Financial & Managerial Accounting

Dr. Mohamed El Baradie

Goals

Introduce professionals with little or no business, accounting, or management background to the essential concepts of Financial and Managerial Accounting.

Dr. Mohamed El Baradie

Financial Accounting
-Field of accounting that treats money as a means of measuring economic performance instead of (as in cost accounting) as a factor of production. It encompasses the entire system of monitoring and control of money as it flows in and out of the firm as assets and liabilities, and revenues and expenses.
-Financial accounting gathers and summarizes financial data to prepare financial reports such as balance sheet and income statement for the firm's management, investors, lenders, suppliers, tax authorities, and other stakeholders.

Dr. Mohamed El Baradie

Users of accounting information

External:

Internal:
Managers Internal auditors Board of directors

Shareholders Prospective investors Creditors Government agencies

Dr. Mohamed El Baradie

Accounting concepts (1)

1- The organization is a going concern
Implies that the business will continue to operate up to a foreseeable future. Foreseeable future should at least be a period exceeding 12 months. This concept requires that Assets should be measured at their historical cost. If the Management of the entity believes that their business will not operate up to a foreseeable future then the assets should be measured at the Break up basis. i.e. at net selling price.

Dr. Mohamed El Baradie

Accounting concepts (2)

2- The accrual basis is used
Accounting transactions should be recognized and recorded in the year of transaction and not necessarily when payment is made or received.

Accruals concept also says that the net profit for the year is the difference between revenues and expenses incurred to generate those revenues.

Dr. Mohamed El Baradie

Accounting concepts (3)

3- The unit of measure
Only transactions which can be measured in monetary value should be recognized in the financial statements. This implies that any transaction which can not be quantified in monetary value will not be recognized in the financial statements. This concept further explains that the currency of money used as a unit of measurement should be stable.

Dr. Mohamed El Baradie

Accounting concepts (4)

4- Consistency
Transactions which are similar should be subjected to the same accounting treatment. When ever the business has chosen a certain accounting treatment then they should follow such treatment in all accounting years. Change of method should be effected if the aim is to show a better presentation of financial statements or the old method has been outlawed by a new accounting standard or company Act.

Dr. Mohamed El Baradie

Accounting concepts (5)

5- Cost
Accounting transactions (assets) should initially be measured at their historical cost to the business. Cost here should either be the production cost if internally constructed or the purchased cost if acquired externally.

Dr. Mohamed El Baradie

Accounting concepts (6)

6- Matching Concept
In determining profit or loss at all times, revenues should be matched against expenses incurred in the process of generating that revenue in the same period. It is necessary to recognize all the revenue/income earned during a period regardless of when money is received. In the same way, all expenses incurred by the business should be included regardless of when money is paid for them.

Dr. Mohamed El Baradie

Accounting concepts (7)

7- Prudence
Accountants should always exercise caution when dealing with uncertainty but should also maintain neutrality in recording transactions. The business is encouraged to take a conservative approach in reporting its affairs. If the accountant is faced with a choice of figures, which are both, acceptable to use in the financial statements he should take a pessimistic rather than an optimistic approach. This emphasize that it is better for accountants to underestimate any anticipated profits rather than under estimating any anticipated loss

Dr. Mohamed El Baradie

The basic Accounting equation

Assets = Liabilities + Owners Equity
A L + OE

Where: - An asset is everything that the organizations owns - A liability is everything that the organization owes - Owners Equity consists of everything that is invested in the organization by the owners.

Dr. Mohamed El Baradie

The extended Accounting equation

Assets + Expenses = Liabilities + Owners Equity+ Revenues

A + E = L + OE + R

Where: - Expenses are amounts that the organization spends to run the business - Revenues are amounts that the organization receives from sales

Dr. Mohamed El Baradie

Example
Start

the business: Paid in $30,000 to start the business

Assets + Expenses = Liabilities + Owners Equity+ Revenues A Cash +30,000 + E = L + OE +30,000 + R Common Stock

Dr. Mohamed El Baradie

Example
Purchase

land for $20,000

Assets + Expenses = Liabilities + Owners Equity+ Revenues A Cash 30,000 -20,000 +20,000 + Land + E = L + OE 30,000 + R Common Stock

Dr. Mohamed El Baradie

Example
Purchase

office supplies $500 0n account (payment in 30 days)

Cash + Office supplies + Land 30,000 -20,000 + 500 + 20,000 = 500 + 30,000 = A/P + Common Stock

Dr. Mohamed El Baradie

Accounts
Examples of accounts
- Assets: building, land, furniture, cars, equipment, Accounts receivable - Liabilities: accounts payable, loans

- Owners Equity: capital, retained earnings.

- Expenses: office supplies, fuel, power, interest - Revenues: sales, interest

Dr. Mohamed El Baradie

The financial accounting cycle

- Recording the transactions
- Posting to ledgers - Trial balance before adjustments - Adjusting entries (pre-paid expenses Accruals) - Trial balance after adjustments - Closing entries - Financial statements (balance sheet, income statement, statement of cash flows, and statement of retained earnings)

Dr. Mohamed El Baradie

The tree of accounts

Accounts are categorized into types.
Each type will have a first level code (number) Each type will have sub-types Sub-types will have second level codes Some sub-types may have 3rd level types of accounts These in turn will have third level codes and so on

Dr. Mohamed El Baradie

The debit & Credit concepts {The double entry system}

Each economic transaction will include at least two sides The debit side & The credit side Sides represent accounts affected by the economic transaction.

Dr. Mohamed El Baradie

Retained earnings

Beginning retained earnings

+ Plus: Revenues (-) Minus: Expenses = Equals Net Income (or Net Loss) (-) Minus: Dividends = Equals: Ending Retained Earnings

Dr. Mohamed El Baradie

Examples

Dr. Mohamed El Baradie