A journal is a chronological (arranged in order of time) record of business transactions.

A journal entry is the recording of a business transaction in the journal. A journal entry
shows all the effects of a business transaction as expressed in debit(s) and credit(s) and
may include an explanation of the transaction. A transaction is entered in a journal
before it is entered in ledger accounts. Because each transaction is initially recorded in a
journal rather than directly in the ledger, a journal is called a book of original entry.

A ledger (general ledger) is the complete collection of all the accounts and transactions
of a company. The ledger may be in loose-leaf form, in a bound volume, or in computer
memory. The chart of accounts is a listing of the titles and numbers of all the accounts
in the ledger. The chart of accounts can be compared to a table of contents. The groups
of accounts usually appear in this order: assets, liabilities, equity, dividends, revenues,
and expenses. Think of the chart of accounts as a table of contents of a textbook. It
provides direction as to what exactly will be found in the financial statement
preparation.
What is a Profit and Loss Statement (P&L)?
The profit and loss (P&L) statement is a financial statement that summarizes the
revenues, costs and expenses incurred during a specified period, usually a fiscal quarter
or year. The P&L statement is synonymous with the income statement. These records
provide information about a company's ability or inability to generate profit by
increasing revenue, reducing costs or both. Some refer to the P&L statement as a
statement of profit and loss, income statement, statement of operations, statement of
financial results or income, earnings statement or expense statement.
What Is a Balance Sheet?
A balance sheet is a financial statement that reports a company's assets, liabilities and
shareholders' equity at a specific point in time, and provides a basis for computing rates
of return and evaluating its capital structure. It is a financial statement that provides a
snapshot of what a company owns and owes, as well as the amount invested by
shareholders.
It is used alongside other important financial statements such as the income statement
and statement of cash flows in conducting fundamental analysis or calculating financial
ratios.
Status and purpose and status of the Framework
The Framework's purpose is to assist the IASB in developing and revising IFRSs that
are based on consistent concepts, to help preparers to develop consistent accounting
policies for areas that are not covered by a standard or where there is choice of
accounting policy, and to assist all parties to understand and interpret IFRS. [SP1.1]
In the absence of a Standard or an Interpretation that specifically applies to a
transaction, management must use its judgement in developing and applying an
accounting policy that results in information that is relevant and reliable. In making
that judgement, IAS 8.11 requires management to consider the definitions, recognition

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criteria, and measurement concepts for assets, liabilities, income, and expenses in the
Framework. This elevation of the importance of the Framework was added in the 2003
revisions to IAS 8.
The Framework is not a Standard and does not override any specific IFRS. [SP1.2]
If the IASB decides to issue a new or revised pronouncement that is in conflict with the
Framework, the IASB must highlight the fact and explain the reasons for the departure
in the basis for conclusions. [SP1.3]
The Framework
Scope
The Framework addresses:
the objective of general purpose financial reporting
qualitative characteristics of useful financial information
financial statements and the reporting entity
the elements of financial statements
recognition and derecognition
measurement
presentation and disclosure
concepts of capital and capital maintenance

Purpose of Financial Statements

The objective of financial statements is to provide information about the financial position,
performance and changes in financial position of an enterprise that is useful to a wide range
of users in making economic decisions (IASB Framework).

Financial Statements provide useful information to a wide range of users:

Managers require Financial Statements to manage the affairs of the company by assessing its
financial performance and position and taking important business decisions.

Shareholders use Financial Statements to assess the risk and return of their investment in the
company and take investment decisions based on their analysis.

Prospective Investors need Financial Statements to assess the viability of investing in a

company. Investors may predict future dividends based on the profits disclosed in the
Financial Statements. Furthermore, risks associated with the investment may be gauged from
the Financial Statements. For instance, fluctuating profits indicate higher risk. Therefore,
Financial Statements provide a basis for the investment decisions of potential investors.

Financial Institutions (e.g. banks) use Financial Statements to decide whether to grant a
loan or credit to a business. Financial institutions assess the financial health of a business to

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determine the probability of a bad loan. Any decision to lend must be supported by a
sufficient asset base and liquidity.

Suppliers need Financial Statements to assess the credit worthiness of a business and
ascertain whether to supply goods on credit. Suppliers need to know if they will be repaid.
Terms of credit are set according to the assessment of their customers' financial health.

Customers use Financial Statements to assess whether a supplier has the resources to ensure
the steady supply of goods in the future. This is especially vital where a customer is
dependant on a supplier for a specialized component.

Employees use Financial Statements for assessing the company's profitability and its
consequence on their future remuneration and job security.

Competitors compare their performance with rival companies to learn and develop strategies
to improve their competitiveness.

General Public may be interested in the effects of a company on the economy, environment
and the local community.

Governments require Financial Statements to determine the correctness of tax declared in

the tax returns. Government also keeps track of economic progress through analysis of
Financial Statements of businesses from different sectors of the economy.

Qualitative characteristics of financial statements

There are mainly five types of financial statements; statement of financial position, income
statement, statement of changes in equity, statement of cash flows and disclosure notes. The
former four mainly show the relevant financial data to a business but the last one mostly
includes the non-financial data that assists the users of the statements to understand the
numbers depicted in financial data.

The main purpose of the financial statements is to educate the shareholders about the
financial status and financial performance of their company. This is because the shareholders
are the real owners of the company but the company is governed and administered by
directors. As directors act as stewards of shareholders, it is their duty to prepare financial
statements that are free from material misstatements as well as also posses some qualitative
characteristics which are important to enhance their quality and relevance. Following are the
main qualitative characteristics of financial statements:

Understandability:
The financial statements are published to address the shareholders of the company. So it is
important that these statements must be prepared in such a way that is easy  to understand and
interpret for the shareholders. The information provided in these statements must be clear and
legible. For the sake of understandability, the management must consider not only the
statutory data and information but also the voluntary information disclosures which would
make financial statements easier to understand. The directors must elaborate the information
provided in the statements where necessary.

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Relevance:The information provided in the financial statements must be relevant to the
needs of its users. Although the main statutory recipients of these statements are
‘shareholders’, but there are many other stakeholders that rely on these statements during
their decision making process e.g. Fund Providing Institutions (Banks, Insurance Companies,
Assets Funding Firms etc.), potential investors (for making investments in prospective
companies), suppliers (for the assessment of credit rating) etc. So the information provided in
these financial statements must be relevant to the ‘information needs’ of all these
stakeholders, which could affect their economic decisions.

Reliability:
The information provided in the financial statements must be reliable and true. The
information extracted to prepare these financial statements must be from reliable and
trustworthy sources. The financial statements must depict the true and fair picture of the
status of the company affairs. This means that the information provided must not have any
significant errors or material misstatements. The transactions shown must be based on the
concepts of prudence and must represent the true nature of company’s transactions and
operations. The areas that are judgmental and subjective in nature must be presented with due
care and keen competence.

Comparability:
The financial statements must be prepared in such a way that they are comparable with prior
year financial statements. This characteristic of financial statements is very important to
maintain, as it makes sure that the performance of the company could be monitored and
compared. This characteristic is maintained by adopting accounting policies and standards
that are applied are consistent from period to period and between different jurisdictions. This
enables the users of the financial statements to identify and plot trends and patterns in the
data provided, which makes their decision making easier.

Timeliness:
All the information in the financial statements must be provided within a relevant span of
time. The disclosures must not be excessively late or delayed so that while making their
economic decisions the users of these statements posses all the relevant and up-to-date
knowledge. Although this characteristic may take more resources but still it is a vital
characteristic as delayed information makes any corrective reactions irrelevant.

5 Main Elements of Financial Statements: Assets, Liabilities, Equity,

Revenues, Expenses

Financial statements are the important reports of the entity that provide the entity’s
financial information at the specific period of time to be used by many stakeholders
such managements, employees, the board of directors investors, shareholders,
customers, suppliers, bankers, and other related stakeholders.

These statements are prepared as the requirement of management, owners,

shareholders, governments, and other related authority organization.

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The completed set of financial statements contain five statements and five elements.
Here are the five statements:

Statement of Financial Position or Balance Sheet

Statement of Financial Performance, or Income Statement,

Statement of Change in Equity,

Statement of Cash flow, and

Noted to Financial Statements

These Financial Statements contain five main elements of the entity’s financial information,
and these five elements of financial statements are:

 Assets,
 Liabilities,
 Equity,
 Revenue, and
 Expenses

Assets:
The official definition of assets are defined by IASB’s Framework for preparation and
presentation of financial statements are the resources control by the entity as the result of past
events and from which the future economic benefits are expected to flow the entity.

Right here could mean the right to use or control the physical assets or the intellectual
property or it could be linked to the other entity’s obligation to pay or transfer the assets to
the entity. For example, the account receivable is the assets of the entity.

Here are examples of assets:

 Land
 Building
 Property
 Computer equipment
 Cash in bank
 Cash on hand
 Cash advance
 Petty cash
 Inventories
 Account Receivables
 Prepaid expenses
 Goodwill
 And other assets that meet the definition of assets above.

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Assets are considered the first element of financial statement and they report only in the
balance sheets. They are staying on the top of the balance sheets.

In general, assets are classified into two types based on the company’s policies and in
accordance with international accounting standard. The first class of assets is current
assets which refer to short-term assets and these kinds of assets are not depreciated. The
movement or usages of them are directly charged to the income statement.

For example, the usages of inventories are charged as operating expenses or costs of
goods sold in the income statement. Some of the current assets are justed move from one
accounting item another.

For example, accounts receivable are moved to cash in bank or cash on hand when the
entity collects the payment from customers.

The second types of assets are fixed assets. These kinds of assets normally refer to assets
that use more than one year and with large amounts as well as are not for trading or
holders for price appreciation. In other words, fixed assets are the resources based on
nature are converted into cash or cash equivalent in more than one year accounting
period.

It is based on the company’s policies to recognize which amount should be classed as

current assets and which amount should go to fixed assets. Yet, the policies should be
aligned with current practice or market as well as reflected the real economic value.

Fixed assets are decreasing value from period to period because of their usages or
because of impairment of their economic value. Depreciation and impairment of fixed
assets are charged into the income statement and they report cumulatively in the contra
account to fixed assets in the balance sheet which is called accumulated depreciation.

Assets of the entity at the specific period can be calculated by the accumulation of
liabilities and equities or total current assets plus total fixed asset.

Liabilities:
The official definition of liabilities define by IASB’s Framework for preparation and
presentation of financial statements are the present obligations arising from the past
events, the settlement of which is expected to result in an outflow from entity resources
embodying economic benefit.

Here are examples of Liabilities in Financial Statements:

Bank Loan

Overdraft

Interest payable

Tax payable

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Account payable

Noted payable

Borrowing from parent company

Intercompany account payable

Salary payable

Liabilities are classified into two different types: Current liabilities and Non-current
Liabilities. Current Liabilities refer to the kind of liabilities that expected to settle
within 12 months after the reporting date.

For example salaries payable are classed as current liabilities because they are expected
to pay to an employee in the following month.

Non-current liabilities refer to liabilities that expected to settle in more than 12 months.
For example, a long term loan from the bank that the term of payments is more than 12
are classed as non-current liabilities. Liabilities records only in the balance sheet and
they are considered as the second element of financial statements.

Liabilities can be calculated by eliminating the total equities from total assets or
accumulation of total current liabilities and total long-term liabilities.

Equity: Equity is officially defined by IASB’s Framework for preparation and

presentation of financial statements, is the residual interest in the assets of the entity
after deducting all its liabilities.

Example: By solving the above definition, Equities = Assets – Liabilities. The good
example of Equity are Ordinary Shares Capital and Retained Earnings. That means
equity increase or decrease depending on the movement of assets and liabilities.

For example, if assets are increasing and the liabilities are stable, then equities will
increase. However, if assets are stable and liabilities are increased, the equity will
decrease.

The items that records in equity are:

Share capital

Retain earning or retain losses

Revaluation gain

Dividends payment

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Revenues:The official definition of revenues defined by IASB’s Framework for
preparation and presentation of financial statement is increase in the economic benefits
during the accounting period in the form of inflows or enhancements of assets or
decrease of liabilities that result in increases in equity, other than those relating to
contributions from equity participants.

The example of revenues is sales revenues from selling of goods or rendering of services,
interest incomes from banks deposits, dividend received from equity investments.

In the income statement, income sometimes called sales revenues or Revenues. These
are referred to the same things.

There are two accounting principles used to records and recognize revenues. First, it
uses a cash basis, and second, it uses accrual basis.

Cash basis, income is recognized at the time cash are received while accrual basis,
income is recognized at the time risks and reward are transferred from sellers to
buyers.

Expenses: Operating Expenses or Administration Expenses

The official definition of Expenses defined by IASB’s Framework for preparation and
presentation of financial statement is decreased in economic benefits during the
accounting period in the form of outflows or depreciation of assets or incurred of
liabilities that result in decreases in equity, other than those relating to distributions to
equity participants.

Expenses here refer to expenses that occur for daily operational costs. Those expenses
are:

Salaries expenses

Depreciation

Interest Expenses

Tax expenses

Utility expenses

Transportation Cost

Marketing Expenses

Rental Expenses

Repair and maintenance

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Internet Fee

Telephone fee

Expenses are records as operational cost in the income statement in the period they
have occurred. Sometimes they called period cost or administrative cost. These expenses
are different from capital expenditure which are paid for purchasing fixed assets.

Accounting Concepts & Conventions

Accounting Concepts are the assumptions and conditions on the basis of which financial
statements of an entity are prepared. These are the concepts which are adopted by the
organizations in preparation of financial statements to achieve uniformity in reporting.
Accounting concepts are the base for formulation of accounting principles. Accounting
concepts have universal application. Here I’m going to discuss some basic details about
these concepts.

(1) Entity concept :Entity concept assumes that business Enterprise is separate from its
owners. Accounting transactions should be recorded with this concept only. The main
intention of this concept is to keep the business transactions keep away from the
influence of personal transactions of its owners.

(2) Periodicity Concept :As per going concern concept an entity is assumed to have
indefinite life. If we want to measure the financial performance of an entity then we
need to divide the operations of entity for a specific period, otherwise it’s very difficult
to ascertain the performance of business.

Periodicity concept assumes a small but workable fraction of time period for measuring
the business performance. Generally it assumes 1 year is taken for this purpose.

(3) Money measurement concept :As per this concept transactions which can be
measured in monetary terms only are to be recorded in books of accounts. Any
transactions which can not be converted into monetary terms should not be recorded in
books. Since money is the medium of exchange and unit of measurement for showing
the financial performance , it doesn’t accept the transactions other than monetary to
record in books of accounts.

(4) Accrual concept :As per this concept transactions should be recognized in the books
of accounts only when they occur and not on any cash basis. The main advantage of this
concept is that financial Statements prepared as per this concept inform the users not
only about past events involving payment and receipt of cash but also about obligations
to pay cash in the future and resources that represent cash to be received in the future.

(5) Matching concept :As per this concept all the expenses which can be matched with
the revenue of that period only should be taken into consideration for financial
reporting. This concept is based on Accrual concept as it gives importance to occurrence
of an expense which is spent for generating a revenue. This concept leads to adjustments
at the end like outstanding expenses, income and Prepaid expenses , incomes.

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(6) Going concern concept :As per this concept financial statements are prepared on an
assumption that enterprise will continue its operations for the foreseeable future. Thus,
it says that enterprise has neither the intention nor the need to liquidate or curtail the
scale of its operations. Valuation of assets of a business entity is dependent on this
assumption.

(7) Cost concept :As per this concept valuation of assets should be done at historical
costs/acquisition cost.

(8) Realisation concept :This concept says that any change in value of an asset is to be
recorded only when the business relaises it. This concept highly prefers Realisation of
the value for which we want to give effect in books of accounts.

(9) Dual Aspect concept :This concept is base for double entry Accounting.s of a
transaction. Under the system, aspects of transactions are classified into two main
types:

1.Debit

2.Credit

Every transaction should have a Debit and credit. Debit is the portion of transaction
that accounts for the increase in assets and expenses, and the decrease in liabilities,
equity and income. And credit is the portion which is a results of decreases the asset,
increases the liability, income, gains, equity.

Accounting conventions:Accounting conventions are the generally accepted guidelines

in preparation of financials.They arise from customs and practical application.They are
not legally documented policies.

Following r the accounting conventions

(1) Conservatism :As per this concept while Accounting one should not anticipate the
income but should provide for all possible losses. When there are many alternative
values to account an asset then we should choose the lesser value. Inventory valuation is
done as per this concept only , as cost or Market value which ever is lower.

(2) Consistency :As per this concept the accounting policies followed in preparation and
presentation of financial statements should be consistent from one period to another
period. A change in Accounting policy can be made only when it is required by law , or
for better presentation of accounts or change in Accounting standards.

(3) Materiality :As per this concept items having significant economic effect on the
business of the enterprise should be disclosed in financial statements and any
insignificant item which is not relevant to the users should not be disclosed in financial
statements.

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What Is the Financial Accounting Standards Board (FASB)?

The Financial Accounting Standards Board (FASB) is an independent nonprofit organization

that is responsible for establishing accounting and financial reporting standards for
companies and nonprofit organizations in the United States, following generally accepted
accounting principles (GAAP). The FASB was formed in 1973 to succeed the Accounting
Principles Board and carry on its mission. It is based in Norwalk, Conn.

How the Financial Accounting Standards Board (FASB) Works

The Financial Accounting Standards Board has the authority to establish and interpret
generally accepted accounting principles (GAAP) in the United States for public and private
companies, as well as for nonprofit organizations. GAAP refers to a set of standards for how
companies, nonprofits, and governments should prepare and present their financial
statements.

The Securities and Exchange Commission (SEC) recognizes the FASB as the accounting
standard setter for public companies. It is also recognized by state accounting boards, the
American Institute of Certified Public Accountants (AICPA), and other organizations in the
field.

The Financial Accounting Standards Board is part of a larger, independent nonprofit group
that also includes the Financial Accounting Foundation (FAF), the Financial Accounting
Standards Advisory Council (FASAC), the Governmental Accounting Standards Board
(GASB), and the Governmental Accounting Standards Advisory Council (GASAC).

The GASB, which is similar in function to the FASB, was established in 1984 to set
accounting and financial reporting standards for state and local governments across the U.S.
The FAF oversees both the FASB and the GASB. The two advisory councils provide
guidance in their respective areas.

Key Takeaways

 The Financial Accounting Standards Board (FASB) sets accounting rules for public
and private companies, as well as nonprofits, in the United States.
 A related organization, the Governmental Accounting Standards Board (GASB), sets
rules for state and local governments.
 In recent years, the FASB has been working with the International Accounting
Standards Board (IASB) to establish compatible standards worldwide.

Collectively, the organizations' mission is to "establish and improve financial accounting and
reporting standards to provide useful information to investors and other users of financial
reports and educate stakeholders on how to most effectively understand and implement those
standards."

The FASB is governed by seven full-time board members, who are required to sever their ties
to the companies or organizations they worked for before joining the board. As a group, they
are chosen to provide "knowledge of accounting, finance, business, accounting education,
and research.” Board members are appointed by the FAF's board of trustees for five-year
terms and may serve for up to 10 years.

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In 2009, the FAF launched the FASB Accounting Standards Codification, an online research
tool designed as a single source for authoritative, nongovernmental, generally accepted
accounting principles in the United States. It "reorganizes the thousands of U.S. GAAP
pronouncements into roughly 90 accounting topics and displays all topics using a consistent
structure," the organization says. The website also provides relevant Securities and Exchange
Commission (SEC) guidance on those topics. A "basic view" version is free, while the more
comprehensive "professional view" is available by paid subscription.

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