Financial Accounting

FINANCIAL ACCOUNTING Accounting to Harold Berman accounting may be defined as identifying, measuring, recording, and communicating financial information. According to American”AICPA” accounting is the act of recording classifying and summarizing in different manners in terms of money, transaction event which are part at least. BUSINESS FIRMS AND THEIR TRANSACTIONS Business Transaction: this is any business dealing which result into exchange of goods and services usually for some money/worth. E.g. buying stocks, sale of stocks, offering of service etc. The transaction can either be cash or cheque is used or credit payment/ receipt are deferred or delayed. Difference between accounting and Book keeping Book keeping: is part of accounting that is concern with recording, it is just a component of accounting and a book keeper normally poses lower academic qualification. Accounting: is wider or broader with its scope extending to financial reporting which also analysis and statements. Objective of Accounting Accounting help in recording of transaction as they occur to assist the owner of business in determining: o Amount owing to the business by debtor o Amount of profit or losses in a period o Flow of cash and goods into or out of business o Nature and asset business own o Nature and amount of what business own o Determine the amount of owners’ capital or equity. Importance of Accounting o It keeps systematic permanent record of financial dealings o It keep records of income and expenses in such a manner that net result of any period can be determined. o It keeps the records of assets and liability in such a way that financial position of the business can be determined. o It makes tax assessment easy and it advantageous to both business and tax authority as over and under assessment. o Accounting helps share holders, management and other stakeholders to monitor and evaluate the performance of the organization. User of Accounting information o XXX o XXX

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o XXX o XXX o XXX Accounting Concepts/ Conventions These are ground rules and basic assumption that covers the preparation of financial statements. Some of these include: o Business entry concepts o Accrual concept o Duality ( Dual aspect) concept o Materiality concept o Monetary ( money measurement) concept o Historical cost concept o Consistency concept o Conservatism / prudence o Going concern o Matching concept o Objectivity concept o Realization THE FUNDAMENTAL ACCOUNTING EQUATION The fundamental accounting equation is a very important equation in accounting and the entire recording system is base up on it. The equation is a valuable basis from which to begin understanding the whole process of accounting. The equality is base on the duality or dual aspect. The accounting equation is stated as follows: Asset= Liability + Capital A=L+C Assets Assets are tangible and intangible resources owned that are controlled by the entity and expected to generate economic f Types of Assets 1. Current Assets: short term assets which have a useful life of only one financial year. E.g. stock/ inventory, cash in hand or in bank, debtor (accounts receivable), prepayment. The balance from the current assets is normally carried forward to the next financial year. 2. Fixed Assets: These are long term assets that can be used for the benefit of the organization for many financial years, E.g. Land, building, furniture (furniture and fittings, plants and machinery, motor vehicles. Liabilities

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These are legal obligations that are to be paid, they are arrived when organization borrows. Types of Liabilities 1. Current Liabilities: these in nature are paid in one year in which it was incurred e.g. nine month loan, accrued expenses, bank overdraft, creditors (accounts payable) 2. Long term Liabilities: These are obligation that requires settlement after one financial year. They bear interest which depends on the amount and period or other terms. E.g. long term loans, debentures, bonds. Capital This is amount owned by a business to the owners of the business. It represents the amount initially invested by the business plus any profit accumulated in the business. If the business is solely financed by owners funds, then; A=C However this situation is very rare since business needs to borrow in order to expand. Illustrations of Accounting Equations BOOK KEEPING SYSTEM In the book keeping system series of short simple source document are recorded ( income statements in balance sheet).

Source Document

Book of Prime Entry

Ledger

Trial Balance

Financial Statement

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Books of Prime Entry These are first book to record transaction. They are designed to show more details relating to transaction that appears in the ledgers. The following are some of the books of prime entry. 1. Sales day books: It’s a book of original entry used to record credit sales Format of sale day book Date

Debtor’s account name

Invoice Number

Folio

Total

Amount xxxxx

E.g. A company sold goods on credit for the following: On September 02 nd to Paul 1.5 m invoice No. 101, On September 05th to Sarah 2m invoice No. 102 and on the 25th September to John 900000 invoice No. 104. Company X Sale day book Date 02nd 05th 25th Total

Debtor’s account name Paul Sarah John

Invoice Number Folio 101 102 104

Amount 1500,000 2000,000 900,000 4,400,000

2. Purchases Day book: it’s a book used to record purchases on credit purchases Format of purchase day book Date

creditor’s account name Invoice Number

Total

Folio

Amount xxxxx

3. Sales Return day Book: This is to record goods that are return by customers; the format is just the same as the day’s sales book. 4. Purchases Returns Day book/Outward return: This book entry records purchases returned to suppliers. It is the same as purchases day book.

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Format of Purchases return day book Date

creditor’s account name Invoice Number

Folio

Amount

Total

xxxxx

The reason for drawing day book reduce the number of posting to the ledger since only total credit sell and credit purchases are posted to the ledger in block. 5. Cash Book: Is a book in which cash and cheque transaction are recorded. i. One column cash book: this has record of cash transactions. Format of one column cash book: Date

Particula r

Cash

Dat e

Particular

Cash

ii. Two Column Cash Book: This records both cash and ch transactions and it derives its name from the money column.

Format of two column cash book: Dat e

Partic ular

Foli o

Cash

Bank

iii. Three Column Cash Book:

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Date

Particul ar

Foli o

Cash

Ban k