Download - Basic accounting principles
Basic Accounting Basic Accounting PrinciplesPrinciples
The Financial StatementsThe Financial Statements
JOIN KHALID AZIZJOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS OF ICMAP, ICAP, MA-
ECONOMICS, B.COM.ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE FINANCIAL ACCOUNTING OF ICMAP STAGE
1,3,4 ICAP MODULE B, B.COM, BBA, MBA & 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.ICAP MODULE D, BBA, MBA & PIPFA.
CONTACT:CONTACT: 0322-33857520322-3385752 0312-23028700312-2302870 R-1173,ALNOOR SOCIETY, BLOCK R-1173,ALNOOR SOCIETY, BLOCK
19,F.B.AREA, KARACHI, PAKISTAN.19,F.B.AREA, KARACHI, PAKISTAN.
JOIN KHALID AZIZJOIN KHALID AZIZ FRESH CLASSES FOR ICAP FRESH CLASSES FOR ICAP MODULE B…FINANCIAL ACCOUNTING.MODULE B…FINANCIAL ACCOUNTING. MODULE D…COST ACCOUNTING.MODULE D…COST ACCOUNTING. REGISTER YOUR SELF NOW.REGISTER YOUR SELF NOW. COMPLETION OF SYLLABUS WITH COMPLETION OF SYLLABUS WITH
ACCENTUATE ON BASIC CONCEPTSACCENTUATE ON BASIC CONCEPTS
Accounting TermsAccounting Terms AccountAccount
• A group of items having A group of items having common characteristicscommon characteristics
Types of AccountsTypes of Accounts• Asset LiabilityAsset Liability• Income ExpenseIncome Expense• EquityEquity
Chart of AccountsChart of Accounts Listing of all of the Listing of all of the
accounts used by a accounts used by a businessbusiness
Asset AccountsAsset Accounts Items of ValueItems of Value Characterized as current Characterized as current
and non-currentand non-current
Liability AccountsLiability Accounts Claims that others have Claims that others have
against the assetsagainst the assets Have a known:Have a known:
• AmountAmount• Date to be paidDate to be paid• Person to whom payment owedPerson to whom payment owed
Also current and non currentAlso current and non current
Equity AccountsEquity Accounts Claims that the owner has Claims that the owner has
against the assetsagainst the assets Sometimes called net Sometimes called net
worthworth Difference between value Difference between value
of assets and liabilitiesof assets and liabilities
Income and Expense Income and Expense AccountsAccounts
Types of equity accountsTypes of equity accounts
Simple accounting Simple accounting systems often only systems often only contain these accountscontain these accounts
Double vs Single Entry Double vs Single Entry AccountingAccounting
Single – One account entry for each Single – One account entry for each transactiontransaction
Double – Two account entries for each Double – Two account entries for each transactiontransaction• One debit and one creditOne debit and one credit
Hybrid systemsHybrid systems• May not match income with May not match income with
expensesexpenses• May not distinguish cash, check, or May not distinguish cash, check, or
creditcredit
Basic Accounting Basic Accounting EquationEquation
Always maintained in Always maintained in double entry accountingdouble entry accounting
Assets will always equal Assets will always equal liabilities plus equityliabilities plus equity
TransactionsTransactions Will be equal and offsettingWill be equal and offsetting Two types:Two types:
• Income & ExpensesIncome & Expenses• Transfers between accountsTransfers between accounts
Cash and Accrual Cash and Accrual AccountingAccounting
Refers to the timing of Refers to the timing of entries into the accounting entries into the accounting systemsystem
Cash Based RecordsCash Based Records Transactions are recorded Transactions are recorded
when cash is received or paid when cash is received or paid outout
Accrual Based RecordsAccrual Based Records Transactions are recorded Transactions are recorded
when they take placewhen they take place Regardless of whether cash Regardless of whether cash
is involvedis involved
Accrual Adjusted Accrual Adjusted StatementsStatements
Cash based records are kept Cash based records are kept throughout the yearthroughout the year
Non-Cash adjustments are Non-Cash adjustments are made to the cash based made to the cash based income statement at the end income statement at the end of the yearof the year
Account ValuationAccount Valuation Income AccountsIncome Accounts
• Value received is recordedValue received is recorded Expense AccountsExpense Accounts
• Value paid is recordedValue paid is recorded Liability AccountsLiability Accounts
• Value is dollar amount owedValue is dollar amount owed
Account ValuationAccount Valuation Asset AccountsAsset Accounts
• More difficult because they More difficult because they may not be traded routinelymay not be traded routinely
Asset ValuationAsset Valuation Cost BasisCost Basis Market Value BasisMarket Value Basis
Cost Basis Asset Cost Basis Asset ValuationValuation
Original cost minus Original cost minus depreciationdepreciation
Must establish a depreciation Must establish a depreciation methodmethod
Market Basis Asset Market Basis Asset ValuationValuation
Recorded as the price they Recorded as the price they could bring if sold, less could bring if sold, less selling expensesselling expenses
Based on recent auctions, Based on recent auctions, appraisals, etc.appraisals, etc.
DepreciationDepreciation Section II page 29, (FFSTF Section II page 29, (FFSTF
Guidelines)Guidelines) Allocation of the expense that Allocation of the expense that
reflects the “using up” of capital reflects the “using up” of capital assets employed by the businessassets employed by the business
Conceptually, this is done over Conceptually, this is done over the useful life of the asset in a the useful life of the asset in a “systematic and rational” “systematic and rational” mannermanner
DepreciationDepreciation Allocation applied to original Allocation applied to original
cost minus salvage valuecost minus salvage value Accelerated versus straight line Accelerated versus straight line
methodsmethods• Example of difference between Example of difference between
management records and tax management records and tax recordsrecords
Can overstate or understate true Can overstate or understate true incomeincome
Financial ReportsFinancial Reports Balance SheetBalance Sheet Income StatementIncome Statement Statement of Cash FlowsStatement of Cash Flows Statement of Owner EquityStatement of Owner Equity
Balance SheetBalance Sheet Represents a financial Represents a financial
situation at a single point in situation at a single point in timetime
Has a date on itHas a date on it Broken down by:Broken down by:
• Type of Asset or liabilityType of Asset or liability• Time or life of the account typeTime or life of the account type
Balance SheetBalance Sheet Current AssetsCurrent Assets
• Cash and other assets that will Cash and other assets that will be converted into cash during be converted into cash during one operating cycleone operating cycle
Non-Current AssetsNon-Current Assets• Those not expected to be Those not expected to be
converted into cash in one converted into cash in one operating cycleoperating cycle
JOIN KHALID AZIZJOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS OF ICMAP, ICAP, MA-
ECONOMICS, B.COM.ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE FINANCIAL ACCOUNTING OF ICMAP STAGE
1,3,4 ICAP MODULE B, B.COM, BBA, MBA & 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.ICAP MODULE D, BBA, MBA & PIPFA.
CONTACT:CONTACT: 0322-33857520322-3385752 0312-23028700312-2302870 R-1173,ALNOOR SOCIETY, BLOCK R-1173,ALNOOR SOCIETY, BLOCK
19,F.B.AREA, KARACHI, PAKISTAN.19,F.B.AREA, KARACHI, PAKISTAN.
Balance SheetBalance Sheet Current LiabilitiesCurrent Liabilities
• Debts that will come due Debts that will come due within one year from the within one year from the balance sheet datebalance sheet date
Non-Current LiabilitiesNon-Current Liabilities• Those debts due more that one Those debts due more that one
year from the balance sheet year from the balance sheet datedate
Balance SheetBalance Sheet Intermediate Assets and LiabilitiesIntermediate Assets and Liabilities Long term Assets and LiabilitiesLong term Assets and Liabilities Can use cost or market valuations Can use cost or market valuations
or bothor both Supporting Schedules are very Supporting Schedules are very
helpfulhelpful Will need a balance sheet for Will need a balance sheet for
beginning and ending of beginning and ending of accounting periodaccounting period
Income StatementIncome Statement Summary of income and Summary of income and
expensesexpenses Represents a period of time Represents a period of time
between two balance sheetsbetween two balance sheets Explains the change in equity Explains the change in equity
between two balance sheetsbetween two balance sheets Can be divided into enterprise Can be divided into enterprise
reportsreports Can be cash or accrualCan be cash or accrual
Assets Liabilities
Equity
Assets Liabilities
Equity
+/- Net Income+/- Valuation Changes
- Family living withdrawals+ Capital contributions
Beginning Balance Sheet Ending Balance Sheet
Income StatementIncome Statement Will have more than one Will have more than one
profit lineprofit line Definition of ProfitDefinition of Profit
• Financial profit is the net Financial profit is the net return to business equityreturn to business equity
Accrual Adjusted Income Accrual Adjusted Income StatementStatement
Cash incomes and expenses Cash incomes and expenses must be adjusted by:must be adjusted by:• Changes in non-cash assetsChanges in non-cash assets
• InventoriesInventories• Pre paid expensesPre paid expenses• ReceivablesReceivables
• Changes in non-cash liabilitiesChanges in non-cash liabilities• PayablesPayables• Accrued interestAccrued interest
Statement of Cash FlowsStatement of Cash Flows Not the same as a cash flow plan Not the same as a cash flow plan
(Budget)(Budget) Is a historical record of sources Is a historical record of sources
and uses of fundsand uses of funds Divisions of Statement:Divisions of Statement:
• Cash from operating activitiesCash from operating activities• Cash from investing activitiesCash from investing activities• Cash from financing activitiesCash from financing activities
Statement of Owner Statement of Owner EquityEquity
Explains the change in owners Explains the change in owners equity between two balances equity between two balances sheetssheets
Changes due to :Changes due to :• Net incomeNet income• Change in inventory valuationChange in inventory valuation• Family living withdrawalsFamily living withdrawals• Capital contributionsCapital contributions• Capital distributionsCapital distributions
Financial AnalysisFinancial Analysis All business owners should All business owners should
have a basic set of financial have a basic set of financial statements at their disposal statements at their disposal and they should know how to and they should know how to analyze and interpret them.analyze and interpret them.
Financial AnalysisFinancial Analysis Two ObjectivesTwo Objectives
• Measure financial condition of Measure financial condition of the businessthe business
• Measure financial performance Measure financial performance of the businessof the business
Financial AnalysisFinancial Analysis
Horizontal AnalysisHorizontal Analysis Vertical AnalysisVertical Analysis Ratio AnalysisRatio Analysis
Horizontal AnalysisHorizontal Analysis Looks at trends in Looks at trends in
performance and strength performance and strength over timeover time• For example, percent change in For example, percent change in
net income from year to yearnet income from year to year
Vertical AnalysisVertical Analysis Looks at within year events Looks at within year events
rather than over timerather than over time• For example, interest expense For example, interest expense
as a percent of total expensesas a percent of total expenses
Ratio AnalysisRatio Analysis Allows for consistent Allows for consistent
comparison of a single comparison of a single business over time as well as business over time as well as comparison between comparison between businessesbusinesses
Converts nominal dollar Converts nominal dollar amounts to a common basisamounts to a common basis
Source of data for Ratio Source of data for Ratio AnalysisAnalysis
Balance SheetBalance Sheet Income StatementIncome Statement
Farm Financial Standards Farm Financial Standards Council (Five Criteria)Council (Five Criteria)
LiquidityLiquidity SolvencySolvency ProfitabilityProfitability Financial EfficiencyFinancial Efficiency Repayment CapacityRepayment Capacity
Ratio AnalysisRatio Analysis 16 different ratios commonly 16 different ratios commonly
usedused Each has limitationsEach has limitations Proper interpretation is Proper interpretation is
criticalcritical
LiquidityLiquidity Ability of a business to pay Ability of a business to pay
current liabilities as they current liabilities as they come duecome due
LiquidityLiquidity Current RatioCurrent Ratio
• Current Assets/Current Current Assets/Current LiabilitiesLiabilities
• Less than one is badLess than one is bad Working capitalWorking capital
• Current assets minus current Current assets minus current liabilitiesliabilities
• Negative number is badNegative number is bad
SolvencySolvency Ability of the firm to repay all Ability of the firm to repay all
of its financial obligationsof its financial obligations
SolvencySolvency Debt to Asset RatioDebt to Asset Ratio
• Total liabilities/total assetsTotal liabilities/total assets• Greater than one badGreater than one bad
Equity to Asset RatioEquity to Asset Ratio• Total equity/total assetsTotal equity/total assets
Debt to Equity RatioDebt to Equity Ratio• Leverage ratioLeverage ratio• Less than one betterLess than one better
ProfitabilityProfitability Rate of return on assetsRate of return on assets Rate of return on equityRate of return on equity Operating profit margin ratioOperating profit margin ratio
Financial EfficiencyFinancial Efficiency Measures the intensity with Measures the intensity with
which a business uses its which a business uses its assets to generate gross assets to generate gross revenues and the revenues and the effectiveness of productioneffectiveness of production
Financial EfficiencyFinancial Efficiency Asset turnover ratioAsset turnover ratio Operating expense ratioOperating expense ratio Depreciation ratioDepreciation ratio Interest expense ratioInterest expense ratio Net income from operations Net income from operations
ratioratio
Repayment CapacityRepayment Capacity Measures the borrower’s Measures the borrower’s
ability to repay term debts ability to repay term debts and capital leases rather and capital leases rather than financial position or than financial position or performanceperformance
Repayment CapacityRepayment Capacity Term debt and capital lease Term debt and capital lease
coverage ratiocoverage ratio Capital replacement and Capital replacement and
term repayment marginterm repayment margin
CautionsCautions Measures are only as good as Measures are only as good as
the data usedthe data used Methods must be consistent Methods must be consistent
between years and between between years and between operationsoperations• Example – Asset valuation methodsExample – Asset valuation methods
Measures ask the right questions Measures ask the right questions but do not provide the answersbut do not provide the answers
JOIN KHALID AZIZJOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS OF ICMAP, ICAP, MA-
ECONOMICS, B.COM.ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE FINANCIAL ACCOUNTING OF ICMAP STAGE
1,3,4 ICAP MODULE B, B.COM, BBA, MBA & 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.ICAP MODULE D, BBA, MBA & PIPFA.
CONTACT:CONTACT: 0322-33857520322-3385752 0312-23028700312-2302870 R-1173,ALNOOR SOCIETY, BLOCK R-1173,ALNOOR SOCIETY, BLOCK
19,F.B.AREA, KARACHI, PAKISTAN.19,F.B.AREA, KARACHI, PAKISTAN.