01 Introduction To Accounting And Mfrd 1

Topics: Balance sheet, Asset, Generally Accepted Accounting Principles Pages: 24 (1120 words) Published: April 24, 2015
HND in Business Management
Module: Managing Financial Resources & Decision – Unit
2
Lesson: Basic Accounting Concepts
Lecturer:
Prepared By: Nilushi
Gunarathne

1

Lecture Outline
 Introduce accounting
 Define assets, liabilities, owners’ equity, revenue and expenses
 Classify a given list of items into assets, liabilities, owners’ equity, revenue and expenses
 Define the accounting equation
 Analyze the effect of transactions on the accounting
equations

Prepared By: Nilushi
Gunarathne

2

Accounting
Accounting is the art of recording, summarizing, reporting,
and analyzing financial transactions.
1.

Financial Accounting
Reporting of the financial position and performance of a firm through financial statements issued to external users on a periodic basis.

2. Management Accounting
The process of identifying , collecting, measuring, analyzing, interpreting and communicating information that have economic value and relevant to the management.

Prepared By: Nilushi
Gunarathne

3

The Basic Accounting
Elements






Assets (A)
Liabilities (L)
Revenue (R)
Expenses (E)
Owners’ equity (OE)

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Assets

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Assets …
Non-current assets also include intangible
assets and investments.
• Intangible assets- Assets which do not have a
physical elements such as goodwill, patents,
copyright
• Investments – Include shares held in other
companies and term deposits held in financial
institutions
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6

Liabilities
• Liabilities are amounts owed by the business
to outside parties.
e.g. creditors, loans ,bank overdrafts.
• creditors - people or business that are owed
money by the business. Because they have sold
goods or services to the business on credit.

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Liabilities …
• Liabilities can also classified as current and
non-current
-Current Liabilities- which will be paid within
a twelve month period.
-Non-current Liabilities- long term
obligations which will be paid over more than a
twelve month period.

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Gunarathne

8

Owners’ Equity
• Owners’ contribution to the business.
• According to the accounting entity assumption
Owners’ contribution should be recorded separately.
• Owners’ contribution ultimately owed by the
business to the owners
• This contribution is known as capital and represent
the owners’ investment in the business.
• Any profit made by the business is added to capital.
• Also any loss that the business makes is subtracted
from capital.
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Components of
Owner’s Equity

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Revenue
• Revenue is the amount earned by the business as a result of its trading operations. (goods and services)
• Revenue is generally known as fees.
• Revenue can be earned on cash and/or credit basis.
• Revenue is generally recorded at the point of sale even
though the cash may be collected at a later date. This is
known as the basis of accounting.

Prepared By: Nilushi
Gunarathne

11

Expenses
• Expenses are costs associated with earning revenue.
• Expenses are used up in the period in which they are
incurred.
e.g. Expenses include rent, telephone, salaries, office
suppliers ,interest paid on lone.

Revenue – Expenses = Profit/Loss

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Gunarathne

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Transaction
• An event that affects the financial position of a
particular entity and can be recorded reliably
OR
• Economic events or activities that affect the
financial position of a business entity and that can
be measured in rupees.

Prepared By: Nilushi
Gunarathne

13

The Accounting Equation
• The accounting elements described above can be
reflected in the form of an equation.
• This equation is called the accounting equation.
• In simplified version ;
Assets= Liabilities +...
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