FA lecture

1. Financial Accounting:
Financial accounting is a specific branch of accounting
involving a process of recording, summarizing, and reporting the myriad
of transactions resulting from business operations over a period of time.
These transactions are summarized in the preparation of financial
statements, including the balance sheet, income statement and cash flow
statement, that record the company's operating performance over a
specified period.
Transaction:
A transaction is a completed agreement between a buyer and a
seller to exchange goods, services, or financial assets in return for money.
The term is also commonly used in corporate accounting. In business
bookkeeping, this plain definition can get tricky. A transaction may be
recorded by a company earlier or later depending on whether it
uses accrual accounting or cash accounting.
Cash:
Cash is bills, coins, bank balances, money orders, and checks. Cash is
used to acquire goods and services or to eliminate obligations. Items
that do not fall within the definition of cash are post-dated checks and
notes receivable. Most forms of cash are electronic, rather than bills
and coins, since cash balances can be stated in the computer records
for investment accounts.
Cash is listed first in the balance sheet, since the reporting sequence is
in order by liquidity, and cash is the most liquid of all assets. A related
accounting term is cash equivalents, which refers to assets that can be
readily converted into cash.
A business is more likely to retain a large amount of cash on hand if it
routinely deals with cash transactions (such as a pawn shop), and is
less likely to retain much cash if it has an excellent cash forecasting
system and can therefore invest in more illiquid but higher yielding
investments with confidence.
Credit:
In accounting, a credit is an entry that records a decrease in assets or
an increase in liability as well as a decrease in expenses or an increase
in revenue (as opposed to a debit that does the opposite). So a credit

2. increases net income on the company's income statement, while a debit
reduces net income.
Assets:
An asset is a resource with a monetary value that a person, business, or
country owns or manages with the hope that it will bring benefits in the
future. Assets are listed on a company's balance sheet and are bought or
built to make the company more valuable or to help it run better. An asset
can bring in money, cut costs, or boost sales in the future. This could be a
piece of manufacturing equipment or a patent.
Asset Classification
Current Assets
"Current assets" are assets that are expected to be turned into cash within
a year. Current assets include cash and other things that can be used as
cash, accounts receivable, inventories, and prepaid expenses.
Accountants look at inventory and money owed to the business regularly.
On the other hand, it's easy to figure out how much cash is worth. If there
are signs that accounts receivable might not be paid, they will be written
down. Or, a company may eliminate an asset that is no longer useful.
Fixed Assets
Fixed assets are things like plants, equipment, and buildings that will last
long. Charges made regularly are used to change how old fixed assets are.
Depreciation is the name for these costs, which may or may not show that
a fixed asset makes less money.
Generally accepted accounting standards let you figure out depreciation
in two main ways (GAAP). The straight-line method says that the value
of a fixed asset decreases throughout its useful life. On the other hand, the
accelerated method says that the value of the asset decreases more
quickly in its first few years of use.
Financial Assets
Financial assets consist of investments in the assets and securities of other
institutions. Financial assets consist of stocks, bonds issued by the
government and corporations, preferred stock, and other hybrid securities.
The valuation of financial assets depends on the classification and
motivation of the investment.
Intangible Assets
Intangible assets are valuable things that you can't see or touch. Patents,
trademarks, copyrights, and goodwill are all part of this. Intangible assets

3. can be amortized or tested for impairment every year, depending on the
type of asset.
Sole Proprietorship?
A sole proprietorship—also referred to as a sole trader or a
proprietorship—is an unincorporated business that has just one owner
who pays personal income tax on profits earned from the business. Many
sole proprietors do business under their own names because creating a
separate business or trade name isn’t necessary.
A sole proprietorship is the easiest type of business to establish or take
apart, due to a lack of government regulation. As such, these types of
businesses are very popular among sole owners of businesses, individual
self-contractors, and consultants. Most small businesses start as sole
proprietor-ships and either stay that way or expand and transition to
a limited liability entity or corporation.
Partnership
A partnership is a form of business where two or more people share
ownership, as well as the responsibility for managing the company and
the income or losses the business generates. That income is paid to
partners, who then claim it on their personal tax returns – the business is
not taxed separately, as corporations are, on its profits or losses.
Corporation
A corporation is a business entity that is owned by its shareholder(s), who
elect a board of directors to oversee the organization’s activities. The
corporation is liable for the actions and finances of the business – the
shareholders are not. Corporations can be for-profit, as businesses are, or
not-for-profit, as charitable organizations typically are.
Debit
Debit means an entry recorded for a payment made or owed. A debit
entry is usually made on the left side of a ledger account. So, when a
transaction occurs in a double entry system, one account is debited while
another account is credited. An account is debited either to increase
the asset balance or to decrease the liability balance. Usually

4. an expense or any asset addition or a reduce in the revenue,
or liabilities are termed as debits.
For example, a small business owner purchases refrigerator for his
business. To record the transaction, she debits the Asset account to
increase the asset balance and credits the Cash account to decrease the
cash balance.
Account Payable:
When a company purchases goods on credit which needs to be
paid back in a short period of time, it is known as Accounts Payable. It is
treated as a liability and comes under the head ‘current liabilities’.
Accounts Payable is a short-term debt payment which needs to be paid to
avoid default.
Accounts Receivable (AR )
is the proceeds or payment which the company will
receive from its customers who have purchased its goods & services on
credit. Usually the credit period is short ranging from few days to months
or in some cases maybe a year.
Notes payable
Notes payable are long-term liabilities that indicate the money a
company owes its financiers—banks and other financial institutions as
well as other sources of funds such as friends and family. They are long-
term because they are payable beyond 12 months, though usually within
five years.:
Notes receivable
are a balance sheet item that records the value of promissory
notes that a business is owed and should receive payment for. A written
promissory note gives the holder, or bearer, the right to receive the
amount outlined in the legal agreement. Promissory notes are a written
promise to pay cash to another party on or before a specified future date.
If the note receivable is due within a year, then it is treated as a current
asset on the balance sheet. If it is not due until a date that is more than
one year in the future, then it is treated as a non-current asset on the
balance sheet.

5. Often, a business will allow customers to convert their overdue accounts
(the business’ accounts receivable) into notes receivable. By doing so, the
debtor typically benefits by having more time to pay.
Owner's Equity/ Capital:
Owner's equity is one of the three main sections of a sole
proprietorship's balance sheet and one of the components of
the accounting equation: Assets = Liabilities + Owner's Equity.
Owner's equity represents the owner's investment in the business minus
the owner's draws or withdrawals from the business plus the net
income (or minus the net loss) since the business began.
Owner's equity is viewed as a residual claim on the business assets
because liabilities have a higher claim. Owner's equity can also be viewed
(along with liabilities) as a source of the business assets.
Example of Owner's Equity
If a sole proprietorship's accounting records indicate assets of $100,000
and liabilities of $70,000, the amount of owner's equity is $30,000.
Due to the cost principle (and other accounting principles) the amount of
owner's equity should not be considered to be the fair market value of the
business.
Income Statement
An income statement is one of the three important financial
statements used for reporting a company’s financial performance over a
specific accounting period. The other two key statements are the balance
sheet and the cash flow statement.
Also known as the profit and loss (P&L) statement or the statement of
revenue and expense, the income statement primarily focuses on
the company’s revenue and expenses during a particular period. The best
way to analyze a company and decide whether you should invest is to
know how to dissect its income statement.

6. Balance Sheet
The term balance sheet refers to a financial statement that reports a
company's assets, liabilities, and shareholder equity at a specific point in
time. Balance sheets provide the basis for computing rates of return for
investors and evaluating a company's capital structure.
In short, the balance sheet is a financial statement that provides a
snapshot of what a company owns and owes, as well as the amount
invested by shareholders. Balance sheets can be used with other
important financial statements to conduct fundamental analysis or
calculate financial ratios.
Revenue
The revenue number is the income a company generates before any
expenses are taken out. Therefore, when a company has "top-line
growth," the company is experiencing an increase in gross sales or
revenue.
Both revenue and net income are useful in determining the financial
strength of a company, but they are not interchangeable. Revenue only
indicates how effective a company is at generating sales and revenue and
does not take into consideration operating efficiencies which could have
a dramatic impact on the bottom line.
Revenue vs. Income:
Revenue is the total amount of income generated by the sale of goods or
services related to the company's primary operations. Revenue, also
known as gross sales, is often referred to as the "top line" because it sits
at the top of the income statement. Income, or net income, is a company's
total earnings or profit. When investors and analysts speak of
a company's income, they're actually referring to net income or the profit
for the company.
Journal:
journal is a detailed account that records all the financial
transactions of a business, to be used for the future reconciling of
accounts and the transfer of information to other official accounting
records, such as the general ledger.

7. ledger
A ledger is a book or digital record containing bookkeeping entries.
Ledgers may contain detailed transaction information for one account,
one type of transaction, or—in the case of a general ledger—summarized
information for all of a company’s financial transactions over a period.
Ledgers are also known as the second book of entry.
Ledgers contain the necessary information to prepare financial statements.