Financial Accounting [WIP]

Accounting concepts

Concepts used in Balance Sheet:

Concepts used in Income Statement:


Types of assets based on Liquidity:

Types of assets based on Tangibility:


Example: Loans, Mortgages, Revenue, Expenses

Types of Liabilities:


Money returned to shareholders if all our assets were turned into cash and all our debts were payed off

Financial reports

Financial reports are used to make business decisions. Three major financial reports are:

Balance Sheet

Snapshot of financial health of business at a point in time.

Format of balance sheet: (src: Wikipedia)
Balance Sheet

Balance sheet based ratios:
1. Current ratio = Current Assets / Current Liabilities

2. Total Debt to Equity = Total Debt / Total Equity

Income Statement

A. Sample Income Statement

B. Format of income statement

C. Retaied Earnings
This net income is used to update Retained Earnings in Balance Sheet as follows:
Retained Earnings Formula
Here, Dividends are not an expense but distribution of equity capital to investors.

D. Making a sale

E. Expenses:
+ Depreciation: Cost from using a tangible non-current asset. No depreciation for land.
+ Amortiztion: Intangible long lived asset. Amortization expense directly reduces value of asset. Eg: Franchise License Amortization

F. Income Statement based ratios:
1. Gross Margin % = GM / Sales * 100
2. Return on Sales = Net Income / Sales * 100

Accounting Records

A. Double-Entry Accounting : Both sides of each transaction are recorded, and at least two accounts are affected.

B. Journal Chronological Record of all entities transaction. After analyzing a transaction, a journal entry is prepared using the rule that debits indicate increases in assets and in expenses and credits indicate increases in liabilities, owners' equity and sales.

C. Debits and Credits: Youtube Tutorial
Debits and Credits

Debit and Credit Practice Questions & Solutions

D. Sample Journal Entry [TBD]

E. Ledger: Journal entries are posted into a ledger of T-accounts where 'debit' means left side of the T-account and 'credit' means right side of the T-account.

F. Sample Ledger and T-accounts [TBD]

G. Adjusting Entries Adjusting entries do not involve any economic exchange with a third party. Once all transactions with outside entities are recorded for the period, adjusting entries are made to particular accounts- Eg. Prepaid expenses, warehouse building, store fixtures, franchise fee and taxes payable.

H. Closing Entries : Close out each temporary or income statement account and reset it to a zero balance, in preparation for the next accounting period. A closing entry is made to close or reset all sales and expense accounts to zero.

I. Preparing financial reports : Finally, the balance sheet and income statement are prepared.

Cash flow statement

How much money came in / went out in a time period

Last Updated: 9, 3 Jun 2021