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Financial Accounting 1
Book keeping
• Book keeping is an art of recording business transections is a set of
books. By J.R.Batliboi
• Recording of Financial Informations.
• Business
• Transections (Cash/Credit) (Monetary)
• Accounting
• Accountable
• Answerable
Language of the Business

Business
• Sole Proprietor Ship (Single owner)
• Responsibility
• Liability-Bankruptcy
• Partnership (Minimum 2 owner.
• Company/Corporation
• Users…
• 1- Recording- Transections- Exchange of Interest- Debit / Credit
• Monetary Transection -Cash -Credit - Creditor, debtor Own - Owe
• Non- Monetary Transections
• Credit Sales (Receivable-Debtor-Asset) -Credit Purchases

(Payable-Creditor-Liability)
2- Classifying: Assets, Liabilities, Capital, Revenue, Expenses,
3- Summarize
Balance Sheet, Income Sheet, Cash flow statement, SOCE, Notes to the accounts
Share holders/ stake holders

Accounting Heads (Classifying)
Assets = Liabilities + Capital
• Assets
• Expenses Balance Sheet
• Liabilities
• Capital Income Statement
• Revenue
Assets
• An Asset is a resource, controlled by the entity as a
result of some past event, and from which future
economic benefits are expected to flow towards the
entity.
• Fixed / Non-Current Assets

• Current Assets (A/C Receivables)
Liabilities
• A Liability is a present obligation, arising from some
past event, the settlement of which will result in an
outflow of economic benefits.
• Long term / Non-Current Liabilities

• Current Liabilities (A/c Payable)
Capital
• Capital is the amount invested in the business by the owner. It may
include:
1. Money initially injected by the owner to start the business
2. Money subsequently injected in the business by the owner
3. Profits made by the business
4. Money taken out of the business
Capital = Initial + Subsequent + Profit – Drawings
Drawings:
Drawings are reductions in the liability of the business. (Cash or Kind)
Expense
• Decrease in economic benefit during the accounting period in the form of
outflows or depletion (decrease in value) of assets or occurrence of liabilities.
• Types of Expenses:
• Revenue Expenditures: Expenses incurred either:
• In the ordinary course of the business i.e. operational business
• To maintain the existing capacity of the business.
• Capital Expenditures: When business spends money either to:

• Buy non-current assets for use in business and not for resale.
• Add to the value of an existing non-current asset by improvement in its
earning capacity
Revenue
• Money earned by selling goods or services to customers whether for
cash or credit. Also known as Income/Sales/turnover.”
Profits:
Excess of Income over Expenses
Loss:
Excess of expenses over Income
Purchases:
Items which are purchased for the intention of selling are
called purchases. Either cash or credit.
Accounting Equation
Assets = Capital + Liabilities
Investment Financing
Assets Capital + Liabilities
Land Building Machinery Cash Total Capital Mr.A Total
2,500 2500 2,500 2500
2500 (2500) 0 0
Adjusting Entries (Matching Concept)
Party A Party B
1. Accrued Expense 2. Accrued Revenue
31-Dec
Salary Exp 500 Salary Receivable 500
Salary Payable (Ahsan) 500 Salary Income 500
5-Jan
Salary Payable 500 Cash 2500
Prepaid Exp 2000 Unearned Rev 2000
Cash 2500 Salary Rec. 500
1-Dec 3.Prepaid Expense (University) 4.Unearned Revenue (ME)
Prepaid Exp (Asset) 2000 Cash 2000
Cash 2000 Unearned Revenue(Liab) 2000
Accounting Assumptions.
Accounting relies on several fundamental assumptions to ensure
consistency and reliability in financial reporting. Here are some of the
key assumptions:
• Going Concern Assumption: This assumption suggests that a business
will continue to operate indefinitely unless there is evidence to the
contrary. It allows accountants to prepare financial statements with
the expectation that the company will continue its operations in the
foreseeable future.--For example, when preparing financial
statements, accountants assume that the company will continue to
operate and won't liquidate or declare bankruptcy in the near term.
• Accrual Basis Assumption: Under this assumption, transactions are
recorded when they occur, regardless of when the cash is exchanged.
Revenue is recognized when it is earned, and expenses are recognized when
they are incurred, even if the cash flow related to those transactions
happens later.--For instance, if a company provides services to a client in
December but receives payment in January, the revenue is recognized in
December, when the service was performed.
• Consistency Assumption: This assumption states that once a company

chooses an accounting method or principle, it should stick with it from one
period to the next. Consistency ensures that financial statements are
comparable across different accounting periods.--For example, if a company
uses the FIFO (First-In-First-Out) method for inventory valuation in one year,
it should continue to use the same method in subsequent years for
comparability.
• Historical Cost Principle: According to this principle, assets should be
recorded at their original purchase cost, rather than at fair market value. This
principle promotes objectivity and verifiability in financial reporting.--For
instance, if a company purchases equipment for $10,000, it will be recorded
in the books at that cost, even if the fair market value of the equipment
changes over time.
• Materiality Assumption: This assumption suggests that only significant or

material items need to be reported in the financial statements. Immaterial
items can be disregarded without affecting the overall usefulness of the
financial information.--For example, if a company purchases office supplies
for $100, it may not be necessary to separately report this expense if it is
immaterial compared to the company's total expenses.
• Objectivity Principle: Also known as the principle of verifiability, this
assumption requires that financial transactions be recorded based on
objective evidence. It ensures that accounting information is reliable and
free from bias.--For example, if a company purchases inventory, the
transaction is supported by an invoice from the supplier, providing objective
evidence of the transaction.
• Stable Monetary Unit Assumption: This assumption assumes that the value
of money remains relatively stable over time. Therefore, financial
statements are prepared using a common monetary unit (e.g., US Dollar,
Euro) without adjusting for inflation or changes in the currency's value.--For
instance, if a company's assets are stated in dollars, the assumption is that
the value of the dollar remains relatively stable, despite potential inflation or
deflation.
Conservatism:
• Conservatism in accounting refers to the principle of erring on the side of caution when faced with
uncertainty. It suggests that when there are multiple acceptable accounting methods or estimates
available, the one that results in lower profits or a more conservative financial position should be
chosen.
• The primary goal of conservatism is to ensure that financial statements reflect a company's financial
position and performance in a manner that is not overly optimistic or exaggerated. By taking a
conservative approach, accountants aim to mitigate the risk of overstating assets or income, thereby
providing users of financial statements with a more realistic view of the company's financial health.
• Some common applications of conservatism in accounting include:
• Asset Valuation: When there is uncertainty about the recoverability of an asset's value,
conservatism may lead accountants to record the asset at a lower value, such as its cost or market
value, whichever is lower.
• Revenue Recognition: In situations where there is uncertainty about the collectibility of revenue,
conservatism may lead to delayed recognition of revenue until it is realized or realizable with
certainty.
• Provision for Losses: Conservatism often prompts companies to create provisions for expected
losses, such as bad debts, inventory obsolescence, or potential legal liabilities, even if the losses
have not yet occurred but are reasonably possible.
• Disclosure: Companies may disclose potential risks and uncertainties in their financial statements
to provide users with a clear understanding of the potential impact on the company's financial
position and performance, even if the risks have not materialized.
• Matching Principle
• Cash/Accrual basis

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Financial Accounting 1

• Recording of Financial Informations.

Language of the Business

• Partnership (Minimum 2 owner.

• Credit Sales (Receivable-Debtor-Asset) -Credit Purchases

Share holders/ stake holders

• Expenses Balance Sheet

• Capital Income Statement

• Fixed / Non-Current Assets

• Long term / Non-Current Liabilities

Capital = Initial + Subsequent + Profit – Drawings

• Capital Expenditures: When business spends money either to:

Assets = Capital + Liabilities

• Consistency Assumption: This assumption states that once a company

• Materiality Assumption: This assumption suggests that only significant or

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