Lecture 2

Fundamentals of
Financial Accounting
(FFA)
Elements of the financial statements

1- Assets
• Resource controlled by the entity as a result of past events
• Future economic benefits expected to flow to the entity.
• Example, a building that is owned and controlled by a business and future benefits.

• Types of Assets
• Non- Current Assets
• Current Assets

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Elements of the financial statements

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Elements of the financial statements
2- Liabilities
• An obligation to transfer economic benefit / pay as a result of past transactions
or events.
• For example, an unpaid tax obligation is a liability.

• Types of Liabilities
• Non- Current Liabilities
• Payable more than 12 months after Reporting date(when FS are
prepared)

• Current Liabilities
• Payable within 12 months after Reporting date(when FS are prepared)

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Elements of the financial statements
3- Equity / Capital
• Amount invested by the Owners to start and run the Business
• Effectively what is paid back to the owners (shareholders).

4- Income
• Inflow of economic benefit to the entity in the reporting period. (Normally
within one year)
• Trading activities Example Sales of business

5- Expenses
• Outflow of economic benefit to the entity in the reporting period. (Normally
within one year)
• Trading activities Example purchases / day to day expenses
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Components of Financial Statements

1- Statement of Financial Position

2- Statement of Total Comprehensive Income
3- Statement of Changes in Equity
4- Statement of Cash Flow
5- Notes to the Financial Statements

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Double Entry Book Keeping System
• Every transaction is recorded twice, as a debit entry in one account and
as a credit entry in another account.

• Total debit entries and total credit entries must always be equal. This
maintains the accounting equation.

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Accounting Equation

The accounting equation is a simple expression of the fact that at any

point in time the assets of the business will be equal to its liabilities plus
the equity of the business.

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Double Entry Book Keeping System
Elements of Financial Statement – Normal
• All the Assets are Debit (Whenever assets are increasing) (Dr.)
• All the Liabilities are Credit (Whenever liabilities are increasing) (Cr.)
• Equity is Credit (Obligation towards Owner) (Cr.)

Accounting Equation
Assets (Dr.) = Liabilities (Cr.) + Equity (Cr.)

• All Expenses are Debit items (Whenever incurring expenses) (Dr.)

• All Incomes are Credit Items (Whenever making earning /revenue) (Cr.)

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Double Entry Book Keeping System
Elements of Financial Statement - (Reverse situation)
• Disposing of Assets (Assets are decreasing) (Cr.)
• Pay off Liabilities (Liabilities are decreasing) (Dr.)
• Paying owner Equity (Obligation towards Owner decreasing) (Dr.)

• Reversing Expenses (Decreasing expenses) (Cr.)

• Reversing Incomes (Decreasing Income) (Dr.)

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Accounting Equation – Example 1

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Accounting Equation
Assets – Liabilities (Net Asset) = Equity

• Asset minus Liabilities are usually Called Net Assets

• A change on one side of an equation must be matched by a change on the other.
• Therefore, an increase in net assets means a matching increase in equity capital and a
fall in net assets means a matching fall in equity capital.

Movements in equity are caused by:

• profit being added to capital or losses deducted from capital; and
• the introduction of more capital into the business (perhaps by providing it with
additional cash or other assets);
• payments to the owners in the form of drawings (or dividends in the case of a
company).

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Accounting Equation
Assets – Liabilities (Net Asset) = Equity

In other words, net assets will change in value between the beginning and end of
a financial year by the amount of profit (or loss) in the period, new capital
introduced and drawings or dividends taken out.

Drawings
Drawings are the withdrawals from Business by the owner for the owner's personal use.
The drawings or draws by the owner are recorded in an owner's equity account as
reduction from Equity.

Dividend
A dividend is the distribution of some of a company's earnings (Profits) to shareholders
(Owners).
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Double Entry Book Keeping System - Example

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