FINANCIAL REPORTING AND

ANALYSIS
MFM 5049
SESSION 1 & 2

Dr. Janitha Abeygunasekera

PhD (QUT, Australia), MBA (PIM), BBA (Col), FHEA (UK)
STRUCTURE OF THE COURSE

Introduction to Accounting
Financial Reporting Process
Financial Report Analysis

Assignment (40%)
Two group Presentations 2
 3

What is Accounting?
Branches of Accounting
Accounting Environment
Qualitative Characteristics
Stakeholders and Information Needs
OUTLINE Concepts
Financial Statements
Accounts
Accounting Equation
Journal
Rules of Debit and Credit
WHAT IS ACCOUNTING?
Accounting is the process of recording, summarizing,
communicating and analyzing the financial transactions of a
business
Parminder and Vickerstaff (2012)

The process of identifying, measuring and communicating

economic information to permit informed judgments and
decisions by users of the information
American Accounting Association
4
BRANCHES OF ACCOUNTING

Accounting

Financial Management
Accounting Accounting
5
 ACCOUNTING ENVIRONMENT
Business
Environment 1. Requirements of Company
Legislations
1. British influence 2. CSE requirements for listed
2. International companies
accounting standards 3. Accounting Standards issued
3. Globalization by the Institute of Chartered
Accounting Accountants of Sri Lanka.

International Regulatory
Environment Environment
6
 QUALITATIVE
CHARACTERISTICS
OF ACCOUNTING

7
 INFORMATION
NEEDS OF
STAKEHOLDERS

8
FUNDAMENTAL CONCEPTS/ PRINCIPLES
OF ACCOUNTING

• Going concern • Money measurement

• Accruals/ Matching - • Historical cost
Group Work - Discussion
Realization • Business entity
• Consistency • etc.
• Prudence/ Conservatism
• Materiality
9
ITEMS IN FINANCIAL STATEMENTS

Group Work - Discussion

10
ACCOUNTS

Assets

Liabilities

Income

Expenses

Owners’ Equity
11
ASSETS

• Assets are essentially items owned (or leased) by the business

which will bring economic benefits.
E.g.

• Assets may be held for a long term for use in the business
(such as Motor vehicles, Buildings) or short-term assets (such
as stock for immediate resale).
LIABILITIES

• Liabilities are amounts the business owes to a third party.

E.g.
INCOME

• Income is mainly the revenue earned by business

E.g.
• Despite the receipt of a payment for a good or service the
income is generated when the good/service is delivered
• Income is different from cash received

14
EXPENSES

• Expenses are the cost incurred in running a business

E.g.
• The nature of expenses varies from business to business
• Expenses are recognized as expenses, even if goods and
services have been consumed but, the business has still not
paid for them
• Expenses are different from cash paid
15
OWNERS’ EQUITY

• The residual interest in the assets of the enterprise after

deducting all its liabilities.

16
OWNER’S EQUITY CONT…
ACCOUNTING EQUATION

Owners’
Liabilities Assets
Equity

18
 EXAMPLE
X, Y and Z are three independent organizations. You are
expected to fill in the blanks.

Case Assets Owners’ Equity Liabilities

X A 210,000 80,000
Y 325,000 140,000 B
Z 140,000 C 45,000

19
UNDERSTANDING THE AE

 A starts a business with a capital of Rs. 200,000

 A purchases furniture for cash worth Rs. 50,000
 A purchases books for resale from B for Rs. 25,000 on credit.
 He sells for cash, books costing Rs. 5,000 for Rs. 7,000
 He sells for credit books costing Rs. 2,000 for Rs. 2,500 to P
 A withdraws cash of Rs. 2,000 and books costing Rs.500 for his
personal use
 The above type statement showing the financial position = balance sheet
 “For every debit there must be equivalent credit and vice versa”
EXAMPLE
Given below are a list of account balances of Mr. Silva’s business.
Find the amount of capital of Mr. Silva using the balances given.

Buildings 3400,000
Cash 800,000
Bank Loan 2100,000
Equipment 900,000
Motor Vehicle 2300,000
Office equipment 500,000
Debtors 1980,000 22

Creditors 800,000
EXAMPLE
Transactions of a newly started partnership business is given below.
Recognize the transactions in the accounting equation
Owner A brings in Capital - Cash Rs 300,000; Building Rs.1000,000
Owner B brings in Capital - Cash Rs 100000; Motor vehicle Rs.2000,000
Obtained a bank loan Rs. 250,000
Purchases inventories Rs. 55,000 for cash
Sold inventories Rs.150,000 (cost was Rs.100,000) for cash
Paid water bill Rs. 2500
Paid electricity bill Rs. 10,000
Sold inventory Rs. 25,000 (cost was Rs.18,000) for credit
Purchased inventory Rs. 250,000 for credit
Owner A withdrew Rs. 10,000 cash for personal use 23
Purchased a computer for the business for cash Rs. 150,000
IMPACT ON ACCOUNTING EQUATION

Owners'
Contribution and
Withdrawals
Transactions
affecting the OE
Revenue and
Accounting Expenses
Equation
Transactions
Changes in
not affecting the
Assets
OE
JOURNAL

• Records all daily transactions of a business

• Is the book in which the double entries are recorded first, under the
double entry system
• It precedes the ledger
• Journalizing - The process of recording transactions in a journal
Date Particulars L.F. Debit Credit
Rs. Rs.
JOURNAL CLASSIFICATION
Purchases Journal
Discussion Point – Search and discuss the different types
of Journals General Sales Journal
Journal Journal

Purchases Returns Journal

Special
Sales Returns Journal
Journals

Bills Receivable Journal

Dual
Role is
Bills Payable Journal
Played
Cash Book
CASH BOOK

 Cash book can be of different types:

1. Simple Cash Book
2. Two column cash book
3. Three column cash book
4. Petty cash book

27
SIMPLE CASH BOOK

• The receipts are recorded in the Dr Side and the payments are
recorded in the Cr side

Dr Simple Cash Book

Cr
Date Particulars LF Amount Date Particulars LF Amount

28
TWO COLUMN CASH BOOK
Dr Cash Book
Cr

Date Particulars LF Discount Amt Date Particulars LF Discount Amt

• The discount allowed and discount received is recorded along

with the cash payments and cash receipts
• Discount columns are not balanced they are only totaled

29
 THREE COLUMN CASH BOOK

Dr Cash Book
Cr
Date Particulars LF Dis. Cash Bank Date Particulars LF Dis. Cash Bank

30
CONTRA ENTRY

 Accounting entry which is recorded on both the debit and

credit side of the cash book is a Contra entry

 E.g., Cash deposited in the bank

Cash withdrawn from the bank

 ‘C’ is in the ledger folio column on both the sides of the Cash
book
31
RULES OF DEBIT AND CREDIT
• The transactions in the journal are recorded based on Debit & Credit

• For this purpose, business transactions have been classified into 3

categories. i.e.
Transactions relating to:
• Persons (Personal Accounts)
• Properties and Assets (Real Accounts)
• Income and Expenses (Nominal Accounts)
 Debit the Receiver
PERSONAL ACCOUNTS Credit the Giver

 Includes the accounts of persons with whom the business deals

 Natural personal accounts: accounts of humans (Harsha’s A/c,

Sampath’s A/c)
 Artificial personal accounts: accounts of corporate bodies or
institutions (clubs, societies etc.)
 Representative personal accounts: accounts that represent a certain
person or a group of persons (if rent is due to the landlord, then
‘outstanding rent account’ will be opened, if salaries are due to
employees, then ‘outstanding salaries account’ will be opened)
REAL ACCOUNTS

• Tangible real accounts: accounts that are related to things that can be
touched, felt, measured etc.
(Cash A/c, Building A/c, Furniture A/c, Stock A/c etc)

• Intangible Real accounts: represents things that cannot be touched

(Patent’s A/c, Goodwill A/c etc.)

Debit What Comes In

Credit What Goes Out
 NOMINAL ACCOUNTS
• These accounts are opened in the books to simply explain the nature of
the transactions
• They do not really exist Debit All Expenses & Losses
Credit All Gains & Incomes
• Rent, electricity, insurance, salaries etc.
• When some prefix or suffix is added to a Nominal A/c, it becomes a
Personal A/c
e.g. Nominal A/c Personal A/c
Rent A/c Rent pre-paid a/c, outstanding rent a/c
Interest A/c Outstanding interest a/c, Interest received in advance a/c
Salary A/c Outstanding salary a/c, Pre-paid salary a/c
OTHER CLASSIFICATIONS OF ACCOUNTS

Owners’ Equity Increase Cr Decrease Dr

Liabilities Increase Cr Decrease Dr

Income Increase Cr Decrease Dr

Assets Increase Dr Decrease Cr

Expenses Increase Dr Decrease Cr

Q&A

37
REFERENCE TEXT BOOKS

• Parminder, J., & Vickerstaff, B. (2012). Financial accounting . London:

Hodder Education, an Hachette UK Company.
• Murthy, G. (2008). Financial Accounting. (1st ed.). Mumbai: Global
Media.
• Stittle, J. & Wearing, R. (2008). The accounting equation and
recording transactions. In Financial accounting (pp. 16-24). London:
SAGE Publications Ltd doi: 10.4135/9781446214688.n2
38