CHAPTER 01 TO 04 AND 13

Financial Accounting MS - 620

Presented To: Sir Mr. Abdul Razzaq

Presented By: MUHAMMAD SHAH
08152411018
What is accounting ?
• Accounting information is the means by which we measure and communicate
economic events.
• Whether you manage a business, make investments, or monitor how you
receive and use your money
• Accounting is the art of recording, classifying, and reporting financial
transaction and events of a business.
Business

• Business is the practice of making one's living or making money by

producing or buying and selling products (such as goods and services).
• In other words we can say that business is a legal activity which is carried
out for the purpose of earning.
• Types
Sole proprietorship Partnership Company /
Organization
Requirements for business

Owner
Assets Liabilities
Equity

Long Term Short Term Long Term Short Term

Assets
• An asset is any resource with financial value that is controlled by a
company, country, or individual.

Short Term Assets
Also called current
Assets. e.g.
Cash
Account receivable
Inventory
Prepaid expense
Marketable securities
Tangible Assets
Furniture, Building,
Long Term Assets
Equipment, Machinery &
Land etc
Also called fixed
Assets.
Intangible Assets
Types:
Good will, Trade mark,
• Tangible Assets
Copy write etc
• Intangible Assets
 Liabilities
• Liabilities are what you owe to others, like investors or banks
that issue your company a loan. OR
• Other party's contribution in the business

Short Term Liabilities Long Term Liabilities

Bank loan for less than Bank loan for more

one year than one year
Account payable Notes payable
Accrued tax Mortgage
Accrued expenses Pledge
Accrued salaries Bonds
Wages payable Debenture
Warranty liability
Owner Equity
• Owner residual interest in the assets of a business or the owners contribution
in the business
• E.g Common stock , Capital Stock, Preferred Stock
Accrual Base in Accounting
• It is a method where revenue and expenses are recorded when they are
earned or incurred, regardless of when the cash transactions occur. This
means:
• Revenue is recognized when it is earned (e.g., when goods are delivered or
services are provided), not necessarily when the payment is received.
• Expenses are recognized when they are incurred (e.g., when goods are
received or services are used), not necessarily when they are paid.
• This approach provides a more accurate picture of a company's financial
position and performance during a specific period, as it matches
revenues with the expenses incurred to generate those revenues.

Prepaid Accrual
Cash
(advance) (Accrued Salaries)
Realization Principle & Expenses
• Revenue should be recognized
when it is earned, regardless of
when the cash is received. A
• Revenue is recognized when
goods or services have been
delivered or performed.
• There is reasonable certainty that
the payment will be received.
• The earnings process is
substantially complete.
• Outflow of money from which the
intention is to generate revenue is
call expenses
• Cost of good sold
• Salaries and Wages
• Rent / Utility Bills
• Supplies , Marketing / advertising
• Interests / Insurance
Types of Accounts
• Assests, Expenses, Liabilities, Owner Equity, Revenue/ Sales
• Mentioned on LHS and RHS as Debit / Credit

Inc / Dec Debit Credit Inc / Dec

Dr Assets Liabilities Cr
Expenses Owner Equity
Rev /Sales
Cr Dr
Income Statement
• It is a financial document that summarizes a company's revenues, expenses,
and profits or losses over a specific period of time, typically a quarter or a
year.
• It Is a financial statement which show net income/loss.
• Two accounts included in this.
• 1. Revenue
• 2. Expenses
Conti… T Shirt Business
• Sales 5000 x 01 =
5000 Rs
• Cost of Good Sold (CGS) = (500)
• Gross Profit
= 4500
• Less Operating Expense = (2000)
• Operating Profit / EBIT = 2500
• Less Interest Expense =
(500)
• Earning Before Tax (EBT) = 2000
• Less Tax Expense =
(1000)
• Earning After Tax (EAT) = 1000
• Less Preferred Dividends = (400)
• Earnings available to C/ S = 600
• Less Common Dividends = (350)
• Retained Earnings =
250 Rs
Balance Sheet
• Is a statement which show the financial position of the organization. It is
recorded on Historical Cost or the actual value
• Assets = liability + owner equity
Conservative & Materiality Principles
• It states that while judging the
value of the asset in balance sheet
, their value is recorded in the
lowest rate
• while judging the value of the
Liabilities in balance sheet , their
value is recorded in the highest
rate
• Significance information that could
influence the decision making of
the users in income statement.
Decision should be made while
keeping the value of the asset /
liabilities
• E.g. If you buy land RS 100000
and also buy calculator Rs 100 so
if you don’t record the cost of
calculator doesn’t mater but the
record of land does matter
because it has certain value.
General Journal
Trafflet Enterprises
General Journal
May 2011
Date Description Debit Amount Credit Amount
May 03 Capital Stock 800000
Cash 800000
May 04 Account Payable 1000
Rent Expense 1000

May 15 Office Equipment 8000

Accounts Payable 8000
May 18 Vehicles 17000
Cash Account 7000
Notes Payable 20000
Conti…
May 20 Account Receivable 32000
Client Revenue 32000
May 26 Dividend 5000
Dividend Payable 5000
May 29 Utilities Expense 200
Cash Account 200
May 30 Cash Account 30000
Account Receivable 30000
May 31 Salaries Expense 14000
Cash Account 14000
T Accounts
Cash
Debit
amount Credit amount
A/R 30000 Capital Stock 800000
Vehicles 7000
Utilities expense 200
Salaries expense 14000

791200 Accounts Payable

30000 821200 Debit
amount Credit amount
Rent expense 1000 Office equipment 8000

7000
1000 8000
Trial Balance
Description Debit Credit
Capital Stock 800000
Cash 791200
Account payable 7000
Rent Expense 1000
Office equipment 8000
Utilities expense 200
Saalaries expense 14000
Vehicles 27000
Notes payable 17000
Account Recievable 2000
Client Revenue 32000
Dividend payable 5000
Dividend 5000
Cash flow
• Cash flow is the movement of money in and out of a company.
For preparation we need three things
• Income Statement Balance Sheet
Balance Sheet
(Previous year) (Current
year)
• Operating Cashflow
• Investing Cashflow
• Financing Cashflow
 Operating Cashflow
• In order to find operating Cashflow we will consider
Net income and sales (income statement)
Current assets and current liabilities (balance sheet) Opening
• These accounts support the operations of business.
Closing
• 7 steps of income statement
1. Sale – Cash received from customers
2. CGS – Cash paid for purchases
3. Operating expense – Cash paid for operating expense
4. Dividend income – Cash received from dividend income
5. Interest income – Cash received from interest income
6. Interest expense – Cash paid for interest expense
7. Tax expense – Cash paid for tax expense
Operating Cashflow
• Sales – Cash received from customers
Sales 2367500
A/R opening 192500
A/R closing (261500)

2298500
• CGS – Cash paid for purchases
CGS 1123300
Inventory Opening (408000)
Inventory Closing 65600

XXXXX
 Operating Cashflow
• Operating expenses – cash paid for operating expenses
Operating expenses (without non cash) 873700
Prepaid expenses opening
(23000)
Prepaid expenses closing
33500
Accrued expenses opening
71500
Accrued expenses closing
(32500)

XXXXX

• Interest income – cash received for interest expense

Interest income
7000
Interest receivable opening 100
Interest receivable closing (0)

XXXX
Operating expense
• Dividend income – cash received from dividend income
Do same as Interest income , just replace the word of interest with
dividend to get the value at the end
• Interest expense – cash paid for tax expense
Interest expense
34500
Interest expense payable opening
13000
Interest expense payable closing
(6000)

XXXX
• Tax expense – cash paid for tac expense
Do same as interest expense, just replace the word of interest with tax to get the
value at the end.
 Investing Cash flow
• In order to find investing cash flow we will consider
Long term assets from two balance sheets (opening and closing).

Building 962500 (1990)

32500 (1989)
637500
Cash paid for purchase of building (637500)
Equipment 520000(1990) 27500(1989)
492055
Cash paid for purchase of building (492055)
Cash received from selling securities 91000
91000 – 637500 – 492055 -
1038555
 Financing cash flow
• In fcf we will consider Long term liabilities, equity and short term notes payable
Short term notes payable 110000(1990)
200000(1989)
90000
Cash paid for notes payable
900000
Long term notes payable 350000(1990)
150000(1989)
200000 ( we will not consider notes payable because cash is not involved)*
Bonds Payable 400000(1990)
0(1989)
400000
Cash received from bonds Solution
400000
Common stock (equity) 450000(1990) (900000)
300000(1989) 400000
150000
Cash received from issue share 150000
150000
Retained earnings 370500(1990) (50000)
226500(1989)
144000
Retained earnings XXXXXX
144000
Cash paid for dividend
50000
Thankyou