Introduction to Financial Accounting

Introduction to Financial AccountingWhy study financial accountingUsersCapital market: Investors, Lenders, AnalystsProduct market: Competitors, Suppliers & CustomersRegulatory forces: Securities Regulators, GovernmentLabour market: Managers & EmployeesCivil SocietyAssumptions underlying accounting measurementAccounting entityGoing concernPeriodicityMoney measurementThe set of conventions, rules and procedures that define accepted accounting practice is referred to as generally accepted accounting principles (GAAP)The accounting EquationAssets =Liabilities + Equity

Assets: resources from which future benefits are expected

Liabilities: Obligations to be paid in future

Equity: Owners claim

Owns= Owes

Assets? Liabilities? Equity?Cash DebtorsSupplies or inventoryLoan payableEquityEquipmentBuildingLandExpenses payableExamplesHot Choc. has assets of Rs. 87000 and liabilities of Rs. 53000. How much is its equity?

Rs. 34000ExamplesABC co. on Sept 30 has following items cash 10000, Inventory 10000, Equity 15000What is the amount of expenses payables Cash + Inventory = Equity + Expenses payable10000 + 10000 = 15000 + Expenses payable 5000 = Expenses payableExamplesAthicas equity is twice its liabilities. Its assets are worth Rs. 81000. How much are its liabilities

Assets = liabilities + equityAssets = liabilities + 2*liabilitiesAssets = 27000

Effect of transactionsOn March 1, Suresh starts Signity Software Solutions by investing Rs. 50000 in cash

Balance sheet on March 1Liabilities and Equity

Assets

Equity 50000Cash 50000

Total 50000Total 50000On March 2, he takes bank loan of Rs. 20000 for businessBalance sheet on March 2Liabilities and Equity

Amount (Rs.)Assets

Amount (Rs.)

Equity 50000Cash70000Bank Loan20000Total70000Total70000On March 3, Signity Software Solutions buys computers worth Rs. 30000Balance sheet on March 3Liabilities and Equity

Amount (Rs.)Assets

Amount (Rs.)

Equity 50000Cash40000Bank Loan20000Computers30000Total70000Total70000On March 4, Signity Software Solutions purchases computer supplies for Rs. 12000. The supplier agreed to give credit for 3 days.Balance sheet on March 4Liabilities and Equity

Amount (Rs.)Assets

Amount (Rs.)

Equity 50000Cash40000Bank Loan20000Computers30000Creditor12000Supplies12000Total82000Total82000On March 5, Signity sells its first software for Rs. 25000. The buyer pays in cashBalance sheet on March 5Liabilities and Equity

Amount (Rs.)Assets

Amount (Rs.)

Equity 75000Cash65000Bank Loan20000Computers30000Creditor12000Supplies12000Total107000Total107000On March 7, its pays off the creditor Balance sheet on March 7Liabilities and Equity

Amount (Rs.)Assets

Amount (Rs.)

Equity 75000Cash53000Bank Loan20000Computers30000Supplies12000Total95000Total95000On March 8, it sells software worth Rs. 20000 to Amby retail. Payment to be received in 7 daysBalance sheet on March 8Liabilities and Equity

Amount (Rs.)Assets

Amount (Rs.)

Equity 95000Cash53000Bank Loan20000Computers30000Supplies12000Debtors 20000Total115000Total115000On March 9, it pays salary of Rs. 25000 and rent of Rs. 16000Balance sheet on March 9Liabilities and Equity

Amount (Rs.)Assets

Amount (Rs.)

Equity 54000Cash12000Bank Loan20000Computers30000Supplies12000Debtors 20000Total74000Total74000On March 10, owner withdraws Rs. 7000 for personal useBalance sheet on March 10Liabilities and Equity

Amount (Rs.)Assets

Amount (Rs.)

Equity 47000Cash5000Bank Loan20000Computers30000Supplies12000Debtors 20000Total67000Total67000Processing TransactionsAccounts: An account is an individual record of increase or decrease in an item that is likely to be of interest and importance

Ledger: is a collection of entire group of accounts of a businessClassification of commonly used accountsAssetsLandBuildingPlant & MachineryOffice equipmentFurniturePrepaid expensesAdvance to suppliers accountDebtors: separate accounts for individual debtorsBills receivableCash

LiabilitiesBills PayableCreditors : separate accounts for individual debtorsUnearned revenueAdvances from customersPayable A/cs like Salary payable, rent payable etc.Long term liabilities: Bank loan, debentures etc.

Equity AccountsShare CapitalRetained earningsRevenues and expenses: revenues increase equity, expenses decrease equityDrawingsDividendsThe T AccountTitle of account

DebitCredit

The difference in amounts between total debits and total credits is called balanceIf total debits exceed total credits account has debit balanceIf total credits exceed total debits account has credit balance

Rules for debit and creditAssetsDebit to increaseLiabilitiesCredit to increaseEquityCredit to increase

Fashion concepts companyOn June 1, Rakesh invested Rs. 50000 and received 5000 shares in share capital of the companyOn June 2, bought office supplies for cash Rs. 2000On June 3, paid office rent, Rs. 1500June 4: Bought office equipment from Agarwal Company for Rs. 9000 with down payment of Rs. 3000 and agreed to pay the balance in six equal monthly installments on last day of the month beginning JuneJune 5: signed an agreement with Ethnic wear to make a new design for payment of fee of Rs. 12000 on completion of work

June 6: paid Rs. 720 for fire insurance policy that would expire next mayJune 7, received fee for design supplied, Rs. 2000June 8, collected from Kidswear, a customer, for services to be provided later, Rs. 1500June 9: Bought office supplies on credit from Mohan Co., Rs 3500June 10: Billed shah co. for designs completed, Rs. 9000June 14: Paid Mohan co. on account, Rs 1000

June 18: Collected from shah co., Rs 4000 June 21: Appointed office manager at monthly salary of Rs. 1500June 27: Received and paid telephone bill, Rs. 200June 28: Paid office assistants salary for June Rs. 800June 29: Received but not paid electricity bill of Rs. 150Jun 30: Paid Agarwal co. on account, Rs 1000