Understanding Financial Accounting Basics

Oct 1, 2024

Lecture Notes: Financial Accounting Overview

Introduction

  • Presenter: James
  • Topic: Financial Accounting
    • Process of identifying, recording, summarizing, analyzing financial transactions.
    • Reporting transactions in financial statements.

Branches of Accounting

  • Financial Accounting
  • Managerial Accounting
  • Tax Accounting
  • Audit
  • Bookkeeping

Financial Accounting Process

  1. Identify the Transaction

    • Example: $40,000 in new subscriptions for "Rough Times"

  2. Prepare a Journal Entry

    • Record of a financial transaction with:
      • Journal number
      • Date
      • Description
      • Accounts affected (Cash and Subscription Revenue)
      • Debits and Credits ($40,000 each)
    • Double-entry accounting: Every transaction affects at least two accounts.

  3. Understanding Double Entry Accounting

    • Assets = What business owns (e.g., cash, inventory)
    • Liabilities = What business owes to third parties
    • Equity = Owner's claim on business's net assets
    • Accounting Equation: Assets = Liabilities + Equity
    • Foundation of double-entry accounting
    • Debits (destination of economic benefit)
    • Credits (source of economic benefit)

  4. Post Journal Entry to General Ledger

    • General Ledger: Complete record of accounts and journal entries
    • Transition from manual books to accounting software
    • Accounts: Record, sort, store related transactions
      • Types: Assets, Liabilities, Equity, Revenue, Expenses, Withdrawals (Dividends)
    • T-Accounts: Visual representation
      • Debits on the left, Credits on the right

  5. Prepare Unadjusted Trial Balance

    • Summarizes closing numbers in all general ledger accounts
    • Ensures debits equal credits
    • Basis for financial statement preparation

  6. Post Adjusting Entries

    • Align books with the Accrual Method of accounting
      • Recognize revenue as earned, record expenses as incurred
    • Adjustments necessary for compliance with IFRS or GAAP
    • Example Adjustment: $10,000 revenue deferred due to unearned subscription

  7. Create Financial Statements

    • Balance Sheet: Snapshot of assets, liabilities, equity
    • Income Statement: Summary of revenues and expenses
    • Cash Flow Statement: Cash inflows and outflows
    • Importance: Provides financial health for stakeholders

  8. Post Closing Entries

    • Clear temporary accounts (revenues, expenses, dividends)
    • Balance transferred to retained earnings
    • Prepare books for next fiscal year

Conclusion

  • The accounting cycle involves identifying, recording, summarizing, analyzing transactions, and reporting them.
  • Importance of financial statements to investors, lenders, and creditors.
  • Mention of accounting cycle cheat sheets and further learning resources.