Financial Accounting

Chapter-1
ACCOUNTING: Accounting is an information system which provides information to its interested users making useful economic decision. Accounting= Asset + liability + owner equity +income +expense
This five things is all about accounting

FINANCIAL STATEMENT: In accounting there are five financial statements. These are:1. Statement of financial position/Balance sheet 2. Statement of comprehensive income/Income Statement 3. Statement of cash flow/Cash flow 4. Statement of change in owners equity/Change in equity 5. Note to the financial statement
Statement of financial position /Balance Sheet (Within Point of time) = Asset + liability + owner equity Statement of comprehensive income/Income Statement (Within Period of time) =Loss + Profit +Investment

Statement of cash flow/Cash flow= Operating + Investment +Financing Statement of change in owners equity/Change in equity = Earning Share BASIC ACCOUNTING EQUATION: The Accounting Equation Measures the resources of the business, and the various claims against those resources o Assets of the business - claims against the assets ASSETS= LIABILITIES(External claim) + OWER'S EQUITY(Internal / Insider claim) The basis for preparing the statement of financial position (Balance Sheet)

ELEMENTS OF THE ACCOUNTING EQUATION: Assets Liabilities Owners Equity Income Expenses All are parts of OE but shown separately Drawings The business activities (Transactions) one or more of these element, therefore also affect the financial statement. THE ACCOUNTING EQUATION ASSETS= LIABILITIES (External claim) + OWER'S EQUITY (Internal / Insider claim

Uses of Fund Owns/Control DEBIT(dr)

EXPLAIN OWNERS EQUITY:

Sources of fund Owes CREDIT(cr)

The Equity section of the accounting equation can be expanded to analyze the effects of income (revenue) and expenses -determines net profit/loss for the period.
Reported on the Income Statement

Net profit/loss is than added to the entitys equity on the Balance Sheet.

Page 1 of 24

Financial Accounting
DEFINATIONS: 1.ASSETS:- Resources having the following characteristics Expected future economic benefit Business has exclusive right of control of the benefit Arises from a past transaction or event Reliable monetary measurement You must be able to apply these characteristics to given items to determine whether they arc 'assets' of a business. Some assets are physical/tangible in nature (Inventory, Land, Vehicle) others are Intangible (legal rights. goodwill) 2. LIABILITIES: They are a current/ present obligation of the business, settlement of which normally results in an outflow of economic benefits from the business to An external Party The result from a past event The Basic concept of liabilities is a debt payable lo a party outside of the business - an external claim - usually for goods/service supplied, or loans made to the business. Include accounts payable, loans, accrued expenses or expenses payable, unearned revenue, mortgages, etc 3. OWNWRS EQUITY: It is known as equity or capital The owners net claim against the business assets. ASSET-LIABILITIES= OWNERS EQUITY The Components of Owners Equity: 1. The owners investment & withdrawals 2. The profit earned/Net income.(Revenue-Expense) Statement of Changes in OE for a sole trader: Balance of capital at start of period plus additional capital injections made by owner plus net profit for the Period (or minus net loss for the Period) minus drawings made by owner equals balance of capital at end of period. 4. REVENUE/INCOME: The purpose of business is to increase OE (to increase the owner's wealth). This is achieved through profitable trading and earning income that Increases economic benefits of the business Takes the form of asset inflows or enhancements; or decreases in liabilities. Result in an Increase in OE. 5. EXPENSE
Decrease economic benefits of business. Take the form of outflows/depletion of assets (such as cash), or incurrence of liabilities.

o They usually represent assets that have been used up during the period They cause the owner's equity to decrease Excludes distributions to the owners

The types of expenses incurred will also depend on the nature of the business. Examples includes: cost of goods, salaries and wages, insurance, electricity, postage, telephone, rent, advertising etc. 6. DRAWINGS Amounts taken from the business by the owner Usually for personal use Could be cash or other assets withdrawn The opposite of owner investments, so they reduce OE.
Page 2 of 24

Financial Accounting
EFFECT OF TRANSACTIONS ON ACCOUNTING EQUATION Every transaction will lead to a dual or twofold effect Leads to Double Entry Accounting Rules for Entry into Accounts - Debits and Credits End Result - Accounting Equation must balance after each transaction TRANSACTION SCALES The scales balance because the assets ($ 100,000) equal the liabilities ($25,000) Plus owner's equity ($75,000)

EXAMPLE:

Flonas Flowers Balance Sheet as at 1st January

Assts Cash Delivery Van Inventory Liabilities 27,000 Bank Loan 58,000 Accounts Payable 15,000 Owners equity(Flonas capital) 100,000 20,000 5,000 75,000 100,000

EFFECT OF TRANSACTIONS ON ACCOUNTING EQUATION EXAMPLE:

1. Owners invest Cash Tk -15,000/Assts +Cash Tk15,000/2. Paid rent on premises Tk-6,000/Assts -Cash Tk 6,000 + Prepaid rent Tk-6,000 3. Purchasing supplies Tk-700 with cash Assts -Cash Tk 700 + Supplies Tk-700 4. Purchasing Inventory Tk-1,620 on credit. Assts +Inventory Tk-1,620 Liabilities Owners equity +Owners capita Tk-15,000

Liabilities

Owners equity

Liabilities

Owners equity

Liabilities + Account Payable Tk-1,620

Owners equity

5. Purchasing Store equipment worth Tk-2,200 with cash 1,000/- & 1,200 credit. Assts Liabilities -Cash Tk-1,000 + Store Equipment Tk-2,200 + Account Payable Tk-1,200 Summary of the above transaction on Flonas Flowers: Assts 100,000 +1,5000 -6,000+6,000 -700+700 +1,620 -1,000+2,200 117,820 Liabilities 25,000 Owners equity 75,000 +15000

Owners equity

+1,620 +1,200 27,820 Page 3 of 24

+90,000

Financial Accounting
EFFECT OF TRADING:

Flonas Flowers Balance Sheet as at 1st January

Assts Cash Prepaid Rent Supplies Store Equipment Delivery Van Inventory Liabilities 34,300 Bank Loan 6,000 Accounts Payable 700 Owners equity(Flonas capital) 2,200 58,000 16,620 117,820 20,000 7,820 90,000

117,820

EXPANDED ACCOUNTING EQUATION

ASSEST= LIABILITY+ OWNERSS CAPITAL+ (Income-Expense-Drawing)

EFFECT OF TRANSACTIONS ON EXPNADED ACCOUNTING EQUATION EXAMPLE:

1. Selling goods which cost Tk-135 for cash Tk-300 Assts Liabilities +Cash Tk 300 Inventory Tk 135 Owners equity +Sales Revenue Tk 300 Cost of goods sold expenseTk-135

2. Purchasing goods on credit for TK-4,320/Assts +Inventory Tk 4,320

Liabilities +Accounts Payable Tk4,320

Owners equity

3. Owners withdraw Tk-50 cash for personal issue. Assts -Cash Tk50

Liabilities

Owners equity -Drawings Tk50

SUMMARY OF STUDY OBJECTIVES

1. Explain what accounting is. Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users. 2. Identify the users and uses of accounting. The major users and uses of accounting are as follows: a. Management uses accounting information in planning, controlling, and evaluating business operations. b. Investors (owners) decide whether to buy, hold, or sell their financial interests on the basis of accounting data. c. Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on the basis of accounting information. Other groups that use accounting information are taxing authorities, regulatory agencies, customers, labor unions, and economic planners. 3. State the accounting equation, and define its components. The basic accounting equation is: Assets = Liabilities + Owners Equity Assets are resources owned by a business. Liabilities are creditor ship claims on total assets. Owners equity is the ownership claim on total assets. The expanded accounting equation is: Assets =Liabilities + Owners Capital -Owners Drawings + Revenues - Expenses Owners capital is assets the owner puts into the business. Owners drawings are the assets the owner withdraws for personal use. Revenues are increases in assets resulting from income - earning activities. Expenses are the costs of assets consumed in the process of earning revenue.

Page 4 of 24

Financial Accounting
EXAMPLES

Page-

20

Type

Example

No:-

1. The owner invested $25,000 cash in the business. 2. The company purchased $7,000 of office equipment on credit. 3. The company received $8,000 cash in exchange for services performed. 4. The company paid $850 for this months rent. 5. The owner withdrew $1,000 cash for personal use.

Page20 Type Example No:Presented below is selected information related to Flanagan Company at December 31, 2010. Flanagan reports financial information monthly. Office Equipment $10,000 Utilities Expense $ 4,000 Cash 8,000 Accounts Receivable 9,000 Service Revenue 36,000 Wages Expense 7,000 Rent Expense 11,000 Notes Payable 16,500 Accounts Payable 2,000 Drawings 5,000 (a) Determine the total assets of Flanagan Company at December 31, 2010. (b) Determine the net income that Flanagan Company reported for December 2010. (c) Determine the owners equity of Flanagan Company at December 31, 2010.

Page 5 of 24

Financial Accounting
Page26-27 Type Example No:1 Joan Robinson opens her own law office on July 1, 2010. During the first month of operations, the following transactions occurred. 1. Joan invested $11,000 in cash in the law practice. 2. Paid $800 for July rent on office space. 3. Purchased office equipment on account $3,000. 4. Provided legal services to clients for cash $1,500. 5. Borrowed $700 cash from a bank on a note payable. 6. Performed legal services for client on account $2,000. 7. Paid monthly expenses: salaries $500, utilities $300, and telephone $100. 8. Joan withdraws $1,000 cash for personal use. Instructions (a) Prepare a tabular summary of the transactions. (b) Prepare the income statement, owners equity statement, and balance sheet at July 31for Joan Robinson, Attorney.

Page 6 of 24

Financial Accounting

PROBLEMS: SET-A
P1-1A

Barones Repair Shop was started on May 1 by Nancy Barone. A summary of May transactions is presented below. 1. Invested $10,000 cash to start the repair shop. 2. Purchased equipment for $5,000 cash. 3. Paid $400 cash for May office rent. 4. Paid $500 cash for supplies. 5. Incurred $250 of advertising costs in the Beacon News on account. 6. Received $5,100 in cash from customers for repair service. 7. Withdrew $1,000 cash for personal use. 8. Paid part-time employee salaries $2,000. 9. Paid utility bills $140. 10. Provided repair service on account to customers $750. 11. Collected cash of $120 for services billed in transaction (10). Instructions (a) Prepare a tabular analysis of the transactions, using the following column headings: Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable, N. Barone Capital; N. Barone, Drawings; Revenues, and Expenses. (b) From an analysis of the owners equity columns, compute the net income or net loss for May.
Page 7 of 24

Financial Accounting
Solution:Assets Account Supplies Receivable + + Liabilities Note Accounts Payable Payable + + Owner's Equity N.Barone capital N. Barone Drawing + Revenue Expens es

Date

Cash +

Equipmen t

1 2 3 4 5 6 7 8 9 10 11 Total

10,000 -5,000 -400 -500 5,100 -1,000 -2,000 -140 120 6,180 750 -120 630

10,000 5,000 -400 500 250 5,100 -1,000 -2,000 -140 750 500 12,310 5,000 250 10,000 -1,000 5,850 -2,790 -250

Total Assets

Income Statement Month End-May 2010 Revenues Service Revenue Service Revenue Total Revenue= Expenses Office Rent Advertising Expenses Employees salary Utilities Expenses Total Expenses= 400 250 2,000 140 2,790 3,060 5,100 750 5,850

Net Income=
P1-4A

Mark Miller started his own delivery service, Miller Deliveries, on June 1, 2010.The following transactions occurred during the month of June. June 1 2 3 5 9 12 15 17 20 23 26 29 30 Mark invested $10,000 cash in the business. Purchased a used van for deliveries for $12,000. Mark paid $2,000 cash and signed a note payable for the remaining balance. Paid $500 for office rent for the month. Performed $4,400 of services on account. Withdrew $200 cash for personal use. Purchased supplies for $150 on account. Received a cash payment of $1,250 for services provided on June 5. Purchased gasoline for $100 on account. Received a cash payment of $1,500 for services provided. Made a cash payment of $500 on the note payable Paid $250 for utilities Paid for the gasoline purchased on account on June 17. Paid $1,000 for employee salaries. Page 8 of 24

Financial Accounting
Instructions (a) Show the effects of the previous transactions on the accounting equation using the following format.
Assets Date Cash + Account Receivable + Supplies + Delivery Van Liabilities Note Payable + Accounts Payable +
M.Miller,

Owner's Equity
M. Miller,

capital -

Drawing +

Revenue -

Expen ses

(b)

Prepare an income statement for the month of June. (c) Prepare a balance sheet at June 30, 2010. Solution:Assets Date Cash + Account Receivable + Supplies + Delivery Van Liabilities Note Payable + Accounts Payable +
M.Miller

Owner's Equity
M. Miller,

capital -

Drawing +

Revenue -

Expens es

1 2 3 5 9 12 15 17 20 23 26 29 30 Total

10,000 -2,000 -500 4,400 -200 150 1,250 1,500 -500 -250 -100 -1,000 8,200 3,150 23,500 Income Statement Month End-June 2010 150 -1,250

10,000 12,000 10,000 4,400 -200 150 100 1,500 -500 -250 -100 -1,000 12,000 9,500 150 10,000 23,500 Balance Sheet Month End-June 2010 Assets 4,400 1,500 5,900 500 250 1,000 100 1,850 4,050 Liabilities Note Payable Accounts Payable Total Liabilities= Owners Equity M. Rodriguez, capital M. Rodriguez Drawings Net Income Total Owners equity= 10,000 -200 4,050 13,850 23,500 9,500 150 9,650 Cash Account Receivable Supplies Delivery Van Total Assets= 8,200 3,150 150 12,000 23,500 -200 5,900 -1,850 -100 -500

Revenues Service Revenue Service Revenue Total Revenue= Expenses Office Rent Utilities Expenses Employees salary Utilities Expenses Total Expenses=

Net Income=

Total Liabilities & Owners Equity

Page 9 of 24

Financial Accounting
P1-4B Michelle Rodriguez started her own consulting firm, Rodriguez Consulting, on May 1, 2010.The following transactions occurred during the month of May. May 1 2 3 5 9 12 15 17 20 23 26 29 30 Michelle invested $7,000 cash in the business. Paid $900 for office rent for the month. Purchased $600 of supplies on account. Paid $125 to advertise in the County News. Received $4,000 cash for services provided. Withdrew $1,000 cash for personal use. Performed $6,400 of services on account. Paid $2,500 for employee salaries. Paid for the supplies purchased on account on May 3. Received a cash payment of $4,000 for services provided on account on May 15. Borrowed $5,000 from the bank on a note payable. Purchased office equipment for $3,100 on account. Paid $175 for utilities.

Instructions (a) Show the effects of the previous transactions on the accounting equation using the following format.
Assets Date
(b)

Liabilities Office Equipme nt Note Payable + Accounts Payable +

M.Rodrig uez,,

Owner's Equity
M. Rodriguez,,

Cash +

Account Receivable +

Supplies +

Revenue -

capital -

Drawing +

Expen ses

Prepare an income statement for the month of May. (c) Prepare a balance sheet at May 31, 2010. Solution:Date For May Assets Account Supplie Receivabl s e + + Liabilities Office Equipm ent Note Payable + Accounts Payable + M. Rodriguez, capital Owner's Equity M. Rodriguez Reven Drawings ue +

Cash +

Expenses

1 2 3 5 9 12 15 17 20 23 26 29 30 Total

7,000 -900 600 -125 4,000 -1,000 6,400 -2,500 -600 4,000 5,000 -175 14,700 2,400 20,800 600 3,100 5,000 3,100 -600 -4,000 5,000 3,100 3,100 600

7,000 -900 -125 4,000 -1,000 6,400 -2,500

-175 7,000 20,800 -1,000 10,40 0 -3,700

Page 10 of 24

Financial Accounting
Income Statement Month End-May 2010 Revenues Service Revenue Service Revenue Total Revenue= Expenses Office Rent Advertising Expenses Employees salary Utilities Expenses Total Expenses= 900 125 2,500 175 3,700 6,700 Liabilities Note Payable Accounts Payable Total Liabilities= Owners Equity M. Rodriguez, capital M. Rodriguez Drawings Net Income Total Owners equity= 7,000 (1,000) 6,700 12,700 20,800 5,000 3,100 8,100 4,000 6,400 10,400 Assets Cash Account Receivable Supplies Service Revenue Total Assets= 14,700 2,400 600 3,100 20,800 Balance Sheet Month End-May 2010

Net Income=

Total Liabilities & Owners Equity

Chapter-2
Identify the basic steps in the recording process. The basic steps in the recording process are: (a) Analyze each transaction for its effects on the accounts, (b) Enter the transaction information in a journal, (c) Transfer the journal information to the appropriate accounts in the ledger. Explain what a journal is and how it helps in the recording process. The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effects of a transaction, (b) Provides a chronological record of transactions, and (c) Prevents or locates errors because the debit and credit amounts for each entry can be easily compared.

Debits and Credits

-:Tabular summary compared to account form:Page 11 of 24

Financial Accounting

JOURNALIZING Illustration 2-13 shows the technique of journalizing, using the first two transactions of Softbyte. On September 1, Ray Neal invested $15,000 cash in the business, and Softbyte purchased computer equipment for $7,000 cash. The number J1 indicates that these two entries are recorded on the first page of the journal. Illustration 2-13 shows the standard form of journal entries for these two transactions. (The boxed numbers correspond to explanations in the list below the illustration.)

The Ledger
The entire group of accounts maintained by a company is the ledger. The ledger keeps in one place all the information about changes in specific account balances. Companies may use various kinds of ledgers, but every company has a general ledger. A general ledger contains all the asset, liability, and owners equity accounts, as shown in Illustration

Page 12 of 24

Financial Accounting

EXAMPLES:

Page 13 of 24

Financial Accounting

Page 14 of 24

Financial Accounting

Page 15 of 24

Financial Accounting

Page 16 of 24

Financial Accounting

Summary Illustration of Journalizing and Posting

Page 17 of 24

Financial Accounting

Page 18 of 24

Financial Accounting
Exercise:

General Journal
Date 2010 Oct Cash 1 Owners Capital (Bob invest cash in business) Rent Expense Cash (Paid store rent sep-10) Equipments Cash Note Payable (Purchased Washers & Dryers on cash & note payable) Prepaid Insurance Cash ( Paid 1 Year accidental insurance policy) Advertising Expense Account Payable(Advertising Bill) Owners Withdrawal Cash ( Bobs Withdraw for personal use) Cash Service Revenue (Cash received laundry service provided) Account title & Explanation Ref. 101 301 401 101 104 101 201 105 101 203 202 204 101 101 205 1,200 25,000 1,000 Debit 20,000

J1
Credit

20,000

1,000

10,000 15,000 1,200 200 200 700 700 6,200 6,200

4 10 20 30

General Ledger Cash

Date 2010 Oct 1 2 3 4 20 30

No : 101
Account title & Explanation Cash (Bob invest cash in business) Cash (Paid store rent sep-10) Cash(Purchased Washers & Dryers on cash ) Cash( Paid 1 Year accidental insurance policy) Cash( Bobs Withdraw for personal use) Cash received laundry service provided Page 19 of 24 Ref. J1 J1 J1 J1 J1 J1 Debit 20,000 Credit 1,000 10,000 1,200 700 6,200 Balance 20,000 19,000 9,000 7,800 7,100 13,300

Financial Accounting
Equipments
Date 2010 Oct 3

No : 104
Account title & Explanation Purchased Washers & Dryers on cash & note payable) Ref. J1 Debit 25,000 Credit Balance 25,000

Prepaid Insurance
Date 2010 Oct 4

No : 105
Account title & Explanation Paid 1 Year accidental insurance policy Ref. J1 Debit 1,200 Credit Balance 1,200

Note Payable
Date 2010 Oct 3

No : 201
Account title & Explanation Purchased Washers & Dryers on cash & note payable Ref. J1 Debit Credit 15,000 Balance 15,000

Account Payable
Date 2010 Oct 10

No : 202
Account title & Explanation Advertising Bill Ref. J1 Debit Credit 200 Balance 200

Advertising Expense
Date 2010 Oct 10

No : 203
Account title & Explanation Advertising Expense Ref. J1 Debit 200 Credit Balance 200

Owners Withdrawal
Date 2010 Oct 20

No : 204
Account title & Explanation Bobs Withdraw for personal use Ref. J1 Debit 700 Credit Balance 700

Service Revenue
Date 2010 Oct 30

No : 205
Account title & Explanation Service Revenue Ref. J1 Debit Credit 6,200 Balance -6,200

Owners Capital
Date 2010 Oct 1

No : 301
Account title & Explanation Bob invest in business Ref. J1 Debit Credit 20,000 Balance -20,000

Rent Expense
Date 2010 Oct 2

No : 401
Account title & Explanation Paid store rent sep-10 Ref. J1 Debit 1,000 Credit Balance 1,000

Trail Balance
30-Sep-12 Account title Cash Equipments Prepaid Insurance Note Payable Account Payable Advertising Expense Owners Withdrawal Service Revenue Owners Capital Rent Expense Debit 13,300 25,000 1,200 Credit

15,000 200 200 700 6,200 20,000 1,000 41,400 41,400

Page 20 of 24

Financial Accounting

Chapter-3
Explain the accrual basis of accounting. Accrual-basis accounting means that companies record events that change a companys financial statements in the periods in which those events occur, rather than in the periods in which the company receives or pays cash. Explain the reasons for adjusting entries. Companies make adjusting entries at the end of an accounting period. Such entries ensure that companies record revenues in the period in which they are earned and that they recognize expenses in the period in which they are incurred. Prepare adjusting entries for deferrals. Deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals to record the portion of the prepayment that represents the expense incurred or the revenue earned in the current accounting period. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued expenses. Companies make adjusting entries for accruals to record revenues earned and expenses incurred in the current accounting period that have not been recognized through daily entries.

Adjusting Entries
Deferrals 1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed. 2. Unearned Revenues. Cash received and recorded as liabilities before revenue is earned. Accruals 1. Accrued Revenues. Revenues earned but not yet received in cash or recorded. 2. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded.

Examples:

Page 21 of 24

Financial Accounting
Adjusting Entries for Accruals Examples-1

Preparing the Adjusted Trial Balance

Page 22 of 24

Financial Accounting

Examples-2

Page 23 of 24

Financial Accounting

Summary of Additional Adjustment Relationships

Page 24 of 24