Financial Accounting Overview

• Accounting can be visualized as a large tree with various branches:
  • Financial Accounting
  • Managerial Accounting
  • Tax Accounting
  • Audit
  • Bookkeeping
• When people mention accounting, they often refer to Financial Accounting.

Definition of Financial Accounting

• The process involves:
  • Identifying financial transactions
  • Recording them
  • Summarizing and analyzing
  • Reporting in financial statements

Example Case: Ruff Times

• Scenario: Owner of a tabloid newspaper, Ruff Times, runs a promotional offer for annual subscriptions.
• Transaction: $40,000 received in cash for subscriptions, starting April 1st.

Steps in Financial Accounting

1. Identify the Transaction

• Recognizing the $40,000 cash received for subscriptions.

2. Prepare a Journal Entry

• Components:
  • Unique journal number
  • Date
  • Description
  • Accounts affected: Cash and Subscription Revenue
  • Debits and Credits: Both $40,000

3. Double Entry Accounting

• Concept:
  • Assets = Liabilities + Equity
  • Accounts:
    • Assets: Cash, Inventory
    • Liabilities: Obligations to lenders/suppliers
    • Equity: Owner's claim on net assets
• Debits and Credits:
  • Debits (increase in assets)
  • Credits (increase in revenue)

4. Post to General Ledger

• General Ledger:
  • Repository for all financial data
  • Modern systems use accounting software
• Accounts Types:
  • Assets
  • Liabilities
  • Equity
  • Revenue
  • Expenses
  • Withdrawals (Dividends)

5. Create a Trial Balance

• Purpose: Summarizes closing numbers in all general ledger accounts.
• Structure:
  • List of all accounts and their closing balances
  • Ensure totals of debits and credits match
  • Unadjusted trial balance checks for errors

6. Make Adjusting Entries

• Purpose: Adjustments to align with the accrual method of accounting.
• Accrual Method: Recognizing revenue as earned and expenses as incurred.
• Scenario Adjustment:
  • Cash accounting was used initially, now need to recognize $10,000 as unearned revenue.

Financial Statements

Types of Financial Statements

• Balance Sheet: Snapshot of assets, liabilities, and equity at a point in time.
• Income Statement: Summary of revenues and expenses over a period, reflecting profitability.
• Cash Flow Statement: Tracks cash inflows and outflows.

Financial Reporting Importance

• Used by investors, lenders, and creditors to assess financial health.
• Ratios can be used for performance comparison.

Closing Entries

• Purpose: Clear temporary accounts for the new year.
• Process:
  • Debit revenue accounts
  • Credit expense accounts
  • Transfer retained earnings to equity section

Conclusion

• The accounting cycle includes identifying, recording, summarizing, and analyzing financial transactions.
• Special thanks for the request and to subscribers for support!