the business
• Research Scholars
- To analyze the financial operations
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19. Limitations of Financial Accounting
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• Records only monetary transactions
• Effects of price level accounting is not considered
• No realistic information due to concepts and convention followed
• Personal bias of accountant affects the accounting statements
• Permits alternative treatment – Lack of uniformity in accounting principles
• Historical in Nature – records only the past transactions and no guidance of future
• Does not record the effect of various govt regulations
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20. Important Termsfor Reference
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Lec 1: Introduction to Financial Accounting

21. Business Transaction
• Any exchange of money or money’s worth as goods and services
between two parties is called a business transaction
• An event which can be expressed in terms of money May relate
to purchase and sale of goods, receipt and
• payment of cash and rendering of services by one party to
another.
• Transactions may be:
I. Cash transaction: When payment is made immediately
II. Credit transaction :When payment is postponed to a future date.
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22. Assets
It is any physical thing or right owned which has money value.
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• These are resources owned by the business which are expected to give benefits in
the future.
• Assets may be fixed assets or current assets
• Assets include:
– Land - tangible
– Building - Tangible
– Equipment – Tangible
– Goodwill – Intangible
– Brand - Intangible
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23. Liability
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• These are amounts owed by the enterprise to the outsiders i.e. to all
others except the owner
• These are claims of outsiders on assets of the firm.
• Liabilities can be contrasted with assets. Liabilities refer to things that you owe or
have borrowed; assets are things that you own or are owed.
• Current (Near-Term) Liabilities
• which are due within a year, with cash. Some examples of short-term liabilities For
example Wages Payable, Interest Payable, Dividends Payable, Unearned Revenues,
Taxes Payable etc
• Non-Current (Long-Term) Liabilities
• any liability that is not near-term falls under non-current liabilities, expected to be
paid in 12 months or more. For example as bonds are issued, mature, or called
back by the issuer. Lec 1: Introduction to Financial Accounting

24. Capital (Owner’s Equity)
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• It is the claim of owners on the assets of an enterprise.
• It is the excess of assets over liabilities i.e. it is what’s left of the assets after
liabilities have been deducted.
• Also known as networth
• Owner’s equity grows when an owner increases their investment or the
company increases its profits.
• A negative owner’s equity often shows that a company has more liabilities
than assets and can signify trouble for a business.
• Positive and increasing equity indicates a healthy, growing company.
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25. Revenue
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• They are amounts received from customers for:
– sales of products or
– performance of services or
– in return of use of the firm’s assets by outsiders.
• Revenues include the following
– Sales proceeds
– fees for performance of services
– Rent
– Interest
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26. Expense
• An expense is the amount incurred in the process of earning
revenue.
• They are amounts that have been paid or will be paid later for costs
that have been incurred to earn revenue.
• Include:
– salaries and wages
– Utilities payments
– supplies used
– advertising
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27. Income
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• It is excess of revenue over expense
• It is the favorable change in owner’s equity which results from operations i.e. it is
an inflow of assets or decrease in liabilities resulting in increase in capital.
Lec 1: Introduction to Financial Accounting
Trade Debtor (Account Receivable)
• A debtor is a person who owes money.
• The amount due from a debtor as per books of account is called book debt or
Accounts Receivable.
• A trade debtor is a person who owes money as a result of purchase of goods or
services on credit

28. Trade Creditor (Accounts Payable)
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• A creditor person to whom money is owing or payable.
• A trade creditor is a person who owes to whom money is owing or payable as a result
of purchase of goods or services on credit
• Accounts Payable is a liability that results from the purchase of goods or
services on account (on credit)
Lec 1: Introduction to Financial Accounting

29. Expenditure
• Takes place when an asset or service is acquired.
• Include
immediately
both payment of a sum anda promise to pay it at a
future date.
• An expense is an expenditure whose benefit finishes or is enjoyed immediately such as salaries,
rent, etc.
• An expenditure which will provide benefits in the future is considered as an asset
• A loss is an expenditure without any benefitto the concern
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