Financial Accounting

Organizations Involved in Standard Setting

 The following organizations are responsible for Standard Setting:

     (a) Securities and Exchange Commission (SEC)

     (b)Financial Accounting Standards Board (FASB)

     (c) International Accounting Standards Board (IASB) 

 

Events Vs. Transactions

What is events?

Events are anything that occur. For example, a manager died, company purchased a machine, Mr. Rahim married Rahima etc.

An event is said to be a transaction when it meets the following conditions:

i)  (1) It must be measured in monetary terms.

ii)(2) It must changes the accounting equation.

(3)  Each transaction has a dual effect on the accounting equation. That is it must have two sides-debit & credit. 

 

Types of Accounts: 

There are five types of account. These are also known as the elements of accounting. They are as follows:

  (1) Asset Account: Assets are claimed by either creditors or owners. For example, furniture, plant and machinery, building, cash, account receivable, inventory etc. Normal balance of assets are debit.

 

l(2) liabilities: Liabilities are claim over assets. Its' normal balance is credit. For example, creditor, accounts payable, salary payable, etc.

 

l(3) Revenue: Revenues are the total amount of sales or services. For example, Sales, service revenue, etc. Revenue are normally credit.

 

l(4) Expenses:Expenses is anything which is occurred  regularly in order to generate revenue. It is normally debit. For example, salary, wages, electricity bill, purchase, etc. 

 

l(5) Capital: Equity or capital is the claim of the owner of the business over the assets. Its' normal balance is credit.

How to calculate Debit and credit?

l1. Assets            =Debit….....Asset increase=Dr

l2. Liabilities   =Credit…... Liabilities increase=Cr

l3. Revenue       =Credit …...Revenue increase=Cr

l4. Expenses     =Debit …......Expenses increase=Dr

l5. Capital       =Credit ….....Capital increase=Cr 

 

The Basic Accounting Equation:

 The fundamental concept of accounting equation is-

  Total Assets must be equal to the Total Liability i. e. TA = TL 

Total liability again may be classified into-

  (1) Internal liability or proprietorship (P) and 

  (2) External liability or (L)

Therefore, Accounting Equation stands for-

                A = L + P 

 

Equity or Capital:

Owner's equity  increase for the following two reasons-

    (1) Investment/ additional capital and (2) Revenue 

 

Owner's equity  decrease for the following two reasons-

    (1) Drawing and (2) Expenses