FINANCIAL ACCOUNTING

INTRODUCTION TO FINANCIAL ACCOUNTING

Accounting - the process of recording, classifying, summarizing and communicating economic
information to interested parties to facilitate informed decision making.

Accounting Equation
Assets = Liabilities Owners Equity (Capital)

Accounting
- Financial Accounting (F.A) – External focus
- Management Accounting (M.A) – Internal focus
- Cost accounting- is a blend of management and financial accounting. Typical of
manufacturing firms.

Users of financial reports/statements

1. Investors (present and prospective) – Insurance firms
2. Management – Competitors for benchmarking purposes
3. Development partners – financiers who would want to invest in the firm.
4. Government agencies especially tax authorities
5. Employees of the firm- to judge job security
6. The general public- you and I
7. Creditors- they want to know if the firm will be able to pay them
8. Suppliers-they would want to supply goods and services to a stable firm.

Elements of financial statements

1. Assets – is anything of value owned by a business that is intended to benefit future
operations. Assets may have physical substance inventory e.g. buildings, motor vehicles,
furniture and fittings, good will (fixed assets) or they may be intangible (copyrights,
trademarks, patent etc).
Fixed assets can be current and long term assets
 2. Liabilities – they are debts or obligations, examples of debts bankloan creditors (accounts
payables) bonds, debentures (secured corporate bonds of a short term nature)
3. Capital/owner’s equity – constitutes the claims of the owner’s of the business in the
business
4. Revenues: Inflows from utilizing the firm’s assets e.g. sales income, fees income, bus
fare income. These revenues should be from the ordinary course of business.
5. Gains: Inflows from incidental items i.e. business operations that are not part of the
ordinary business e.g. on sale of furniture and fittings, gain on sale of equipments etc.
6. Expenses: The costs incurred in the process of generating revenues; these must be
incurred in the day to day operations of the firm e.g. salaries of employees
Expenses, e.g. rent expenses, utilities, repairs and maintenance, insurance
7. Losses: They are incidental costs incurred in the process of generating revenues – those
must be costs from activities to transactions that are not part of day to day business.

Cash basis versus accrual basis of accounting

Cash basis: Revenues are recognized when cash is actually collected; expenses are recognized
when cash is actually paid for the expenses. This is common with small firms and personal
business e.g. sole proprietorship.

Accrual basis: Revenues are recognized when realized and earned and not necessarily when
cash is collected; expenses are recognized when efforts have been incurred in generating the
revenues and not necessarily when money is paid out. Accrual accounting is often associated
with big/large firms e.g. companies.

Assignment- explain the Double-entry concept in Financial Accounting.