This document provides an overview of basic financial accounting concepts. It defines accounting and describes the six main tasks of accountants as collecting data, journalizing, posting, summarizing, reporting, and interpreting. It also outlines the typical accounting cycle of collecting transactions, recording them, classifying them by account, preparing trial balances, making adjustments, and preparing financial statements. Key accounting heads are discussed like assets, liabilities, equity/capital, revenues and expenses. Finally, the basic rules of debit and credit for increasing or decreasing different types of accounts are explained.

1. Basic Concepts of Financial
Accounting
Prepared by:
Mr. Ahmed Saeed
https://dollarupload.com/dl/8fcf15fb

2. Table of Contents
1. Definition of Accounting
2. Six Tasks to be Done by Accountants
3. Accounting Cycles
4. Analysis of Financial Transaction
5. Types of Accounting Heads
6. Commonly used Accounting Heads
7. Rules of Debit and Credit

3. 1. Definition of Financial Accounting
• Accounting is an Information system.
• Accounting is the process of generating information for users /
managers from the data of financial transactions of organizations.
• Accounting is the art and science of collecting, recording, classifying,
summarizing, Reporting and Interpreting the data of Financial
Transactions / Events of an organization or entity in a prescribed
manner.
• Accounting is the language of the business.

4. 2. Six Task to be Done the Accountants
Financial Accountants are supposed to do following six task:
1. Collection the data of financial transactions/events duly
supported by their objective evidences.
2. Journalizing: Recording the data of financial transactions in the
books of original entries/journal.
3. Posting: Head of account wise classification of financial
transactions
4. Summarizing: Preparing Trail Balance (Unadjusted, Adjusted, Post
Closing and Opening Trail Balance)
5. Reporting: Preparing financial Statements after adjustments
6. Interpretation/ Analyzing different economics aspects of
organization

5. 3. Accounting Cycle
Accounting cycle is the process used by the accountant to process financial
transactions data in an organization. Accounting cycle include following steps:
1. To Collect the data of Financial Transactions of their organizations.
Collection of objective evidence of transactions is needed to ascertain
the genuineness of transactions.
2. To Record the data of Financial Transactions in a prescribed manner in
the book of original entries/journal. Books of original entry includes
General Journal, Cash Book/Cash Receipt Journal/ Cash Payment Journal,
Purchase Journal/Sales Journal/Purchase Return Journal/Sales Return
Journal. This step is known as journalizing.
3. To Classify the Financial Transactions recorded in the books of original
entry as per their head of account, accountants use 2nd book of account
known as Ledger. Ledger can be General Ledger / Subsidiary Ledger.
This step is know as posting.

6. 3. Accounting Cycle (Continued)
4. To Summarize the data of recorded transactions in the books of
original entries and posted in ledger, we have to prepare trail
Balance (Unadjusted). To Prepare the trail balance all accounts in
the General ledger are balanced and listed in trail balance.
5. Adjustments: The trail balance prepared in the step 4 is
unadjusted. This trial balance need to checked that whether all
account balances are correct or not. If some account balance is
not what it should be. Then we will have to adjust the said
account balance to make I correct one with the help of an
adjusting entries. All revenues / Expense / Assets / liabilities /
Capital heads of accounts must have accurate balance. Account
balance should not be either overstated or under stated.

7. 3. Accounting Cycle (Continued)
6.1 After the adjustments are identified, recorded, posted, trail balance is
prepared again which is known as adjusted trail balance.
6.2 After the adjustment financial statements are prepared.
6.3 Closing of books of account is done at the end of the accounting year.
Closing entries are made to bring the nominal/temporary accounts
balances i.e. revenues and expenses to zero.
6.4 Preparation of post closing trail balance which consist of only
permanent account balance i.e assets, liabilities, and capital/owner
equity.
7. Opening of Books of Accounts at the beginning of accounting year by
carrying forward the closing balance of permanents accounts in ledger
as opening balance.

8. 4. Analysis of Financial Transactions
• To record each and every financial transaction in books of original entry the
accountant has to conduct the analysis of each and every financial
transaction.
• There are two aspect of each and every financial transaction. One aspect is
called debit which is the receiving aspect and other aspect is called the
credit which is the paying aspect.
• All accountant should know the three things about each and every financial
accounting transaction. What we receive and what we pay in a financial
transaction. Three things an accountant should know before recording a
transactions in book of original entries.
1. Actual name of Goods/services received or paid
2. Accounting name/ Head of account of Goods /services received or paid
3. Type of Account/ Nature of Account /Component of Account

9. 5. Types of Accounting Heads on the basis of
their Nature
• All accounting heads used in any organization can be only and only
five types. 1. Assets 2. Liabilities 3. Capital/owner equity 4.
Revenues/Incomes 5. Expenses
• Assets are the resources owned by organizations that generate future
benefits. Liabilities are the claims other than owners on the assets of
the organizations. Capital Accounts are the claims of owners on the
assets of the organizations. Revenues or incomes are the gross value
of goods or services rendered. Expenses are the value of benefits
received. Expenses are the payments whose revenue has been
generated.

10. 6. Commonly used Accounting Heads
Asset Nature Heads of Accounts:
Current Assets(Cash A/c, Bank A/c, Account Receivables, Bill Receivables,
Stock/ Inventory/Merchandise a/c, Prepaid Expenses a/c, Income receivables
a/c etc.)
Fixed Assets (Land a/c, Building a/c, Furniture and fixture a/c, Plant and
Machinery a/c, office equipment a/c, Vehicles a/c, Tools a/c, Office Supplies
a/c etc.)
Liabilities Nature Heads of Accounts:
Current Liabilities (Account Payable/Creditors a/c, Bill Payable a/c, Expense
payables a/c, Advance Incomes A/c, short term loans)
Long Term Liabilities (Loan Payable, Bonds Payable)

11. 6. Commonly used Accounting Heads
(Continued)
• Capital or Owner Equity Nature Heads of Accounts:
(Capital A/c, Drawing A/c, Profit and loss a/c, Retained earnings a/c)
• Revenue / Income Nature Heads of Accounts
Sales a/c, Sales return a/c, Fee a/c, Interest Income a/c, rent income a/c,
other or Misc. income a/c.
• Expense Nature Heads of Accounts:
Purchase a/c, Cost of goods Sold a/c, Selling expenses (sales commission a/c,
salaries a/c, advertising a/c, etc), Admin Expenses (Electricity charge a/c, fuel
expenses a/c, rent expense a/c, salaries expense a/c, repair and maintenance
expense a/c) Financial expenses ( Interest expense a/c)

12. 7. Rules Debit or Credit
• When we want to make an increase in an in an asset nature account or
expense nature account we will have to debit that particular accounting
head. To record decrease in an asset or expense nature account we do this
in accounting by crediting the accounting head. Incase of increase in asset
and expense our organization is receiving some thing and vice versa.
• When we want to record the increase in any account relating to revenue
type or liability type or capital type. We can do this by crediting the
relevant accounting head. To record the decrease in any revenue type,
liability type or capital type account we do this by debiting the relevant
account. Incase of increase of revenues/liabilities/ capital our organization
is gives some thing which we record by crediting the accounting head.