Learn Financial Accounting & Budgeting From Scratch

1. Learn Financial Accounting & Budgeting From Scratch Become a Xero Certified Accounting Advisor

2. Financial Accounting Process – Explained Section A

3. A. Financial Accounting Process • Definition of Financial Accounting; • Accounting Equation; • Double Entry Principles; • Chart of Accounts; • Income Statement; • Balance Sheet; • Cash Flow Statement; • Statement of Changes in Equity; • Journal, ledger and Trial Balance; • GAAP & IFRS.

4. Lecture #A1 Definition of Financial Accounting

5. Financial Accounting Definition Financial Accounting is the method of keeping records and making report on five types of transactions or accounts of a business entity. 1 2 3 4 5 Asset Liability Equity Expense Revenue Build factory taking a loan and your own money to produce and sell.

6. Two Founding Principles of Accounting Financial Accounting is the method of keeping records and making report on five types of transactions or accounts of a business entity. 1 2 Business is a separate legal entity. It’s separate from its owners. Transactions are financial events which bring monetary changes in any or all of your account types.

7. Financial Accounting Definition Financial Accounting is the method of keeping records and making report on five types of transactions or accounts of a business entity. Any visible or invisible objects that we bought, made or received someway and which somehow gives us benefits in cash or non-cash form. 1 Asset

8. Financial Accounting Definition Financial Accounting is the method of keeping records and making report on five types of transactions or accounts of a business entity. Liability is the amount of money or any other asset your business owes to third party (other than owners). Business must pay it back to third party with or without interest. 2 Liability

9. Financial Accounting Definition Financial Accounting is the method of keeping records and making report on five types of transactions or accounts of a business entity. Equity is the amount of money or any other asset your business owes to owners. Business is not bound to pay it back the capital amount. Normally owners contribute this amount to make profit. 3 Equity

10. Financial Accounting Definition Financial Accounting is the method of keeping records and making report on five types of transactions or accounts of a business entity. Main operation of a business is to produce goods and service and sell those for profit. All the money business spend to produce and sell are called expenses. 4 Expense

11. Financial Accounting Definition Financial Accounting is the method of keeping records and making report on five types of transactions or accounts of a business entity. Main operation of a business is to produce goods and service and sell those for profit. All the money business receives by selling its products or services are called revenue. 5 Revenue

12. Lecture #A2 Accounting Equation

13. Accounting Equation Accounting is abnormally dependent on a magnificent equation which says a company’s Total Asset is equal to the sum of Total Liability and Total Equity. Asset = Liability + Equity What about Expense and Revenue?

14. Accounting Equation Accounting is abnormally dependent on a magnificent equation which says a company’s Total Asset is equal to the sum of Total Liability and Total Equity. Asset = Liability + Equity How does equity increase over time? Profit/Loss = Revenue - Expenses • Revenue increases Equity • Expense decreases Equity

15. Accounting Equation - Dynamic Asset = Liability + Equity Static Equation – This equation shows company’s current financial position at a certain point of time. Asset = Liability + Equity+ [Revenue – Expenses] Dynamic Equation – This equation shows company’s financial position changed through revenue and expense transactions.

16. Accounting Equation – Left & Right Side Asset = Liability + Equity+ Revenue – Expenses Reorganize the Equation’s Left and Right Side. Take Expense to Left Side. Asset + Expenses= Liability + Equity+ Revenue

17. Accounting Equation – Left & Right Side Asset = Liability + Equity+ Revenue – Expenses Reorganize the Equation’s Left and Right Side. Take Expense to Left Side. Left Side = Debit Side Right Side = Credit Side Asset + Expenses= Liability + Equity+ Revenue

18. Lecture #A3 Double Entry Principles

19. Double Entry Principles Left Side = Debit Side Right Side = Credit Side Asset + Expenses= Liability + Equity+ Revenue Every transaction must bring change in Accounting equation. There are always twoentries for every transaction. One entry is known as a credit entry and the other a debit entry. At the end of the transaction, both debit and credit side of the equation will remain equal.

20. Double Entry – How it works?

21. Double Entry – How it works?

22. Double Entry – How it works?

23. Double Entry – How it works?

24. Double Entry – How it works?

25. Double Entry – How it works?

26. Congratulations!!! • “Accounting Equation and Double Entry Principle” – these two concepts are the foundation of Financial Accounting; • If you have understood Accounting Equation and Double Entry System – you have learnt 50% of financial accounting that you need to be an accountant; • Once you are capable of breaking down each transaction, explain their impact on accounting equation and make a journal posting using Double Entry principle, all you need later is to summarize those journals in standard formats; • Every report you see in you in accounting is taken from the Accounting equation and nowhere else.

27. Lecture #A4 Chart of Accounts

28. Chart of Accounts “Chart of Accounts” is the list of all accounts under major account groups: Asset, Liability, Equity, Expense & Revenue.

29. Chart of Accounts “Chart of Accounts” is the list of all accounts under major account groups: Asset, Liability, Equity, Expense & Revenue.

30. Chart of Accounts “Chart of Accounts” is the list of all accounts under major account groups: Asset, Liability, Equity, Expense & Revenue.

31. Chart of Accounts “Chart of Accounts” is the list of all accounts under major account groups: Asset, Liability, Equity, Expense & Revenue.

32. Chart of Accounts “Chart of Accounts” is the list of all accounts under major account groups: Asset, Liability, Equity, Expense & Revenue.

33. Lecture #A5 Income Statement

34. Income Statement • Income Statement is also called “Profit & Loss Statement” or “Statement of Income”; • The statement is just an elaborate demonstration of business’s revenues and expenses; • The source of Revenue and Expenses are again the Dynamic Accounting Equation: • Asset + Expense = Liability + Equity + Revenue

35. Income Statement Formula • Objective of Income Statement is to show company’s Profit or Loss elaborately; • Profit / Loss = Revenues - Expenses • Recall the classification of Revenues and Expenses:

36. Income Statement Presentation There are several levels of profit & loss: (1) Gross Profit/Loss; (2) Operating Profit/Loss; (3) Profit Before Tax (4) Profit from continuing operation; (5) Net Profit

37. Income Statement Formula There are several levels of profit & loss: (1) Gross Profit/Loss; (2) Operating Profit/Loss; (3) Profit Before Tax (4) Profit from continuing operation; (5) Net Profit Gross Profit / Loss Direct Operating Revenues- Direct Operating Expenses Sales Revenue (Direct) Service Revenue (Direct) Cost of Goods Sold Raw Materials (cost of sold items) Wages & Labor Accounts Direct Factory Cost Accounts

38. Income Statement Formula There are several levels of profit & loss: (1) Gross Profit/Loss; (2) Operating Profit/Loss; (3) Profit Before Tax (4) Profit from continuing operation; (5) Net Profit Operating Profit / Loss (Gross Profit + Indirect Operating Revenues) - Indirect Operating Expenses Gross Profit = Operating Revenues- Direct Operating Expenses Indirect Operating Revenues = Occasional Sales of Byproducts, wastages etc. Marketing Expenses Administrative Expenses Promotion Expenses General & Miscellaneous Expenses

39. Income Statement Formula There are several levels of profit & loss: (1) Gross Profit/Loss; (2) Operating Profit/Loss; (3) Profit Before Tax (4) Profit from continuing operation; (5) Net Profit Profit/Loss Before Tax Operating Profit/Loss + (Nonoperating Direct Revenues – Nonoperating Direct Expenses) Gross Profit - Indirect Operating Expenses Non-Operating Direct Revenues: Interest Income Property Rental etc. Non-Operating Direct Expenses: Interest Expenses Legal Expenses

40. Income Statement Formula There are several levels of profit & loss: (1) Gross Profit/Loss; (2) Operating Profit/Loss; (3) Profit Before Tax (4) Profit from continuing operation; (5) Net Profit Profit/Loss from continuing operation Profit / Loss Before Tax – Tax Expenses Operating Profit/Loss + (Nonoperating Direct Revenues – Nonoperating Direct Expenses) Tax Expenses All kinds of taxes on regular operations

41. Income Statement Formula There are several levels of profit & loss: (1) Gross Profit/Loss; (2) Operating Profit/Loss; (3) Profit Before Tax (4) Profit from continuing operation; (5) Net Profit Net Profit / Loss of the Year Profit/Loss from continuing operation – Profit/Loss from Discontinued Operation Profit / Loss Before Tax – Tax Expenses Profit/Loss from Discontinued Operation: Indirect Non-Operating Revenues – Indirect Non Operation Revenue (net of taxes)

42. Income Statement - Presentation

43. Income Statement - Presentation

44. Lecture #A6 Balance Sheet

45. Balance Sheet • Balance Sheet again is made from the Accounting Equation; • Balance Sheet provides a detailed summary of company’s financial position: Assets, Liabilities and Equity; • Through Balance Sheet you can know the total of left side (asset) and total of right side (liability + equity + profit/loss) of the company at a specific point of time; Asset = Liability + Equity + (Revenue- Expense) Asset = Liability + Equity + (Profit/Loss)

46. Balance Sheet Format Balance Sheet presents company’s Assets, Liability and Equity. 1 2 3 Asset Liability Equity

47. Balance Sheet Format

48. Balance Sheet Format

49. Lecture #A7 Statement of Cash Flows

50. Cash Flow Statement • Every financial transaction changes company’s financial position: Asset = Liability + Equity; • Cash is a liquid and current asset, the life blood of a business, and it requires special attention and separate reporting; • As a balance sheet item, cash is an accumulative account. Cash has an opening balance and a closing balance; • Statement of Cash Flowsprovides an overview of the cash inflows and outflows of the business during a certain period of time. • More easy to say: SCF shows how the opening balanced reached to closing balance.