First year -4th sheet – Chapter One

There are three goals /objectives/ aims of financial accounting:

1. To measure net profit (income) or net loss of the firm. Net income (loss) is the difference between
total revenues & gains and total expenses & losses. Net income (loss) is measured by preparing
income statement.
2. To measure financial position of the firm. Financial position is measured by determining total
Assets, total Liabilities and owner’s equity. Financial position is measured by preparing financial
position statement or balance sheet.
3. To measure the degree of liquidity by preparing cash flows statement.

The procedures of financial accounting: (Accounting Cycle):

There are five procedures that constitute the The Accounting Cycle
accounting cycle. 1. To identify the financial transactions.
1) Identifying 2. To analyze the transactions into debit/credit.
2) Analyzing Financial transactions/events 3. To record to transactions in journal(Entries)
3) Recording 4. To post the entries into accounts in ledger.
4) Posting 5. To prepare trail balance using the balances
5) Preparing  Financial statement of ledger accounts.
6. To prepare financial statements using the
balances of trail balance.

Users of Accounting Information

Financial Accounting System
Provides external users with financial
information.
External users such as Stockholders
(shareholders) - Lenders- Investors- Creditors –
Government –External Auditors.
Cost & managerial Accounting System
Provides internal users with managerial
information for internal decision making
process.
Internal users such as Mangers –officers –
controllers – Internal auditor

Definition of financial accounting

Financial accounting is an information system that identifies, analyzes, records, posts financial
transactions & prepares financial statement to assist interested users with accounting information
required for decision making process”.

The difference between Accounting & Book keeping

Accounting is a science which contains theories, Book keeping is an application of GAAP through
concepts, assumptions, standards, and principals the Accounting System .Accounting system
which constitute the Conceptual framework or constitutes the application framework of GAAP.
Generally Accepted Accounting Principles Accounting system has five components:
(GAAP). 1) Chart of accounts.
2) Documents & vouchers.
3) Books & records
4) Documentary cycle.
5) Financial statements & reports.

Conceptual Framework of Financial Accounting

First level: The Objectives
The main objective of financial accounting is Objectives
producing accounting information to assist the
external & internal users for decision making process. Qualitative
characteristics &
These accounting information are derived from Elements
financial statement & reports. Principles, Assumptions &
constraints

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 First year -4th sheet – Chapter One

Second level: The concepts related to qualitative characteristics of accounting information:

Accounting information which is generated from financial statement & reports must have three main
qualitative characteristics to be useful for the external & internal users.
1. Relevant information : Related to the decisions of its users.
2. Reliable information : Trusted by the users. Therefore, the info. Should be objectivity
(documented), accurate, free of errors, & free of bias
(representative faithfully).
3. Comparable information : Helpful in comparing between different firms and also, between
accounting periods inside the same firm.

Third level: Accounting principles, Assumptions, & Constraints (GAAP)

Accounting principles 4 principles
1. Historical cost principle or : The financial transactions should be measured on the basis of
measurement principle actual cost. Actual cost is considered objective. Objectivity
concept means the information is supported by independent &
unbiased evidence (document or voucher).
2. Recognition principle :  Revenue recognition principle means that the revenue must
be recognized (recorded) when it is earned (not received or
collected)
 Expense recognition principle means that the expense must
be recognized (recorded) when it is incurred (not paid) to
generate revenue.
3. Matching principle : Means that comparing revenues with expenses to measure
(determine) net profit (income) or net loss through the income
statement.
4. Full Disclosure principle : Means that the firm is required to report the details
information behind financial statement that would impact the
decisions of users.

Accounting Assumptions 4 Assumptions

1. Going concern
Assumption
2. Accounting period
Assumption
3. Monetary unit
Assumption
4. Accounting (Business)
Entity Assumption
: Presumes that the life of firm will continue forever.
: Presumes that the life of firm must be divided into accounting
periods. Accounting period is (one year) or (12 months).
Accounting period starts Jan.1 and ends Dec .31. Sometimes
accounting period starts 1/7/2014 and ends 30/6/2015.
: Presumes that the financial transactions will be measured by
the Egyptian Pound (L.E) as a measuring unit.
: Presumes that the firm has independent personality separately
from the personality of its owner. The owner of the firm is
nature person and the firm is legal person.
A Business Entity has one legal forms:
 A sole proprietorship a firm owned by one person.
 A partnership a company owned by two or more persons
called partners.
 A corporation a company owned by a large number of
persons called stockholders or shareholders where the
ownership of corporation (Capital) is divided into units
called share or stock.

Accounting Constraints 2 constraints

1. Materiality constraint : The firm must disclose about the important information.
2. Cost –Benefit : The benefit of disclosure about information must exceed
constraint its cost

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 First year -4th sheet – Chapter One

Example 1 VI:
Presented below is information related to sole proprietorship of Amr Khalil attorney.
Service revenue 2007 340,000
Total expenses – 2007 211,000
Assets, January 1, 2007 85,000
Liabilities, January 1, 2007 62,000
Assets, December31, 2007 168,000
Liabilities, December 31, 2007 80,000
Drawings – 2007 ?
Instructions: Prepare the 2007 owner's equity statement for the firm.
Solution
Statement of Owner's Equity
Capital beginning 1
+ Net income 2
+ investment 3
- Drawing (?)
y
Capital Ending 4

1st number (Capital beginning) We'll use the data in January 1, 2007
Assets = Liabilities + Owner's equity
85,000 = 62,000 + ?
Owner's equity = 85,000 - 62,000
= 23,000

2nd number (Net income) We'll use Income statement data

Income Statement
Revenues
Service revenue 340,000
340,000
- Expenses
Total expenses 211,000
(211,000)
Net income 129,000

3rd number = zero because it is not given

4th number (Capital beginning) We'll use the data in December 31, 2007
Assets = Liabilities + Owner's equity
168,000 = 80,000 + ?
Owner's equity = 168,000 - 80,000
= 88,000

After the solution above the Statement of Owner's equity will be as follows:
Capital beginning 23,000 23,000 + y = 88,000
+ Net income 129,000 y = 88,000 – 23,000 = 65,000
+ investment 0 so
- Drawing (x) 129,000 – x = y
y 129,000 – x = 65,000
Capital Ending 88,000 x = 129,000 – 65,000 = 64,000
drawing is equal to 64,000