MGT101 Midterm Notes Lectures 1-9

Chapter - 1 Basics of Financial Accounting

Definition of Accounting

Accounting is a language that is used to communicate and understand the financial ideas, financial expressions, financial thoughts and financial information.

Accounting is a 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.

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

i. Transactions are the outcome of dealings made. ii. Events Events are the outcome of incidents happened. iii. Conditions are the adjustments in recorded information.

Transaction (source of financial information)

Transaction occurs when two persons deal with each other 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, Loss by accident, Foreign exchange (gain/loss)

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. Examples include:  Fixed Assets to be depreciated according to their expected useful life

Money measurement

Money measurement means to assign a value in reporting currency to accounting phenomena.

Financial position

Financial position means; an entity’s status of Resources & Sources.

1. Resources are the assets
2. Sources are the means of finances that include liability and owners’ equity

Functions of financial accounting (Accounting cycle)

Financial accounting is a subject that is about financial information Financial accounting is used to:

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

So, there are five functions of Financial Accounting.

Classifying

All types of financial information are classified into five main heads: i. Assets ii. Liabilities iii. Incomes iv. Expenses v. Owners’ Equity.

These main heads are further sub-classified into accounting heads, which are then used for recording accounting transactions in the books of accounts.

Recording

Financial information are 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

Assets:

Assets are the resources in control

Liabilities:

Liabilities are the present obligations

Owners’ Equity:

Owners’ equity is the source of finance that represents owners' stake

Incomes:

Incomes are earnings

Expenses: