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The whole accounting years divided into various segments according to the period ... Accounting principles and practices should not be changed year to year. ...

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Financial Accounting - I

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Financial Accounting-I

BY

Mr. M. VijayaRagunathan


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Unit-I

Introduction and Fundamentals of Accounting


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Accounting

  • Meaning

  • Definition

  • Concepts

  • Conventions

  • Functions

  • Limitations

  • Kinds

  • Golden Rules


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Meaning and Definition

  • Meaning- : Language of business to communicating each other.

  • Definition- : As per AICPA” Art of recording , Classifying and Summarizing in a 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. 


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Concepts of Accounting

  • Business Entity Concept:

    Business is always separated from the owners. There is no connection between owner and business

  • Going Concern Concept:

    Business will run for indefinite period or long period.

    3. Money measurement Concept:

    Only the monetary based transaction will be recorded in the accounting books, other transaction will be ignored from the accounting books.


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4. Dual Aspect Concept:

For every debit there must be a corresponding credit or Total Assets = Total Liabilities.

5. Accounting period Concept:

The whole accounting years divided into various segments according to the period or time(12months).

6. Cost Concept:

Cost price is only recorded in the accounting books, market price will be ignored from the accounting books.


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7. Matching Concept:

At the end of the period total expenses matched with total revenue to find the profit or loss.

8. Material Concept:

Only the material based will be taking place in the accounting books whereas others will be ignored.


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Conventions

1.Conventions of Disclosure:

Material based information (Profit and Loss A/c, Balance Sheet) disclosed to owners, investors and government bodies.

2. Conventions of Consistency:

Accounting principles and practices should not be changed year to year. It may continue for long period of time.


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3. Conventions of Conservatism:

Its all about adopting policy “Playing Safe”. Loss can be taken into consideration. Profit will be ignored.

4. Conventions of Materiality:

Only the material based will be taking place in the accounting books whereas others will be ignored.


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FUNCTIONS (OR) ADVANTAGES OF ACCOUNTING

1. Keeping Systematic records

2. Protecting Business Property

3. Communicating Results to the interesting people

4. Meeting Legal Requirements


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LIMITATIONS OF ACCOUNTING

1. Only financial based information can be recorded

2. Cost concept (people looking balance sheet of company least manner)

3. Confliction between Concepts

4. Personal Judgment of Accountant


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KINDS OF ACCOUNTING

1. Financial accounting : concerned only with the financial state of affairs and financial results of operation.

2. Management accounting: To provide necessary information about funds, costs, profit etc. As it enables the management to discharge its functions properly.

3. Cost Accounting: It was developed to overcome the limitations of financial accounting. The main purpose of cost accounting is to analyze the expenditure involved.


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GOLDEN RULES OF ACCOUNTING

1.PERSONAL ACCOUNT

Natural (Human beings)

Artificial (Banks, Company and Firms)

“Debit the Receiver

Credit the Giver”


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2. REAL ACCOUNT( Assets)

“Debit what comes in

Credit what goes out”

ASSETS: Anything which will enable the firm to get cash or benefit in a future.

I) Tangible : Those which can be seen, feel and touched that is, which have physical Existence.


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1. Current Assets : Those assets which can be converted into cash within short period of Time or normal business cycle or within one year.

2. Fixed Assets :Those assets which are purchased for the purpose of operating the business but not for resale.


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  • 1.Current assets ( Examples) 2. Fixed assets ( Examples)

  • a) Cash in hand a) Land

  • b)Cash at bank b) Building

  • c)Closing stock c) Plant and d)Machinery

  • e)Bills Receivable d) Motor car

  • f)Short-term Investment e) Premises etc

  • g)Prepaid Expenses

  • e)Sundry Debtors etc


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II) Intangible : Those which cant be seen, and touched that is but feel it, which Does not have physical existence.

  • a) Goodwill

  • b) Patents rights

  • c) Copy rights


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  • 3.NOMINAL ACCOUNT:

    “Debit all Expenses and Losses

    Credit all Incomes and Gains”


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  • A)Expense :Income:

  • a) Salaries Paid a) Rent received

  • b) Rent Paid b) Commission received

  • c) Commission c) Interest received etc.,

  • d) Interest Paid

  • e) Advertisement

  • f) Fright charges etc.,


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Journal

Journal : A transaction first entered into books of accounts chronological order called journal entry

Proforma of Journal


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Ledger: A transaction second time entered into books of accounts called ledger

Proforma Of Ledger

Capital A/c


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Subsidiary books

All sub divided books called subsidiary books.

1. Purchase book: Only the credit purchase of goods, meant for resale will take place on the purchase book

2. Sales book : Only the credit sales of goods, meant for resale will take place on the sales book


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3.Purchase return book (Return outwards book): Goods, which are purchased on credit , may be returned to the supplier.

4.Sales Return book ( Return inwards book): Goods , which are sold for credit may be returned to company, if they are defective.


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  • 5.Cash book : Transaction connected with cash like buying and selling it can be classified into following methods:

    • Simple cash book

  • Double column cash book

  • Triple column cash book

  • Petty cash book


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6.Bills receivable book: Goods are sold for credit to customers with an agreement written by company and counter signed by customer called bills receivable book.

7.Bills Payable book:Goods are purchased for credit from Suppliers with an agreement written by suppliers and counter signed by company called bills payable book.


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8. Journal Proper: There are certain transaction which cannot be entered in through any subsidiary books and such transaction entered in the form of journal, called journal proper. Like opening entries, closing entries and adjusting entries


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Problem Solving


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Assignment

Double Entry System


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References:

  • Financial Accounting- R.L. Gupta

  • Financial Accounting- R.S.N. Pillai and Bhagawathi


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Unit-II

Rectification of Errors and

Bank Re-Conciliation Statement


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Rectification of Errors

  • An error is a mistake and rectification means correcting the mistakes that have occurred.

    Types of Errors

  • Error of Principle

  • Error of Omission

  • Error of Commission

  • Error of Compensation


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1. Error of principle

When some fundamental principle of accountancy is violated while recording the transaction.

Example

Capital expenditure treated as revenue expenses

2. Error of omission

A transaction completely omitted in the books of accounts.


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3. Error of commission

These are the errors which caused due to wrong posting, wrong totaling, wrong casting of the subsidiary books, wrong balancing.

4. Error of compensation

If the effect of one error is neutralized by the effect of some other error, such errors are called compensating errors.


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Bank Re-conciliation Statement

  • Meaning:

    A statement reconciling as at a particular date the balance of cash at bank as shown in an enterprise own records and that indicated on the bank statement. In principle the two balances should be equal and opposite but difference may arise for number of reasons.


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Causes of Disagreement

1. Cheques issued but not presented for payment.

2. Cheques paid into bank but not credited by the bank.

3. Amount directly deposited into bank but not entered in the cash book.

4. Bank charges debited in the pass book but not entered in the cash book.

5. Dividend, interest collected by the bank but not entered in the cash book.


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6. Bankers allow interest on bank but not entered in the cash book.

7. Dishonor of cheques not entered in the cash book.

8. Credit if any in the passbook.

9. Debit if any in the passbook.

10. Subscription, premium, etc., paid by the banker under standing orders.


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Need and Importance

  • The importance of this statement lies in the fact that it ensures that the bank balance shown by the cash book is reconciled with that of the bank pass book.

  • In the absence of Bank Reconciliation statement, the customer cannot be sure of the correctness of the bank balance depicted by the cash book.


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Debit-credit balances

  • Cash book shows debit balances = favourable balance

  • Cash book shows credit balances = unfavourable balance/overdraft

  • Pass book shows credit balances = favourable balance

  • Pass book shows debit balances = unfavourable balance/overdraft


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Problem Solving


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Assignment

  • Capital Expenditure and Revenue Expenditure

  • Capital Receipts and Revenue Receipts


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References:

  • Financial Accounting- Arulanandham and Raman

  • Financial Accounting- S.C. Shukla


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Unit-III

Final Accounts


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Final Accounts

  • Trading Account: Trading account is prepared mainly to know the profitability of goods bought or manufactured sold by the businessmen. Difference between the selling price and cost price of the goods is that gross results.

  • Profit and Loss account: To know the net profit or net loss of the business activities after adjusting Office , administrative, selling and distribution expenses

  • Balance Sheet: To know the financial position of the company like assets and liabilities of the business. It contains two sides Assets and Liabilities


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Trading A/c


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Profit and Loss A/c


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Balance Sheet


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Problem Solving


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Assignment

1. Uses of Final Accounts


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References:

  • Financial Accounting- Jain and Narang

  • Financial Accounting- Arulanandham and Raman


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Unit-IV

Depreciation


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Depreciation

  • Meaning:

    Fall in the value and utility of assets due to their constant use and expiry of time is termed as depreciation


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Causes of Depreciation:

  • Due to the constant use due to the wear and tear arise in fixed assets resulting in their values.

  • Value of assets decreases with the passage of time

  • Due to new invention and techniques.

  • By permanent fall in market price.

  • Due to accident or depletion.


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Methods of Depreciation

1. Fixed Installment/ Straight Line Method

Under this method, amount of depreciation remains equal from year to year.

2. Diminishing Balance Method

The amount of depreciation charged year after year also goes on declining.

3. Annuity Method

It is assumed that the amount spend in the purchase of assets is an investment which should interest.


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4. Depreciation Fund Method

This method not only takes depreciation into account but also makes provision for the replacement of asset when it becomes useless.

5. Revaluation Method

Compare the value of assets at the end of the year with the value in the beginning of the year.

6. Depletion Method

Depletion means exhausting of natural resources,


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Assignment

1. Advantages and Limitations of Depreciation


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References:

  • Financial Accounting- R.L. Gupta

  • Financial Accounting- S.C. Shukla


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Unit-V

Consignment and JointVenture


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Consignment

Meaning

Consignment is an arrangement under which the manufacturer or wholesaler sends his goods at his own risk to his agent in a different place for the purpose of sales on commission basis. The person who sends the goods is known as consignor. The ownership of the goods remains with the consignor. The person to whom the goods are sends for sales is known as the consignee or the agent.


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Important Terms

1. Proforma Invoice

When the consignor sends the goods to the consignee, he forwards a statement showing the particulars of the goods such as quality, quantity, price etc

2. Commission

Consignor pays commission to consignee for selling his goods. Commission is generally calculated at fixed percentage of total sales as per terms laid by the con


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3. Recurring Expenses

These expenses are incurred after the goods have been received at consignee’s go down.


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4. Non Recurring Expenses

Expenses are incurred for bringing the goods from the place of the consignor to the place of the consignee. Hence all the expenses incurred till the goods reach the godown of the consignee are non recurring expenses.


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Joint Veture

Meaning:

Joint venture is a business venture where two or more person agrees to undertake jointly a particular venture. Joint venture is a particular partnership. It is defined as “the kind of business proposition where two or more persons jointly venture to complete a specific business undertaking on agreed conditions to share the profit or loss arising there from, on a temporary partnership basis until its completion.”


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Characteristics of Joint Venture

  • Joint venture has no firm name.

  • It is an agreement between two or more persons to share profit and losses on agreed proportion.

  • The agreement is valid only for a specific venture alone.

  • The members of the venture are known as the co-ventures.

  • As soon as the completion of the task agreement of the venture comes to an end.


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Problem Solving


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Assignment

1. Current Analysis of Joint Venture Firms in India


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References:

  • Financial Accounting- R.S.N. Pillai and Bhagawathi

  • Financial Accounting- S.C. Shukla


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