TOPIC 1 INTRODUCTION TO FINANCIAL ACCOUNTING

FINANCIAL ACCOUNTING NOTES
Definition
INTRODUCTION TO ACCOUNTING
This is the process of identifying, measuring, classifying, summarizing, recording and communicating of financial
information
 Identifying – in accounting, this is the process of recognition or non-recognition of business
activities as accountable events. Stated differently, this is the process which determines if an
event has accounting relevance.
 Measuring – in accounting, this is the process of assigning monetary amounts to the
accountable events.
 Communicating – accounting information should be communicated to the different
decision makers. Communicating accounting information is achieved by the
presentation of different financial statements.
 Recording – The accounting term for recording is journalizing. All the accountable events are
recorded in a journal.
 Classifying – The accounting term for recording is posting. All accountable events that are
recorded in the journal are then classified or posted to a ledger.
 Summarizing – the items that are journalized and posted are summarized in the five basic financial statements.

OBJECTIVES OF ACCOUNTING
1.Systematic recording of transactions – Basic objective of accounting is to systematically record the financial
aspects of business transactions i.e. book-keeping.
2.Ascertainment of results of above recorded transactions – Accountant prepares profit and loss account to
know the results of business operations for a particular period of time. If revenue exceeds expenses, then it is
said that business is running profitably but if expenses exceed revenue, then it can be said that business is
running under loss.
3.Ascertainment of the financial position of the business – Businessman is not only interested in
knowing the results of the business in terms of profits or loss for a particular period but is also anxious to
know that what he owes (liability) to the outsiders and what he owns (assets) on a certain date.
4.Providing information to the users for rational decision-making – Accounting aims to meet the
information needs of the decision-makers and helps them in rational decision-making.
5.To know the solvency position: By preparing the balance sheet, management not only
reveals what is owned and owed by the enterprise, but also it gives the information regarding concern’s
ability to meet its liabilities in the short run (liquidity position) and also in the long-run (solvency
position) as and when they fall due

USERS OF ACCOUNTING INFORMATION AND THEIR NEEDS
1.Shareholders/owners
2.Management
3.Government
4.Employees
5.Creditors/suppliers
6.Investors
7.Public
8.Consumers/end users/customers/client
9.Financial analysts
10.Financial institutions/Lenders
11.Competitors
12. Trade unions

ACCOUNTING EQUATION
The accounting equation, also called the basic accounting equation, forms the foundation for all
accounting systems. In fact, the entire double entry accounting concept is based on the basic
accounting equation.

The accounting equation equates a company’s assets to its liabilities and equity.
Here is the basic accounting equation.
Assets equal the sum of liabilities and owner’s equity (Capital).
Assets

An asset is a resource that is owned or controlled by the company to be used for future benefits.
Some assets are tangible like cash while others are theoretical or intangible like goodwill or
copyrights.

Another common asset is a receivable. This is a promise to be paid from another party. Receivables
arise when a company provides a service or sells a product to someone on credit.
All of these assets are resources that a company can use for future benefits. Here are some common examples of assets:

 Cash
 Accounts Receivable
 Prepaid Expenses
 Vehicles
 Buildings
 Goodwill
 Copyrights
 Patents
Liabilities
A liability is an amount of money owed to another person or organization.
A common form of liability is a payable. Payables are the opposite of receivables. When a company
purchases goods or services from other companies on credit, a payable is recorded to show that the
company promises to pay the other companies for their assets.
Here are some examples of some of the most common liabilities:
 Accounts payable
 Bank loans
 Personal Loans
 Officer Loans
 Unearned income
Equity (Capital)
Equity represents the portion of company assets that shareholders or partners own.
Owners can increase their ownership share by contributing money to the company or decrease equity
by withdrawing company funds. Likewise, revenues increase equity while expenses decrease equity.
Here are some common equity accounts:
 Owner’s Capital
 Owner’s Withdrawals
 Reserves
 Paid-In Capital