Financial

Accounting
Sherif El-Halaby
BSC, 3 DIPLOMAS, PGC, GTA, PGCAP600, ICB,
MBA, MSC, PHD
LECTURER OF ACCOUNTING & ISLAMIC
BANKING
POSTDOCTORAL RESEARCHER
LECTURER IN PLYMOUTH UNIVERSITY& EAST
LONDON UNIVERSITY & MSA UNIVERSITY &
ARAB ACADEMY

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C1
Importance of Accounting
Accounting

Identifying
Select transactions and events

Recording
Input, measure and classify

Communicating
Prepare, analyze and interpret
 The Accounting Definition
Accounting is an information system
that identifies, records, and
communicates the economic events
of an organization to interested users

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 What is Accounting?

Accounting consists of three basic activities - it

 identifies,

 records, and

 communicates

the economic events of an organization to interested

users.

LO 1 Explain what accounting is.

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What is Accounting?
Three Activities

The accounting process includes

the bookkeeping function.

LO 1 Explain what accounting is.

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 The same concept of
accounting and
accountability
In your Life
Now and in the hereafter
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 The Accounting Cycle

Processing
• Documents •Financial
and Analysis of •Journal Statements
transactions •Ledger •Financial
•Adjustments Reports
Inputs •Trial Balance
Outputs

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Accounting cycle

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What is Finance?
•Finance can be defined as the art and science
of managing money.
• At the personal level, finance is concerned with
individuals’ decisions about how much of their
earnings they spend, how much they save, and
how they invest their savings.
• In a business context, finance involves the
same types of decisions: how firms raise money
from investors, how firms invest money in an
attempt to earn a profit, and how they decide
whether to reinvest profits in the business or
distribute them back to investors.
© Pearson Education 2013 1-9
 Legal Forms of Business Organization:
Corporations
Figure 1.1
Corporate
Organization

© Pearson Education 2013 1-10

The Managerial Finance Function:
Relationship to Accounting
• The firm’s finance (treasurer) and accounting
(controller) functions are closely-related and
overlapping.
• In smaller firms, the financial manager
generally performs both functions.
• One major difference in perspective and emphasis
between finance and accounting is that accountants
generally use the accrual method while in finance,
the focus is on cash flows.
• The significance of this difference can be illustrated
using the following simple example.

© Pearson Education 2013 1-11

The Managerial Finance Function:
Relationship to Accounting (cont.)

• The Nassima Corporation experienced the following

activity last year:

Sales US$100,000 (1 yacht sold, 100% still uncollected)

Costs US$80,000 (all paid in full under supplier terms)

• Now contrast the differences in performance

under the accounting method versus the cash
method.

© Pearson Education 2013 1-12

The Managerial Finance Function:
Relationship to Accounting (cont.)
INCOME STATEMENT SUMMARY

ACCRUAL CASH

Sales US$100,000 US$ 0

Less: Costs (80,000) (80,000)

Net Profit/(Loss) US$ 20,000 US$(80,000)

© Pearson Education 2013 1-13

The Managerial Finance Function:
Relationship to Accounting (cont.)
• Finance and accounting also differ with respect
to decision-making.
• While accounting is primarily concerned with
the presentation of financial data, the financial
manager is primarily concerned with analyzing
and interpreting this information for decision-
making purposes.
• The financial manager uses this data as a vital
tool for making decisions about the financial
aspects of the firm.

© Pearson Education 2013 1-14

The Managerial Finance Function:
Primary Activities of the Financial Manager
Figure 1.2
Financial Activities

© Pearson Education 2013 1-15

C2

Users of Accounting Information

External Users Internal Users

•Lenders •Consumer Groups •Managers •Sales Staff

•Shareholders •External Auditors •Officers/Directors •Budget Officers
•Governments •Customers •Internal Auditors •Controllers
C2

Users of Accounting Information

External Users Internal Users

Financial accounting Managerial accounting

provides external users provides information needs
with financial statements. for internal decision-makers.
QUESTIONS ASKED BY INTERNAL USERS

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QUESTIONS ASKED BY EXTERNAL USERS

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The Accounting System

Managers
(internal
decision
Reports makers)
information
to decision
Collects and processes makers
financial information Investors and
Creditors
(external
decision
makers)

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Stockholders
Vs.
Stakeholders

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 Who Uses Accounting Data

Common Questions Asked User

1. Can we afford to give our
employees a pay raise? Human Resources
2. Did the company earn a
satisfactory income? Investors
3. Should any product lines be
eliminated? Management
4. Is cash sufficient to pay dividends
to shareholders? Finance
5. What price for our product will
maximize net income? Marketing
6. Will the company be able to pay
its debts? Creditors
LO 2 Identify the users and uses of accounting.
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The Building Blocks of Accounting

Accounting Standards

International Accounting Standards Board (IASB)

http://www.iasb.org/

International Financial Reporting Standards (IFRS)

Financial Accounting Standards Board (FASB)

http://www.fasb.org/

Generally Accepted Accounting Principles (GAAP)

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LO 4 Explain accounting standards and the measurement principles.
C4Principles and Assumptions
of Accounting

Revenue Recognition Principle

1. Recognize revenue when it is earned. Cost Principle
2. Proceeds need not be in cash. Accounting information is based on
3. Measure revenue by cash received actual cost. Actual cost is
plus cash value of items received. considered objective.

Full Disclosure Principle

Matching Principle A company is required to report the
A company must record its expenses
details behind financial statements
incurred to generate the revenue reported.
that would impact users’ decisions.
C4

Accounting Assumptions

Now Future
Going-Concern Assumption Monetary Unit Assumption
Express transactions and events in
Reflects assumption that the business
monetary, or money, units.
will continue operating instead of
being closed or sold.

Business Entity Assumption Time Period Assumption

A business is accounted for Presumes that the life of a company can
separately from other business be divided into time periods, such as
entities, including its owner. months and years.
The Building Blocks of Accounting

Measurement Principles
Cost Principle – or historical cost principle, dictates that
companies record assets at their cost

Fair Value Principle – states that assets and liabilities

should be reported at fair value (the price received to sell an
asset or settle a liabilities

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LO 4 Explain accounting standards and the measurement principles.
The Building Blocks of Accounting
Assumptions
Monetary Unit – include in the accounting records only
transaction data that can be expressed in money terms.

Economic Entity – requires that activities of the entity be

kept separate and distinct from the activities of its owner and
all other economic entities
 Proprietorship.
 Partnership. Forms of Business
 Corporation. Ownership

LO 5 Explain the monetary unit assumption

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and the economic entity assumption.
 Forms of Business Organization

Sole Proprietorships
Partnerships Corporations
 Legal Forms of Business
Organization
• A sole proprietorship is a business owned by one
person and operated for his or her own profit.
• A partnership is a business owned by two or
more people and operated for profit.
• A corporation is an entity created by law.
Corporations have the legal powers of an
individual in that it can sue and be sued, make
and be party to contracts, and acquire property
in its own name.

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Forms of Business Ownership

Proprietorship Partnership Corporation

 Generally owned  Owned by two or  Ownership

by one person more persons divided into
 Often small shares
 Often retail and
service-type service-type  Separate legal
businesses businesses entity organized
 Owner receives under corporation
 Generally unlimited
any profits, law
personal liability
suffers any  Limited liability
 Partnership
losses, and is
agreement
personally liable
for all debts
LO 5 Explain the monetary unit assumption
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and the economic entity assumption.
Strengths and Weaknesses of the Common Legal
Forms of Business Organization

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Matter of Fact

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Indicate whether each of the following statements presented below
is true or false.

1. The three steps in the accounting process are

identification, recording, and communication. True

2. The two most common types of external users are

investors and company officers. False

3. Shareholders in a corporation enjoy limited legal

liability as compared to partners in a partnership. True

LO 5 Explain the monetary unit assumption

and the economic entity assumption.
Forms of Business Ownership

Question
A business organized as a separate legal entity under law
having ownership divided into ordinary shares is a

a. proprietorship.

b. partnership.

c. corporation.

d. sole proprietorship.

LO 5 Explain the monetary unit assumption

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and the economic entity assumption.
 The Accounting Targets
•Measurement of operating results
•Measurement of financial position
•Measurement of cash flows
• Providing financial information
for decision making for both
interested users (Internal and
External)
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 The Accounting System
Accounting System

Financial Accounting System Managerial Accounting System

Periodic financial statements and Detailed plans and continuous
related disclosures performance reports

External Decision Makers Internal Decision Makers

Investors, creditors, Managers throughout the
suppliers, customers, etc. organization

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Management Uses of Financial Statements
Marketing managers and credit managers use
customers’ financial statements to decide whether to
extend credit.

Purchasing managers use suppliers’ financial

statements to decide whether suppliers have the
resources to meet the demand for products.

Employees’ union and human resource managers use

the company’s financial statements as a basis for
contract negotiations pay rates.

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 ACCOUNTING
STANDARDS
IFRS VS. GAAP
AAOIFI

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Management Responsibility and the Demand for
Auditing

To ensure the accuracy of the company’s

financial information, management:
 Maintains a system of controls.
 Hires outside independent auditors.
 Forms a board of directors to review these two
safeguards.

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Independent Auditors
Auditors express an
Overall, I believe
opinion as to the fairness these financial
of the financial statement statements are
presentation. fair.

Independent auditors
have responsibilities that
extend to the general
public.

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Independent Auditors
An audit involves . . .
Examining the financial reports to
ensure compliance with GAAP.
Examining the underlying
transactions incorporated into the
financial statements.
Expressing an opinion as to the
fairness of presentation of financial
information.

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 ‫اكبر مكاتب المراجعه فى العالم (االربعه الكبار)‬
‫‪BIG4 AUDITORS‬‬
‫• كانت هذه المجموعة تسمى فيما مضى الثمانية الكبار ومن ثم تقل صت‬
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‫األربع الكبار بعد انهيار شركة آرثر آندرسون في سنة ‪ 2002‬إثر‬
‫فضيحة إنرون‪.‬‬
‫• ديلويت توش توهماتسو ( امريكا) ‪DELOITTE & TOUCHE‬‬
‫• برايس وتر هاووس كوبرز ( انجلترا) ‪PRICE WATER HOUSE & COOPERS‬‬
‫• ارنست ويونغ ( انجلترا) ‪ERNST & YOUNG‬‬
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‫تقرير المراجعه الخارجى لبنك الراجحى بالسعوديه‬

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