MGT101 Short Notes Feb 2021 by Ali

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.

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. Or (Financial information means the information that can be measured in terms of money)

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

i) Transactions

Transactions are the outcome of dealings made.

ii) Events

Events are the outcome of incidents happened. There are two types of events, Monetary and Non-Monetary events

iii) Conditions

Conditions are the adjustments in recorded information.

Money measurement

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 means; an entity’s status of Resources & Sources. Resources are the assets that an entity holds in its control and Sources are the means of finances through which the entity makes such assets. Means of finances include; liability and owners’ equity. Assets= liability + equity

Elements of Financial Statements or Types of Account

Assets:

Assets are the resources in control of entity as a result of past event.

Liabilities:

Liabilities are the present obligations of entity arising from past events

Income:

Incomes are earnings of the entity through Revenue or Gains.

Expense:

Expenses are the costs that expire during the reporting period of entity.

Owners’ Equity:

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

Entity

It is an activity that is undertaken by individuals or group of people for some purpose (profit or non profit).

Users of Financial Information

Investor/Shareholders/owners 2 Trade contacts 3 Lenders 4 Taxation authorities 5 Manager and Employees 6 Financial consultants and advisers 7 Government 8 Public

Enhancing qualitative characteristics

1 Comparability 2 Verifiability 3Timeliness 4Understandability

Chapter – 2 · Recording Financial Information · Double Entry Bookkeeping System – Accounting Equation

There are three sources of financial information:1. Transactions2. Events3. Conditions

Types of transactions

There are two types of transactions: 1. Cash Transactions 2.Credit Transactions.

Cash transaction means the transaction in which cash/cheque is either paid or received at the same time while entering into the transaction.

Credit transaction means a transaction in which payment or receipt in terms of cash or any other financial instrument is deferred for some future period.

Debtors (Accounts Receivables) – ASSETS

These are the customers to whom goods/services are sold on credit terms based on a commitment that they will pay money in future. They are treated as accounts receivables.

Creditors (Accounts Payable) – LIABILITIES

These are the suppliers from whom the goods/services are purchased on credit term based on a commitment that they will be paid in future, they are treated as accounts payables.

ACCOUNTING EQUATION

In accounting the resources controlled by a business are assets and sources of such inputs are owner’s equity and liabilities. So, we can amend the above equation as:

(Assets = Owner’s Equity + Liabilities) · Incomes – Expenses = Profit or · Profit = Incomes – Expenses · Owner’s Equity = Capital + Profit ( – loss) – Drawings

It very interesting because of its mathematical wizard; that both sides of equation shall remain equal.

Chapter – 3

Rules of Debit and Credit

1. Debit – Debere in Latin – denoted by Dr. 2. Credit – Credere in Latin – denoted by Cr.

in the books of accounts. Dr. and Cr. Are also termed as tools of accounting Debit Group consists of: 1. Assets 2. Expenses Credit Group consists of: 1. Owner’s Equity2. Liabilities3. Incomes Conventionally accounts were divided into three types; personal, real, nominal.

Analyzing “Debit and Credit

Debit Group Increase Dr Decrease Cr Credit Group Increase Cr Decrease Dr

Important Accounting equations

(i) Σ Dr = Σ Cr (ii) Resources = Sources (iii) Assets = Owners’ Equity + Liabilities (iv) Owners’ Equity = Capital + Profit – Loss – Drawings (v) Profit/Loss = Incomes – Expense The core concept of double entry bookkeeping is that each transaction is recorded twice.

Concept of Voucher and Supporting Documents

Voucher is an internal document that is prepared to witness that the transaction is complete and verified, it is supported by needful documents and authorized by appropriate signatories.

Types of vouchers

1 Journal Vouchers 2 Cash Payment Voucher 3 Bank Receipt & Payment Voucher 4 Gift Voucher