Financial Accounting

THE MILLENNIUM UNIVERSITY

COLLEGE

Finance In the Hospitality Industry

 ACCOUNTING
 Accounting (Definition):- is art of
recording, classifying and
summarizing the financial
transactions and interpreting
the result therefore.

 Accounting Equation:
 Assets = Liabilities + Capital
 TYPES OF ACCOUNTS
 Personal
 Natural
 Artificial
 Representative
 Real
 Tangible (Physical Assets) (machinery, buildings
etc.)
 Intangible (goodwill, patents etc.)
 Nominal
 Expenses/ Losses
 Incomes/ Gains
 PERSONAL ACCOUNTS
 Personal accounts are categorized into natural
person's personal accounts, artificial person's
personal accounts and representative person's
personal accounts. Natural person's personal
accounts belong to human beings, such as the
TMUC account, while artificial person's personal
accounts relate to companies and other legal
entities, such as charitable organizations
accounts. Representative accounts represent
specific persons, such as the advance expense
account.
 ACCOUNTS
 Tangible assets include both fixed assets, such
as machinery, buildings and land, and current
assets, such as inventory and cash.
 The opposite of a tangible asset is an intangible
asset. Nonphysical assets, such as patents,
trademarks, copyrights, goodwill and brand
recognition, are all examples of intangible assets.
 EXAMPLE
Transactions Account involved Nature of accounts
1 Rent paid Rent Nominal
Cash Real
2 Salaries paid Salary Nominal
Cash Real
3 Interest received Interest Nominal
Cash Real
4 Furniture purchased Furniture / Expense Nominal
Cash Real

5 Outstanding Salary Outstanding salary Personal

Salary Nominal
6 Paid to Ali Ali Personal
Cash Real

7 Received from Akram Cash Real

Proprietor Capital Personal
 TYPES OF ACCOUNTS
 Accounts pertaining to the five accounting
elements:
 Accounts are created/opened when the need arises for whatever
purpose or situation the entity may have. For example, if your
business is an airline company they will have to purchase
airplanes, therefore even if an account is not listed below, a
bookkeeper or accountant can create an account for a specific
item, such as an asset account for airplanes. In order to
understand how to classify an account into one of the five
elements, a good understanding of the definitions of these
accounts is required. Below are examples of some of the more
common accounts that pertain to the five accounting elements:
 Asset accounts:
 Asset accounts are economic resources which benefit the
business/entity and will continue to do so. Cash, bank, accounts
receivable, inventory, land, buildings/plant, machinery,
furniture, equipment, supplies, vehicles.
 TYPES OF ACCOUNTS
 Liability accounts:
 Liability accounts record debts or future obligations the
business/entity owes to others. Accounts payable, salaries and
wages payable, income taxes, bank overdrafts, trust accounts,
accrued expenses, sales taxes, advance payments (unearned
revenue), debt and accrued interest on debt, etc.
 Equity accounts:
 Equity accounts record the claims of the owners of the
business/entity to the assets of that business. Capital, retained
earnings, drawings, common stock, etc.
 Income/Revenue accounts:
 Income accounts record all increases in Equity other than that
contributed by the owner/s of the business. Services rendered,
sales, interest income, membership fees, rent income, interest
from investment, donation etc.
 TYPES OF ACCOUNTS
 Expense accounts:
 Expense accounts record all decreases in the
owners' equity which occur from using the assets
or increasing liabilities in delivering goods or
services to a customer - the costs of doing
business. Telephone, water, electricity, repairs,
salaries, wages, depreciation, stationery,
entertainment, rent, fuel, utility, interest etc.
 TYPES OF ACCOUNTS

Kind of account Debit Credit

Asset Increase Decrease
Liability Decrease Increase
Income/Revenue Decrease Increase
Expense Increase Decrease
Equity/Capital Decrease Increase
 INTRODUCTION TO DEBITS AND CREDITS

 Under the double-entry system every business

transaction is recorded in at least two accounts.
 One account will receive a "debit" entry, meaning
the amount will be entered on the left side of that
account.
 Another account will receive a "credit" entry,
meaning the amount will be entered on
the right side of that account.
 DEBIT
 A debit is an accounting entry that either
increases an asset or expense account, or
decreases a liability or equity account.

 A debit is an expense, or money paid out from an

account.

 Debit is abbreviated as Dr.

 CREDIT

 A credit is an accounting entry that either

increases a liability or equity account, or
decreases an asset or expense account.

 Credit is the amount paid into the account.

 It is abbreviated as Cr.
 ACCOUNTING CYCLE
 Recording the transaction- journal
 Classifying – Ledger

 Summarizing – Trial Balance/ Profit & Loss

account/ Balance Sheet
 Interpretation- Ratio analysis
 JOURNAL
 “The process of recording a
transaction in a journal is called
journalizing the transactions.”

 Journal is a book that is maintained

on a daily basis for recording all the
financial entries of the day. Passing
the entries is called journal entry.
Journal entries are passed according
to rules of debit and credit of double
entry system.
 FUNCTIONS OF JOURNAL
 To analyze each transaction into debit and credit
so as to enable their posting in the ledger

 To arrange transaction ,chronological i.e in order

of date.
 ADVANTAGES OF JOURNAL
 Show all necessary information relating to
a transaction
 Provide the explanation of the transaction

 Date wise record of all the transaction can

be obtained
 Help in locating and preventing the errors
 JOURNAL


 JOURNAL

 Column 1: It represents the date of transaction.

 Column 2: Line 1 (... ... ... ...) represents the name
of account to be debited.
 Line 2 (... ... ... ...) represents the name of account
to be credited.
 Line 3 for narration of transaction.

 Column 3: Ledger Folio (L.F.) represents the

page number of ledger account on which we post
these entries.
 Column 4 : Amount(s) to be debited.

 Column 5 : Amount(s) to be credited.