1. Lecture-1
INTRODUCTION TO FINANCIAL
ACCOUNTING
By: Shahid Akbar
shahidakbar32@yahoo.com

2. All you got to do is
Listen, use Common Sense and Grab the Concepts Step
by Step

3. IdentifiesIdentifies
RecordsRecords
CommunicatesCommunicatesRelevantRelevant
ReliableReliable
ComparableComparable
AccountingAccounting
is a
system that
information
that is
to help users make better
decisions.
to help users make better
decisions.

4.  Identifying
Business
Activities
 Recording
Business
Activities

Communicating
Business
Activities

5. Accounting
Financial
Accounting
Management
Accounting
External Users Internal Users
Reporting
to
Reporting
to
For reporting financial
position and financial
performance to
external users.
Balance Sheet,
Income Statement,
etc.
For planning, control
and decision making
by Internal Users.
Monthly sales report,
Production analysis
report , Internal
memos etc.
Shareholders
External
auditor
Suppliers
Lenders
Labors unions
Governments
& agencies
Board of
Directors
Managers
External
Users
Internal
Users

6. Information Needs and Costs
Benefits Costs
Information Requirements
Internal requirements
by Management for better
decision making, planning
and control
External requirements
by Regulatory authorities,
International frameworks,
Government agencies etc.
Administrative costs
Fees for Expert opinions
Additional burden on
employees
Surveys and Researches
etc
Type of Costs incurred
>
Benefits drawn from information should be greater than the
cost incurred to produce that information.

7. Financial accounting practice is governed by concepts and rules
known as generally accepted accounting principles (GAAP).
Financial accounting practice is governed by concepts and rules
known as generally accepted accounting principles (GAAP).
Relevant
Information
Relevant
Information
Affects the decision of
its users.
Affects the decision of
its users.
Reliable InformationReliable Information Is trusted by
users.
Is trusted by
users.
Comparable
Information
Comparable
Information
Is helpful in contrasting
organizations.
Is helpful in contrasting
organizations.

8. Accounting Principles
Matching Principle
Company records the expenses it
incurred to generate the revenue
reported.
Revenue Recognization
Principle
Cost Principle
Full Disclosure Principle
Company reports the details behind
financial statements that would
impact users decisions.
Accounting information is based
on actual cost
•Cost is measured on a cash or
equal to cash basis
1. Recognize revenue when it is
earned.
2. Proceeds need not be in cash.
3. Measure revenue by cash
received plus cash value of items
received.

9. Accounting Assumptions
Monetary Unit assumption
Express transactions and events in
monetary, or money, units.
Business Entity assumption
A business is accounted for
separately from other business
entities, including its owner.
Time period Assumption
Life of a company can be divided
into time periods .
Now Future
Going-Concern Principle
Reflects assumption that the
business will continue operating
instead of being closed or sold.

10. Types of businesses
Advantages:
- Owner’s total control
- Least regulated
- Minimal accounting and
reporting requirements
Disadvantages:
- Limited Resources
- Unlimited Liability
- Management problems
- Owner dies, Business
Advantages:
- Larger resources
- Risk sharing
- Experience pool
- Minimal accounting and
reporting requirements
Disadvantages:
- Unlimited liability
- Limited resources
- Conflicts & disputes
- Existence uncertainty
- Non-transferability
Advantages:
- Can raise capital
- Limited risk
- Ownership transferability
- Perpetual existence
- Board experience
Disadvantages:
- Registrations
- Administrative and regulatory
costs
- Excessive accounting and
reporting requirements
- Organizational issues
- Complex structure
- Double Taxation
Sole Proprietorship
Partnership
Corporation

11. Owners of a corporation are called
shareholders (or stockholders).
When a corporation issues only one class of
stock, we call it common stock (or capital
stock).

12. Characteristics Proprietorship Partnership Corporation
Business entity yes yes yes
Legal entity no no yes
Limited liability no no yes
Unlimited life no no yes
Business taxed no no yes
One owner allowed yes no yes
**

13. Board of
Directors
Share holder (s)
Managers
Business
appoint
hire
manage & run
audit
Financial
Auditors
produce
External
Users
distributed
to
Financial
Reports

14. 1. Balance Sheet
2. Income Statement
3. Statement of Cash Flows
4. Statement of Stockholders’ Equity
A Balance Sheet is a quantitative summary of the financial
position of a business at any point in time.
Income statement shows the performance of a company, how
did the company made net income out of revenues.
Cash flow statement is concerned with the cash inflows and
outflows of the company
This statement shows the changes in owners’ interest and
application of retained earning between two accounting
periods

15. Statement of Cash flows
The movement of money into or out of a business, is
called
JeansCo
Employees
Creditors
Purchase of assets
Investments
Dividends
Customers
Loans
Share issue
Cash
Inflow
Cash
Inflow
Cash
Outflo
w
Cash
Outflo
w
Overview: What is Cash flow

16. Statement of Cash flows
11
Overview: Types of Cash
flows
Operational Cash flows: received or
spent as a result of company’s
business activities
Selling clothing
Purchasing
merchandize Paying salaries

17. Statement of Cash flows
22
Overview: Types of Cash
flows
Investment Cash flows: spent or
received through company’s investing
activities
Loan repayments
Fixed assets
Investing in
Stocks & bonds

18. Statement of Cash flows
33
Overview: Types of Cash
flows
Financing Cash flows: cash received
through debt or paid out as debt
repayments
Issuance of stocks
Repaying
loans
Bank loan

19. Statement of Cash flows
Managers affect cash by three types of decisions:
1. Operating decisions
2. Financing decisions
3. Investing decisions
Typical Activities Affecting Cash

20. Statement of Cash flows
Typical Activities Affecting Cash
Operating activities are transactions that affect the
purchase, processing, and selling of a company’s products
and services
Making sales
Collecting accounts receivable
Purchasing inventory
Paying accounts payable
The first major section of the statement of cash flows is
labeled cash flows from operating activities

21. Statement of Cash flows
Typical Activities Affecting Cash
Financing decisions are concerned with how to obtain or
repay cash
Financing activities are a company’s transactions that
obtain resources from debt and equity transactions
Issuance of additional stock
Borrowing money from the bank
Repaying previous loans
The financing section on the statement is labeled cash flows
from financing activities

22. Statement of Cash flows
Typical Activities Affecting Cash
Investing decisions include the choices to acquire or
dispose of long-term productive assets or long-term
investments
Investing activities are transactions that acquire or dispose
of assets that are expected to provide services for more than
one year
- Purchasing or disposing of equipment
The investing section on the statement is labeled cash flows
from investing activities

23. Statement of Cash flows
Typical Activities Affecting Cash
Cash Inflows Cash Outflows
Operating Activities:
Collections from customers Cash payments to suppliers
Interest and dividends collected Cash payments to employees
Other operating receipts Interest and taxes paid
Other operating cash payments
Investing Activities:
Sale of property, plant, and equipment Purchase of property, plant, and equipment
Sale of securities that are not Purchase of securities that are not
cash equivalents cash equivalents
Receipt of loan repayments Making loans
Financing:
Borrowing cash from creditors Repayment of amounts borrowed
Issuing equity securities Repurchase of equity shares (including the
Issuing debt securities purchase of treasury stock)
Payment of dividends

24. Balance Sheet
A Balance Sheet is a quantitative summary of the financial position of
a business at any point in time. It summarizes the assets, liabilities and
the shareholders’ equity of a company.
Assets Liabilities Owner’s Equity+=
Assets
Liabilities
An asset is a resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity
e.g, land & building, plant & machinery, fixtures, delivery vans etc.
A present obligation of the enterprise arising from past events, the settlement of which
is expected to result in an outflow from enterprise of resources embodying economic
benefits e.g., loan, bonds, creditors/account payables etc.
Owners’ Equity
This is the amount by which a company is financed through common and preferred
shares.
This is residual claim of common stockholders in assets after all the liabilities are paid

25. LandLand
EquipmentEquipment
BuildingsBuildings
CashCash
VehiclesVehicles
Store
Supplies
Store
Supplies
Notes
Receivable
Notes
Receivable
Accounts
Receivable
Accounts
Receivable
Resources
owned or
controlled
by a
company
Resources
owned or
controlled
by a
company

26. Taxes
Payable
Taxes
Payable
Wages
Payable
Wages
Payable
Notes PayableNotes PayableAccounts
Payable
Accounts
Payable
Creditors’
claims on
assets
Creditors’
claims on
assets

27. Owner’s
claims
on
assets
Owner’s
claims
on
assets
RevenuesRevenues
Owner
Investments
Owner
Investments
Owner
Withdrawals
Owner
Withdrawals
ExpensesExpenses

28. LiabilitiesLiabilities EquityEquityAssetsAssets = +
RevenuesRevenues ExpensesExpenses
Owner CapitalOwner Capital
Owner
Withdrawals
Owner
Withdrawals
_
+
_

29. Let’s start a business!
J. Scott, forms a consulting business, named
Fast forward and accessories
J.Scott owns and manage the business
mjb@hotinarea.com

30. The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Capital (equity)
J. Scott, the owner, contributed $20,000
cash to start the business.

31. J. Scott, the owner, contributed $20,000
cash to start the business.

32. The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
Purchased supplies paying $1,000
cash.

33. Purchased supplies paying $1,000
cash.

34. The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
Purchased equipment for $15,000
cash.

35. Purchased equipment for $15,000
cash.

36. Transaction Analysis
The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Purchased Supplies of $200 and
Equipment of $1,000 on account.

37. Purchased Supplies of $200 and
Equipment of $1,000 on account.

38. Transaction Analysis
The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)
Borrowed $4,000 from 1st American
Bank.

39. Borrowed $4,000 from 1st American
Bank.

40. The balances so far appear below. Note that the Balance Sheet Equation
is still in balance.
Now let’s look at transactions involving revenue,
expenses and withdrawals.

41. Transaction Analysis
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
Rendered consulting services
receiving $3,000 cash.

42. Rendered consulting services
receiving $3,000 cash.

43. Transaction Analysis
The accounts involved are:
(1) Cash (asset)
(2) Salaries expense (equity)
Paid salaries of $800 to employees.
Remember that the balance in the salaries expense account
actually increases.
But, equity actually decreases because expenses reduce equity.

44. Remember that expenses decrease equity.
Paid salaries of $800 to employees.

45. Transaction Analysis
The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Withdrawals (equity)
J. Scott withdrew $500 from the
business for personal use.
Remember that the balance in the J. Scott, Withdrawals account
actually increases.
But, equity actually decreases because withdrawals reduce
equity.

46. Remember that withdrawals decrease equity.
J. Scott withdrew $500 from the
business for personal use.

47. Financial Statements
Let’s prepare the Financial Statements reflecting the
transactions we have recorded.
1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Statement of Cash Flows

48. Net income is the
difference
between
Revenues and
Expenses.
The income statement describes a
company’s revenues and expenses
along with the resulting net income or
loss over a period of time due to
earnings activities.

49. The net income
of $2,200
increases
Scott’s capital
by $2,200.
The Statement of
Owner’s Equity explains
changes in equity from
net income (or net loss)
and from owner
investments and
withdrawals for a period
of time.

50. The Balance Sheet
describes a
company’s
financial position
at a point in time.
The Balance Sheet
describes a
company’s
financial position
at a point in time.

51. The Statement of Cash Flows identifies cash
inflows and cash outflows over a period of time.