Financial Accounting-I BY Mr. M. VijayaRagunathan
Unit-I Introduction and Fundamentals of Accounting
Accounting • Meaning • Definition • Concepts • Conventions • Functions • Limitations • Kinds • Golden Rules
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.
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.
Contd… 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.
Contd… 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.
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.
Contd… 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.
FUNCTIONS (OR) ADVANTAGES OF ACCOUNTING 1. Keeping Systematic records 2. Protecting Business Property 3. Communicating Results to the interesting people 4. Meeting Legal Requirements
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
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.
GOLDEN RULES OF ACCOUNTING 1.PERSONAL ACCOUNT Natural (Human beings) Artificial (Banks, Company and Firms) “Debit the Receiver Credit the Giver”
Contd… 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.
Contd … 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.
Contd … • 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
Contd… 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
Contd… • 3.NOMINAL ACCOUNT: “Debit all Expenses and Losses Credit all Incomes and Gains”
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.,
Journal Journal : A transaction first entered into books of accounts chronological order called journal entry Proforma of Journal
Ledger: A transaction second time entered into books of accounts called ledger Proforma Of Ledger Capital A/c
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
Contd… 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.
Contd… • 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
Contd… 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.
Contd… 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
Assignment Double Entry System
References: • Financial Accounting- R.L. Gupta • Financial Accounting- R.S.N. Pillai and Bhagawathi
Unit-II Rectification of Errors and Bank Re-Conciliation Statement
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
Contd … 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.
Contd … 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.
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.
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.
Contd… 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.
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.
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
Assignment • Capital Expenditure and Revenue Expenditure • Capital Receipts and Revenue Receipts
References: • Financial Accounting- Arulanandham and Raman • Financial Accounting- S.C. Shukla
Unit-III Final Accounts
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
Assignment 1. Uses of Final Accounts
References: • Financial Accounting- Jain and Narang • Financial Accounting- Arulanandham and Raman