Accounting & Finance

Important Terms and Topics

Accounting:
Accounting is a systematic process of identifying, analyzing, classifying and summarizing the
transactions.

Finance:
The system or study of creating, circulating and managing money.

Basic Accounting Equation:

Liability Owner’s Asset

Equity s

Liability:
 Liability is a term in accounting that is used to describe any kind of financial obligation that a
business has to pay at the end of accounting period to a person or business.
 Liabilities are settled by transferring economic benefits such as money, goods or services.

Owner’s Equity:

 The definition of owner's equity is the owner's investment in an asset after they deduct
any liabilities.
 It's the difference between the number of assets and the value of liabilities that allows the
owner to know what they own after paying off debts.
 Owner's equity is also called net worth or net assets.

Assets:
 An asset is a valuable resource or item owned by an individual, entity or company with the
potential to generate economic value.
 Assets can be tangible, such as property, machinery or inventory and intangible like patents,
trademarks or intellectual property.
 Assets play a crucial role in financial accounting and are listed on a balance sheet, reflecting the
entity’s wealth.
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Assets Liabilities
Something a business owns: Something a business owes:
 Cash  Employee Wages
 Inventory  Employee Benefits
 Property  Vendor Payments
 Account Receivables  Long Term Loan
 Vehicles
 Equipment

Accounting Cycle:
A collective process of identifying, analyzing, and recording the accounting events of a company.
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Single Entry System:

Single-entry accounting is a method of tracking business assets, liabilities, income, and expenses which
records each transaction a single time. Also referred to as single-entry bookkeeping. Compare with
double-entry accounting, which logs every transaction so that the assets are liabilities/equity.

Double Entry System:

Double-entry accounting is a method of documenting business expenses and revenue by entering every
single transaction as a debit and credit. The way this operates is every transaction involves adding or
subtracting money from two different accounts.

Financial Statements:
“Written records that convey the business activities and the financial performance of a company”.

The income statement, balance sheet, and statement of cash flows are required financial statements.
These three statements are informative tools that traders can use to analyze a company's financial strength
and provide a quick picture of a company's financial health and underlying value.

 Statement of Comprehensive Income(Income Statement):

The income statement shows a company's expense, income, gains, and losses, which can be put into a
mathematical equation to arrive at the net profit or loss for that time period.

WHAT GOES ON AN INCOME STATEMENT?

While all financial data helps paint a picture of a company’s financial health, an income statement
is one of the most important documents a company's leadership team and individual investors can
review, because it includes a detailed breakdown of income and expenses over the course of a
reporting period. This includes:

 Revenue: The amount of money a business takes in during a reporting period

 Expenses: The amount of money a business spends during a reporting period
 Costs of goods sold (COGS): The cost of component parts of what it takes to make whatever it
is a business sells
 Gross profit: Total revenue less COGS
 Operating income: Gross profit less operating expenses
 Income before taxes: Operating income less non-operating expenses
 Net income: Income before taxes less taxes
 Earnings per share (EPS): Division of net income by the total number of outstanding shares
 Depreciation: The extent to which assets (for example, aging equipment) have lost value over
time
 EBITDA: Earnings before interest, depreciation, taxes, and amortization
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 Statement of Financial Position(Balance Sheet):

A statement of financial position is a financial statement that summarize a company's assets (what it
owns), liabilities (what it owes), and equity (assets less liabilities) on a particular date – usually at the
end of a financial month or financial year.

Importance of the Balance Sheet

The balance sheet is a very important financial statement for many reasons. It can be looked at
on its own and in conjunction with other statements like the income statement and cash flow
statement to get a full picture of a company’s health.

Four important financial performance metrics include:

 Liquidity – Comparing a company’s current assets to its current liabilities provides a

picture of liquidity. Current assets should be greater than current liabilities, so the
company can cover its short-term obligations. The Current Ratio and Quick Ratio are
examples of liquidity financial metrics.
 Leverage – Looking at how a company is financed indicates how much leverage it has,
which in turn indicates how much financial risk the company is taking. Comparing debt
to equity and debt to total capital are common ways of assessing leverage on the balance
sheet.
 Efficiency – By using the income statement in connection with the balance sheet, it’s
possible to assess how efficiently a company uses its assets. For example, dividing
revenue by the average total assets produces the Asset Turnover Ratio to indicate how
efficiently the company turns assets into revenue. Additionally, the working
capital cycle shows how well a company manages its cash in the short term.
 Rates of Return – The balance sheet can be used to evaluate how well a company
generates returns. For example, dividing net income by shareholders’ equity
produces Return on Equity (ROE), and dividing net income by total assets
produces Return on Assets (ROA), and dividing net income by debt plus equity results
in Return on Invested Capital (ROIC).

How the Balance Sheet is structured

 Current Assets
o Cash and Equivalents
o Account Receivable
o Inventory
 Non-Current Assets
o Plant, Property and Equipment
o Intangible Assets
 Current Liabilities
o Accounts Payable
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o Current Debts/Notes Payable
o Current Portion of Long Term Debt
 Non-Current Liabilities
o Bonds Payable
o Long Term Debt
 Share Holders Equity
o Share Capital
o Retained Earnings
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 Statement of Cash Flow:

A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows
that a company receives from its ongoing operations and external investment sources. It also includes
all cash outflows that pay for business activities and investments during a given period.

Cash Flow Definitions

 Cash flow: Inflows and outflows of cash and cash equivalents.

 Cash balance: Cash on hand and demand deposits (cash balance on the balance sheet).
 Cash equivalents: Cash equivalents include cash held as bank deposits, short-term
investments, and any very easily cash-convertible assets — includes overdrafts and cash
equivalents with short-term maturities (less than three months).

Cash Flow Statement Sections

Below is a breakdown of each section in a statement of cash flows. While each company will
have its own unique line items, the general setup is usually the same.

1. Operating cash flow

Operating activities are the principal revenue-producing activities of the entity. Cash flow from
operations typically includes the cash flows associated with sales, purchases, and other expenses.

2. Investing cash flow

Cash flow from investing activities includes the acquisition and disposal of non-current assets and other
investments not included in cash equivalents. Investing cash flows typically include the cash flows
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associated with buying or selling property, plant, and equipment (PP&E), other non-current assets, and
other financial assets.

3. Financing cash flow

Cash flow from financing activities results from changes in a company’s capital structure. Financing cash
flows include cash flows associated with borrowing and repaying bank loans or bonds and issuing and
buying back shares. The payment of a dividend is also treated as a financing cash flow.
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Petty Cash:
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Petty cash is a small amount of money kept on hand for the purpose of making small payments
such as office supplies, postage, and other small expenses. It is usually kept in a locked box and is
reimbursed periodically.

Petty cash is a current asset and should be listed as a debit on the balance sheet. When first
funding a petty cash account, the accountant should write a check made out to "Petty Cash" for
the desired amount of petty cash and then cash the check at the company's bank.

Responsibilities as an Accountant in School:

 Cash Handling
 Prepare Salary Sheet
 Handle Petty Cash
 Prepare Minute Sheet ( Petty Cash )
 Maintain FBISE Admission Portal
 Maintain Fee Ledger
 Maintain Students Files
 Maintain Employees Records
 Issue Fee Voucher to Students (Monthly Basis)
 Issue Salaries Slip to Employees (Monthly Basis)
 Maintain Expenses and Revenue Records
 Maintain Students Management System ( Daily Basis )
 Maintain Students Fee Record
 Bank Payments (Daily Basis)
 Timely Vendor Payments
 Public Dealing regarding Fee
 Follow up for late fee students (Daily Basis)
 Send reminder message for Fee
 Bank Account reconciliation (Daily Basis)
 Received Cash from Students (Daily Basis)