BASICS OF FINANCIAL ACCOUNTING

BUSINESS:
In the literal sense “business” is derived from the word “busy” which means to be engaged in
doing work or “the state of being busy”.
Or
All economic legal activities are connected with production and exchange of goods and
services to earn profit is called “business”.
Or
Investing money, to make more money I.e. introducing the main idea of profit. The primary
objective of business is to earn profit.

Profit is the excess of income over expenditure. When expenditure exceeds income, the
business is running at a loss.

ORGANIZATION/ENTITY:
Organization is a social arrangement of people that is structured and managed to meet
a need or to pursue collective goals. Organization is a place where people work together and
achieve goals objectives for themselves and for others. The basic goal of organization is to make
Profit.
FORMS OF ORGANIZATIONS:
There are three different forms of organization that can be formed to conduct a business, these
are as follows;
a) Sole-traders/proprietorship
b) Partnership
c) Joint stock company

WHY DO ORGANIZATIONS EXIST?

Organizations can achieve results which individuals cannot achieve by themselves. Therefore,
the following advantages for organizations are as follows:

a) It helps to overcome individual limitations

b) Focus on specialization
c) Save time
d) Increased knowledge and skills

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FEATURES/CHARACTERISTICS OF ORGANIZATION:

TYPES OF COMPANY
EVALUATION
SOLE TRADERS PARTNERSHIP JOINT STOCK LIMITED
PARAMETERS
ESTABLISHMENT EASY EASY COMPLICATED

FINANCE RAISING LOW MODERATE HIGH

OBLIGATIONS UNLIMITED UNLIMITED LIMITED

AGE OWNER'S LIFE OWNER'S LIFE PERPETUAL LIFE

LEGAL
NO REQUIREMENTS NO REQUIREMENTS NEED TO BE FOLLOWED
REQUIREMENTS

ACCOUNTING
“Accounting is the art of recording, classifying and summarizing transactions, events and
interpreting the results.”

PURPOSE OF ACCOUNTING
The purpose of accounting is to provide financial Information of the entity. Financial
information mainly consists of INCOME STATEMENT AND BALANCE SHEET.

COMPONENTS OF FINANCIAL INFORMATION (FINANCIAL STATEMENT)

The purpose of financial statement is to provide financial information. There are two basic
components of financial statement. These are as follows;

 Income statement (profit and loss account)

 Balance sheet (statement of financial position)

ACCOUNITNG PERIOD:
Accounting period normally consist of 12 moths. Accounting period may end at 31st December,
30th June or at any other date. While calculating the profit/loss current year expenses and
revenues should be recorded.

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 INCOME STATEMENT
Purpose if income statement is to provide profit or loss of organization. There are two main
components of Income Statement
 Revenues (Income generated from the sale of goods or services)
 Expenses (Outflow of resources by the organization)

EXAMPLES OF EXPENSES EXAMPLES OF REVENUES

 Rent expense  Commission revenue
 Salary expense  Consultation revenue
 Electricity expense  Interest revenue
 Telephone expense  Fees revenue
 Printing and stationary  Sales revenue
 Depreciation expense  Purchase return/return
 Bad debt expense outward
 General expense  Purchase discount/
 Interest expense discount received
 Transportation expense
 Advertisement expense
 Insurance expense
 Sales discount/discount allowed
 Sales return/return inward
 purchases

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 BALANCE SHEET

The purpose of BALANCE SHEET is to provide the financial status or position of the
organization. There are three main components of balance sheet items
 Assets (Assets are the resources owned and controlled by entity as a result of past event and
future benefit is expected to flow)
 Liabilities (A liability is something which is owed to somebody else)
 Owner’s equity

ASSETS

CURRENT ASSETS FIXED ASSETS

EXAMPLES OF CURRENT ASSETS EXAMPLES OF FIXED ASSETS

 Cash (cash at hand)  Land

 Bank balance (cash at bank)  Building
 Marketable securities  Vehicles/automobiles
 Account receivable  Furniture and fixture
 Notes / bills receivable  Equipments
 Other receivable  Machine
 Merchandise
 Office supplies
 Prepaid/unexpired
 Short term investment

ALLOWANCE FOR DEPRECIATION/ACCUMULATED DEPRECIATION:

Allowance for depreciation is the contra asset account. It is shown in the balance sheet
and is deducted from the value of fixed asset.

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 ALLOWANCE FOR RECEIVABLE/BAD DEBT:

Allowance for bad debt is the contra asset account. It is shown in the balance sheet and
is deducted from the value of account receivable/trade receivable.

LIABILITIES

CURRENT LIABILITY LONG TERM LIABILITY

EXAMPLES OF CURRENT LIABILITY EXAMPLES OF LONG-TERM LIABILITY
 Account payable  Long term loans
 Notes or bills payable  Mortgage
 Unearned  Debenture/bonds payable
 Bank overdraft
 Short term loans
 Other payable/Accrued
o Tax payable
o Rent payable
o Insurance payable
o Interest payable
o Salary payable

OWNER’S EQUITY

CAPITAL ADDITIONAL investment

DRAWINGS PROFIT/LOSS

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