Financial Accounting

Basic Elements of Accounting

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Basic Elements of
Accounting

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The Basic elements

(components) of Accounting are:

1.
2.
3.
4.
5.

Assets
Liabilities
Owners Equity
Revenue
Expenses

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Assets

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Assets are economic resources that are

owned by a business and are expected to
benefit future operations.
Types of Assets:
Current Assets
Fixed Assets

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Current Assets

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Current Assets are those assets which are

easily convertible into cash within one
financial year.
Examples are:
Cash
Notes Receivable
Accounts Receivable
Inventory

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Fixed Assets

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Fixed Assets are those assets which can be

utilized for more than one financial year.
Examples are:
Land
Building
Machinery
Vehicle
Furniture

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Liabilities

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Liabilities are debts of the business. The

amount payable to creditors.
Types of Liabilities:
Short-term Liabilities: which covers one year
or less than one year
Long-term Liabilities: which covers more than
one year
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Owners Equity

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Owners Equity represents the owners claim

to the assets of the business
OR
Investment by owners in a business is
called Owners Equity.

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Revenue

Revenue is the price of goods sold and

services rendered during a given accounting
period.
OR
Earnings of the business is called revenue.
Inflows of the business

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Expense

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Total value of all resources consumed in

producing goods and services.
OR
The cost of goods and services required to
produce income.
outflows of the business

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Financial Accounting
Terminologies used in Accounting

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Accounting
Terminology

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Owner: A person invests capital(cash,

good, services) in business is called owner.
He is entitled to the profit and loss of the
business.

Transaction:

Any activity which involves

an exchange of value is called a transaction.
For example purchase or sale of goods and
services.
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Accounting
Terminology
Voucher: A written evidence in support of
a transaction is called Voucher. whenever a
transaction takes place, voucher is
prepared which can be used as a basis for
recording transaction as well as it is a
written proof of a transaction.

Account:

A summarized record of a
business transaction is called an account.

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Accounting
Terminology
Merchandise (Goods):

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The things or
items bought or sold by a business in order
to earn profit are called merchandise or
goods. For example, a seller buys book with
the intention to resale it , so these books
can be called merchandise.
Purchases: Goods or services, equipment
and other items brought for the business
are called purchases.
- Cash purchases: when goods are
purchased on cash.
- Credit purchases: when goodsHigher
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Accounting
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-Purchases Returns: when merchandise

purchased are returned back to the supplier
for some defects or any other reason.

Sales: When merchandise(goods &

services) are sold out, they are called sales.
- Cash sales: when merchandise are sold on
cash.
- Credit sales: when merchandise are sold
on credit.
- Sales Returns: when the merchandise are
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Accounting
Terminology

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Commission: when a person provide

some business service for another person or
business, the remuneration rewarded to the
person is called commission.
Note:
-Commission Received is Revenue
- Commission Paid is Expense

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Accounting
Terminology

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Discount: it is a deduction, reduction,

grant or an allowance from the price of
goods or any other assets purchased sold or
from the amount payable or receivable in
order to attract theWould
customers:
be discussed
- Cash discount
later
- Trade discount

Notes Receivables:

They are claims

against debtors evidenced by a written
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promise to pay a certain sum in
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Accounting
Terminology

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Notes Payable: A written promise of the

business to pay a specific amount on a
specified date.

Accounts Receivables (Debtors):

Claims against Debtors, less formal than
notes, that arise from the sale of goods and
services on credit. All the person or
corporations to whom the credit sale is
made are known as DEBTORS or Accounts
Receivables.
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Accounting
Terminology

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Accounts Payable(Creditors):

The

claims of the outsiders (outside the

business) for goods and services purchased
on credit called accounts payable. This is a
liability account.

Drawing:

Cash or goods taken by the

owner for personal use.

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Accounting Terminology

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Debit:

An amount entered on the lefthand side of an account. A debit is used to

record increase in an asset and a decrease
in a liability or in owners equity.

Credit: An amount entered on the righthand side of an account. A credit is used to

record a decrease in an asset and an
increase in a liability or in owners equity.
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Accounting Terminology

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Data base:

A storage system of
information within a computer- based
accounting system.

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Accounting
Terminology

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Single Entry:

does record or give effect

to the two fold aspect of each and every
transaction. Generally a cash book and
books to record personal accounts are only
maintained.

Double Entry:

In which double effect of

every transaction is recorded.
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Accounting
Terminology

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Financial Statement:

The principal
means of reporting general-purpose
financial information to persons outside a
business organization is a set of accounting
reports called financial statements.
Note: a complete set of financial statements
includes: A Balance sheet, An income
statement, A statement of owners equity
and A statement of cash flows.
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Accounting
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Balance Sheet:

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showing at a specific
date the financial position of the company
by indicating the resources that it owns ,
the debts that it owes, and the amount of
the owners equity (investment) in the
business.

Income Statement:

indicating the
profitability of the business over the
preceding year (or other time period).
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Accounting
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Statement of Owners Equity:

explaining certain changes in the amount of
the owners equity (investment) in the
business.

Statement of Cash Flows:

summarizing the cash receipts and cash
payments of the business over the same
time period covered by the income
statement.
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