Title:

Understanding Financial Accounting

Fundamentals

Team Members:
1.M. Ibrahim 4. Hassan Irtiza
2023-BS-CS-013 2023-BS-CS-015
2.Shifa Rizwan 5. Sarmad Waheed
2023-BS-CS-018 2023-BS-CS-014
3.Umer Rasool 6. Burair Abbas
2023-BS-CS-029 2023-BS-CS-012

Course:
Financial Accounting
Semester:
Spring 3rd 2023
 Table of Contents
1.Introduction...........................................................................................................................3
2.Financial Accounting............................................................................................................3
3.Fundamental Principles of Financial Accounting..............................................................3
4.Financial Statements.............................................................................................................5
5.Financial Statements analysis..............................................................................................7
7.Summary and Generaliztion................................................................................................8
1.Introduction
Financial Accounting plays a significant role in providing insights into the financial stability
and performance of a business. It highlights the importance of having good financial
information and knowing how to use it to make effective business decisions. It is the
language of business, providing a structured framework for recording, summarizing, and
interpreting financial transactions. Financial accounting not only serves as a means of
compliance with regulatory requirements but also acts as a compass guiding strategic
decisions and fostering stakeholder trust. This report aims to dig into the fundamentals of
financial accounting, outlining its importance and key principles.

2.Financial Accounting
Financial accounting is the process of recording, classifying, and reporting financial
transactions. And the events of a business or organization. It appears as a vital tool in
providing relevant and reliable information for decision-making by investors, creditors, and
other stakeholders. Financial accounting involves:

1. Identifying and recording financial transactions and events.

2. Classifying transactions into appropriate accounts.
3. Reporting financial information in a clear and transparent manner.
4. Following accounting standards and principles.

Financial Accounting includes:

 Assets are the resources owned by a company

 Liabilities are the debts and obligations owed by a company

 Equity is the ownership in the company such as shares and interest.

 Revenue is the earnings of the company from sales activities.

 Expense is the cost to run a business.

3.Fundamental Principles of Financial Accounting

Financial accounting consists of several fundamental principles that establish the framework
for recording, reporting, and interpreting financial transactions. These principles are essential
for ensuring the accuracy, reliability, and relevance of financial information. Here are some
fundamental principles:
Accrual Principle: Financial transactions are recorded when they occur, regardless of when
cash is exchanged. This means recognizing revenues when earned and expenses when
incurred, irrespective of cash timing.

Revenue Recognition Principle: Revenue should be recognized in the period it's earned, not
necessarily when cash is received, ensuring revenue is recorded when earned and realizable.

Consistency Principle: Accounting methods and procedures should remain consistent over
time within an entity to enable meaningful comparisons between different periods.

Objectivity Principle: Financial information should be based on objective evidence and

verifiable data, ensuring reliability and independent verification.

Cost Principle: Assets are typically recorded at historical cost rather than market value,
reflecting the amount paid for an asset at the time of acquisition.

 Accounting Equation:
The Accounting Equation is the foundation of financial accounting. It represents the
relationship between a company's assets, liabilities, and equity:
Assets = Liabilities + Equity
This equation is always in balance, meaning that the total value of a company's assets
is equal to the total value of its liabilities and equity.
Assets:
- Resources owned or controlled by the business
- Examples: Cash, Inventory, Property, Equipment
Liabilities:
- Debts or obligations owed by the business
- Examples: Loans, Accounts Payable, Taxes Owed
Equity:
- Ownership interest in the business
- Examples: Common Stock, Retained Earnings
Example

Transaction : The Nizamy Company invested $120,000 cash to start the business.
Impact:
Assets: Cash increases by $120,000.
Equity: Common stock (or contributed capital) increases by $120,000.
Equation:
Assets = Liabilities + Equity
$120,000 = $0 + $120,000
 Recording Financial Transactions:
Financial transactions are recorded in a company's general ledger using debits and
credits. The rules for recording transactions are:

Double Entry Accounting:

Double-entry accounting is a system of bookkeeping where every financial transaction is

recorded in at least two accounts. Debit and Credit accounts are used in double-entry system
which provides a check and balance for each transaction, which helps ensure accuracy

- Debits:

- Increase Assets (e.g., Cash, Inventory)

- Decrease Liabilities (e.g., Accounts Payable)

- Decrease Equity (e.g., Dividends)

- Credits:
- Decrease Assets (e.g., Cash, Inventory)
- Increase Liabilities (e.g., Loans)
- Increase Equity (e.g., Common Stock)
When recording a transaction, the total value of debits must equal the total value of credits.
This ensures that the Accounting Equation remains in balance.
Example:
- Transaction: Purchase office supplies for $1,000 cash
- Debit: Office Supplies (Asset) $1,000
- Credit: Cash (Asset) $1,000

4.Financial Statements

There are three main financial statements that provide insight into a company's financial
performance and position:

1. Balance Sheet (Statement of Financial Position)

2. Income Statement (Profit and Loss Statement)

3. Cash Flow Statement (Statement of Cash Flows)

Let's dive into the first two:

1.Balance Sheet (Statement of Financial Position):

The Balance Sheet presents a construction company's financial position at a specific point in
time, typically the end of an accounting period (e.g., December 31, 2022). It's a snapshot of
the company's:

- Assets (what the company owns or controls)

- Liabilities (what the company owes)

- Equity (the ownership interest)

The Balance Sheet follows the Accounting Equation: Assets = Liabilities + Equity

Example:

| Assets | Value |

| --- | --- |

| Cash | $10,000 |

| Inventory | $50,000 |

| Property | $200,000 |

| Total Assets | $260,000 |

| Liabilities | Value |

| --- | --- |

| Accounts Payable | $30,000 |

| Loans | $100,000 |

| Total Liabilities | $130,000 |

| Equity | Value |

| --- | --- |
| Common Stock | $50,000 |

| Retained Earnings | $80,000 |

| Total Equity | $130,000 |

| Total Liabilities and Equity|$260,000 |

2.Income Statement (Profit and Loss Statement):

The Income Statement presents a construction company named Nizamy financial

performance over a specific period (e.g., January 1, 2022, to December 31, 2022). It shows:

- Revenues (income earned)

- Expenses (costs incurred)

- Net Income (profit or loss)

The Income Statement follows the format:

Revenues - Expenses = Net Income

Example:

| Revenues | Value |

| --- | --- |

| Sales | $500,000 |

| Other Income | $20,000 |

| Total Revenues | $520,000 |

| Expenses | Value |

| --- | --- |

| Cost of Goods Sold | $300,000 |

| Operating Expenses | $150,000 |

| Taxes | $20,000 |

| Total Expenses | $470,000 |

| Net Income | Value |

| --- | --- |

| $50,000 |

5.Financial Statements analysis

Financial statement analysis is the evaluation of a company's financial statements to assess its
financial performance, position, and prospects. It involves analysing financial data to identify
trends, patterns, and relationships to make informed decisions. This analysis helps
stakeholders understand a company's financial health, identify areas for improvement, and
make informed investment or credit decisions.

Financial statement analysis helps to:

- Evaluate financial performance and position

- Identify areas for improvement

- Make informed investment or credit decisions

- Assess a company's ability to generate cash and pay its debts

- Identify potential risks and opportunities

For example, you can calculate ratios like the current ratio to assess its ability to meet short-
term obligations, or the return on equity to measure its profitability. Financial statement
analysis helps investors, creditors, and other stakeholders understand the company's financial
health, identify potential risks or opportunities, and make informed decisions about
investing or lending.

6.Time Value for Money

The time value of money means that money you have right now is worth more than the same
amount of money in the future. This is because you can do things with your money now to
make it grow, like putting it in a savings account or investing it or you can use money to earn
interest or to be invested to generate returns over time.

For example, let's say you have $100. If you keep that $100 and don't spend it, it can earn
interest or increase in value over time. So, in the future, that $100 could be worth more than
$100.
On the other hand, if you have to wait to receive money in the future, it's not as valuable
because you're missing out on the opportunity to use that money now.

So, the time value of money is all about understanding that money has more value when you
have it now compared to having it in the future.

7.Summary and Generaliztion

Today's report has covered the fundamental principles of financial accounting, the importance
of financial statement analysis, and the significance of integrating time value of money
principles into financial practices. It's crucial for students to practice calculations and apply
these concepts to real-world scenarios for better comprehension and decision-making skills.