Financial Accounting - Want to Become Financial Accountant in 30 Days?

By Alamgir Khurasani

"How to become a financial accountant in 30 days?" is a concise and complete guide for the beginners of financial accounting. This book is equally helpful for students who want to start with their accounting career and for teachers who can use it for a quick revision and for making brief notes, in particular covering the theoretical aspect of accounting. In addition, it can be used by both professionals either having an accounting background or doesn't possess accounting knowledge. Professional accountants can revise their accounting studies while professionals from other study backgrounds can enhance their profile by adding accounting knowledge in their resumes.

The best and distinctive thing about this book is that the content is divided into 30 days, thus assisting the readers to plan their reading accordingly. The chapters have covered accounting knowledge in such a way that with every passing day, the reader can feel that the book is adding value to their accounting skills. In addition, the sections are divided based on the assumption that the reader is new to the world of accounting. Therefore, units are arranged in such a way that the reader can learn accounting from scratch to the final form in 30 days' time.

The content includes the basic recording of accounting; creating of ledgers; posting to ledgers; closing of ledgers; preparation of Trial balance and with the help of trial balance, financials of a business are prepared. Moreover, in-depth analysis of the financial statements through ratio analysis; horizontal and vertical analyses have been conducted. In a nutshell, after going thoroughly with the book, the readers will be in a commanding position in understanding accounting transactions and the application of their accounting knowledge.

• Language: English
• Publisher: Khurasani
• Release date: Jul 4, 2020
• ISBN: 9781386674252

Book preview

Basic Accounting

Basic Accounting comprises of recording transactions in accounting records from scratch. This process includes:

›  Understanding whether an accounting transaction will be recorded on the debit side of an account or on the credit side.

›  Recording transactions in their correct heads of account.

›  Ensuring that transactions are recorded as per the guidelines of accounting standards.

What are Debits & Credits?

Atransaction in accounting is recorded in a T – Account; the left side of an account is referred to as Debit side while the right side of an account is called a Credit side . Every transaction in accounting has two impacts; one is on the credit side and the other impact is on the debit side. This theory is based on an accounting principle – Dual Bookkeeping, which states that every accounting transaction WIL be having an effect on both debit and credit side of an account, either one will be increasing and another will be decreasing or both sides will have an increment due to an accounting transaction.

Pillars of Accounting:

Accounting transactions are recorded in T- Form accounts. Now the issue is what to record and where transactions will be recorded. Pillars of accounting has resolved this problem since through this category an accountant can easily decide in which category a transaction will fall and whether it is a debit item or credit item. Pillars of Accounting are as follows:

›  Assets

›  Liabilities

›  Equity

›  Expense

›  Income

Now, we will look for the general rules for the above mentioned accounting pillars. The general rule for Assets is that all assets are debited in a T-account. This means that whenever there will be an increase in the asset, it will be accounted for on the debit side of an account. On the other hand, if there is a reduction in an asset it will be recorded on the credit side of an account. Following are some prominent asset accounts:

›  Land

›  Building

›  Fixtures & Fittings

›  Motor Car

›  Account Receivable

›  Cash at Bank

›  Cash at Hand

›  Inventory

›  Prepaid Expenses

Liabilities:

Liabilities are what a business owes to its stakeholders. The general rule of accounting for liabilities is that all liabilities are recorded on the credit side of an account. This means that liabilities are going to increase on the credit side of an account while any reduction in liabilities will be accounted for on the debit side of an account. Following are some popular liabilities:

›  Trade Payables

›  Bank overdraft

›  Bank Loan

›  Debentures

›  Loan notes

›  Accrued Expenses

Equity:

Equity refers to the stake of shareholders in a company. It represents the amount that would be returned to shareholders if all assets were liquidated and of all company’s debts were paid off. The general rule of accounting for equity is that all items under equity will be a credit to a T- account. This means that equity items increase on the credit side of an account while the reduction in equity items is accounted for on the debit side of an equity account. Following is the list of some important equity items:

›  Share capital

›  Share premium

›  Retained earnings

›  Revaluation reserve

Expense:

Expense refers to all expenditures a business incurs while performing its operational activities. The general rule of accounting for expense is that all expense related items will be recorded on the debit side of an expense account, while any reduction in the expense account will be treated as credit entry. Following is the list of some prominent expenses:

›  Rent Expense

›  Salary Expense

›  Heating & Lighting

›  Selling expenses

›  Depreciation

›  Tax Paid

›  Interest Expense

›  Sundry Expenses

Income:

Income refers to all sorts of earnings received by a business through its operations or investment. According to the general rule of accounting, income is to be credited in the account. This means that any increase in the income will be recorded on the credit side of an income account while a decrease will be reflected through the debit side of an account. Following are some of the important income:

›  Revenue (Turnover)

›  Discount Received

›  Rent receivable

›  Investment income

›  Dividend received

Accounting Principles

Accounting principles are the rules and principles companies must comply with in preparing financial statements. The Financial Accounting Standards Board (FASB) is responsible for issuing a standardized set of accounting principles referred to as Generally Accepted accounting principles (GAAP). Following is the list of most common and fundamental accounting principles:

Accrual Principle

Consistency Principle

Prudence Principle

Matching Principle

Materiality Principle

Cost Principle

Revenue Recognition Principle

Going concern Principle

Understanding Accounting Principles:

Accrual Principle:

Accrual principle states that accounting is based on the theory that accounting transactions need to be recorded in the period they occurred rather than the period when there are cash flows associated with them. For instance, if a salary is not paid to an employee in the previous year but was rather paid in the following year, then this salary amount must have been shown in the income statement as Accrued salary expense while in the Balance sheet, it needs to be shown as Accrued Salary under the current liability section.

Consistency Principle:

According to this principle, a business needs to continue with a specific method it used initially unless another method gives a true and fair view of transactions recorded. For example, if a business uses a Straight-line method for calculating depreciation in the first year then it cannot use another method rather would be required to continue with the existing method of depreciation. This is aimed to reduce the chances of accounting records not showing a true and fair view since the amount of depreciation will be different using different methods. Thus net profit reported might be not showing the true picture.

Prudence Concept:

This principle emphasizes the need to take into account expenses and liabilities immediately as soon as the chances of their occurrence emerge but assets and income need to be recorded once they are virtually certain to occur. The chances are further explained that liability will be recorded in the financial statements if there is more than 50% chance of its occurrence. On the other hand, if the chances are less than 50% then liability will be accounted for in the notes to the account, to bring it into attention of the stakeholders.

Comparatively, an asset or revenue will only be recorded in the books of the account if chances of their occurrence are more than 95% that is virtually certain. In addition, if chances are even more than 50%, they will only be recorded in the notes to the accounts. This accounting principle ensures that assets or income are not overstated while making sure than liabilities or expenses are not understated. So that stakeholders of the business are shown the true and fair picture of the business.

Matching Principle:

This principle ensures that all those expenses which the business has incurred in generating revenue are taken into account.  For instance, if the business records sale in its accounts then all relevant inventory and related selling expenditures need to be recorded in the cost of goods sold. This principle is in compliance with Accrual principle but accounting based on cash basis does not follow this theory rather it only considers items that are cash related.

Materiality Principle:

According to this principle, an accountant is allowed to violate an accounting principle if the related amount is very insignificant for the business. For instance, if a multi-billion dollar company’s accountant expenses out a printer purchased for $150. This is justifiable because no one would find financial statements to be misleading if this amount is shown as an expense. It is because of this accounting principle that financial statements show rounded figures to thousands, millions, or billions depending on the size of the company.

Cost Principle:

According to this principle, an accountant is required to record assets at their original cost that is the amount spent on purchasing them originally. In addition, the asset will remain in the books of accounts with this amount until it is disposed of. Therefore, the amounts shown in the financial statements are shown as historical cost.

Revenue Recognition Principle:

This accounting principle sets guidelines for business regarding recognizing its revenue. According to this principle, revenue would be recognized as soon as any sales are made regardless of the fact whether cash has been received or not against those sales. For instance, a company might sell its products for $10,000 but would not end up receiving any amount since the sales were on credit. This doesn’t mean that the business would not record any revenue since recognition of revenue is not dependent on the receipt of cash.

Going Concern Principle:

According to this principle, an accountant of the company is required to assess whether the business could foresee its future that is the business is expecting to continue trading enough to survive and will not be liquidated, within the next 12 months . If an accountant doubts its future then it is his responsibility to disclose it in the financial statements and bring it into the attention of concerned stakeholders of the business. In addition, the business will not defer any expense rather all expenditures will be recorded at once.

DAY - 2

Books of original Entry

Accounting transactions are recorded in the Books of the original entry initially from source documents. The records are summarized and closing balances are transferred to respective ledgers. After posting to ledgers, the closing balances are used in the preparation of Trial balance which is then used in the preparation of financial statements. This whole process is referred to as the accounting cycle. Following is the list of books of original entries:

›  Purchase Journal

›  Sales Journal

›  Purchase Return

›  Sales Return

›  Cash Journal

›  General Journal

Purchase Journal:

Purchase Journal is used for all credit purchases. Cash Purchases are not recorded in this Journal. This is a very important point since many accountants make this mistake by including cash purchases in this journal. Recording of Purchases are done through source documents in