Financial Accounting WEEK # 6

Financial Accounting
UE-121
Instructor: Raheela
Farooq
Week # 6
Accounting Principles
Accounting principles are the
rules and guidelines that
companies and other bodies must
follow when reporting financial
data.
These rules make it easier to
examine financial data by
standardizing the terms and
methods that accountants must
use.
Cost principle
The historical cost principle is the most basic
of the valuation principles.
It states that assets and liabilities should be
recorded at their historical cost, the price paid
to acquire the asset or create the liability.
“Historical price” means acquisition price or
past cost.
For example, an aster was purchased for
$50,000 and paid $1000 for its installation.
Here, the acquisition cost shall be $50000
only, although it will be recorded in the book
of account at $51000.
The going concern assumption
The going concern principle is the
assumption that an entity will
remain in business for the
foreseeable future.
Conversely, this means the entity
will not be forced to halt
operations and liquidate its
assets in the near term at what
may be very low fire-sale prices.
Objectivity principle
Objectivity concept in accounting
is referred to as the principle
which states that financial
statements should be objective in
nature.
In other words, the financial
information should be unbiased
and free from any kind of internal
and external influence.
Realization principle
The realization principle is the
concept that revenue can only be
recognized once the underlying
goods or services associated with
the revenue have been delivered
or rendered, respectively.
Thus, revenue can only be
recognized after it has been
earned.
Matching principle
The matching principle is an
accounting concept that dictates
that companies report expenses
at the same time as the revenues
they are related to.
Revenues and expenses are
matched on the income
statement for a period of time
(e.g., a year, quarter, or month).
Accrual v/s Cash principle
Cash basis lets businesses record
income and expenses only when
cash is actually received or paid.
Accrual accounting involves
tracking income and expenses as
they are incurred (when an
invoice is sent or a bill received)
instead of when money actually
changes hands.
Accounting cycle
 The sequence of accounting procedures used
to record, classify and summarize accounting
information in financial reports at regular
intervals is often termed the accounting
cycle.
 Accounting cycle generally consists of eight

steps.
Accounting cycle Steps
1. Journalize transactions
2. Post each journal entry to the appropriate ledger accounts
3. Prepare trial balance
4. Making end of period adjustments
5. Preparing an adjusted trial balance
6. Preparing financial statements
7. Journalizing and posting closing entries
8. preparing an after closing trial balance

1.Identify Transactions
• First, separate your business transactions from
all of the transactions you made.
• You only want to include transactions related to
your company in your financial records.
• For example, you won’t record your grocery bill
as a business expense in your books.
 Transactions:
Exchange of goods or services between

businesses or individuals. Can also be other
events having an economic impact on a
business.
2. Record Transactions In Your
Journal
 The journal is where you initially record
business transactions.
 It is a running list of financial activities, like a
checkbook.
 Track transactions in your journal
chronologically as they happen.
 If you use double-entry bookkeeping, record
two entries for each transaction.
 Enter a debit for one account and a credit for
another.
 The debit and credit should be equal.
 Bookkeeping:
The act of systematically recording the financial

transactions affecting a business.
 General Journal:
(GJ) A book or original entry in a double-entry

system. The journal lists transactions and indicated
accounts to which they are posted.
The general journal includes all transactions which
aren't included in specialized journals used for cash
receipts, cash disbursements, and other common
transactions.
3.Post Entries to the General
Ledger
 The general ledger is also known as the book of final entry.
 General ledger entries are changes made to each account in
your books.
 Using your journal, organize transactions into different
accounts.
 For example, if a customer paid for a product with cash,
enter the transaction under the cash account in your books.
 General Ledger:
(GL) A book in which monetary transactions of a business are

posted (in the form of debits and credits) from a journal.
It is the final record from which financial statements are
prepared.
The general ledger accounts are often the control accounts
which report totals of details included in subsidiary ledgers.
4. Unadjusted Trial Balance
For your books to be accurate, the
debit and credit entries must be equal.
Use an unadjusted trial balance to test
if your debits and credits match.
 Trial Balance:
A listing of all account balances that

provides a test of whether total debits
equals total credits.
5. Adjusting Entries
At the end of an accounting period, you might have incurred
expenses but not paid for them yet. And, you might have
earned income but not collected it yet. Use adjusting entries to
recognize transactions that have occurred but not been
recorded.
For example, you earned interest on a bank account balance.
You have not recorded the interest in your books, but it
appears on your bank statement. Use an adjusted entry to
recognize the interest in your books.
Unearned Revenue:
Money received by a business before it is earned. It is a

liability to your company until it is earned.
Prepaid Expenses:
Amounts paid in advance to a creditor or vendor for

goods or services. Insurance premiums are a good
6. Adjusted Trial Balance
Do an adjusted trial balance after
making adjusting entries and
before creating financial
statements. This step tests to see
if the debits and credits match
after making adjusting entries.
7. Create Financial
Statements
Once your accounts are up-to-date, create statements.
The following are common financial
statements for small business:
 Income Statements compare your profits and losses

for the period.
 Balance Sheets determine progress by detailing
assets, liabilities, and equity.
 Cash Flow Statements show money coming into and
out of the business.
Use your financial statements to measure performance,

make improvements, and set goals. You can also use
statements to talk with lenders and negotiate terms
with vendors.
8. Close Your Books
 The final step in the accounting cycle is to close your
accounting books.
 Closing your books wraps up financial activities for
the period.
 Do tasks like updating accounts payable, reconciling
accounts, reviewing your petty cash fund, and
counting inventory.
 When you close your books, you should get your
accounting set up for the next period.
 Decide which processes are moving your business
forward.
 Create a calendar for completing future tasks.
 File any financial documents from the last period and
get rid of old documents that are no longer useful.

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Financial Accounting

 Accounting cycle generally consists of eight

2. Post each journal entry to the appropriate ledger accounts

3. Prepare trial balance

4. Making end of period adjustments

5. Preparing an adjusted trial balance

6. Preparing financial statements

7. Journalizing and posting closing entries

8. preparing an after closing trial balance

Exchange of goods or services between

The act of systematically recording the financial

(GJ) A book or original entry in a double-entry

(GL) A book in which monetary transactions of a business are

A listing of all account balances that

Money received by a business before it is earned. It is a

Amounts paid in advance to a creditor or vendor for

 Income Statements compare your profits and losses

Use your financial statements to measure performance,

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