Principles Of Financial Accounting By Mahmoud Ramadan

n !!

Who is the accountant?

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 Principles Of Financial Accounting By Mahmoud Ramadan

What is the meaning of Financial Accounting?

 Definition ?
 Equation(Consisting of( ?
 Cycle ?
 Importance ?

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 Principles Of Financial Accounting By Mahmoud Ramadan

Introduction

Accounting is the language of business

 Identify ( Expense , Revenue… etc )
 Record ( 500$ , 200$ ... etc )
 Communicate ⇛ Analyze and interpret for users & Prepare accounting reports
( Financial Statements)

Resulting from economic events and operations over a period of time relating to entity

Accountant Owner

communicates

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 Principles Of Financial Accounting By Mahmoud Ramadan

Type of accounting information users :-

External users
 Who are external users ?
- External users are those entities interested in the financial results
of a business, but who take no part in operating the entity.
- Investors , Creditors , Customers , Suppliers

⇛ Financial Accounting serve external users

- its focus is on informing those outside of a company. The final

accounts or financial statements produced through financial
accounting are designed to disclose the firm's business
performance and financial health.
- Based on historical information , a financial statement contains
data for a defined period of time.
- financial accounting reports are highly regulated, especially the
income statement, balance sheet, and cash flow statement. Since
this information is released for public consumption and is highly
anticipated by investors, companies are very careful about how
they make calculations, how figures are reported, and in what
format those reports appear.

Internal users
 Who are internal users ?
- There are several groups of people within a business that use its
accounting information, each having different needs and
objectives.

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 Principles Of Financial Accounting By Mahmoud Ramadan

Management, Owners, Employees,

⇛ Managerial Accounting serve internal users

- The main objective of managerial accounting is to produce useful

information for a company's internal decision-making. Business
managers collect information that feeds into strategic planning,

- helps management set realistic goals, and encourages an efficient

directing of company resources.

- Managerial accounting is created for a company's executives.

- Managerial accounting looks at past performance but also creates

business forecasts. Business decisions are informed by this type of
accounting.

- Reports generated through managerial accounting are only

circulated internally. Each company is free to create its own
system and rules on managerial reports.

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 Principles Of Financial Accounting By Mahmoud Ramadan

Questions:

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Principles Of Financial Accounting By Mahmoud Ramadan

Chapter 1

Accounting in Action

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 Principles Of Financial Accounting By Mahmoud Ramadan

Definition of financial accounting :-

Is an information system that ( identifies , records and communicates )

the economic events of an organization, then preparing financial
statements that companies’ use to show their financial performance and
position to people outside the company or interested users

purpose of financial accounting

- Provide information that is needed for decision making
- Prepare financial reports ( Financial Statements ) about firm’s
- performance over a specified period of time to external parties

Basic Accounting Eqation

Assets = Liability + Owner’s Equity

Asset

Assets are resources owned and controlled by the entity with economic
value with the expectation that it will provide a future benefit.

 Cash on hand & in bank

 Accounts Receivable (A/R)
 Notes receivable
 Allowance for Doubtful Accounts
 Interest Receivable
 Inventory
 Supplies
 Prepaid Insurance
 Prepaid Rent
 Lands
 Equipment , Mashines

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 Principles Of Financial Accounting By Mahmoud Ramadan

 Buildings, Property
 Furniture and fixtures
 Vehicles
Liability
is something a person or company owes, usually a sum of money.
Liabilities are settled over time through the transfer of economic
benefits including money, goods, or services.

Another Definition: Claims (agaist assets) of those to whom the company

owes money.

________________________________________________

 Accounts payable
 Notes Payable
 Unearned Service Revenues
 Salaries and
 Wages Payable
 Unearned Rent Revenue
 Interest Payable
 Dividends Payable
 Income Taxes Payable
 Bonds Payable
 Discount on Bonds Payable
 Premium on Bonds Payable
 Mortgage Payable

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 Principles Of Financial Accounting By Mahmoud Ramadan

Equity

Called : Claims of owners Or Residual Equity Or Net Worth

The ownership claim on total assets is owner’s equity. It is equal to total

assets minus total liabilities.

Here is why: The assets of a business are claimed by either creditors or

owners. To find out what belongs to owners, we subtract the creditors’
claims (the liabilities) from assets. The remainder is the owner’s

claim on the assets—the owner’s equity. Since the claims of creditors

must be paid before ownership claims, owner’s equity is often referred
to as residual equity

 Owner’s Capital
 Owner’s Drawings
 Common Stock
 Preferred Stock
 Paid-in Capital in Excess of Par— Common Stock
 Paid-in Capital in Excess of Par— Preferred Stock
 Treasury Stock
 Retained Earnings
 Dividends

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 Principles Of Financial Accounting By Mahmoud Ramadan

For Example:- to create a company

Uses of funds sources of funds

Liabilities
Sources _____
• Creditors
of Owner’s
funds • Owners equity

Uses of • Assets
funds

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 Principles Of Financial Accounting By Mahmoud Ramadan

ECONOMIC ENTITY ASSUMPTION

- The economic entity assumption requires that the activities of

the entity be kept separate and distinct from the activities of
its owner and all other economic entities.
- The accounting process and the accounting equation are
related to the economic entity (Business ) not the owner.

Transactions

- Are the economic events of the business recorded by

accountants
- Transactions may be identified as either external or internal
transactions.
- Accounting reports is result from all transactions which
happened during period
- Each transactions must be analyzed in terms of its effect on
the components of the basic accounting equation

Increase ↑ Increase ↑ -
Increase ↑ - Increase ↑
Increase ↑ Increase ↑ Increase ↑
Increase ↑
- -
Decrease ↓
Decrease ↓ Decrease ↓ -
Decrease ↓ - Decrease ↓
Decrease ↓ Decrease ↓ Decrease ↓

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 Principles Of Financial Accounting By Mahmoud Ramadan

Solution

1. Increase in Asset & Increase in equity

2. Decrease in Asset &Decrease in Equity
3. Increase in Payable &Increase in Liability
4. Increase in Asset & Increase in Equity
5. Decrease in Asset & Decrease in Equity

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 Principles Of Financial Accounting By Mahmoud Ramadan

6. Increase in Asset & Decrease in Asset

7. Increase in Liability & Decrease in Equity
8. Increase in Asset & Decrease in Asset
9. Increase in Asset & Increase in Equity

Assets = Liabilities + Owner’s Equity

Beg.Capital + Investment-Drawing +Revenues-Expenses

If Revenues > Expenses

The result will be Loss and decrease in Owner’s Capital and
Owner’s Equity overall
If Revenue
The result will be Profit and Increase in Owner’s Capital and
Owner’s Equity overall
Example
Classify each of the following items as
( owner’s drawings , Revenues , Expenses )
1. Advertising expense (E)
2. Service Revenue (R)
3. Insurance expense (E)
4. Salaries and wages expense (E)
5. Owner’s drawings (D)
6. Rent revenue (R)
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 Principles Of Financial Accounting By Mahmoud Ramadan

7. Utilities expense (E)

Ex/On April 1, Julie Spengel established Spengel's Travel

Agency. The following transactions were completed during
the month:
- Invested $15,000 cash to start the agency
- Paid $600 cash for April office rent.
- Purchased equipment for $3,000 cash.
- Incurred $700 of advertising costs in the Chicago Tribune, on
account
- Paid $900 cash for office supplies
- Performed services worth $10,000: $3,000 cash is received
from customers, and the balance of $7,000 is billed to
customers on account
- Withdrew $600 cash for personal use
- Paid Chicago Tribune $500 of the amount due in transaction
(4)
- Paid employees salaries $2,500
- Received $4,000 in cash from customers who have previously
been billed in transactions (6)
A) Prepare a tabular analysis of the transactions using
the following column headings: Cash, Accounts
Receivable, Supplies, Equipment, Accounts Payable,
Owner's Capital, Owner's Drawings, Revenues, and
Expenses.

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 Principles Of Financial Accounting By Mahmoud Ramadan

B)From an analysis of the owner's equity columns, compute

the net income or net loss for April.
Solution

No. Cash A/R Supp Equip A/P Capital Draw Rev Ex

1 51,000 15,000
2 (600) (600)
3 (3,000) 3,000
4 700 (700)
5 (900) 900
6 3,000 7,000 10,000
7 (600) (600)
8 (500) (500)
9 (2,500) (2,500)
10 4,000 (4,000)
Tot 13,900 3,000 900 3,000 200 15,000 (600) 10,000 (3,800)
Bal.1 20,800 200 14,400 6,200
Bal.2 20,800 20,800

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 Principles Of Financial Accounting By Mahmoud Ramadan

Users of Financial Statementsa. Users may directly or

indirectly have an economic interest in a specific business.
Users with direct interests usually invest in or manage the
business, and users with indirect interests advise, influence,
or represent users with direct interests.
1) Users with direct interests include
a) Investors or potential investors
b) Suppliers and creditors
c) Employees
d) Management
2) Users having indirect interests include
a) Financial advisors and analysts
b) Stock markets or exchanges
c) Regulatory authorities
b. External users use financial statements to determine
whether doing business with the firm will be beneficial.

1) Investors need information to decide whether to

increase, decrease, or obtain an investment in a firm.
2) Creditors need information to determine whether to
extend credit and under what
terms.

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 Principles Of Financial Accounting By Mahmoud Ramadan

3) Financial advisors and analysts need financial

statements to help investors evaluate particular
investments.
4) Stock exchanges need financial statements to
evaluate whether to accept a firm’s stock for listing or
whether to suspend the stock’s trading.
5) Regulatory agencies may need financial statements
to evaluate the firm’s conformity with regulations and
to determine price levels in regulated industries.

c. Internal users use financial statements to make

decisions affecting the operations of the business.
These users include management, employees, and the
board of directors.
1) Management needs financial statements to assess
financial strengths and
deficiencies, to evaluate performance results and past
decisions, and to plan for
future financial goals and steps toward accomplishing
them.
2) Employees want financial information to negotiate
wages and fringe benefits based
on the increased productivity and value they provide to
a profitable firm

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