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Finance Basics

Introduction to Accounting
Need for Accounting
Meaning of Book-Keeping
Meaning of Accounting
Attributes of Accounting
Branches of Accounting
Users of Accounting Information
Accounting Cycle
Finance Basics
Accounting Equation
Introduction and Meaning
Effects of Business Transactions on Accounting
Equation
Purchase of an asset of credit
Rules of Accounting Equation

Finance Basics
Double Entry System
Types of Accounting
Rules of the Double Entry System (Debit and Credit)
Advantage of Double Entry System
Journal
Meaning of Journal
Objectives of Journal
Rules of Journalizing
Miscellaneous Journal Entries
Finance Basics
Ledger
Meaning of Ledger
Rules of the Double Entry System (Debit and Credit)
Advantage of Double Entry System
Journal
Trial Balance
Cash Book

Finance Basics
Introduction to Accounting
Need for Accounting
Accounting is the language of business.
Accounting in general communicates the results of
business operations to various parties who are
interested in business.
The businessman is in need for accounting as he is
interested also to know the financial position of his
business during a particular accounting period.
Even the head of the family is also needs accounting
to manage the family income and necessary payment
during a particular period.

Finance Basics
Introduction to Accounting
Meaning of Book-Keeping
Book-Keeping is mainly concerned with recording
of financial data relating to business operations in
a significant and orderly manner.
It is a branch of knowledge which guides us how
to keep a record of financial transaction.
The need of maintaining a record of income and
expenditure in a significant and systematic
manner has give a birth to the book-keeping.

Finance Basics
Introduction to Accounting
Meaning of Accounting
Accounting is a wider term and includes
recording, classifying and summarizing of
business transactions of terms of money,
Transactions and preparation of financial reports.

Finance Basics
Introduction to Accounting
Definitions of Accounting
Accounting is the process of recording,
classifying, summarizing, analyzing and
interpreting the financial transactions and
communicating the results thereof to the persons
interested in such information.

Finance Basics
Introduction to Accounting
Attributes of Accounting

Attributes of Accounting
Recording
Classifying
Communication Summarizing
Financial Transactions
Analysis and Interpretation
Finance Basics
Introduction to Accounting
Attributes of Accounting
1) Recording: Is the 1
st
step in an accounting
Cycle, by recording the business transactions in
books of original entry, i.e. Journal, where the
transactions of financial nature are recorded in
an orderly manner. The journal provides a
completer record of all business transactions.

Finance Basics
Introduction to Accounting
Attributes of Accounting
2) Classifying: Classifying is the 2
nd
stage of the
accounting Cycle. It is concerned with the
systematic analysis of business transactions of
similar nature at one place, done in a book
called Ledger. In this book, all transactions of
similar nature are entered on different pages
under different account heads.
Example: All transactions relating to cash and bank
are posted to cash and bank accounts.

Finance Basics
Introduction to Accounting
Attributes of Accounting
3) Summarizing: The next stage is to present the
data in a manner which is useful to internal and
external users of accounting information. This
presentation is done by preparing trail balance
and final accounts with a view to ascertain profit
or loss made during a particular accounting
period.
Finance Basics
Introduction to Accounting
Attributes of Accounting
4) Financial Transactions: Accounting records only
those transactions which are of financial
character, i.e. which can be expressed in terms
of money.
For Example: unhealthy relations between the
employer and the employee cannot be recorded in
books of accounts.
Finance Basics
Introduction to Accounting
Attributes of Accounting
5) Analysis and interpretation: The accounting
information must be analyzed and interpreted
by calculating various ratios and percentages or
by applying other techniques in order to judge
the past performance of the company and make
sound plans for the future.
Finance Basics
Introduction to Accounting
Attributes of Accounting
6) Communication: The results of analysis and
interpretation must be communicated to the
parties who are to make decisions or form
judgments. This information is passed in the
form of ratios, graphs, diagrams, fund flow
statements or income statements and balance
sheet so that appropriate decisions may be
taken at the right time.
Finance Basics
Introduction to Accounting
Objectives of Book-Keeping and Accounting:
1) To maintain systematic record.
2) To ascertain the financial position of business.
3) To ascertain the operational profit or loss.
4) T facilitate rational decision-making.
5) Knowledge of debtors and creditors.
6) Knowledge of purchase and sales.
7) Knowledge of cash and bank balance.
8) Knowledge of close and stock.
9) Basis of income tax and sales tax.
Finance Basics
Introduction to Accounting
Advantage of Book-Keeping and Accounting:
1) Increase in memory power.
2) Information regarding performance and position.
3) Comparison.
4) Helpful in tax assessment.
5) Proof in the court.
6) Business valuation.
7) Helpful in raising loans.
8) Helpful in insolvency.
9) Assistance to various parties.
10) Errors and frauds.
11) Helpful in admission and retirement of a partner.
Finance Basics
Introduction to Accounting
Branches of Accounting


Accounting
Financial
Accounting
Cost
Accounting
Management
Accounting
Finance Basics
Introduction to Accounting
Branches of Accounting
1) Financial Accounting: The main objective of this
form of accounting is to ascertain the financial
position of a business on a particular date and
to provide the users with accounting information
like shareholders, creditors, bankers, financial
institutions, etc.
This objective is achieved by the preparation of
financial statement, i.e. trading and profit-ad-
loss account and the balance sheet.
Finance Basics
Introduction to Accounting
Branches of Accounting
2) Cost Accounting: The main aim of cost
accounting is to ascertain the cost per unit of a
product or process and to control the cost. The
cost accountant is required to assemble and
interpret cost data for the use of management in
controlling current operations and in planning
for the future.
Finance Basics
Introduction to Accounting
Branches of Accounting
3) Management Accounting: Its main objective is
to provide necessary information for the
management for discharging its functions. It
assists the management in discharging its
various functions such as planning, control,
evaluation of performance and decision making.
Finance Basics
Introduction to Accounting
Users of Accounting Information

Users
Internal Users External Users
Owners
Management
Employees
Creditors
Investors
Government
Customers
Researchers
Foreigners
Business Management Customers
Employees
Owners
Investors
Government
Creditors
Researchers
Main users of
accounting
information
relating to
business
Finance Basics
Introduction to Accounting
Accounting Cycle

Recording
Classifying
Summarizing
Analysis and
Interpretation
Finance Basics
Introduction to Accounting
Accounting Cycle
An Accounting cycle is a complete sequence starting with the
recording of transactions and ending with the preparation of
the final accounts.
1. Recording: Record the transactions and events in the journal
2. Classifying: Classify the transactions recorded in the journal
in their respective accounts in the ledger.
3. Summarizing: Summarize the data by preparing a list (i.e.
trial balance) showing the balances of each and every
account to verify whether the sum of debit balances is equal
to the sum of credit balances.
4. Analysis and interpretation: Trading and profit-and-loss a/c
as well as balance sheet is prepared to analyze and interpret
the data.
Finance Basics
Introduction to Accounting
Questions
Fill in the blanks
1. Accounting is the .. of business
2. Accounting records only those transactions which
are of . Character.
3. Accounting can be useful only for recording
. Transactions

Finance Basics
Introduction to Accounting
Questions
Fill in the blanks (Answers)
1. Accounting is the Language of business
2. Accounting records only those transactions which
are of Financial Character.
3. Accounting can be useful only for recording
business Transactions

Finance Basics
Introduction to Accounting
Questions
Choose the correct answer
1. The basic function of financial accounting is to:
a) Record all business transactions
b) Interpret the financial data
c) Assist the management in performing functions effectively.

Finance Basics
Introduction to Accounting
Questions
Choose the correct answer
1. The basic function of financial accounting is to:
a) Record all business transactions
b) Interpret the financial data
c) Assist the management in performing functions effectively.

Finance Basics
Introduction to Accounting
Questions
Choose the correct answer
2. The main function of accounting is to:
a) Record economic data
b) Recoding and classifying business transactions
c) Provide the informational basis for action
d) Attain non-economic goals

Finance Basics
Introduction to Accounting
Questions
Choose the correct answer
2. The main function of accounting is to:
a) Record economic data
b) Recoding and classifying business transactions
c) Provide the informational basis for action
d) Attain non-economic goals

Finance Basics
Introduction to Accounting
Questions
Choose the correct answer
3. Management accounting provides invaluable
services to management in performing:
a) All management functions.
b) Coordinating management functions
c) Controlling functions

Finance Basics
Introduction to Accounting
Questions
Choose the correct answer
3. Management accounting provides invaluable
services to management in performing:
a) All management functions.
b) Coordinating management functions
c) Controlling functions

Finance Basics
Accounting Equation
Introduction and Meaning
The recording of business transactions is entirely
based on Accounting Equation.
Accounting Equation is based on the dual concept of
Accounting.
Dual Concept states that every debit must have a
corresponding credit and every credit must have a
debit.
The total of the debit side must be equal to the total of
the credit side.

Finance Basics
Accounting Equation
Introduction and Meaning
Accounting Equation states that at any point of time
the assets of a business must equal to the total of
owners equity, i.e. the capital and outsiders claim
(liabilities)
The equation is based on the principle that accounting
deals with property, and the rights to property and the
sum of properties owned is equal to the sum of rights
to the properties.
The properties owned by a business are called
ASSETS and rights to properties are known as
LIABILITIES or EQUITIES of the business

Finance Basics
Accounting Equation
Introduction and Meaning
Accounting Equation is an accounting formula expressing
equivalence of assets and liabilities in every business
transaction, so the assets of a business are always equal to
the liabilities or capital:
Assets = Liabilities + Capital
Or
Capital = Assets Liabilities
Or
Liabilities = Assets Capital
Or
Assets = Total equity

Finance Basics
Accounting Equation
Effects of Business Transactions on Accounting Equation
The following explain the effects of some business
transactions on the accounting equation:
1. Commencement of business: Hamad started his business
with capital of SAR 100,000



Balance Sheet of Hamad as on .

Assets (-) (SAR) Liabilities (=) (SAR) Proprietors claim or
Capital (SAR)
Cash 100,000 Liabilities NIL Hamads Capital 100,000
Liabilities Amount (SAR) Assets Amount (SAR)
Hamads Capital 100,000 Cash 100,000
Finance Basics
Accounting Equation
Effects of Business Transactions on Accounting Equation
2. Purchase of an asset for CASH: Hamad purchased furniture
for cash SAR 10,000





Balance Sheet of Hamad as on .

Assets (-) SAR Liabilities (=) SAR Capital or P SAR
Cash
Furniture
90,000
10,000
Liabilities NIL Capital 100,000

100,000 NIL 100,000
Liabilities Amount (SAR) Assets Amount (SAR)
Hamads Capital 100,000 Cash
Furniture
90,000
10,000
100,000 100,000
Finance Basics
Accounting Equation
Effects of Business Transactions on Accounting Equation
3. Purchase of an asset on CREDIT: Hamad purchased an
asset of SAR 20,000 on credit from SBM






Balance Sheet of Hamad as on .

A (-) SAR L (=) SAR Capital or P SAR
Cash
Asset
Furniture
90,000
20,000
10,000
SBM 20,000 Capital 100,000

120,000 20,000 100,000
Liabilities Amount (SAR) Assets Amount (SAR)
Hamads Capital
SBM
100,000
20,000
Cash
Furniture
Asset
90,000
10,000
20,000
120,000 120,000
Finance Basics
Accounting Equation
Effects of Business Transactions on Accounting Equation
4. Payment to SBM on Cash: Hamad paid SAR 5000 to SBM






Balance Sheet of Hamad as on .

A (-) SAR L (=) SAR Capital or P SAR
Cash
Asset
Furniture
85,000
20,000
10,000
SBM 15,000 Capital 100,000

115,000 15,000 100,000
Liabilities Amount (SAR) Assets Amount (SAR)
Hamads Capital
SBM
100,000
15,000
Cash
Furniture
Asset
85,000
10,000
20,000
115,000 115,000
Finance Basics
Accounting Equation
Effects of Business Transactions on Accounting Equation
5. Drawings for personal use: Hamad withdrew SAR 15,000 for
his personal use:






Balance Sheet of Hamad as on .

A (-) SAR L (=) SAR Capital or P SAR
Cash
Asset
Furniture
70,000
20,000
10,000
SBM 15,000 Capital 85,000

100,000 15,000 85,000
Liabilities Amount (SAR) Assets Amount (SAR)
Hamads Capital
SBM
85,000
15,000
Cash
Furniture
Asset
70,000
10,000
20,000
100,000 100,000
Finance Basics
Accounting Equation
Effects of Business Transactions on Accounting Equation
6. Salary paid 1000






Balance Sheet of Hamad as on .

A (-) SAR L (=) SAR Capital or P SAR
Cash
Asset
Furniture
69,000
20,000
10,000
SBM 15,000 Capital 84,000

99,000 15,000 84,000
Liabilities Amount (SAR) Assets Amount (SAR)
Hamads Capital
SBM
84,000
15,000
Cash
Furniture
Asset
69,000
10,000
20,000
99,000 99,000
Finance Basics
Accounting Equation
Effects of Business Transactions on Accounting Equation
7. Goods worth SAR 40,000 purchased for CASH







Balance Sheet of Hamad as on .

A (-) SAR L (=) SAR Capital or P SAR
Cash
Asset
Furniture
Stock
29,000
20,000
10,000
40,000
SBM 15,000 Capital 84,000

99,000 15,000 84,000
Liabilities Amount (SAR) Assets Amount (SAR)
Hamads Capital
SBM
84,000
15,000
Cash
Stock
Furniture
Asset
29,000
40,000
10,000
20,000
99,000 99,000
Finance Basics
Accounting Equation
Effects of Business Transactions on Accounting Equation
8. Goods worth SAR 40,000 sold for CASH for SAR 60,000







Balance Sheet of Hamad as on .

A (-) SAR L (=) SAR Capital or P SAR
Cash
Asset
Furniture
Stock
89,000
20,000
10,000
NIL
SBM 15,000 Capital 104,000

119,000 15,000 104,000
Liabilities Amount (SAR) Assets Amount (SAR)
Hamads Capital
SBM
104,000
15,000
Cash
Furniture
Asset
89,000
10,000
20,000
119,000 119,000
Finance Basics
Accounting Equation
Rules of Accounting Equation
1. Debit if increase in asset, and credit if decrease in
asset.
2. Credit if increase in Capital, and debit if decrease in
Capital.
3. Credit if increase in Liabilities, and debit if decrease
in liabilities
4. Credit if there is increase in income, and debit if
dcrease in income.

Finance Basics
Accounting Equation
Rules of Accounting Equation
Calculate total equity if:
1. Owners equity is SAR 60,000
2. Equity of creditors is SAR 50,000
3. Revenues during that period is SAR 70,000
4. Expenses during that period is SAR 65,000
5. Also calculate owners revised equity.
Finance Basics
Accounting Equation
Rules of Accounting Equation
Solution
Equity

Or Owners Equity
So
So Revised Equity



Profit


Total Equity


= Asset - Liabilities

= Total Equity Creditors Equity

= Owners initial capital + Profit (Revenues Expenses)
= 60,000 + 5000 (70,000 65,000)
= 65,000

= Revenues Expenses
= 70,000 65,000 = 5000

= Owners revised equity + Outsiders equity
= 65,000 + 50,000
= 115,000
Finance Basics
Accounting Equation
Questions
Choose the correct answer
1. Accounting Equation =
a) A L = P
b) A = L - P
c) A = P - L

Finance Basics
Accounting Equation
Questions
Choose the correct answer
1. Accounting Equation =
a) A L = P
b) A = L - P
c) A = P - L

Finance Basics
Accounting Equation
Questions
Choose the correct answer
2. Capital is equal to
a) Assets + Liabilities
b) Assets - Liabilities
c) Assets + Cash in Bank
Finance Basics
Accounting Equation
Questions
Choose the correct answer
2. Capital is equal to
a) Assets + Liabilities
b) Assets - Liabilities
c) Assets + Cash in Bank
Finance Basics
Accounting Equation
Questions
Choose the correct answer
3. In a business, total assets are SAR 100,000 while
liabilities are SAR 20,000. What will be its capital?
a) 120,000
b) 80,000
c) 60,000
Finance Basics
Accounting Equation
Questions
Choose the correct answer
3. In a business, total assets are SAR 100,000 while
liabilities are SAR 20,000. What will be its capital?
a) 120,000
b) 80,000
c) 60,000
Finance Basics
Accounting Equation
Questions
Choose the correct answer
4. In a business, total capital is SAR 60,000, its
creditors are for SAR 40,000. Its assets will be
a) 100,000
b) 60,000
c) 40,000
Finance Basics
Accounting Equation
Questions
Choose the correct answer
4. In a business, total capital is SAR 60,000, its
creditors are for SAR 40,000. Its assets will be
a) 100,000
b) 60,000
c) 40,000
Finance Basics
Accounting Equation
Questions
Choose the correct answer
5. Net worth is equal to:
a) Capital + Assets
b) Capital - Assets
c) Assets - Liabilities
Finance Basics
Accounting Equation
Questions
Choose the correct answer
5. Net worth is equal to:
a) Capital + Assets
b) Capital - Assets
c) Assets - Liabilities
Finance Basics
Accounting Equation
Questions
Choose the correct answer
6. Which is the correct equation?
a) Assets = Capital + Liabilities
b) Assets = Liabilities - Capital
c) Assets = Capital - Liabilities
Finance Basics
Accounting Equation
Questions
Choose the correct answer
6. Which is the correct equation?
a) Assets = Capital + Liabilities
b) Assets = Liabilities - Capital
c) Assets = Capital - Liabilities