Financial Accounting Overview

• Definition: Financial accounting is the process of identifying, recording, summarizing, and analyzing an entity's financial transactions and reporting them in financial statements.
• Key Types of Accounting: Financial, Managerial, Tax, Audit, and Bookkeeping.

Example of Financial Accounting in Action

• Scenario: Ownership of "Ruff Times" Tabloid Newspaper.
• Transaction: $40,000 received from new annual subscriptions, starting April 1.

Steps in Financial Accounting

1. Identify Transaction: Recognize the $40,000 income from subscriptions.
2. Prepare Journal Entry:
   • Unique journal number, date, description, accounts affected, debits and credits (both $40,000 for cash and subscription revenue).
   • Use of Double Entry Accounting:
     • Assets = Liabilities + Equity (Accounting Equation).
     • Total Debits must equal Total Credits.
3. Posting to General Ledger:
   • Store financial data in a general ledger (historically a large book, now often accounting software).
   • Types of Accounts: Assets, Liabilities, Equity, Revenue, Expenses, Withdrawals.
   • T Accounts: Visual representation of accounts (debits on left, credits on right).

Trial Balance and Adjusting Entries

• Trial Balance:
  • Internal report summarizing all general ledger accounts at the end of the financial year (December 31).
  • Lists account balances (debits left, credits right).
• Adjusting Entries:
  • Bring books in line with the Accrual Method of Accounting (recognizing revenue and expenses as they are earned/incurred).
  • Difference between cash accounting and accrual accounting (cash accounting recognizes revenue upon cash receipt).
  • Example: Adjusting for $10,000 of subscription revenue as a liability (deferred/unearned revenue).

Financial Statements

• Purpose: Summarize business activities for stakeholders (investors, lenders, etc.).
• Types of Financial Statements:
  1. Balance Sheet: Snapshot of assets, liabilities, and equity at a point in time.
  2. Income Statement: Summarizes revenues and expenses over a period, showing profitability.
  3. Cash Flow Statement: Summarizes cash inflows and outflows.
• Financial Ratios: Used by investors for analysis (not covered in this session).

Closing Entries

• Purpose: Prepare books for the next financial year by clearing temporary accounts (revenues, expenses, dividends).
• Example Closing Entry:
  • Debit revenue accounts, credit expense accounts to reset to zero.
  • Retained earnings reflect profits carried over.

Conclusion

• Accounting Cycle: The process of financial accounting includes identifying, recording, summarizing, and analyzing transactions.
• Engagement: Thanks to viewers for support and feedback; invitation to explore more accounting topics.