Lecture#1

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Financial Accounting– Language of

Business.

Prepared & Delivered by: Babar Akhtar

O:E – User of Financial Information – Branches of Accounting – Types of Accounting Statements – Single Entry Vs Double Entry – Book-keeping Vs Accounting .Lecture Outline – History – Definition – Accounting Cycle (Description) – A/c Equation– Example – Assets. Liabilities.

The people of that time relied on ancient accounting methods to record the growth of crops and herds. the earliest accounting records.Castle improved it in 1543.L Pecioli (Father of Accounting) in 1494. which date back more than 7.  Accounting was firstly introduced as a field of study by an Italian author F.000 years. .  In 1900.  Accounting is thousands of years old. were found in Mesopotamia (Assyrians). Edward Jones made drastic improvements in it and laid down the foundation of modern accounting.  English Author H.History of Accounting.

– Accounting is the process of identifying. measuring and communicating economic information so a user of the information may make informed economic judgments and decisions based on it. Classifying. Accounting is also widely referred to as the “language of business” .Accounting Defined Accounting is an art and Science of Recording. Summarizing. Reporting and interpreting Financial transactions of a business entity.

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the money that an organization owes. and the net worth of the organization.Accounting Equation • The accounting equation is a mathematical formula that describes the relationship between the property that an organization owns. Assets = Liabilities + Owner’s Equity (Resources in the business = Resources supplied by the owner) .

 Current Assets– Assets which have a useful life of less than or equal to 1 year or they are converted into cash within one year.  Current Liabilities– Those liabilities which are paid-off within 1 year.)  Intangible Assets– Assets which cannot be seen or touched. Owner’s Equity 1) Assets-.  Long-term Liabilities– Those liabilities which are paid-off in more than 1 years.Economic resources of a business. (Example: Goodwill) 2) Liabilities– Financial obligations of a business. Stock etc)  Fixed/Long-term Assets– Assets which have a useful life of more than 1 year. which are utilized to generate revenue. . Liabilities. Machinery. (Example: Plant. Land etc. but they exist in every business. A/c Receivable. Building.Assets. (Example: Cash.

Users of Accounting Information .

Liabilities & Owner’s Equity) of a business at a particular point in time Cash Flow Statement: A formal financial statement showing a summary of cash inflows and outflows under certain required headings. Expense.Financial Statements Written records concerning the financial circumstances of a business organization generally include the following statements. Profit/Loss) for a specific span of time. called as Accounting Period. Balance Sheet: A statement that shows solvency/financial position (Assets. Income Statement: A financial statement that gives operating results (Income. Statement of changes in equity: A financial statement reporting all items causing changes to the ownership interest during the financial period .

• Cost Accounting: Special purpose Accounting that provides information to help the management of a firm evaluate production costs and efficiency. • Tax Accounting: Special Purpose Accounting that includes preparing tax returns and planning future transactions to minimize the amount of tax. and government accountants. involves private. which is concerned with the provisions and use of accounting information to managers within organizations. to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions. public.Branches of Accounting • Management/Managerial Accounting: Special purpose Accounting. .

Single Entry System • This is the conventional style of keeping records of financial transactions. as it is clear from the name. In this system. That means.e. This actually is not a system but is a procedure by which small business concerns. In single entry book keeping system. whereas the other one is a personwise record of goods sold on credit “Udhar Khata”. there are usually two to three registers “Khata”. There may or may not be a register of suppliers to whom money is payable. only one aspect of transaction i. only one aspect of the transaction is recorded. . like retailers and small shopkeepers. In one register cash received from customers is recorded. keep record of their sale / income.

e. The accounting system that records both the aspects of transaction in books of accounts is called double entry system. .Double Entry System • The concept of double entry is based on the fact that every transaction has two aspects i. The account that receives the benefit is debited and the account that provides the benefit is credited. The ultimate result of the system is that for every Debit (Dr) there is an equal Credit (Cr). ‘Debit’ and ‘Credit’ are denoted by ‘Dr’ and ‘Cr’ respectively. receiving a benefit and giving a benefit.

the receipt the account of .Single Entry Vs Double Entry System Single entry system records only one aspect of the transaction such as: • Cash received from sale is register only. • When cash is received from whom something was sold on may just be recorded in individual only. recorded in cash recorded in the the customer. • Goods sold on credit are individual’s account only. to credit.

So. in this case Debit is given to customer’s account (account receivable) instead of cash.e. goods sold but the benefit received is not cash but a right to receive cash from the customer. • When the goods are sold on credit the benefit given is the same i. The goods sold are benefit transferred to the purchaser (Credit) whereas the cash received if the benefit against the goods sold (Debit). • When cash is received from the customer the right to receive cash ceases. Therefore. . • When good are sold on cash the two aspects of the transaction are the seller has sold goods and received cash against them. the benefit received is cash and benefit transferred is the right to receive cash. Here cash will be debited and customer will be credited.Single Entry Vs Double Entry System Double entry system records both the aspects of the transaction.

including people. you should think of accounting as a giant sifter and of bookkeeping as the process of pouring the stuff into the sifter. dates and sources of each revenue and expense transaction.Book Keeping Vs Accounting • Bookkeeping... Sales Tax etc.is the bigger picture. as well as taking the information that is obtained through the bookkeeping process and using that information to analyze the results of the business. and records the transaction’s history. It involves the process of recording of the amounts. It is the system that keeps track of the data.is the tedious part of the financial affairs of a business.  Accounting . as well as issues such as taxation.  Accounting is the system that provides the reports and information needed for management to make decisions as to the direction of the business.  Bookkeeping is concerned with the systems that enable the financial information to be extracted in the transactions that generate revenue and incur expense in the business.  Things get stirred around and you get the information. Summing up. .