RECAP LECTURE 11

THE ACCOUNTING EQUATION Assets = Capital + Liabilities It is a fact that the totals of each side will always equal one another, and that this will always be true no matter how many transactions are entered into. The actual assets, capital and liabilities may change, but the equality of assets with that of the total of capital and liabilities will always hold true

DOUBLE ENTRY ACCOUNTING The T-Account The mechanics of double-entry accounting is illustrated by using a T-account, which may be defined as the simplest form of bookkeeping account. A title is placed above the account, and debit and credit entries are entered on the left and right side respectively. (Draw)

DOUBLE ENTRY ACCOUNTING ACCOUNTS To Record Entry in Account Assets Increase Debit Decrease Credit Liabilities Increase Credit Decrease Debit Capital Increase Credit Decrease Debit

DOUBLE ENTRY ACCOUNTING – LECTURE 12 Practical Question: 1.On 1 st May 19-7 Bashir started in business and deposited Rs5000 into a bank account. 2.On 3 rd May 19-7 Bashir buys a building for Rs On 6 th May 19-7 Bashir buys some goods for Rs500 from Dawood to pay later. 4.On 10 th May 19-7 goods which had cost Rs100 were sold to Junaid, the money to be paid later

DOUBLE ENTRY ACCOUNTING 5. On 13 May 19-7 goods which had cost Rs50 were sold to Danish, he paid immediately by cheque. 6. On 15 May 19-7 Bashir pays a cheque for Rs200 to Dawood in part payment of the amount owing Required: Prepare Journal / Double Entries Prepare T-accounts Prepare Statement of financial position

DOUBLE ENTRY ACCOUNTING SOLUTION

DOUBLE ENTRY ACCOUNTING Processing Transactions 1.Cash 2.Receivables 3.Revenues 4.Wages Payable 5.Labour Expense 6.Inventories 7.Insurance expense 8.Prepaid Insurance

DOUBLE ENTRY ACCOUNTING Machinery & Building 1.Machinery 2.Machinery – Accumulated Depreciation 3.Machinery - Depreciation Expense 1.Building 2.Building – Accumulated depreciation 3.Building – Depreciation Expense

FINANCIAL STATEMENTS A Financial Statements is a collection of data organized according to logical and consistent accounting procedures. Its purpose is to convey an understanding of some financial aspects of a business firm. It may show a position at a moment in time, as in the case of statement of financial position (balance sheet) or may reveal a series of activities over a given period of time, as in the case of an Income Statement

FINANCIAL STATEMENTS The majority of firms include extensive financial statements in their annual reports, which receive wide distribution The proper preparation and use of financial statements requires the financial manager to define and distinguish among certain terms

FINANCIAL STATEMENTS Funds and Working Capital The terms funds is commonly used with a number of meanings, ranging from the broad to the very restricted. Some managers use the term funds to refer to all financial resources held by a firm. In this usage, all the firm’s assets both fixed and current would be forms of funds.

FINANCIAL STATEMENTS Funds and Working Capital A more specific definition limits funds to current assets, those assets usually converted into cash within the next 12 months. With this definition, funds would include cash, marketable securities, debtors and stock. Fixed assets, such as property, plant and equipment would be omitted.

FINANCIAL STATEMENTS Funds and Working Capital Another definition identifies funds as the difference between current assets and current liabilities The term working capital is closely related to the term funds and has two common meanings To avoid confusion arising from misunderstanding in the usage of terms, financial managers should always question the meaning of a term.

FINANCIAL STATEMENTS Funds and Working Capital For our purposes, we define these terms precisely; CASH: we mean currency, money deposited in a bank or money held in highly liquid money market investments, we will use the term cash. The term marketable securities will be used for short-term investments that do not mature in the next week or so

FINANCIAL STATEMENTS Funds and Working Capital Funds or working capital: These two terms will be used synonymously to refer to a firm’s current assets Net working Capital: The difference between current assets and short- term debts will be defined as net working capital. This reflects an important measure of a firm’s liquidity. Is the excess debtors & stock held by the firm above the level of short-term obligations.

FINANCIAL STATEMENTS Three major financial statements are; 1.Income Statement 2.Statement of financial position (old name is balance sheet) 3.Statement of cash flow (flow-of-funds statements) (Will be discussed in detailed in lecture 13)