FINANCIAL

ACCOUNTING
MGT 131
A proprietorship is Advantages
owned by one • Ease in organizing
individual.
• Low cost of
organizing
Disadvantage
• Limited source of
financial resources
• Unlimited liability
 A partnership is owned by two or more
individuals.

Advantages
• More financial resources than a
proprietorship.
• Additional management skills.
Disadvantage
• Unlimited liability.
A corporation is organized under state or
federal statutes as a separate legal entity.

Advantage
• The ability to obtain large amounts of
resources by issuing stocks.
• Limited liability
Disadvantage
• Double taxation
• Difficult process to establish
The Purpose of Accounting

 The basic purpose of Accounting is to provide

information to decision makers that is useful in
making economic decisions.
 Accounting helps decision making by showing
where and when money has been spent and
commitments have been made.
Accounting
■ Accounting is a process of
– Identifying
– Recording
– Summarizing and
– Reporting economic
information to decision makers
 Users of Accounting Information

External Internal
• Lenders • Managers
• Shareholders • Officers
• Governments • Internal Auditors
• Consumer Groups • Sales Staff
• External Auditors • Budget Officers
• Customers • Controllers
• Financial accounting provides • Managerial accounting provides
external users with financial information needs for internal
statements. decision makers.
Accounting system

■ Financial Accounting ■ Managerial Accounting

Focuses on the specific needs of Focus of managerial accounting is on
decision makers external to the the needs of managers within the
organization, such as stockholders, organization rather than interested
suppliers, banks, and government parties outside the organization.
agencies.
It involves the development and
Financial accounting is the language interpretation of accounting
that translates economic events into information intended specifically to
uniform and comprehensive aid management in running the
information, understandable by business.
outside observers.
Managerial Accounting Vs Financial
Accounting
Managerial Accounting Financial
Accounting
Users of information Managers within organizations Interested parties outside
organizations
Regulations Not required and unregulated Must confirm to
GAAP/IFRS/IAS/SECP
Source of Data Organizations basic accounting Almost exclusive drawn from
system plus other sources the organizations basic
accounting system which
accumulate financial info

Nature of Reports and Focus on sub units within org Focus on entire enterprise
procedures (Dept., divisions, region etc.) based on Historical Data
historical as well as projection of
future events
The primary What is the financial
questions
concerning picture of the organization
a firms
financial
on a given day?
success that
decision
makers How well did it do during a
want
answered
given period?
are:
The accountant answers these questions with three
major financial statements:
• Balance sheet
• Income statement
• Statement of cash flows

Annual Reports

• A combination of financial statements, management discussion and

analysis, and graphs and charts that is provided annually to investors.
Generally Accepted Accounting
Principles
Financial accounting practice is governed by concepts and rules known as
generally accepted accounting principles (GAAP).
• Relevant Information
• Affects the decision of its users.
• Reliable Information
• Is trusted by users.
• Comparable Information
• Is helpful in contrasting organizations.

Financial Accounting Standards Board

Securities and Exchange Commission

The Accounting Equation

Assets = Liabilities + Owner’s Equity

The resources The rights of the The rights

owned by a creditors, which of the
business represent debts owners
 Cont.…
Assets Liabilities Owners equity
(everything firm
(debts of the firm) (rights of the owners)
owns)
• Cash • Account payable • Owner Investments
• Account receivable • Tax payable • Owner Withdrawals
• Notes Receivable • Note payable • Revenue
• Vehicles • Wages • Expense
• Land
• Buildings
• Supplies
Expanded Accounting Equation

Assets = Liabilities + Owner’s Equity

_ _
+
Owner
Owner Capital Revenues Expenses
Withdrawals
Effects of Transactions on Owner’s Equity

Owner’s Equity

Decreased by Increased by

Owner’s Owner’s
withdrawals investments
Expenses Revenues

Net
income
Transaction Analysis Equation

The accounting equation must remain in

balance after each transaction.

Assets = Liabilities + Owner’s Equity

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

The accounts involved are:

(1) Cash (asset)
(2) J. Scott, Capital (equity)
Transaction Analysis
J. Scott, the owner, contributed $20,000 cash to start
the business.
Assets = Liabilities + Equity
Accounts Notes J. Scott,
Cash Supplies Equipment Payable Payable Capital
(1) $ 20,000 $ 20,000

$ 20,000 $ - $ - $ - $ - $ 20,000

$ 20,000 = $ 20,000
Transaction Analysis

Purchased supplies paying $1,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Supplies (asset)
Transaction Analysis

Purchased supplies paying $1,000 cash.

Assets = Liabilities + Equity
Accounts Notes J. Scott,
Cash Supplies Equipment Payable Payable Capital
(1) $ 20,000 $ 20,000
(2) (1,000) $ 1,000

$ 19,000 $ 1,000 $ - $ - $ - $ 20,000

$ 20,000 = $ 20,000
Transaction Analysis

Purchased equipment for $15,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Equipment (asset)
Transaction Analysis

Purchased equipment for $15,000 cash.

Assets = Liabilities + Equity
Accounts Notes J. Scott,
Cash Supplies Equipment Payable Payable Capital
(1) $ 20,000 $ 20,000
(2) (1,000) $ 1,000
(3) (15,000) $ 15,000

$ 4,000 $ 1,000 $ 15,000 $ - $ - $ 20,000

$ 20,000 = $ 20,000
Transaction Analysis

Purchased Supplies of $200 and Equipment of $1,000

on account.
The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Transaction Analysis

Purchased Supplies of $200 and Equipment of $1,000

on account.
Assets = Liabilities + Equity
Accounts Notes J. Scott,
Cash Supplies Equipment Payable Payable Capital
(1) $ 20,000 $ 20,000
(2) (1,000) $ 1,000
(3) (15,000) $ 15,000
(4) 200 1,000 $ 1,200

$ 4,000 $ 1,200 $ 16,000 $ 1,200 $ - $ 20,000

$ 21,200 = $ 21,200
Transaction Analysis

Borrowed $4,000 from 1st American Bank.

The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)
Transaction Analysis

Borrowed $4,000 from 1st American Bank.

Assets = Liabilities + Equity
Accounts Notes J. Scott,
Cash Supplies Equipment Payable Payable Capital
(1) $ 20,000 $ 20,000
(2) (1,000) $ 1,000
(3) (15,000) $ 15,000
(4) 200 1,000 $ 1,200
(5) 4,000 $ 4,000
$ 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000

$ 25,200 = $ 25,200
Transaction Analysis

Note that the Balance Sheet Equation is still in balance.

Assets = Liabilities + Equity
Accounts Notes J. Scott,
Cash Supplies Equipment Payable Payable Capital
Bal. $ 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000

$ 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000

$ 25,200 = $ 25,200
Transaction Analysis

Now let’s look at transactions involving revenue,

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

Rendered consulting services receiving $3,000 cash.

Assets = Liabilities + Equity
Accounts Notes J. Scott,
Cash Supplies Equipment Payable Payable Capital Revenue
Bal. $ 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000
(6) 3,000 $ 3,000

$ 11,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ 3,000

$ 28,200 = $ 28,200
Transaction Analysis

Paid salaries of $800 to employees.

The accounts involved are:
(1) Cash (asset)
(2) Salaries expense (equity)

Remember that the balance in the salaries expense account actually

increases.
But, equity actually decreases because expenses reduce equity.
Transaction Analysis

Paid salaries of $800 to employees.

Assets = Liabilities + Equity
Accounts Notes J. Scott,
Cash Supplies Equipment Payable Payable Capital Revenue Expenses
Bal. $ 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000
(6) 3,000 $ 3,000
(7) (800) $ (800)

$ 10,200 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ 3,000 $ (800)

$ 27,400 = $ 29,000

Remember that expenses decrease equity.

Transaction Analysis

J. Scott withdrew $500 from the business for personal

use.
The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Withdrawals (equity)

Remember that the balance in the J. Scott, Withdrawals account actually increases.
But, equity actually decreases because withdrawals reduce equity.
Transaction Analysis

Scott withdrew $500 from the business for personal

use.
Assets = Liabilities + Equity
Accounts Notes J. Scott, J. Scott,
Cash Supplies Equipment Payable Payable Capital Withdrawal Revenue Expenses
Bal. $ 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000
(6) 3,000 $ 3,000
(7) (800) $ (800)
(8) (500) $ (500)
$ 9,700 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ (500) $ 3,000 $ (800)

$ 26,900 = $ 29,500

Remember that withdrawals decrease equity.

Financial Statements

Balance Sheet
– A financial statement that shows the financial status of a
business entity at a particular instant in time.
Income statement
– A financial statement that reports a company's financial
performance over a specific accounting period.
– Financial performance is assessed by giving a summary of
how the business incurs its revenues and expenses through
both operating and non-operating activities.
Cont.…

PROFIT=Revenue is greater than expenses.

LOSS =Revenue is lesser than expenses.

Sales Revenue xxxx

- Less Expenses xxxx
= Gross profit xxxx
- Operating Cost:
Selling General Administration Expenses xxxx
= Net Income xxxx
Statement of Cash Flows
Cash flow statement, also known as statement of cash flows, it shows inflow-outflow
of funds for a specific period of time.

Cash Flows from Operating Activities

Reports a summary of cash receipts and cash payments from operations.

Cash Flows from Investing Activities

Reports the cash transactions for the acquisition and sale of relatively permanent
assets.
Cash Flows from Financing Activities
Reports the cash transactions related to cash investments by the owner, borrowings,
and cash withdrawals by the owner.