Financial Accounting

Definition & Functions of Accounting

Accounting is the art of recording, classifying and summarizing in significant manner and in terms of money, transactions and events which are, in part, at least of a financial character and interpreting the results thereof. -American Institute of Certified Public Accountants (AICPA), 1941.

Accounting: A Working Definition

Accounting is the process of recording, classifying, summarizing, analyzing and interpreting the financial transactions and communicating the results thereof to the persons interested in such information

Book-keeping v/s Accounting

Book-keeping:

Recording financial transactions of a

business entity.

Involves routine lower level activity.

Accounting
Designing the systems for recording,
classifying and summarizing the recorded data and interpreting them for internal and external users.

Requires high level of knowledge, deeper

conceptual understanding & analytical skills.

Users of Accounting Information

Business Owners. Managers. Lenders Investors. Government. Employees/Workers. Suppliers Customers

Branches of Accounting
Financial Accounting:
Cost Accounting:
Preparation of Financial Statements.

Compiling cost records. Accounting for managerial decision-making, i.e. planning and control.

Management Accounting:

Financial Accounting : Roadmap

Scope & importance Accounting concepts / GAAP Accounting mechanics Inventory accounting Depreciation accounting Corporate financial reporting

:Understanding related concepts & basic analysis

Objectives of Accounting
To keep systematic records. To protect business properties. To ascertain the operational profit or loss. To ascertain the financial position of the
business. To facilitate rational decision-making.

Basic accounting terms

Assets v/s liabilities- current and noncurrent(fixed) Capital / Drawings Debtor/creditor Bills receivable / Bills payables Trade discount/ cash discount Bad debts Capital v/s revenue expenditure

Examples

Raw material inventory Goodwill Bank overdraft Bills receivable Plant and machinery Debtors Cash and bank balance Long term loan from bank

Accounting Principles

(also known as Accounting Standards)

Meaning: Rules of action or conduct adopted by accountants universally while recording accounting transactions. They are a body of doctrines commonly associated with the theory and procedures of accounting, serving as an explanation of current practices and as a guide for selection of conventions or procedures where alternatives exists.

Accounting principles: Categories

Accounting Concepts: Basic
assumptions or conditions upon which the science of accounting is based. Accounting Conventions: The customs or traditions which guide the accountant while preparing the accounting statements.

Accounting Concepts
Separate Entity Concept. Going Concern Concept. Money Measurement Concept. Cost Concept Dual Aspect Concept. Accounting period Concept. Periodic Matching of Cost and Revenue
Concept. Realization Concept.

Accounting Concepts(Contd.)
Conservatism. Consistency. Materiality.

Application of accounting concepts: Transactions

Proprietor started business by introducing
cash Received an order from a customer Sanction of cash credit limit by bank Mr. Joshi is more productive than Mr. Kapoor even though both earn same salary Purchased raw material for cash or credit

Transactions(contd.)
Raw materials purchased for Rs.20,000
less trade discount of 5 % Mr. Roy ,a debtor for Rs.20,000 is likely to pay only 50% of the amount due. Rent for the current year is Rs.50,000 out of which only Rs.30,000 was paid this year

Systems of Accounting
Cash System: A system of accounting in
which entries are passed ONLY when cash is received or paid. Mercantile or Accrual System: A system in which entries are passed when an amount becomes due for payment or receipt, irrespective of whether cash is received or paid, or not.

Basic financial statements

The Balance sheet : Statement of financial

position as at a particular date The income statement : Statement showing net income earned during a particular period. The cash flow statement showing the sources and uses of cash during a particular period.

Case study : Ribbons and bows

Accounting Equation
Assets = Liabilities.
Extended Accounting Equation:
Assets =Liabilities + Owners Capital

Assets Liabilities = Owners Capital Case study : Music mart,Inc.

Accounting Mechanics
Original document : Voucher
Books of prime entry : Journal

A/C headwise classification : Ledger

Summary of a/c balances : Trial Balance Final Reporting : Financial Statements

Types of accounts
Personal Account : Includes Persons,
firms,companies,any legal entity

Real A/c :Includes any properties or assets Nominal a/c : Includes expenses or losses,
incomes or gains

Golden rules of journalising a transaction

Type of a/c
Personal a/c Real a/c

Rule
Debit the receiver Credit the Giver Debit what comes in Credit what goes out Debit all expenses/losses Credit all incomes /gains

Nominal a/c

Extension of the golden rule

Personal a/c : Includes debtor:asset OR
Creditor : Liability

Real a/c : Includes assets

Nominal a/c: Incomes and expenses
Hence we can say that:

 Alternative method of passing journal

entry:
Increase in asset or expense Debited

Extension of the golden rule(Contd.)

Decrease in asset or expense

Increase in liability or income

Credited
Credited

Decrease in liability or income Debited