FINANCIAL ACCOUTING

SHAHAM AHMED

CONCEPTUAL FRAME WORK

SHAHAM AHMED

Financial Accounting
Financial Accounting aims at finding the results of an
accounting year in terms of profits or losses and
assets and liabilities.
Art and science of classifying, analyzing and
recording business transactions in a systematic
manner in order to prepare a summary at the end of
the year to find out the results of the concerned
accounting year,

Business transactions
Classification of transactions
Recording of transactions
Summary of transactions

Financial Accounting
OBJECTIV
E

QUALITATIVE
CHARACTERISTICS
of
accounting
information

ASSUMPTIONS

ELEMENTS
of
financial
statements

PRINCIPLES

CONSTRAINTS

Financial Accounting
Objectives of Financial Reporting
(1) useful to those making investment and credit decisions who have a
reasonable understanding of business and economic activities
(2) helpful to present and potential investors, creditors, and other users in
assessing the amounts, timing, and uncertainty of future cash flows
(3) about economic resources, the claims to those resources, and the changes in
them.

Financial Accounting
Qualitative Characteristics of Accounting Information
Primary Qualities: Relevance and Reliability

Relevance
Timeliness
Reliability.
Representational faithfulness
Neutrality

Secondary Qualities: Comparability and Consistency

Comparability.
Consistency.

Financial Accounting
Basic Elements
ASSETS

Probable are resources owned by a business. They are things of value used in
carrying out such activities as production, consumption and exchange.
The common characteristics possessed by all assets is the capacity to provide future
services or benefits to the entities that use them.

LIABILITIES

are claims against assets.

They are existing debts and obligations.
Most claims of creditors attach to total enterprise assets rather than to the specific
assets provided by the creditor.

EQUITY
Residual interest in the assets of an entity that remains after deducting
liabilities. In a business enterprise, the equity is the ownership interest.
INVESTMENTS
Or Paid-in capital is the term used to describe the total amount paid in by
BY OWNERS. stockholders.
The principal source of paid-in-capital is the investment of cash and other
assets in the corporation by stockholders in exchange for capital stock.
DISTRIBUTIONS
Decreases in net assets of a particular enterprise resulting from
TO OWNERS transferring assets, rendering services, or incurring liabilities by the
enterprise to owners.

its

Financial Accounting
COMPREHENSIVE
Change in equity (net assets) of an entity during a period from
INCOME
transactions and other events and circumstances from non owner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners.
REVENUES
Inflows or other enhancements of assets of an entity or settlement of its
liabilities (or a combination of both) during a period from delivering or
producing goods, rendering services, or other activities that constitute
the entitys
ongoing major or central operations.
EXPENSES
Outflows or other using up of assets or incurrences of liabilities (or a
combination of both) during a period from delivering or producing goods,
rendering services, or carrying out other activities that constitute the
ongoing major or central operations.

entitys

GAINS
Increases in equity (net assets) from peripheral or incidental transactions
of an entity and from all other transactions and other events and
circumstances affecting the entity during a period except those that result
from
revenues or investments by owners.
LOSSES

Decreases in equity (net assets) from peripheral or incidental transactions

of an entity and from all other transactions and other events and
circumstances affecting the entity during a period except those that result
from
expenses or distributions to owners.

Financial Accounting
INCREASE
DECREASE
Dividends to
Stockholders

Investments by
Stockholders

Stockholders
Equity
Revenues

Expenses

Financial Accounting

The Basic Accounting Equation

Assets

Liabilities
Equity

Stockholders

Financial Accounting
ASSUMPTIONS
1. Economic entity
The activity of a business enterprise can be kept
separate and distinct from its owners and any other
business unit.
2. Going concern

that the business enterprise will have a long life.

3. Monetary unit
means that money is the common denominator of
economic activity and provides an appropriate basis for
accounting measurement and analysis.
4. Periodicity
implies that the economic activities of an enterprise can
be divided into artificial time periods. These time
periods vary, but the most common are monthly,
quarterly, and
yearly.

Financial Accounting
PRINCIPLES
1. Historical cost
that most assets and liabilities be accounted for and
reported on the basis of acquisition price.
2. Revenue recognition Revenue is generally recognized
(1) when realized or realizable
(2) when earned.
3. Matching

expense recognition is tied to revenue recognition.

it dictates that efforts (expenses) be matched with
accomplishment (revenues) whenever it is reasonable
practicable to do so.

4. Full disclosure providing information that is of sufficient importance to

influence the judgment and decisions of an informed
user is followed.

and

Financial Accounting
CONSTRAINTS
1. Cost-benefit
2. Materiality
3. Industry practice
4. Conservatism

Financial Accounting
Transactions

are the economic events of the enterprise.

They may be identified as external or internal.

1 External transactions
involve economic events between
the company and some outside
enterprise or party.
2 Internal transactions

are economic events that occur

entirely within one company.

Financial Accounting

Ray and Barbara Neal decide to open a computer programming company to be

incorporated as Softbyte, Inc.

They invest $15,000 cash in exchange for $15,000 of common stock.

Softbyte purchases computer equipment for $7,000 cash.
Softbyte purchases computer paper and other supplies Acme Supply Company for
$1,600. Acme Supply Company agrees to allow Softbyte to pay this bill in next month.
Assets
Cash

Supplies

=
+

Equipment

Liabilities
Accounts
Payable

+
+

Stockholders
Equity
Common
Stock

Assets

= Liabilities +

stockholder equity

Investment + Revenue

Expenses

Cash + Equi + Com + Supp + Acc. = Account + Advance + Shares + Service Rent Inse - Sala - Supplies
pment puter lies
Rec.
Payable
Income
uranc ries
Exp.