Financial Accounting

WRIT I
Introduction:
The progress of a business depends on the decisions taken to run it. These
decisions made after the close observation of financial operations and the financial
position of the business. Financial statements help in this process. A number of
statements prepared for these purpose, most essential statements include income
statement and Balance sheet.(Brigham & Houston, 2012)

Income statement:
The statement that provides the information about revenues and expenses for a particular
time period is known as income statement also called profit and loss account. It includes
revenues of sales, other income, operating expenses, taxes, other expenses.

Features:

 It helps to keep an eye on operating expenses.

 It helps to cut down extra expense.
 It gives us opportunity to increase revenues.
 Estimated profit/loss helps in future financial decisions.

Balance sheet:
It shows financial position of business at a particular time. The financial health of a
business determines by this statement. It includes all types of assets like liquid assets,
fixed assets, current liabilities, long term liabilities and capital.

Features:

 It isnot an account, so it doesn’t have any debit or credit side.

 This statement gives data for particular time.
 Liquid asset shows how easily the use cash.
 Current liabilities describe the need of cash.

Accrual system of accounting:

A system of accounting in which transactions are recorded when occurred instead of cash
receipt and payments.

Merits:

 Easy to manage:

In this system the record of transactions managed easily.

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  Comply with GAAP:
This system is in accordance with GAAP.
 Transparent:
This system is clearer and more transparent. Each and every event is captured in
it.

Demerits:

 Challenging:

The person who manages the account, should understand when and how the
transactions recorded.

 Difficult to switch:

In this system its not easy to alter the methodology or convert it to cash base of
system. Because a number of transactions needed to be handled properly.

 Chance of Fraud:

In this system transaction recorded before receipt and payment of cash, so

someone can change the transaction easily.(Ferran & Chan, 2013)

Types of financial transactions:

Any activity that has impact on financial status of a business is known as financial
transaction. Financial transactions are categorized on the base of cash, these are cash
transaction, credit transaction and non-cash transactions. We can elaborate it with some
examples. (Eliot & Eliot, 2009)

a. A company started its business with cash.

A company named Spark started business with cash of 1000 OMR. This transaction
appeared in accounting equation as follows:

Asset Liabilities + Capital

Cash a/c O.E a/c

1000 1000

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In this transaction both sides of accounting equation increased by 1000. So, it has an
impact on asset and capital a/c.

b. Cash is deposited in the company's bank account.

Asset Liabilities + Capital

Cash a/c + Bank a/c O.E

(-1000) 1000 1000

Impact of this transaction has shown at asset side only because decrease in one asset
result in increase of another asset.

c. The company purchased an asset by cheque.

Asset Liabilities + Capital

Cash a/c + Bank a/c + Asset a/c O.E

(-1000) + (1000-400) + 400 1000

Same result just like previous transaction because asset increase and other asset a/c of
bank decreases by 400.

d. The company purchased goods on credit.

Asset Liabilities + Capital

Cash a/c + Bank a/c + Asset a/c + Stock a/c Creditor a/c O.E

(-1000) +(1000-400) + 600 + 500 500 1000

In this transaction increase in asset resulted in increase of a liability. As it is a credit

purchase

e. The company sold assets by cheque.

Asset Liabilities + Capital

Cash a/c + Bank a/c + Asset a/c + Stock a/c Creditor a/c O.E

(-1000) +(1000-400+800) + (600-600) + 500 500 (1000+200)

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 Asset should be sold on profit so the amount above cost, transfer in owner equity.

f. The company receives cash for other income.

Asset Liabilities + Capital

Cash a/c + Bank a/c + Asset a/c + Stock a/c Creditor a/c + O.E

(-1000 + 400) +(1000-400+800) + (600-600) + 500 500 (1000+200 + 400)

This transaction increases asset side by increasing cash a/c and debit side by increasing
capital a/c owner equity a/c.

Journal Entries:
a. The company started its business with a deposit in its bank account.

Date Particulars Dr OMR Cr OMR

12-09-20 Bank a/c 100000
Capital 100000
a/c
(The
company
started
business
with cash)

b. The company received a loan from the bank and deposited in its bank account.

Date Particulars Dr OMR Cr OMR

12-09-20 Bank a/c 100000
Bank loan 10000
a/c
(Bank loan
received
and deposit
in bank)

c. The company paid salaries to employees by cheque.

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Date Particulars Dr OMR Cr OMR
11-11-20 Salaries a/c 40000
Bank a/c 40000
(Salaries
paid to
employees)
d. The company received with interest revenues by cheque.

Date Particulars Dr OMR Cr OMR

11-11-20 Bank a/c 5000
Interest a/c 5000
(Interest
received as
other
income)

e. Performance of services by cash and credit.

Date Particulars Dr OMR Cr OMR

20-11-20 Bank a/c 1000
Revenue a/c 1000
(Services
rendered for
cash)

20-11-20 Debtor a/c 1000

Revenue a/c 1000
(Services
rendered on
credit)

f. Purchase of an asset for cash and credit.

Date Particulars Dr OMR Cr OMR

25-11-20 Asset a/c 5000
Bank a/c 5000
(Asset
purchased
for cash)

25-11-20 Asset a/c 5000

Creditor a/c 5000
(Asset

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 purchased
on credit)

g. Received cheque from debtors.

Date Particulars Dr OMR Cr OMR

01-12-20 Bank a/c 1000
Debtors a/c 1000
(Cheque
received
from
debtors)

h. Paid cheque to creditors.

Date Particulars Dr OMR Cr OMR

01-12-20 Creditor a/c 5000
Bank a/c 5000
(Payment to
creditors)

Ledger:
Bank a/c

Date Particular DebitOMR Date Particular CreditOMR

12-09-20 Capital a/c 100000 11-11-20 Salaries a/c 40000
12-09-20 Bank loan 100000 25-11-20 Asset a/c 5000
a/c
11-11-20 Interest a/c 5000 25-11-20 Creditor 5000
20-11-20 Revenue a/c 1000
Debtor a/c 1000 Balance 157000

207000 202000

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Capital a/c

Date Particular DebitOMR Date Particular Credit

OMR
12-09-20 Bank a/c 100000

Balance 100000
100000 100000

Bank loan a/c

Date Particular DebitOMR Date Particular CreditOMR

12-09-20 Bank a/c 1000000

Balance 100000
100000 100000

Salaries a/c

Date Particular DebitOMR Date Particular CreditOMR

11-11-20 Bank a/c 4000

Balance 4000
40000 40000

Revenue a/c

Date Particular DebitOMR Date Particular CreditOMR

20-11-20 Debtor a/c 1000

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 20-11-20 Bank a/c 1000
Balance 2000
2000 2000

Interest a/c

Date Particular DebitOMR Date Particular CreditOMR

11-11-20 Bank a/c 5000
Balance 5000
5000 5000
Debtors a/c

Date Particular DebitOMR Date Particular CreditOMR

01-12-20 Bank a/c 5000 20-11-20 Revenue a/c 5000

5000 5000

Asset a/c

Date Particular DebitOMR Date Particular CreditOMR

25-11-20 Bank a/c 5000
25-11-20 Creditor a/c 5000
Balance 10000
10000 10000

Creditor a/c

Date Particular DebitOMR Date Particular CreditOMR

01-12-20 Bank a/c 5000 25-11-20 Asset a/c 5000

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 5000 5000

Spark. co
Trial Balance
As on 31st Dec. 2020.

Particulars Debit Credit

OMR OMR
Bank a/c 157000
Capital a/c 100000
Bank loan 100000 Sole proprietorship and
a/c limited companies:
Revenue a/c 2000
Salaries a/c 40000
There are different types of
Asset a/c 10000
businesses like sole
Interest a/c 5000 proprietorship, partnership,
limited companies and
public companies. Currently
we discussed two of them.

Sole Proprietorship:
Total 207000 207000 A business type in
which a single person runs whole business known as sole proprietorship. As a business
man the person can opt business of his own choice. This type of business has merits and
some demerits also. We discussed briefly here.(Baron, 2008)

Merits:

 Simple Accounts
 Easily manageable
 Less rules and regulation
 Easy windup at any time

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  Less chance of fraud
 Cost effective
 Gaining all profit

Demerits:

 Unlimited liability
 No vacations
 Burden of work
 Personal taxation
 Less legal protection
 Business life span depend on owner

Limited company:
Other type of business is limited company. In this type we can register our business
legally. We can avail many benefits through this registration. As a limited company
we can also participate in progress of the country.(Damodaran, 2006)

Merits:

 Limited liabilities
 Less burden of work
 Vast opportunities for business
 Avail tax benefit
 Segregation of income
 Highly salaried
 Business runs as separate entity

Demerits:

 Paying registration fee

 Need competent employees
 Difficult to manage accounts
 Need legal advisor to comply with legal rules and regulation.
 Chance of fraud increases as business grow more. (Shim & Siegel,2008)

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References:

Brigham,E.F.,& J.F.Houston. (2012) Fundamentals of financial management. Mason,

OH: Harecourt College Publisher. [Online]. Available at:

https://hostnezt.com/cssfiles/businessadmin/Fundamentals%20of%20Financial

%20Management%20%2012th%20edition%20%20-%20Brigham%20Houston.pdf

[Accessed:21 Oct 2022]

PAGE 11
Baron, D. P.(2008) Business & organization. Chester: Pearson. [Online]. Available

at:https://www.amazon.co.uk/Business-Environment-International-David-Baron/dp/

0138005060 [Accessed:21 Oct 2022]

Damodaran, A.(2006)Applied corporate finance. New York, NY: John Wiley & Sons,

Inc.ebook. [Online]. Available at:https://books.google.com.pk/books?

hl=en&lr=&id=8ZF17t9eru4C&oi=fnd&pg=PR4&dq=%E2%80%A2+Damodaran,+A.

(2006)+Applied+corporate+finance.+New+York,+NY:+John+Wiley+%26+Sons,

+Inc.&ots=Aa-XSMFmS4&sig=odVA7YsQxsv2K8Zotw7pZ2H-Z-

s#v=onepage&q&f=false [Accessed:21 Oct 2022]

Elliot, B & Elliot, J. (2009). Financial accounting and reporting. Harlow, Essex: Pearson

Education Limited. [Online]. Available at:https://core.ac.uk/download/pdf/33797479.pdf

[Accessed:21 Oct 2022]

Ferran, E. &Chan Ho, L. (2013) Principles of corporate financelaw. UK:Oxford

University press. [Online]. Available at:https://books.google.com.pk/books?

id=4XQVDAAAQBAJ&printsec=frontcover&dq=principle+of+corporate+finance&hl=e

n&sa=X&redir_esc=y#v=onepage&q=principle%20of%20corporate%20finance&f=false

[Accessed:21 Oct 2022]

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Shim,J.& Siegel, J.(2008). Haupage, NY: Baron's. [Online]. Available

at:http://196.190.117.157:8080/jspui/bitstream/123456789/23335/1/175.pdf.pdf

[Accessed:21 Oct 2022]

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