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Introduction To Accounting
Introduction To Accounting
Business
Environments:
Semester 2 Lecture 6:
Introduction to Finance
LEARNING OUTCOMES
Accounting
Process of preparing
financial statements that process of preparing
companies' use to show reports about business
their financial operations that
help managers make
performance and position
to people outside the Financial Management short-term and long-term
company decisions.
Process of Financial Accounting
of Business
Finance Managers
Employees
and their
Information Business
representatives
Lenders Government
Investment Community
Suppliers
analysts representatives
Fundamental Enhancing
Faithful
Relevance
representation
Materiality
threshold
Understand-
Comparability Timeliness Verifiability
ability
Expected returns on
an investment need
to be higher to
encourage
investment in riskier
environments
0 Risk
BE, Semester 2, Lecture 6, Introduction to Finance 10
Financial Statements
Business entity concept - This concept assumes that, for accounting purposes,
the business enterprise and its owners are two separate independent entities.
Thus, the business and personal transactions of its owner are separate. For
example, when the owner invests money in the business, it is recorded as
liability of the business to the owner. Similarly, when the owner takes away
from the business cash/goods for his/her personal use, it is not treated as
business expense. Thus, the accounting records are made in the books of
accounts from the point of view of the business unit and not the person
owning the business. This concept is the very basis of accounting
Accounting Concepts
Going concern concept - This concept states that a business firm will
continue to carry on its activities for an indefinite period of time. Simply
stated, it means that every business entity has continuity of life. Thus, it
will not be dissolved in the near future. This is an important assumption
of accounting, as it provides a basis for showing the value of assets in the
balance sheet
Accounting period concept - All the transactions are recorded in the
books of accounts on the assumption that profits on these transactions
are to be ascertained for a specified period. This is known as accounting
period concept. Thus, this concept requires that a balance sheet and
profit and loss account should be prepared at regular intervals. This is
necessary for different purposes like, calculation of profit, ascertaining
financial position, tax computation etc.
Accounting Concepts
Assets - An asset is anything of value or a resource of value that can be converted into
cash. Individuals, companies, and governments own assets. For a company,
an asset might generate revenue, or a company might benefit in some way from owning
or using the asset. Eg – Land, Buildings, Motor vehicles, Trade receivables, Prepayments,
Cash, Inventory
Liabilities - A liability is defined as the future sacrifices of economic benefits that the
entity is obliged to make to other entities as a result of past transactions or
other past events, the settlement of which may result in the transfer or use of assets,
provision of services or other yielding of economic benefits in the future. Eg- Loans, bank
overdraft, trade payables, accrued payments
Equity - Equity represents the value that would be returned to a company's shareholders
if all of the assets were liquidated and all of the company's debts were paid off. (Owner’s
share of the company)
Classification of Assets
Income – The revenue of the organization earned through sale of goods or any other source such
as investment income, rent etc.
Expenses – Cost incurred in the organization to run day to day operations such as raw material
cost, salaries and wages, electricity etc.
Note – Income and Expenses are recorded in the Income statement whereas Assets, Liabilities
and Equity are recorded in the SOFP