Financial Accounting

ISA 505

The objective of the auditor, when using external confirmation procedures, is to design and perform such procedures to obtain relevant and reliable audit evidence.

Working Capital

Working capital is a measurement often used to express the relationship between current assets and current liabilities. Working capital is the excess of current assets of a company, organization or any other entity over it’s current liabilities. Every business industry has it’s own standards for working capital, in some industries there should be more working capital available to the company while in some industries a little working capital is enough to smoothly run the company.

Working Capital Formula

Working capital are the resources available to a company to run it’s day-to-day operations smoothly. Working capital consist of cash and liquid assets available to a company after paying it’s current liabilities. In other words, if we deduct current liabilities of a company from current assets what will remain is called working capital or net working capital.

Gross Working Capital

Gross working capital is the total amount of current assets available to a company, specifically all those current assets which are readily convertible to cash (usually convertible within a year or less).

Operating Capital Vs Working Capital

The capital used for the operations of a company is known as operating capital. Sometimes people confuse operating capital with working capitaland use both terms interchangeably. But operating capital is a broader term than working capital because operating capital comprises of factory, plant and machinery, inventories, raw materials, cash and cash equivalents. In other words all of the assets a company uses in it’s daily operations is called operating capital.

Internal Users of Accounting Information

Every internal employee of the enterprise uses accounting information. From basic labor categories to the chief executive officer, all employees are paid, and their paychecks are generated by the accounting information system.

External Users of Accounting Information

External users of accounting information are individuals and other enterprises that have a financial interest in the reporting enterprise, but they are not involved in the day-to-day operations of that enterprise.

Essential Concepts of Financial Accounting

Accounting Equation

Accounting equation is the base of double entry bookkeeping and the double entry bookkeeping is the base of whole of the modern accounting system. Therefore accounting equation is the starting point to understand double entry bookkeeping.

Accounting Equation Example

Revenues and Expenses

Businesses are organized to earn a profit, and here we will discuss revenue and expense transactions.

Accounting Concepts

Bookkeeping concerns primarily with the recording of transactions in the books of accounts. The recording is based on certain assumptions. These assumptions are known as accounting concepts.

Accounting Cycle

An accounting cycle is a systematic process of recording, classifying and summarizing business activities / transactions, so that the accounting information can be transformed into a more readable / understandable format for internal as well as external users of accounting information.

Debit and Credit

Most of the readers get confused when an accountant debit or credit a transaction. Readers who don’t have accounting background ( even with little accounting background) generally think that a debit means an increase in the account and a credit means a decrease in the account. This thought is totally wrong.

Chart of Accounts

A list showing total number of accounts used by an organization is known as chart of accounts. Different businesses have different types of accounts and different number of accounts.

Defining Accounts

Distinctive sorts of organizations use diverse sorts of accounts. For instance, a manufacturing business will require different records for reporting manufacturing costs. A retail business, notwithstanding, will have accounts for the purchases of finished goods.

General Journal

Journals are also called books of original entry. In advanced bookkeeping frameworks, all transactions of the business are recorded in the general journal.

General Ledger

After recording the transactions in general journal, then these transactions posted to the General Ledger where we can find the balance of any account.

Income Statement

Income statement presents the results related to revenue and expense transactions for the current period. This is the 4th and major step in the accounting cycle.

Trial Balance

After posting journal entries from journals to general ledger, next step in preparing financial statements is the trial balance. Trial balance shows debit and credit totals for every ledger account.

Post Closing Trial Balance

Once the income statement is cleared, it is necessary to ensure that the balance sheet still balances. This is done by completing another trial balance called the post-closing trial balance

Bank Reconciliation Definition Example Template Form

Although banks have highly sophisticated systems, there is a possibility that they make a mistake. At the end of every month, a bank supplies its customers with records (bank statements) arranged by its representatives.

Petty Cash

An organization may require little amounts of cash to pay for petty (little) expenses, for example, parking a car, postage stamps and courier expenses.


Like accounts receivable, inventory involves the everyday operations of the company; and can also contain a huge portion of the company’s current assets. However, unlike accounts receivable, inventory isn’t just a monetary concept.

Intercompany Inventory Transactions

Affiliated consolidated entity is an aggregation of a number of different companies. The financial statements prerequisite the individual affiliates are consolidated into a single set of financial statements representing the financial position and operating results of the entire economic entity as if it were a single company.

Current Liabilities

Liabilities represent a part of an organization’s balance sheet. Balance sheet of an organization is based on accounting equation.

Assets = Liabilities + Owner’s Equity

Accrued Expenses

Accrued expenses or accrued charges are current period expenses but not paid until the current period is expired. Accrued expenses are recognized in the current period as expenses but will be paid on a later date.

Accounts Payable

Sometimes an organization may receive goods or get services from a supplier or vendor in advance and will pay the supplier or vendor on a future date. In this case we can say that the organization is buying goods or services on credit (on account).

Financial Ratios

The following is a guide to some common ratios used to measure the financial performance of a business. Different industries have different benchmarks for each ratio. It is important to understand the trends in a company’s performance from period-to-period and the relative performance of a company within its industry for each ratio.

Treasury Stock

One way a corporation can reduce the number of shares it has outstanding is to buy them back on the stock market. The transaction involves a debit to treasury stock and a credit to cash for the market value of the shares.

Callable Bonds

When the bond reaches maturity, it is time for the issuing company to repay the principal to whoever holds the bond at the time. This is also called redemption. The issuing company may have the option to redeem a bond early.

Working Capital

Working capital is a measurement often used to express the relationship between current assets and current liabilities. Working capital is the excess of current assets of a company, organization or any other entity over it’s current liabilities.

Auditing Notes

International Standards on Auditing

Cost Audit


Introduction to Cost Audit

Cost audit is an examination of cost accounting records and verification of the facts to ascertain that the cost of the product under reference has been arrived at in accordance with principles of Cost Accounting and evaluation of adequacy of proper Cost Accounting Records and their maintenance.

Principles of Cost Audit

There are certain principles that the cost auditor has to observe in planning and performing the cost audit. There are also principles that the cost auditor has to see are being observed by the company he is auditing.

Planning Cost Audit

Cost Audit should be planned with professional care, recognizing that circumstances may exist to cause the cost statements to be materially misstated.

Cost Auditor’s Report

Performing Cost Audit – Background Knowledge and Audit Procedures

Before performing cost audit, the cost auditor must have or obtain knowledge of the industry and its business environments, sufficient to enable him, to identify and understand the events, transactions and practices that in the Cost Auditor’s judgment may have a significant effect on the cost accounting statements of the entity to be audited, or on the cost audit report.

Performing Cost Audit – Important Elements of Cost

Raw materials and other materials which can be directly identified with production would normally constitute major part of the cost.

Cost Accounting System and Reconciliation

What is Risk

Risk is a concept. It is a measure of uncertainty (probabilities). In the business process, the uncertainty involves the achievement of organizational objectives.

Cost of Risk

  1. Greater risk usually implies greater cost.
  2. Cost of risk can be divided into five components which are given …

Cost Trade offs

Risk Types

Risk Analysis – Process

Step # 1 – Risk Identification

The first step in the process of managing risk is to identify potential risks. Risks are about events that, when triggered, cause problems. Hence, risk identification can start with the source of problems, or with the problem itself. This can be done in two ways …

Managing Assessed Risk

Risk Avoidance

This includes not performing an activity that could carry risk. An example would be not buying a property or business in order to not take on the legal liability that comes with it. Another would be not flying in order not to take the risk that the airplane were to be hijacked …

Questions and Answers

What is World Trade Market?

What is profit and loss appropriation account

What is an income statement?

What goes into the general journal?

What is the purpose of special journals in accounting?

What is recorded in the cash payments journal?

What is a balance sheet?

What is Return on Equity?

What is Return on Assets?

What is Asset Turnover?