MGT101 Midterm Lectures 1-9

Chapter - 1

Basics of Financial Accounting

Accounting:-

Accounting is the art of recording, summarizing, reporting, and analyzing financial transactions. OR Accounting is the art of recording, classifying, summarizing, in significant manner and in terms of money, Transaction and events which are in part of at least and Interpreting the results there of.

Language:-

Language is a medium that is used to communicate and understand some ideas, feelings, expressions or information.

Financial information

Any information that is measurable in terms of money and causes a change in financial position of an entity is known as financial information.

Sources of Financial Information

There are three sources of financial information, which are also known as accounting phenomena.

•  Transactions Transactions are the outcome of dealings made.
•  Events Events are the outcome of incidents happened.
•  Conditions Conditions are the adjustments in recorded information.

Transaction (source of financial information)

Transaction occurs when two persons deal with each other. For example; a person receiving birthday gift from his friend is a social transaction.

Dealing between entity and other person includes:

1. Dealing of entity (first party) with owner/s (Second party)
2. Dealing of entity (first party) with any person other than the owner/s (third parties).

Event (source of financial information) Event means anything that happens. There are two types of events, Monetary and Non-Monetary events.

Monetary

Event It is an outcome of happening or occurrence of incident that can be measured in terms of money and can cause a change in financial position (financial status) of an entity. Examples include Loss by fire.

Non-Monetary

Event it is an outcome of happening or occurrence of incident that cannot be measured in terms of money and cannot cause a change in financial position (status) of an entity. Examples include Winning or losing a game that does not carry financial impacts.

Condition (source of financial information)

Condition is the third source of financial information. It requires certain adjustments to be made in already recorded transactions and events.

Money measurement

Money measurement is often misunderstood as receipt or payment of cash. Whereas, money measurement means to assign a value in reporting currency to the information, regardless the cash is still payable or receivable.

Financial position

Financial position is the current balances of the recorded assets, liabilities, and equity of an organization. This information is recorded in the balance sheet, which is one of the financial statements. The financial position of an organization is stated in the balance sheet as of the date noted in the header of the report.

Assets = liability + equity

Functions of financial accounting (Accounting cycle)

The procedures for analyzing, recording, classifying, summarizing, and reporting the transactions of a business. So, there are five functions of Financial Accounting.

Financial accounting is used to:

1. Classify,
2. Record,
3. Summarize,
4. Report, and
5. Analyze

Classifying

All types of financial information are classified into five main heads:

i) Assets ii) Liabilities iii) Incomes iv) Expenses v) Owners’ Equity

Recording

Financial information is recorded in the books of accounts according to the prescribed rules. Summarizing

Recorded financial information is summarized in another book of account. These summaries are prepared for each accounting head that are named as ledger accounts

Reporting

The results of summaries of each accounting head are reported to the users of financial information by preparing financial statements

Analyzing

Finally the facts reported are analyzed for certain decision making purposes

Elements of Financial Statements

All financial information of a business entity are divided into five main heads of accounts. These are also known as elements of financial statements, according to the conceptual framework of financial reporting by IFRS.