Financial Accounting Notes
1. What is Business?
• A business is any activity that provides goods or services to customers with the aim of
earning profit.
• Businesses use resources (money, people, equipment) to produce and sell products or
services.
• Main Goal: Earn profit and create value for owners.
2. Types of Organizations
• Service Business: Provides services (e.g., salons, hospitals).
• Merchandising Business: Buys and sells finished goods (e.g., retail shops).
• Manufacturing Business: Produces goods from raw materials (e.g., textile mills, car
factories).
3. What is Accounting?
• Accounting is called the “language of business.”
• It means recording, classifying, summarizing, and reporting financial transactions of a
business.
• Purpose: To provide useful information for decision-making.
4. Financial Statement
• Reports that show the financial performance and position of a business.
• Four Main Statements:
1. Balance Sheet – Shows Assets, Liabilities, and Equity.
2. Income Statement – Revenues & Expenses → Profit or Loss.
3. Cash Flow Statement – Cash inflows & outflows.
4. Statement of Equity – Changes in owner’s equity.
5. What is Financial Accounting?
• Branch of accounting that prepares financial reports for external users (owners,
investors, banks, tax authorities).
• Focus: Historical data (what has already happened).
6. Decision Makers in Accounting
• Internal users: Managers, employees (for planning and control).
• External users: Investors, creditors, government, customers.
7. What is Managerial Accounting?
• Accounting focused on internal management.
• Provides detailed reports, budgets, forecasts for decision-making inside the business.
• Unlike financial accounting, it’s not shared with outsiders.
8. Accounting Cycle
Steps followed to record and report financial data:
1. Identify transactions
2. Record in Journal
3. Post to Ledger
4. Prepare Trial Balance
5. Adjusting Entries
6. Adjusted Trial Balance
7. Prepare Financial Statements
8. Closing Entries
9. Forms of Organizations
1. Sole Proprietorship – One owner, full control, unlimited liability.
2. Partnership – Two or more owners, shared profit & risk.
3. Corporation (Company) – Separate legal entity, shareholders, limited liability.
10. Accounting Equation
Assets = Liabilities + Owner’s Equity
• This always stays balanced after each transaction.
11. Assets
• Definition: Resources owned by the business that provide future benefits.
• Categories of Assets:
o Current Assets: Cash, inventory, accounts receivable.
o Fixed Assets: Land, building, equipment.
o Intangible Assets: Patents, goodwill, trademarks.
12. Liabilities
• Definition: Obligations/debts of a business.
• Types:
o Current Liabilities: Payable within 1 year (creditors, wages payable).
o Long-Term Liabilities: Payable after 1 year (loans, bonds).
13. Capital / Owner’s Equity
• The owner’s claim on the assets after liabilities are paid.
• Increases with investment and profit.
• Decreases with withdrawals and losses.
14. Retained Earnings
• Part of net income kept in the business instead of being distributed.
• Shows growth and reinvestment in the company.
15. Dividend
• The portion of profit distributed to shareholders (in companies).
• Reduces retained earnings.
16. Revenue
• Money earned from sales or services.
• Types of Revenue:
o Operating Revenue: From main business activities (sales, service fees).
o Non-Operating Revenue: From side activities (interest income, rent income).
17. Expense
• Cost incurred to earn revenue.
• Types of Expense:
o Operating Expenses: Salaries, rent, utilities.
o Non-Operating Expenses: Loss on sale of assets, interest expense.
18. What is Transaction?
• Any financial event that changes the assets, liabilities, or equity of a business.
• Must be measurable in money.
• Example: Buying furniture for cash.
19. Analysis of Transaction
Steps to analyze:
1. Identify accounts involved.
2. Check type of account (Asset, Liability, Equity, Revenue, Expense).
3. Determine increase or decrease.
4. Apply Debit-Credit rules.
Example:
Paid rent Rs. 5,000.
• Rent Expense ↑ (Debit 5,000)
• Cash ↓ (Credit 5,000)
