FOFA 1

Introduction to accounting

What we will cover

1. Accounting
1.
2.
3.
4.
5.
6.
7.

Accounting Equation and

Basic Accounting Transactions
Double entry and accounting
cycle
Accrual Accounting and the
Income Statement
Earnings and Cash Flow
statements
Sales accounting
Inventory accounting
Financial statement analysis

2 Finance
1.
2.
3.
4.
5.

6.
7.

Valuation
Financial system
RBI and SEBI
Bonds and Treasury
bills
Futures options and
derivatives
Insurance
Foreign exchange

Introduction to
accounting

Define Accounting
Accounting Transaction
Accounting Equation
Assets, liability and
owners equity
The Accounting
Equation and Financial
Position

Luca Pacioli
Father of acctg

Accounting is a system of
recording information
about a business.
The information that is
collected is primarily
numerical.

This information is then

presented to various
people to help them
make decisions.
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Business

Business
A separate entity
Long Term
Facilities
Assets
Short Term
Owners
Equity
Long Term
Lenders
Liability Short Term
Cash or Credit sales
Revenues
Cash or Credit Purchases Expenses
Dividends and Growth
Earnings

What is accounting
Identification: economic event relevant to business
Recording: diary of events measured in money
(Transaction)

Summarization: ledger, trial balance and Financial

statements

Communication: annual report and ratios, graphs and

charts

Accounting Equation
The whole of accounting is based on a single
equation
ASSETS = EQUITY + LIABILITIES

ASSETS
Assets are the economic resources of the
entity, and include such items as cash,
accounts receivable (amounts owed to a firm
by its customers), inventories, land, buildings,
equipment, and even intangible assets like
patents and other legal rights.
Assets entail probable future economic
benefits to the owner.
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Owners equity
Owners equity is the owner's stake in the business.
The total owners equity (i.e., stockholders equity)
of a corporation usually consists of several amounts,
generally corresponding to the owner investments in the
capital stock (by shareholders)
and additional amounts generated through earnings that
have not been paid out to shareholders as dividends
(dividends are distributions to shareholders as a return on
their investment).

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Liabilities
Liabilities are amounts owed to others
relating to loans, extensions of credit, and
other obligations arising in the course of
business.
Implicit to the notion of a liability is the idea
of an existing obligation to pay or perform
some duty.

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Accounting Transaction
Financial accounting refers to the recordation of information
about money.
A "transaction" is a business event that has a monetary impact.
A transaction triggers the recording of information about the
money involved in the event.

Examples:
Incurring debt from a lender
The receipt of an expense report from an employee
The receipt of an invoice from a supplier
Selling goods to a customer
Remitting sales taxes to the government
Paying wages to employees
Remitting payroll taxes to the government
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Money Measurement Concept

The money measurement concept states that a
business should only record an accounting
transaction if it can be expressed in terms of
money.
This means that the focus of accounting
transactions is on quantitative information, rather
than on qualitative information.
Thus, a large number of items are never reflected
in a company's accounting records, which means
that they never appear in its financial statements.
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Examples of items that cannot be

recorded as accounting transactions

Employee skill level

Employee working conditions
Expected resale value of a patent
Value of an in-house brand
Product durability
The quality of customer support or field
service
The efficiency of administrative processes
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Transactions
Each transaction represents some sort of
change to one's assets, liabilities or owner's
equity.

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Which company will u invest?

Financial Position

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Trace the accounting Equation

We'll be using a business called George's Catering to illustrate each of the basic
accounting transactions.
a) What is the first thing George is going to do? Hes going to invest in the
business (hes going to put some assets into the business). George decides to
invest $15,000 of his personal funds into the businesss bank account. What
happens to our equation?
b) George realizes that he needs more money to create a really high-quality
catering business. Yet he does not have any more personal funds available to
invest in the business. He decides to take a loan from the bank to the value of
$5,000.
c) George Burnham is running short of cash at home. He needs some money to
buy his daughter a bicycle for her birthday (i.e. for personal use). He decides to
withdraw $500 from the business bank account. What is the impact on the
equation for Georges Catering?
d) Now Georges Catering provides catering services for a wedding. George gets
$10,500 from this job in cash. What happens to our accounting equation?
e) Now Georges Catering provides catering services for a wedding. George gets
$10,500 from this job in cash. What happens to our accounting equation?
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f. Georges Catering provides catering services for a funeral for the Smiths. The
services are provided on the 8th of April and the agreed fee is $5,000. As
part of the agreement, the Smiths will only make payment at the end of
April.
g. The Smiths pay the full amount owed to Georges Catering on the 30th of
April.
h. In order to be able to successfully pull off the catering job for the wedding
and for future jobs, George decides to hire an assistant. He paid the assistant
a $4,000 salary.
i. George Burnham receives the telephone bill from the telephone company on
the 30th of April. It says that Georges Catering owes $200 for the month of
April. The telephone company offers payment terms of 15 days from the
date that the bill is received. George intends to use these payment terms and
pay after a week or two. How does this transaction affect the equation on
the 30th of April?
j. George Burnham pays the amount owing to the telephone company on the
13th of May.
k. George sees that he has quite a bit of spare cash, and so decides to pay back
some of the loan from the bank. He writes out a check for $4,000.

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