1

ENAT COLLEGE
SHASHEMENE CAMPUS
POST GRADUATE PGOGRAM

Bridge course on Basic Accounting

November, 2023

11/22/2023
Welcome to the World of
Accounting
2

11/22/2023
 1. What is Accounting
Vision Enterprises
Financial Statement
at December 31, 1997
Vision Enterprises
Assets Financial Statement

JOURNAL Cash
Account Receivable
Land Assets
Cash
Total Assets
at December 31, 1997

Account Receivable
$4,456
Vision Enterprises
$5,714
Financial Statement
$ 981
at December---------
31, 1997
$11,151
$4,456
$5,714
Land Assets ======$ 981
Liability Cash --------- $4,456
Account Payabl $3,830$11,151
Total Assets
Account Receivable $5,714
Notes Payable Land $ 416 ====== $ 981
Liability --------- ---------
Total Liability
Account TotPayabl
al Assets $4,246 $3,830 $11,1 51
Notes Payable ====== $ 416 ======
Stockholder’s Equity
Liabili ty $2,365 ---------

PAYMENT Contribu
Totaled C p tal
Liabi
Retained Earnings
Total Stockholder’s
Equity
lity Payable
Account
Notes Payable
Stockholder’s Equity
Contribu ed C p tal
Total Liability
Retained Earnings
$ 367 $4,246 $3,830
---------====== $ 416
$2,732 $2,365 ---------
======$ 367$4,246
---------======
TotalStockholder’s
Equit y Stockholder’s Equity $2,732 $2,365
Contributed Capital ====== $ 367

3 Retained Earnings
Total yStockholder’s
Equit
---------
$2,732
======

11/22/2022
1.1 Definition of Accounting (As a Process)
4
is a
Accounting Process of Identifying

Recording&
summarizing

information
Relevant Reporting
that is

Reliable

to help users make better

decisions.
Comparable

11/22/2022
 Definition of Accounting (As A system)
5

Accounting is a system of processing

financial and non-financial data from
internal and external sources and
reporting the result (information) to
the interested users for wise
(informed) decision making.

11/22/2022
 1.2 Accounting Activities
6

 Identifying  Recording,
summarizing,
Business analyzing
Activities Business
Activities 
Communicating
Business
Activities

11/22/2022
 11/22/2022
BY; Dr. Dagnu L 7
1.3 What is the relation between accounting
and bookkeeping?
8

 Bookkeeping is the recording of financial

transactions and events, either manually or
electronically.
 Accounting is much more. It includes identifying,
measuring, recording, and analyzing business events
and transactions, and helps information users to
make economic decisions.

11/22/2022
 1.4 Processing Accounting Information
(the Accounting cycles)
9

 Identifying & recording of business trans /& events

 Classifying of data by posting to ledgers
 Summarizing of data from ledgers in to
unadjusted work sheet
 Adjusting, correcting, updating, records
(completion of work sheet)
 Closing nominal accounts to summarize operation
of the accounting period
 Preparation of post closing trial balance (F/st.)
 Reversing & adjusting of certain entries for next
accounting periods

11/22/2022
 1.5 Users of Accounting Information
10

External Users Internal Users

•Lenders •Consumer Groups •Managers •Sales Staff

•Shareholders •External Auditors •Officers •Budget Officers
•Governments •Customers •Internal Auditors •Controllers
11/22/2022
 Users of Accounting Information…
11

External Users Internal Users

Financial accounting provides Managerial accounting provides

external users with financial information needs for internal
statements. decision makers.

11/22/2022
 Users of Accounting Information-External
12

 Lenders: Whether the firm (borrower) can

repay the money or not?
 Shareholders: whether to buy, hold, or sell
stocks?
 Governments: whether the firm pay all due
tax?
 Customers: whether the firm can exist to
provide post-sale services?
 External Auditors: whether the financial
statements are prepared according to GAAP?
 Etc.
11/22/2022
 Users of Accounting Information-Internal
13

 Marketing managers: target customers, set price,

monitor sales.
 Production managers: monitor cost and ensure
quality.
 Purchasing managers: what, when and where to
purchase materials.
 Human resource managers: employees’ performance
and compensation.

11/22/2022
 1.6 An Overview of Accounting Principles
14

 General principles: basic assumptions, concepts, and

guidelines for preparing financial statements.
Usually stem from long-used accounting practice.
 Specific principles: detailed rules used in reporting
business transactions and events.
Usually created by a pronouncement from an
authoritative body.

11/22/2022
 I. Assumptions

A. Business Entity
B. Going-Concern
C. Monetary Unit measurement

11/22/2022 BY; Dr. Dagnu L 15

 II. Concepts

A. Accounting Period Concept

B. The Objectivity Concept
C. The Dual-Aspect Concept

11/22/2022 BY; Dr. Dagnu L 16

 III. Principles

A. Historical Cost Principle

B. Revenue Realization Principle
C. Matching Principles
D. Full-Disclosure Principles

11/22/2022 BY; Dr. Dagnu L 17

 IV. Constraints

A. Materiality
B. Consistency
C. Conservatism
D. Cost-Benefit

11/22/2022 BY; Dr. Dagnu L 18

Financial Statements:
-A Lens to View Business
- Carry information from
19
processed data

Financial
Statements

11/22/2022
 1.7 Types of Financial Statements and
Reports
20

 The Income Statement

 The Balance Sheet
 The Statement of Retained
Earnings
 The Statement of Cash Flows






11/22/2022
 The Income Statement
21

 An income statement is a summary of the revenues

and expenses of a business over a period of time,
usually either one month, three months, or one year.
 Summarizes the results of the firm’s operating and
financing decisions during that time.
 Operating decisions of the company apply to
production and marketing such as sales/revenues,
cost of goods sold, administrative and general
expenses (advertising, office salaries)
 Provides operating income/earnings before interest
and taxes (EBIT)
11/22/2022
Results of financing decisions are
reflected in the remainder of the
22

income statement.
When interest expenses and taxes are 
subtracted from EBIT, the result is net
income available to shareholders.
 Net income does not necessarily 
equal actual cash flow from operations
and financing.

11/22/2022
 BALANCE SHEET: It depicts the basic
Accounting equation
23

Assets = Liabilities + Equity

Liabilities &
Assets Equity

11/22/2022
 The Balance Sheet

24

 A summary of the assets, liabilities, and equity of a business at a particular point in time, usually at
the end of the firm’s fiscal year.

Assets = Liabilities + Equity

(Resources of the (Obligations of (ownership left over
business enterprise) the business) Residual)

Fixed Assets Long-term Common stock outstanding

(Plant, Machinery, Equipment (Notes, bonds, & Additional paid-in capital
Buildings) Capital Lease Retained Earnings
Current Assets Obligation)
(Cash, Marketable Securities, Current Liabilities
Account Receivable, Inventories) (Accounts Payable,
Wages and salaries,
Short-term loans
Any portion of long-term
Indebtedness due in one-year)

11/22/2022
 THE STATEMENT OF CASH FLOWS
25

The statement is designed to show how the firm’s operations have affected
its cash position and to help answer questions such as these:

Is the firm generating the cash needed to purchase additional fixed assets for
growth?
Is the growth so rapid that external financing is required both to maintain 
operations and for investment in new fixed assets?


 Does the firm have excess cash flows that can be used to repay debt or to invest in
 new products?

 The statement shows :
- Cash flows from operating activities
- Cash flows from Investing activities
- Cash flows from financing activities

11/22/2022
Mode of Learning Accounting
Learn Accounting
26 Concepts
(Ten Fundamental Accounting Concepts)

Understand Accounting Conventions

(Three major conventions)

Classify the Accounting Events

(Capital, Revenue, Deferred Revenue Expenditure)

Apply the Accounting Rules

(Personal, Real and Nominal Rules)

Record the Transaction as a Journal

(Entering the Debit and Credit Side of Transaction)

Classify the Transaction

(Asset, Liability, Revenue or Expense)

Summarize the Transaction

(Prepare Trial Balance, Trading, P&L and Balance Sheet)
11/22/2022
Part 2 Information
Processing
27

11/22/2022
 Accounts
28
• The records that are kept for the individual asset,
liability, equity, revenue, expense, and dividend
components

• In other words, a business would maintain an

account for cash, another account for inventory,
and so forth for every other financial statement
element

• All accounts, collectively, are said to comprise a

firm’s general ledger.

11/22/2022
 The Debit/Credit Rules
29

 Assets/Expenses/ Dividends
 Debits increase these accounts and credits decrease these
accounts.
 These accounts normally carry a debit balance

 Liabilities/Revenues/Equity
 Credits increase these accounts and debits decrease these
accounts.
 These accounts normally carry a credit balance






11/22/2022
 Accounting Rule of Thumb
30

Nature of Transaction Increase Decrease

Asset Debit Credit
Liability Credit Debit
Revenue Credit Debit
Expense Debit Credit
Profit Credit Debit
Losses Debit Credit

11/22/2022
 Analysis of Transactions and Events
31

 As transactions occur, it is necessary to perform an

analysis to determine
 what accounts are impacted and
 how they are impacted (increased or decreased).


 Then, debits and credits are applied to the accounts,
utilizing the rules set forth in the preceding slide

11/22/2022
 Determining an Account’s Balance
32

• The balance of a specific account can be determined

by
– considering its beginning (of period) balance, and then
– netting or offsetting all of the additional debits and credits to
that account during the period

11/22/2022
 The Journal
33

 Contains a chronological listing of a company’s

transactions and events

 Source documents are reviewed and interpreted as to

the accounts involved.

 Then, they are documented in the journal via their

debit/credit format

11/22/2022
 Posting
34

 to determine the balance of each specific account, we

will copy (“post”) the entries listed in the journal into
their respective ledger accounts.
 In other words, the debits and credits in the journal
will be accumulated (“transferred”/“sorted”) into the
appropriate debit and credit columns of each ledger
page

11/22/2022
 The Trial Balance
35

 A trial balance is simply a listing of the ledger

accounts along with their respective debit or credit
balances.

 The trial balance is not a formal financial statement,

but rather a self-check to determine that debits equal
credits

11/22/2022
 Chart of Accounts
36

 A listing of all accounts in use by a particular

company
 Individual accounts are often given a specific
reference number.
 The numbering scheme helps keep up with the
accounts in use, and helps in the classification of
accounts.
 Control and Subsidiary Accounts



11/22/2022
Part 3 Income Measurement
37

11/22/2022
 “Accounting” Income
38

 historical cost
 objective and verifiable

 market values
 more relevant for decision-making


 this is a long-running debate, and specific accounting
rules are mixed

11/22/2022
 Income Terminology
39

• Revenues -- Inflows and enhancements from

delivery of goods and services that constitute
central ongoing operations
• Expenses -- Outflows and obligations arising from
the production of goods and services that
constitute central ongoing operations
• Gains -- Like revenues, but arising from peripheral
transactions and events
• Losses -- Like expenses, but arising from
peripheral transactions and events

11/22/2022
 Basic Elements of Revenue Recognition
40

 The basic conditions of revenue recognition are to

look for both
 (a) an exchange transaction, and
 (b) the earnings process being complete.


 It is important to note that receiving payment is not
a criterion for initial revenue recognition

11/22/2022
 Basic Elements of Expense Recognition
41

 Associating cause and effect

 Systematic and rational allocation
 Immediate recognition


 It is important to note that making payment is not a
criterion for initial expense recognition

11/22/2022
 The Adjusting Process
42

 Multi-period items
 Prepaid insurance

 Prepaid rent

 supplies

 Depreciation

 Unearned revenue








11/22/2022
 The Adjusting Process
43
 Multi-period items  Accrued items
 Prepaid insurance  Accrued salaries
 Prepaid rent  Accrued interest
 Supplies  Accrued rent
 Depreciation  Accrued revenue
 Unearned revenue








11/22/2022
 Accrual- Versus Cash- Basis Accounting
44

 Accrual basis
 Cash basis
 Modified Approaches









11/22/2022
Part 4 The Reporting Cycle
45

11/22/2022
 Preparing Financial Statements
46

 It is necessary to utilize the adjusted trial balance

because it has been updated to reflect the year-end
adjusting entries

 A Worksheet Approach
 one may desire to prepare financial statements that take into
account necessaryadjustments,
 but without actually updating journals and ledgers





11/22/2022
 The Accounting Cycle and Closing Process
47

• Reflecting on the accounting processes thus far

described reveals the following typical steps:
– transactions are recorded in the journal
– journal entries are posted to appropriate ledger accounts
– a trial balance is constructed
– adjusting entries are prepared and posted
– an adjusted trial balance is prepared
– formal financial statements are produced

11/22/2022
 The Closing Process
48

 The purpose of the closing process is two-fold

 Closing is a mechanism to update the retained earnings
account

 Revenue, expense, and dividend accounts represent amounts

for a period of time
 one must “zero out” these accounts at the end of each period to
reset them to begin the next accounting period

11/22/2022
 The Closing Process
49

 Closing involves a four step process

 close revenue accounts

 close expense accounts

 close the Income Summary account to Retained Earnings

 close the Dividend account to Retained Earnings

 Income Summary -- a non-financial statement

account used only to facilitate the closing process

11/22/2022
 Classified Balance Sheets
50

 Assets
 Current Assets

 Long-term Investments

 Property, Plant, and Equipment

 Intangible Assets

 Other Assets








11/22/2022
 Classified Balance Sheets
51

 Liabilities
 Current Liabilities

 Long-term Liabilities

 Equity
 Capital Stock

 Retained Earnings








11/22/2022
 Notes to the Financial Statements
52

 Financial statements, by themselves, may not tell the

whole story
 Notes are used to describe
 accounting policies,
 major business events,
 pending lawsuits, and
 other facets of operation






11/22/2022
 Business Liquidity and the Operating Cycle
53

 Liquidity is the ability of a firm to meet its near-term

obligations as they come due.

 Inadequate liquidity can spell doom, even for a

company with bright long-term prospects and
significant noncash assets.

11/22/2022
 Business Liquidity
54

 Working capital is the difference between current

assets and current liabilities
 Current Ratio
 Current Ratio = Current Assets/Current Liabilities
 Quick Ratio
 Quick Ratio = (Cash + Short-term Investments + Accounts
Receivable)/Current Liabilities

11/22/2022
 Objectives of Financial Reporting
 to provide useful information
55 for investors, creditors, 

analysts, government, and other financial statement users

 Qualitative Characteristics of Accountings
 Primary Qualities
 Relevance
 Reliability

 Secondary Qualities
 Comparability
 Consistency







11/22/2022
 56

 Threshold Issues
 Materiality

 Cost-benefit

 Other Concepts
 Elements of financial statements

 Recognition and measurement

 Cash flows and present value

 Objectives for non business entities





11/22/2022
 Cash Flows and the Cash Flow Statement
57

 Operating Activities
 Investing Activities
 Financing Activities


 Methods of preparing cash flow statements






11/22/2022
 58

The end thanks!!

11/22/2023