Fundamentals of accountin,abdirizak.pptx

This slide is fundamentals of Accounting organized in a helpful manner to business owners

1. Fundamentals of Accounting Introduction to Accounting Principles of Accounting Accounting equation Double-entry accounting system Source documents A ccounting cycle Financial statements

2. 1. Introduction to Accounting Definition of accounting Importance of accounting in business Role of accounting in decision-making Definition of Transaction and Account in Accounting

3. Definition of Accounting Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business. It provides insight into the financial health and performance of an organization by tracking its income, expenses, assets, and liabilities .

4. Importance of accounting in business Accounting plays a crucial role in business by providing accurate and timely financial information that helps in making informed decisions. It enables businesses to monitor their financial performance, comply with regulatory requirements, attract investors, secure loans, and plan for future growth.

5. Role of accounting in decision-making Accounting helps in decision-making by providing relevant financial data that aids in evaluating the profitability, solvency, and efficiency of a business. This information is essential for setting goals, creating budgets, identifying areas for improvement, and measuring the success of strategic initiatives.

6. Account and Transaction in accounting An account: is a detailed record that tracks the changes in value related to a specific aspect of a business, such as assets, liabilities, equity, revenue, or expenses. Each account is represented in the general ledger and contains a summary of all transactions associated with that particular element . Transaction : refers to any exchange of goods, services, or money between two parties that results in a financial impact on the business. Each transaction involves at least two accounts and affects the accounting equation (Assets = Liabilities + Equity) by either increasing or decreasing the value of assets, liabilities, or equity.

7. 2. Principles of Accounting Generally Accepted Accounting Principles (GAAP) Going Concern Principle Accrual Principle Consistency Principle Conservatism Principle Matching Principle Historical Cost Principle Materiality Principle Objectivity Principle Full Disclosure Principle

8. Generally Accepted Accounting Principles (GAAP) Generally Accepted Accounting Principles (GAAP) are a set of standard accounting principles, standards and procedures that companies use to compile their financial statements. These principles provide a standard framework for reporting financial information to ensure consistency and transparency in financial reporting.

9. Going Concern Principle This principle assumes that a company will continue to operate in the foreseeable future. Financial statements are prepared under the assumption that the company will not liquidate or be forced to scale down its operations .

10. Accrual Principle This principle states that revenues and expenses should be recognized in the period in which they are earned or incurred, regardless of when cash is exchanged. This ensures that financial statements accurately reflect the financial performance and position of a company.

11. Consistency Principle This principle requires companies to use the same accounting methods and principles from one period to the next. Consistent application of accounting policies helps ensure comparability between financial statements over time .

12. Conservatism Principle This principle guides accountants to choose accounting methods and estimate uncertainties in a way that results in lower profits and lower asset values, rather than overstating them. This principle helps to avoid overstating financial performance and assets .

13. Matching Principle This principle requires that expenses should be recognized in the same period as the related revenues, to reflect the true cost of generating revenue. This principle helps in accurately measuring the profitability of a company .

14. Historical Cost Principle This principle states that assets should be recorded at their original acquisition cost, rather than at their current market value. This principle provides objectivity and reliability in financial reporting .

15. Materiality Principle According to this principle, financial information that could influence the decisions of users of financial statements should be disclosed. Materiality is based on the relative size and significance of an item to the overall financial statements.

16. Objectivity Principle This principle requires that financial statements be based on verifiable and objective evidence, rather than on subjective estimates or opinions. Financial information should be free from bias and based on reliable data.

17. Full Disclosure Principle This principle requires that all relevant information that could impact the decisions of financial statement users should be disclosed in the financial statements or in the notes to the financial statements. This ensures transparency and completeness in financial reporting .

18. 3. Accounting equation Definition of the accounting equation Explanation of how the accounting equation works Importance of the accounting equation

19. Definition of the accounting equation The accounting equation, Assets = Liabilities + Equity, is the fundamental principle of accounting that illustrates the relationship between a company's resources (assets), debts (liabilities), and ownership interests (equity).

20. Explanation of how the accounting equation works The accounting equation states that the total assets of a business must equal the total liabilities plus equity. This equation ensures that the company's financial statements remain balanced, as any change in one component must be accompanied by an equal and opposite change in another component

21. Importance of the accounting equation The accounting equation is crucial in maintaining balance in financial statements. By adhering to this equation, businesses can accurately track their financial position, monitor changes in assets and liabilities, and assess the impact of transactions on equity. It serves as a foundation for understanding the financial health of a company and guiding decision-making processes.

22. 4. Double-entry accounting system Explanation of the double-entry accounting system Definition of debits and credits in accounting How the debit and credit rule applies to different types of accounts

23. Explanation of the double-entry accounting system The double-entry accounting system is based on the concept that every financial transaction affects at least two accounts - one account is debited, and another account is credited. This system ensures that the accounting equation remains in balance .

24. Definition of debits and credits in accounting In accounting, debits and credits are used to record increases and decreases in accounts. Debits typically represent assets and expenses, while credits signify liabilities, equity, and revenues. The rules for debits and credits vary for different types of accounts .

25. T he debit and credit rule application to different types of accounts The debit and credit rule dictates how transactions are recorded in different types of accounts. For example, an increase in an asset account is recorded as a debit, while an increase in a liability account is recorded as a credit. Understanding these rules is essential for accurately capturing the impact of transactions on financial accounts and maintaining the integrity of financial statements.

26. Normal balances of accounts & Increase/Decrease of debit and credit rule

27. 5. Source documents Definition of source documents Invoices Receipts Bank Statements

28. Definition of source documents Source documents are the original records that provide evidence of a transaction or event. They are used to initiate, record, and track business activities, serving as the foundation for accounting entries and financial reporting . Source documents are essential for maintaining accurate and reliable financial records, ensuring transparency and accountability in business operations, and facilitating auditing and compliance procedures

29. Invoices Invoices are formal documents issued by a seller to a buyer, requesting payment for goods or services rendered. They include information such as the seller’s contact details, the buyer’s information, a description of the goods or services, quantities, prices, terms of sale, and payment due dates . Use : Invoices play a vital role in billing customers, documenting sales transactions, managing accounts receivable, and tracking revenue. They also serve as legal documentation for financial and tax purposes .

30. Receipts Receipts are written acknowledgments issued by a seller to a buyer upon receiving payment for goods or services. They contain details such as the date of purchase, items purchased, price, payment method, and seller information . Use: Receipts serve as proof of purchase for customers, facilitate returns or exchanges, help track sales transactions, and support accurate record-keeping for tracking revenue and cash flow.

31. Bank Statements Bank statements are official documents provided by financial institutions to customers, detailing all transactions related to their bank accounts. They include details such as deposits, withdrawals, transfers, cleared checks, fees, and account balances. Use: Bank statements help account holders reconcile their bank records, monitor transactional activity, detect errors or unauthorized charges, track account balances, and verify the accuracy of deposits and withdrawals.

32. 6. Accounting cycle Identifying and Analyzing Transactions Journalizing Transactions   Posting to the General Ledger Preparing a Trial Balance   Making Adjusting Entries Preparing Financial Statements   Closing the Books

33. Identifying and Analyzing Transactions The first step in the accounting cycle is to identify and analyze all financial transactions that have taken place within a specific time period. This involves reviewing source documents such as receipts, invoices, and bank statements to understand the nature of each transaction.

34. Journalizing Transactions  Once all transactions have been identified and analyzed, the next step is to record them In the company’s general journal. Each transaction is recorded using double-entry accounting, which means that every debit must be balanced by a corresponding credit to ensure that the accounting equation (Assets = Liabilities + Equity) remains in balance.  

35. Posting to the General Ledger After journalizing transactions, the next step is to post the journal entries to the general ledger. The general ledger is a collection of all accounts used by the company to record financial transactions. Each account in the general ledger represents a specific asset, liability, equity, revenue, or expense .

36. Preparing a Trial Balance  Once all transactions have been journalized and posted to the general ledger, a trial balance is prepared. The trial balance is a summary of all the accounts in the general ledger and their respective debit and credit balances. The purpose of the trial balance is to ensure that debits equal credits and that the accounting records are accurate.

37. Making Adjusting Entries At the end of the accounting period, adjusting entries are made to ensure that the company's financial statements reflect the most up-to-date and accurate information. Adjusting entries are typically made for items such as accrued expenses, prepaid expenses, depreciation, and unearned revenue. These entries ensure that revenue and expenses are recognized in the correct accounting period.

38. Preparing Financial Statements  After making adjusting entries, the next step in the accounting cycle is to prepare the company’s financial statements. The most common financial statements include the income statement, balance sheet, and statement of cash flows. These statements provide valuable information about the company’s financial performance, position, and cash flows .

39. Closing the Books The final step in the accounting cycle is to close the books for the current accounting period. This involves transferring the balances of temporary accounts (revenue, expenses, and dividends) to the retained earnings account. By closing the books, the company starts with zero balances in these accounts for the next accounting period. This step helps ensure that the financial statements accurately reflect the company’s performance for the period.

40. 6. Financial statements Income Statement Balance Sheet Cash Flow Statement

41. Income Statement The income statement, also known as the profit and loss statement, shows a company's revenues, expenses, and profits (or losses) over a specific period, typically a quarter or a year. The basic equation for an income statement is :   Revenue - Expenses = Net Income

42. Key components of the income statement include Revenue : t he total amount of money earned from selling goods or services. Cost of Goods Sold (COGS): t he direct costs associated with producing goods or providing services. Gross Profit: r evenue minus COGS. Operating Expenses: c osts incurred in the normal course of business operations, such as salaries, rent, and utilities. Operating Income: g ross profit minus operating expenses. Net Income: t he final amount after subtracting all expenses from revenue .

43. Balance Sheet : The balance sheet provides a snapshot of a company's financial position at a specific point in time, typically the end of a quarter or fiscal year. It lists a company's assets, liabilities, and shareholders' equity. The fundamental equation of a balance sheet is: Assets = Liabilities + Shareholders' Equity

44. Key components of the balance sheet include : Assets : Resources owned by the company that have economic value, such as cash, inventory, equipment, and accounts receivable. Liabilities : Debts and obligations owed by the company, including loans, accounts payable, and accrued expenses. Shareholders ' Equity: The difference between assets and liabilities, representing the owners' claim on the company's assets . The balance sheet helps investors and creditors evaluate a company's financial health and its ability to meet short-term and long-term obligations.  

45. Cash Flow Statement The cash flow statement shows how changes in balance sheet accounts and income affect cash and cash equivalents, providing insights into a company's liquidity, solvency, and operating activities. The cash flow statement is divided into three main sections

46. Key components of the cash flow statement include Operating Activities: t he net amount of cash generated or used by operating activities. Investing Activities: the net amount of cash used for investing in assets. Financing Activities: the net amount of cash provided by or used in financing activities. Net Increase (Decrease) in Cash and Cash Equivalents: t he overall change in the company's cash and cash equivalents during the reporting period.   The cash flow statement helps stakeholders understand how a company generates and uses cash, which is crucial for assessing its ability to maintain operations, invest in growth, and meet financial obligations.

47. Refrences Accounting for Dummies Accounting for Non-Accountants Accounting Made Simple

48. Prepared by: Abdirizak Mohamed Abdirihman Senior Economist at Mama Africa center