Financial Accounting Revision Notes

Introduction to Financial Accounting 📚

Financial accounting is the process of recording, summarizing, and reporting the financial transactions of an entity over a period of time. The purpose of financial accounting is to provide useful financial information to users such as shareholders, creditors, and regulatory authorities. 📊💼

Objectives of Financial Accounting 🎯

• 1. To maintain a systematic record of financial transactions. 📚
• 2. To ascertain the financial performance (profit or loss) of the entity. 📈
• 3. To determine the financial position of the entity through the balance sheet. 📊
• 4. To provide useful financial information to stakeholders for decision making. 🤝
• 5. To ensure accountability and transparency in financial reporting. 🔍

Key Concepts in Financial Accounting 💡

• 1. Double-entry system: A system of accounting where every transaction affects at least two accounts (debit and credit). 🔄
• 2. Financial Statements: These include the income statement (profit or loss account), balance sheet, and cash flow statement. 📑
• 3. Accrual Concept: Revenues and expenses are recorded when they are earned or incurred, not when cash is received or paid. 💵
• 4. Going Concern: The assumption that the business will continue to operate for the foreseeable future. ⏳
• 5. Consistency: The principle that the same accounting methods should be applied consistently from period to period. 🔄

The Accounting Cycle 🔄

The accounting cycle refers to the steps followed in the accounting process from the identification of a transaction to the preparation of financial statements. The main steps are: 🔍

• 1. Identifying and recording transactions in the journal. 📝
• 2. Posting journal entries to the ledger (T-accounts). 📊
• 3. Preparing a trial balance to check the accuracy of the ledger. ✔️
• 4. Making adjusting entries to account for accruals and deferrals. ⚖️
• 5. Preparing an adjusted trial balance. 📈
• 6. Preparing financial statements. 📑
• 7. Closing the books and making closing entries. 🔒

Financial Statements 📑

• 1. Income Statement: Also known as the profit and loss account, it shows the revenues, expenses, and net profit or loss of a business over a period of time.
• 2. Balance Sheet: A snapshot of the financial position of a business at a specific point in time, showing assets, liabilities, and equity.
• 3. Cash Flow Statement: It shows the cash inflows and outflows of a business during a period, classified into operating, investing, and financing activities.

Conclusion 📝

Financial accounting plays a crucial role in ensuring that financial information is accurately recorded and reported. By following standard principles and the accounting cycle, businesses can provide stakeholders with reliable information to aid in decision-making. 📊🤝