FUNDAMENTAL ELEMENTS OF FINANCIAL ACCOUNTING

The book entitled Fundamental Elements of Financial Accounting is a must read. The importance of financial accounting in both manufacturing and service oriented organizations can not be over emphasized. This is because they need to prepare their financial statements on annual, quarterly or biannual basis. In fact corporate organizations are by regulations required to prepare their financial statements to enable them file their returns to appropriate authorities. The three major financial statements which we discussed in this book are cashflow statement, Profit and loss(P&L) Account and Balance Sheet.Again, there are those that use financial statements for different purposes ie the so called users of financial information. Accounting is defined as the process of collecting, recording, summarizing, and communicating financial information to owners and other interested parties. Alternatively it can be defined as a method of accumulating financial information using an organized/ systematic approach involving recording transactions in the books of account (journals and ledgers), analyzing these transactions, summarizing them and reporting them to various users including owners by way of financial statements. Financial information is an output of the accounting system. Recording transactions in the books of account constitutes book keeping. Keeping accounts and generating financial reports and information from these accounts for various purposes is Accounting. In other words accounting is broader than bookkeeping. The preparation of financial reports is based on accounting principles or conventions. There are accounting standards as well which must be observed in the preparation, presentation and disclosure of financial information in the financial reports. The financial information reported to the various parties must be objective, relevant, understandable, reliable and comparable. We further discussed the Generally ,Accepted Accounting Principles8(GAAP). These Accounting principles constitute “ground rules” for financial reporting. They are also referred to as standards, assumptions, postulates and concepts. Accounting rules are not rooted in laws of nature, as the laws of the physical sciences. They are developed in relation to what we consider to be the most important objectives of financial reporting. International Financial Reporting Standards(IFRS) is also globally adopted in preparation of financial statements apart from GAAP.We further dwelt on Accounting processes which involves recording transactions in the accounts.We discussed financial statements. The maintenance of financial records or the keeping of accounts is not an end in itself. Accounts are kept with a view to using information in them to prepare financial statements. Using the information in the accounts company financial statements are prepared to fulfill the stewardship function or for accountability to shareholders, investors, government, tax authorities and other external parties. Other reports can also be prepared from the same accounts to provide information to company management for internal use e.g. for planning, control or decision-making. We dwelt on analysis of financial statements. Business organizations use different resources in their operations. These resources are made available to some organizations but not to others. It is very important for organizations to use these resources efficiently and effectively. Essentially, effective allocation and use of available resources are key.In the analysis of financial statement we use financial ratios. The following are the five major ratios we analyzed ie liquidity or solvency ratio, profitability ratio, activity ratio , debt(Leverage) ratio and investors’ ratio. We further discussed revenue and income recognition in income statement. Revenue is essentially key in an income statement. Hence, we begin the discussion of line items in the income statement with revenue recognition. We dwelt finally on Accounting Modules 1&2-Concepts ,Book Keeping Etc.