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Financial Accounting

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Sourabh Chitre

This document provides an overview of key accounting concepts including bookkeeping, accounting, financial accounting, cost accounting, management accounting, accounting cycle, accounting equation, types of accounts, rules of accounting, analysis of transactions, and journal entries. It defines accounting as the process of collecting, recording, classifying, and summarizing financial transactions. It also describes the different types of accounts (asset, liability, capital, income, expense), users of accounting information, and the steps in the accounting cycle.

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FINANCIAL ACCOUNTING
BOOK KEEPING  Book-Keeping is the systematic recording of transactions in the books of accounts.
ACCOUNTING  Is analysis and interpretation of book-keeping records.  A process of collecting, recording, classifying and summarizing the transactions and events of financial nature.
ACCOUNTING AS AN INFORMATION SYSTEM  Accounting is said to be the language of business.  The basic objective of accounting is to make the necessary information available to a variety of decision makers about financial results and financial position of a business enterprise.  By making such information available at the right time it helps them in making rational and adroit decisions.
USERS OF ACCOUNTING INFORMATION INSIDERS OUTSIDERS  Investors  Management  Employees  Government and its various agencies  Taxation authorities  Researchers  Public  Authorities dealing with environmental issues  Creditors  Customers
BRANCHES OF ACCOUNTING  Financial Accounting  Management Accounting  Cost Accounting  Social Responsibility Accounting  Throughput Accounting  Human Resource Accounting  Price level Accounting/Inflation Accounting
FINANCIAL ACCOUNTING  An original form of accounting, mainly concerned with the process of identifying, measuring, recording, classifying, summarizing, analyzing, interpreting and communicating the financial transactions and business events.  The main purpose of this branch of accounting is primarily to maintain systematic records to ascertain financial performance and financial position and to communicate the accounting information to the various interested parties.  The information provided by financial accounting about financial result and financial position is significant, but not sufficient for smooth, orderly and efficient conduct of business.  Management of today needs to be equipped with more information for structured and strategic planning and effective control of the business activities.
COST ACCOUNTING  Cost accounting is the classifying, recording and appropriate allocation of expenditure for the determination of costs of products or services, and for the presentation of suitably arranged data for the purpose of guidance and control.  it deals with detailed study of cost mainly with reference to cost ascertainment, cost reduction and cost control.
MANAGEMENT ACCOUNTING  Top management needs concise but distilled information for taking invincible decisions at the appropriate time.  This system of accounting is an attempt to perform the function of decision making efficiently, effectively and diligently.  It is the application of accounting techniques for providing information, designed to help all levels of management in general and top level in particular, in planning and controlling the activities of business enterprise and in decision making. It is not only concerned with decision making but also evaluating the impact of its decisions and actions.
TO SUMMARIZE  Financial accounting is concerned with the preparation of accounts  Cost accounting with cost ascertainment, cost reduction and cost control  Management accounting with decision making based on the interpretation and analysis of accounts.
TERMINOLOGY
ASSETS  Economic resources owned by business & from which future economic benefits are reaped.  Owned Physical Objects ( Tangible)  Rights ( Intangible)  Eg. Land & building, Machinery, Debtors, goodwill, Patents etc.
TYPES OF ASSETS • Land & Building • Machinery Fixed Assets • Cash • Debtors Current Assets • Discount on issue of debentures • Preliminary Expenses Fictitious Assets
LIABILITY  Amount owing by one person ( Debtor) to another person (Creditor)  Financial obligations payable to outside parties.
• Long term loans • Debentures Fixed Liability • Creditors • Short term loans Current Liability • Guarantees undertaken • Pending Financial Cases Contingent Liability
• Investment made by proprietor in the business. Capital • Withdrawal of capital. Drawings
• Articles manufactured or Purchased by business for further sale. Goods • Unsold stock at the end of an accounting period. Stock
ASSETS Capital+ Liability Owner’s Equity Outsider’s Equity
• Person who has taken debt or liable to make payment or deliver goods & services. Debtors • Person who has given debt or has a right to claim money or goods or avail services. Creditors
ACCOUNTING CYCLE
THE ACCOUNTING CYCLE  Accounting procedures are performed over a period of time.  Procedures are performed in a definite order in the accounting cycle.  The accounting period is a period of time covered by the income statement.  Usually this is a twelve month period.  The accounting cycle has sequential steps to be performed again each year.
ACCOUNTING CYCLE Identify & measure the transaction Record the transaction (JOURNAL) Classify the transaction (Ledger) Summarize the classified transactions (Trial balance) Analysis and Interpretati on (Financial statements
Rules of different accounts and basics of making an entry GOLDEN RULES OF ACCOUNTING
These are the accounts of persons with whom the business deals. There are three categories of personal accounts:  Natural personal accounts  Artificial personal accounts  Representative personal accounts TYPES OF ACCOUNTS PERSONAL ACCOUNTS:
Debit : The receiver, Credit: The giver RULE
 These are the accounts of property, assets and goods etc. These accounts may be classified into:  Tangible real accounts  Intangible real accounts REAL ACCOUNTS
Debit : What comes in Credit: What goes out RULE
 These are the accounts of expenses, losses, incomes and gains etc. These accounts are opened to explain the nature of transactions. NOMINAL ACCOUNTS
Debit : All expenses & Losses Credit: All incomes & gains RULE
CLASSIFY THE ACCOUNTS AS PER THEIR NATURE  Wages  Hyderabad Club  Discount allowed  Discount received  Unexpired insurance  Interest received  Sales  Stock  Drawing  Salary  Nominal  Artificial personal  Nominal  Nominal  Rep. Personal  Nominal  Tangible Real  Tangible Real  Rep. Personal  Nominal
CLASSIFY THE ACCOUNTS AS PER THEIR NATURE  Goodwill  Bills payable  Bad debts  Trade marks  Capital  Bad debts recovered  Sanjay  Infosys  land  Stationary  Intangible Real  Tangible Real  Nominal  Intangible real  Rep. personal  Nominal  Real personal  Art. Personal  Tangible real  Nominal
ANALYSIS OF TRANSACTIONS  Read the transactions carefully.  Find out the two accounts involved in it.  Determine the nature of accounts i.e. real, personal or nominal.  Analyze effect of transaction on business.  Apply rules
QUESTION FOR ACCOUNTING EQUATION  Amul started business with cash Rs. 60,000  Bought furniture for cash Rs. 2,000  We bought goods on credit from X for Rs. 10,000  Paid rent in advance Rs. 1,000  Sold goods on credit for Rs. 4,000  Paid to X 6,000 on account.  Received Rs. 2,000 from debtors.  Paid salary Rs. 1,200.  Withdraw for private use Rs. 2,000.
IMPORTANT POINTS  Capital Account  Drawings Account  Interest on Capital  Interest on drawings  Trade discount  Cash discount  Bad debts  Depreciation  Expenses on acquiring or installation of fixed assets
OPENING ENTRY  Ramesh has following assets and liabilities as on April 1, 2016  Cash in hand Rs.5,000  Cash at bank Rs.7,500  Stock of goods Rs.2,500  Sundry debtors Rs.8,000  Land & building Rs.20,000  Bills receivables Rs.2,000  Sundry creditors Rs.2,000  Bills payable Rs.3,000  Bank loan Rs.5,000 Pass necessary opening entry
PRACTICE QUESTION FOR JOURNAL  Capital invested Rs.50,000 in cash and a building worth Rs.80,000.  Paid wages for construction of building Rs.1,500.  Booked an order with Mr. Rakesh for Rs.4,000.  Goods given as charity worth Rs.500  Received commission from Harish Rs.100  Rs.200 owing by Mr. Mongia written of as bad debt  Rent due to the landlord Rs.500  Allow interest on capital @ 6% on capital of Rs.50,000  Charge interest on drawings Rs.200
ASSIGNMENT QUESTION NO.1  Cash in hand Rs.2,000  Cash at bank Rs.8,000  Advances from customer Rs.2,500  Bills receivables Rs.2,000  Amount due from X Rs.4,000  Stock of goods Rs.3,000  Machinery Rs.4,000  Amount due to Z Rs.1,000  Goodwill Rs.1,500  Pass opening entry in books of account.
ASSIGNMENT QUESTION NO.2  Capital invested in cash Rs.4,00,000.  At the time of investment owner brings furniture to the business worth Rs.1,00,000  Goods given as free samples for advertisement worth Rs.2,000.  Depreciation charged on furniture Rs.1,500.  Wages due but not paid Rs.1,200.  Received cash from Aamir Rs.1,450 and allowed him discount Rs.50.  Provide interest on capital Rs. 4,000  Jacob bought goods on credit worth Rs.1,000.
THANK YOU QUESTIONS ……….???????

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Financial Accounting

  • 2. BOOK KEEPING  Book-Keeping is the systematic recording of transactions in the books of accounts.
  • 3. ACCOUNTING  Is analysis and interpretation of book-keeping records.  A process of collecting, recording, classifying and summarizing the transactions and events of financial nature.
  • 4. ACCOUNTING AS AN INFORMATION SYSTEM  Accounting is said to be the language of business.  The basic objective of accounting is to make the necessary information available to a variety of decision makers about financial results and financial position of a business enterprise.  By making such information available at the right time it helps them in making rational and adroit decisions.
  • 5. USERS OF ACCOUNTING INFORMATION INSIDERS OUTSIDERS  Investors  Management  Employees  Government and its various agencies  Taxation authorities  Researchers  Public  Authorities dealing with environmental issues  Creditors  Customers
  • 6. BRANCHES OF ACCOUNTING  Financial Accounting  Management Accounting  Cost Accounting  Social Responsibility Accounting  Throughput Accounting  Human Resource Accounting  Price level Accounting/Inflation Accounting
  • 7. FINANCIAL ACCOUNTING  An original form of accounting, mainly concerned with the process of identifying, measuring, recording, classifying, summarizing, analyzing, interpreting and communicating the financial transactions and business events.  The main purpose of this branch of accounting is primarily to maintain systematic records to ascertain financial performance and financial position and to communicate the accounting information to the various interested parties.  The information provided by financial accounting about financial result and financial position is significant, but not sufficient for smooth, orderly and efficient conduct of business.  Management of today needs to be equipped with more information for structured and strategic planning and effective control of the business activities.
  • 8. COST ACCOUNTING  Cost accounting is the classifying, recording and appropriate allocation of expenditure for the determination of costs of products or services, and for the presentation of suitably arranged data for the purpose of guidance and control.  it deals with detailed study of cost mainly with reference to cost ascertainment, cost reduction and cost control.
  • 9. MANAGEMENT ACCOUNTING  Top management needs concise but distilled information for taking invincible decisions at the appropriate time.  This system of accounting is an attempt to perform the function of decision making efficiently, effectively and diligently.  It is the application of accounting techniques for providing information, designed to help all levels of management in general and top level in particular, in planning and controlling the activities of business enterprise and in decision making. It is not only concerned with decision making but also evaluating the impact of its decisions and actions.
  • 10. TO SUMMARIZE  Financial accounting is concerned with the preparation of accounts  Cost accounting with cost ascertainment, cost reduction and cost control  Management accounting with decision making based on the interpretation and analysis of accounts.
  • 12. ASSETS  Economic resources owned by business & from which future economic benefits are reaped.  Owned Physical Objects ( Tangible)  Rights ( Intangible)  Eg. Land & building, Machinery, Debtors, goodwill, Patents etc.
  • 13. TYPES OF ASSETS • Land & Building • Machinery Fixed Assets • Cash • Debtors Current Assets • Discount on issue of debentures • Preliminary Expenses Fictitious Assets
  • 14. LIABILITY  Amount owing by one person ( Debtor) to another person (Creditor)  Financial obligations payable to outside parties.
  • 15. • Long term loans • Debentures Fixed Liability • Creditors • Short term loans Current Liability • Guarantees undertaken • Pending Financial Cases Contingent Liability
  • 16. • Investment made by proprietor in the business. Capital • Withdrawal of capital. Drawings
  • 17. • Articles manufactured or Purchased by business for further sale. Goods • Unsold stock at the end of an accounting period. Stock
  • 19. • Person who has taken debt or liable to make payment or deliver goods & services. Debtors • Person who has given debt or has a right to claim money or goods or avail services. Creditors
  • 21. THE ACCOUNTING CYCLE  Accounting procedures are performed over a period of time.  Procedures are performed in a definite order in the accounting cycle.  The accounting period is a period of time covered by the income statement.  Usually this is a twelve month period.  The accounting cycle has sequential steps to be performed again each year.
  • 22. ACCOUNTING CYCLE Identify & measure the transaction Record the transaction (JOURNAL) Classify the transaction (Ledger) Summarize the classified transactions (Trial balance) Analysis and Interpretati on (Financial statements
  • 23. Rules of different accounts and basics of making an entry GOLDEN RULES OF ACCOUNTING
  • 24. These are the accounts of persons with whom the business deals. There are three categories of personal accounts:  Natural personal accounts  Artificial personal accounts  Representative personal accounts TYPES OF ACCOUNTS PERSONAL ACCOUNTS:
  • 26.  These are the accounts of property, assets and goods etc. These accounts may be classified into:  Tangible real accounts  Intangible real accounts REAL ACCOUNTS
  • 27. Debit : What comes in Credit: What goes out RULE
  • 28.  These are the accounts of expenses, losses, incomes and gains etc. These accounts are opened to explain the nature of transactions. NOMINAL ACCOUNTS
  • 29. Debit : All expenses & Losses Credit: All incomes & gains RULE
  • 30. CLASSIFY THE ACCOUNTS AS PER THEIR NATURE  Wages  Hyderabad Club  Discount allowed  Discount received  Unexpired insurance  Interest received  Sales  Stock  Drawing  Salary  Nominal  Artificial personal  Nominal  Nominal  Rep. Personal  Nominal  Tangible Real  Tangible Real  Rep. Personal  Nominal
  • 31. CLASSIFY THE ACCOUNTS AS PER THEIR NATURE  Goodwill  Bills payable  Bad debts  Trade marks  Capital  Bad debts recovered  Sanjay  Infosys  land  Stationary  Intangible Real  Tangible Real  Nominal  Intangible real  Rep. personal  Nominal  Real personal  Art. Personal  Tangible real  Nominal
  • 32. ANALYSIS OF TRANSACTIONS  Read the transactions carefully.  Find out the two accounts involved in it.  Determine the nature of accounts i.e. real, personal or nominal.  Analyze effect of transaction on business.  Apply rules
  • 33. QUESTION FOR ACCOUNTING EQUATION  Amul started business with cash Rs. 60,000  Bought furniture for cash Rs. 2,000  We bought goods on credit from X for Rs. 10,000  Paid rent in advance Rs. 1,000  Sold goods on credit for Rs. 4,000  Paid to X 6,000 on account.  Received Rs. 2,000 from debtors.  Paid salary Rs. 1,200.  Withdraw for private use Rs. 2,000.
  • 34. IMPORTANT POINTS  Capital Account  Drawings Account  Interest on Capital  Interest on drawings  Trade discount  Cash discount  Bad debts  Depreciation  Expenses on acquiring or installation of fixed assets
  • 35. OPENING ENTRY  Ramesh has following assets and liabilities as on April 1, 2016  Cash in hand Rs.5,000  Cash at bank Rs.7,500  Stock of goods Rs.2,500  Sundry debtors Rs.8,000  Land & building Rs.20,000  Bills receivables Rs.2,000  Sundry creditors Rs.2,000  Bills payable Rs.3,000  Bank loan Rs.5,000 Pass necessary opening entry
  • 36. PRACTICE QUESTION FOR JOURNAL  Capital invested Rs.50,000 in cash and a building worth Rs.80,000.  Paid wages for construction of building Rs.1,500.  Booked an order with Mr. Rakesh for Rs.4,000.  Goods given as charity worth Rs.500  Received commission from Harish Rs.100  Rs.200 owing by Mr. Mongia written of as bad debt  Rent due to the landlord Rs.500  Allow interest on capital @ 6% on capital of Rs.50,000  Charge interest on drawings Rs.200
  • 37. ASSIGNMENT QUESTION NO.1  Cash in hand Rs.2,000  Cash at bank Rs.8,000  Advances from customer Rs.2,500  Bills receivables Rs.2,000  Amount due from X Rs.4,000  Stock of goods Rs.3,000  Machinery Rs.4,000  Amount due to Z Rs.1,000  Goodwill Rs.1,500  Pass opening entry in books of account.
  • 38. ASSIGNMENT QUESTION NO.2  Capital invested in cash Rs.4,00,000.  At the time of investment owner brings furniture to the business worth Rs.1,00,000  Goods given as free samples for advertisement worth Rs.2,000.  Depreciation charged on furniture Rs.1,500.  Wages due but not paid Rs.1,200.  Received cash from Aamir Rs.1,450 and allowed him discount Rs.50.  Provide interest on capital Rs. 4,000  Jacob bought goods on credit worth Rs.1,000.

Editor's Notes

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