This document provides an introduction to financial accounting. It defines accounting as the process of measuring, processing, and communicating financial and non-financial records of a business. It distinguishes between financial accounting, cost and management accounting, and management accounting. The document also discusses the differences between financial and management accounting, types of businesses and their accounting needs, and key accounting principles such as GAAP, the accounting equation, and the accounting cycle.

1. Introduction to
Financial Accounting
Hammad J. Vohra, FCCA
Introduction to Business
Finance

2. What is Accounting?
 The process/system of measuring, processing and communicating
financial and non-financial records of a business entity.
 Financial Accounting
 A specific field of accounting which involves a process of recording,
summarizing and reporting transaction resulting from business
operations over a period of time.
 Cost & Management Accounting
 Cost Accounting, is a part of Management accounting that aims to
capture a company’s total cost (production and non-production) for
decision making purposes.
 Management Accounting
 A specialized branch of accounting, which aims to assists managers in
making decisions based on financial and non-financial data.

3. Difference Between Financial &
Management Accounting
Management Accounting Financial Accounting
Information mainly
produced for
Internal use: e.g. managers
andemployees
External use: e.g. shareholders,
creditors, lenders, banks,
government.
Purpose of information To aid planning, controlling
and decision making
To record the financial
performance in a period and
the financial position at the
end of that period.
Legal requirements None Limited companies must
produce financial accounts.
Formats Management decide on the
information they require and
the most useful way of
presenting it
Format and content of financial
accounts intending to give a
true and fair view should follow
accounting standards and
company law.
Nature of information Financial and non-
financial.
Mostly financial.
Time period Historical and forwardlooking. Mainly an historical record.

4. Business Types & Accounting
 There are different forms/types of business, as listed and
discussed below. However, no matter what form of business
one has, the need of accounting doesn’t end.
 Sole Proprietorship
 Partnership
 Corporations (Limited Liability Companies – Private & Public)

5. Business Types & Accounting
 There are different forms/types of business, as listed and
discussed below. However, no matter what form of business one
has, the need of accounting doesn’t end.
 Sole Proprietorship: A single individual owns and operates the
business
 Partnership: A registered business owned by two or more
individuals
 Corporations (Limited Liability Companies – Private & Public): A
business incorporated as a legal separate entity and is separate
from its owners and managers.

6. Business Types & Accounting
 Sole Proprietorship
 Pros
 Easy and relatively cheaper to start a business
 Few Government regulations
 Taxation benefits: subject to lower income taxes than are
corporation
 Cons
 Unlimited liability
 Limited life
 Capital constraints

7. Business Types & Accounting
 Partnership
 Pros
 Easy and relatively cheaper to start a business
 Taxation benefit: On individual business on pro-rata basis
 Not much regulatory requirements
 Cons
 Again unlimited liability regardless of investment ratio
 Limited life
 Capital constraints

8. Business Types & Accounting
 Corporation
 Pros
 Limited liability subject to ownership
 Unlimited operating life
 Easier to raise large amounts of funding
 Cons
 Legal and regulatory requirements
 Double taxation

9. Business Types & Accounting
 Infact, its true that no matter what type of business organization
you have, the need of accounting remains vital.
 However, for Corporations (specifically Public Limited ones),
accounting is crucial and plays a vital role in Financial
Reporting.

10. Financial Reporting?
 Financial Reporting is an extended term related to Financial
Accounting.
 Financial Accounting includes recording of even the smallest
transaction, whilst financial reporting requires presentation of
these transaction in a more pecular format, known as FINANCIAL
STATEMENTS.

11. Financial Statements?
 Financial Statements includes different statements/documents
reflecting a business performance, financial strength, ownership
structure etc. The following are types of Financial Statements
required under Financial Accounting & Reporting:
 Statement of Financial Performance (Income Statement)
 Statement of Financial Position (Balance Sheet)
 Statement of Changes in Equity
 Statement of Cash Flows
 Notes to the Financial Statements/Accounts.

12. The use of Financial Statements
 So, why we need financial statements? Well, for the following
purposes:
 Investors (Corporations only)
 Taxation Authorities
 Bankers
 Employees
 Management’s decision making purposes (Cost Accounting)

13. Professional Accountancy?
 Accountancy is not an easy profession or task to do and there are
various well renowned institutions governing the accountancy
profession, which includes:
 Association of Chartered Certified Accountants (ACCA)
 Institute of Chartered Accountants in England & Wales (ICAEW)
 Institute of Chartered Accountants in Scotland (ICAS)
 Chartered Accountants Ireland (CAI)
 American Institute of Certified Public Accountants
 Chartered Institute of Management Accountants (CIMA) – management accountancy
focus
 Canadian Institute of Chartered Accountants (CICA)
 CPA Australia
 Chartered Accountants Australia & Newzealand (CAANZ)
 Institute of Management Accountants – mangement accountancy focus

14. Generally Accepted Accounting
Principles (GAAP)
 GAAP: is a collection of commonly-followed accounting rules
and standards for financial reporting. GAAP specifications
include definitions of concepts and principles, as well as
industry-specific rules.

15. Accounting Principles
Accounting Principles
Accounting
Assumptions
Accounting
Concepts
Accounting
Constraints
Accounting
Standards
1. Money
Measureme
nt
2. Business
Entity
3. Going
Concern
4. Time Period
1. Accrual
Concept
2. Revenue
Recognition
3. Matching
4. Historical
Cost
5. Dual Aspect
1. Materiality
2. Prudence
3. Consistency
4. Cost
Benefit
Issued by
Country’s
Regulatory
Body
1. FASB
2. IASB
3. FRC

16. Accounting Assumptions
 Money Measurement: All transactions should be measured in
monetary terms and in the currency of the country the business
operates in.
 Business Entity: The concept assumes that the business and the
owners are two separate being (even in case of proprietorship)
and that the expense/income of business is not of the owner.
 Going Concern: An important assumption, focusing on the
existence of the business. It assumes that the business will
continue to exist and operate in the foreseeable future.
 Time Period: Business should have a defined ACCOUNTING
PERIOD, for which it records and reports transactions and
maintain books of account.

17. Accounting Concepts
 Accrual Concept: Income and expenses must be recognized in the
accounting period to which they relate and not on the basis of
related cash flow.
 Revenue Recognition: Also referred to as Realisation Concept,
which entails that revenue should be recognized only when it is
earned, than irrespective of whether cash has been received or
not.
 Matching Principle: All expenses incurred should be recorded in
the same period in which the revenue (due to which expenses
were incurred), is earned.
 Historical Cost: This concept says that all assets should be
recorded at their original purchase price (historical cost).

18. Accounting Constraints
 Materiality: Information is material if its omission or
misstatement could influence the economic decision of the users
taken on the basis of financial statements.
 Prudence: As known as Conservatism concept, which entails that
record expense and liability as soon as possible, but revenue
should be recognized only when they are realized or assured.
 Consistency: Once an accounting principle/method is adopted,
the same shall be applied in the future accounting period.
Change may only be adopted if it will improve the reported
results.
 Cost Benefit: The concept that the cost of providing financial
information in the financial statements must not outweigh the
benefit of that information to the users.

19. Accounting Standards
 When we talk about professional accountancy, financial reporting
and the likes, we need to understand that these are applicable on
Corporations.
 Corporations have a different role all together and alot of money
is involved, public money!
 So we need to be sure, that the figures being reported are correct,
consistent among competitors, industry and understandable by
the common man.
 Hence, the role of accounting is governed by Accounting
Standards.

20. Accounting Standards
 International Accounting Standards Board (IASB)
 This is a professional body which issues accounting standards
under the name of IAS (previously) and now IFRS.
 These are applied (after local modification) by organizations
worldwide.
 Financial Accounting Standards Board (FASB)
 This professional body issues accounting standards which are
used and applied by US registered/based corporation.

21. The Debit-Credit Concept
DEBIT CREDIT
ASSET INCREASE DECREASE
LIABILITY DECREASE INCREASE
EQUITY DECREASE INCREASE
INCOME DECREASE INCREASE
EXPENSE INCREASE DECREASE

22. Key Terminologies
 Assets
1. Current Assets
2. Non-Current Assets
 Liabilities
1. Current Liabilities
2. Non-Current Liabilities
 Capital
 Accumulated Profits
 Revenue / Income
 Expenses / Cost

23. The Duality Concept
 Keep this in mind for the rest of your lives:
 Every transaction have two aspect, no matter what.
 For every debit, there is always a credit.
 Debit is nothing, its simply the left side of the account
 Credit is nothing, its simply the right side of the account
 The entire concept of accounting is based on the following
equation: THE ACCOUNTING EQUATION
 Assets = Liabilities + Equity
 Note: equity is treated same as liability…why so?

24. The Accounting Cycle
Analyze
Transaction
s
Journalize
Transactions
Post to
Ledger
Prepare Trail
Balance
Adjustments
Prepare
Financial
Statements
Close
Accounts
Prepare
Adjusted Trail
Balance