ACC 122

BASIC FINANCIAL
ACCOUNTING

Presented by: Mr Emmanuel Mtui

 Fundamentals of
Financial Accounting

TOPIC 4 & 5.
The Basic Accounting
Equation
• Financial accounting is based upon
the accounting equation.
Assets = Liabilities + Owners' Equity
– This is a mathematical equation which
must balance.
– If assets total TZS300 and liabilities total
TZS200, then owners' equity must be
TZS100.
Fundamentals of Financial
Accounting

Principles,
concepts
and
regulations

Recording
Analysis of
financial accounting
statements transactions

Preparation
of accounts
Financial accounting
❑ Financial accounting is primarily concerned with
providing a true and fair view of the activities of a
business to parties external to it.
❑ To ensure that this is done correctly, considerable
attention will be paid to accounting concepts and to
any requirements of legislation, accounting
standards, and (where appropriate) the regulations
of the stock exchange.
❑ Financial accounting can be separated into a
number of specific activities, such as conducting
audits, taxation, book-keeping, and insolvency.
 Financial accounting
‘the recording, summarizing and
classification of accounting transactions as
a basis for the preparation of financial
statements for stakeholders.’

Financial accounting Management accounting

• external focus • internal focus
• required by law • no legal requirement
• governed by rules and • no set formats or rules
regulations • main purposes are
• purpose is the planning,
production of controlling and decision
statutory accounts making
 Elements of the financial
statements

Assets

• Assets are valuable resources that are

owned by a firm.
– They represent probable future economic
benefits and arise as the result of past
transactions or events.
Liabilities

• Liabilities are present obligations of

the firm.
– They are probable future sacrifices of
economic benefits which arise as the
result of past transactions or events.
Owners' Equity

• Owners' equity represents the

owners' residual interest in the assets
of the business.
– Residual interest is another name for
owners' equity.
Owners' Equity

• Owners may make a direct investment

in the business or operate at a profit
and leave the profit in the business.
Owners' Equity

• Yet another name for owners' equity is

net assets.
– Indicates that owners' equity results
when liabilities are subtracted from
assets.

Owners’ Equity = Assets – Liabilities

Revenues
• Revenues are inflows of assets (or
reductions in liabilities) in exchange
for providing goods and services to
customers.
– A retail store such as Uswazi primases
earns revenues by selling goods to
customers.
– A CPA firm earns revenues by providing
services such as tax return preparation or
auditing.
Revenues
• Critically important point:
– Cash need not be received in order for
revenue to be recorded.
– Revenues are earned when a company
does what it is supposed to do according
to a contract.
Revenues
• Accounts receivable are promises by a
customer or client to pay cash in the
future.
• A related concept concerns cash
received before a service is performed
or goods are delivered.

→ Example of Revenues:
• Rental income, sales, Commission
received.
Expenses
• Expenses are the costs incurred in
running the business on a day to day
basis and thus do not include the cost
of purchasing fixed assets or
repayment of any loans.
– Capital Expenditure
– Revenue Expenditure
Expenses
• Expenses occur when resources are
consumed in order to generate
revenue.
• They are the cost of doing business.
– Examples include rent, salaries and
wages, insurance, electricity, utilities, and
the like.
Expenses

• A critically important point similar to

that for revenues holds true for
expenses.
– A business need not pay out cash in order
to have to record that an expense has
occurred.
Expenses

• A critically important point similar to

that for revenues holds true for
expenses.
– If a repairman comes to the business to
work on the air conditioning system, then
the business has a repair expense even
though that work may be charged to its
account.
Expenses

• A critically important point similar to

that for revenues holds true for
expenses.
– The company will have a liability which
it will settle later with the payment of
cash.
– The word "payable" is usually used in a
liability title.
Examples of Payables
• Notes payable—written obligations.
• Accounts payable—unwritten
obligations that arise in the normal
operations of a business.
• Wages payable.
Sales of Inventory
• Sales of inventory contain both
revenue and expense components.
• A revenue transaction exists because
an asset has been obtained and goods
have been provided to customers.
• An expense transaction exists because
an asset has been consumed to
generate the revenue.
• The resulting expense is called cost of
goods sold.
Adjustments to Accounts
• Several adjustments must be made to
accounting records at the end of the
accounting period.
• A balance in an account may need to
be adjusted because of the passage of
time and the occurrence of events in
that time period.
Adjustments to Accounts
• An amount may not have been
recorded in an account at all.
– The amount will have to be recorded
before the financial statements are
prepared so that all the information will
be correct.
Revenues and Expenses
• Remember that four transactions
affect owners' equity.
– Owner investments increase owners'
equity.
– Owner withdrawals decrease owners'
equity.
– Revenues increase owners' equity.
– Expenses decrease owners' equity.
Primary Financial Statements
The Balance Sheet (SFP)
• The balance sheet shows a firm's
assets, liabilities, and owner's equity
at one point in time.
– The date on the balance sheet will be a
single date, such as December 31 or
June 30.
 Statement of financial position
ASSETS $ $
Non-current assets
Property, plant and equipment X
Intangible assets X
Investments X
X
Current assets
Inventories X
Trade and other receivables X
Prepayments X
Cash and cash equivalents X X
TOTAL ASSETS X
 Cont..:Statement of financial position

CAPITAL AND LIABILITIES $ $

Balance B/D X
Net profit X
Drawings (X)
X X
Non-current liabilities
Interest-bearing borrowings X
Current liabilities
Trade and other payables X
Accruals X X
TOTAL CAPITAL & LIABILITIES X
Classification of assets
❑Non-current assets
Those assets used in the business on an
ongoing basis (more than one accounting
period) to enable the business undertake its
activities. Examples include land and
building, plant and equipment
❑ Current assets
Those assets which convert to cash as part
of the normal business and operating
activities. Examples include inventories
and trade receivables
Classification of liabilities
❑Non-current liabilities
Those liabilities which fall due for payment more
than 12 months after the reporting date (i.e. date
of the statement of financial position).
Examples include long-term bank loans

❑Current liabilities
Those liabilities which fall due for payment
within 12 months of the reporting date.
Examples include trade payables and bank
overdraft
The Income Statement (SCI)
• The income statement summarizes a
firm's revenues and expenses for a
period of time.
– The date on the income statement will
be a phrase such as, "For the month
ended July 31," or "For the year ended
December 31."
The Income Statement
• If revenues exceed expenses, then the
result is net income.
• If expenses exceed revenues, then the
result is a net loss.
The Income Statement
• Only revenues and expenses appear
on the income statement.
– Students sometimes think that cash is a
good thing and should appear on the
income statement.
– Cash is an asset and so will appear on the
balance sheet.
 Income Statement
For the Month Ended January 31, 2000
Revenues
Sales $ 4,000
Service
650
Total revenue 4,650
Expenses
Cost of goods sold 2,200
Rent 1,000
Salary 700
Depreciation 208
Interest 133
Utilities 120
Total expenses 4,361
Net income $ 289
Key Terms
▪ Revenue – money coming into the business
from sales
▪ Purchases – only include items that the
business trades with; sells on.
▪ Inventory – these are the goods that the
business has in stock
▪ Cost of Sales – cost to the business of the
goods which have been sold in the financial
year
▪ Carriage in – the expense to the business of
having purchases delivered
Gross and net profit
❑Gross profit
The difference between sales revenues and
the costs of sale incurred in purchasing or
manufacturing the goods sold or services
provided during an accounting period.

❑Net profit
The difference between sales revenues and
all expenses incurred during the
accounting period. This will take into
account distribution cots, administrative
expenses and finances charges.
Formulae
Effects of profit/ loss on capital
▪ Profits increase owner's equity
The net income is closed to the owner's equity
account, increasing the owner's capital. This means
that the owner's investment in the business has
grown.

▪ Losses decrease owner's equity

the net loss is closed to the owner's equity account,
decreasing the owner's capital. This means that the
owner's investment in the business has minimized.
The Statement of Owners'
Equity
• The statement of owners' equity
summarizes the changes that took place in
owners' equity during the period under
review.
• Analysis of the statement of owner equity
provides understanding of whether change
in total equity was due to profitability (i.e.,
net profit or loss), capital gains or losses
from the sale of assets, contributed capital,
or a revaluation of assets
The Statement of Owners'
Equity
• It will have the same date as does the
income statement.
• It shows results over a period of time,
not just at one point in time.
The Statement of Owners'
Equity
• The statement starts with the
beginning balance of owners' equity
and adds in any owner investment
and net income.
• If there are withdrawals, then they are
subtracted, as is a net loss.
• A business will have either a net
income or a net loss, not both.
The Statement of Owners'
Equity
Statement of Owners’ Equity
For the Month Ended January 31, 2000
Balance, January 1 $ 0
Investment by owner $ 50,000
Net income 289
Withdrawal by owner (100)
Balance, January 31 $ 50,189
Relationship Between Balance
Sheet and Income Statement
• Changes in net income, owner
contributions, and owner
withdrawals, all of which affect
owners' equity, explain changes in net
assets.
==Thank you==
 Basic Concepts of
Financial Accounting

End of Financial Accounting

Seminar Qn1.
Seminar Qn2.
. Sakwera Ltd

Trial Balance as of March 31, 2014

Acount Title Debit (TZS) Credit (TZS)

Cash 3,000

Accounts Receivable 1,250

Building 1,000

Equipment 2,750

Bank Loan 4,000

Accounts Payable 2,800

Salary Expense 1,500

Other Expenses 1,750

Owner’s Capital 5450

Owner’s
1,000
Withdrawal

Total 12,250 12,250