FINANCIAL ACCOUNTING - 1

• SYLLABUS
• UNIT-1. THEORETICAL FRAMEWORK AND PRACTICAL TRANSACTION -10%
• UNIT -2.SALE OR CONVERSION OF PARTNERSHIP FIRM TO A LIMITED
COMPANY – (PRACTICAL) -30%
• UNIT -3. STRUCTURE OF BALANCESHEET AS PER COMPANIES ACT, 2013
(THEORY AND PRACTICAL) – 30%
• UNIT -4. BRANCH ACCOUNTING –(THEORY AND PRACTICAL) – 30%
ACCOUNTING CONCEPT
AND CONVENTIONS
 Accounting
“Accounting is a process of systematically recording the monetary
transaction of a person or a business relating to a definite time period
in the books of accounts”
 Advantages
1) Information about business transactions
2) Information about income and expenses
3) To know gross profit
4) To know net profit
5) Comparison with past results
6) To know financial position
7) Determine the tax liability
8) Control over employees
9) Useful to stake holders
USER OF FINANCIAL ACCOUNTING
INFORMATION
1.Investors
Need information about the profitability, dividend yield and price
earnings ratio in order to assess the quality and the price of shares of a
company
2. Lenders
Need information about the profitability and solvency of the business
in order to determine the risk and interest rate of loans
3. Management
Need information for planning, policy making and evaluation
4. Suppliers and trade creditors
Need information about the liquidity of business in order to access the
ability to repay the amounts owed to them
5. Government
Need information about various businesses for statistics and formulation of
economic plan.
6. Customers
Interested in long-term stability of the business and continuance of the supply of
particular products.
7. Employees
Interested in the stability of the business to provide employment, fringe benefits
and promotion opportunities.
8. Public
Need information about the trends and recent development.
 1. Business entity concept
Accounting concepts
2. Money measurement concept
3. Going concern or continuity concept
4. Cost concept
ACCOUNTING CONCEPT
It refers to basic rules, 5. Realisation principal
assumptions and principles
which act as a primary 6. Accrual concept
standard for recording
business transactions and 7. Accounting period
maintaining books of
accounts.
8. Consistency concept
9. Conservatism concept
10. Materiality concept
11. Full disclosure
1. Business Entity Concept:
Business considered to be distinct from its owners-proprietors, partners or
members.
Considered as two distinct and separate entities.
Transaction has to be recorded from point of view of business and not owners.
Cash contributed by the proprietor, for example, adds to the cash resources of
the business and hence, is debited to Cash account, though it reduces the cash
resources of the proprietor. The businessman is just like a creditor of the
business.
Any private and personal incomes and expenses of the owner(s) should not be
treated as the incomes and expenses of the business. E.g. Insurance premiums
for the owner’s house should be excluded from the expense of the business or
The owner’s property should not be included in the premises account of the
business
2. Money measurement concept
As per this concept only monetary transactions are recorded in the books of
accounts.
Measurement of business transactions in money helps in understanding the state
of affairs of the business in better way.
Accounting does not give the picture of non monetary items.
It is due to this concept that 1. Recording in terms of money and 2. Recording
only monetary items.
The principle suffers from two major limitation:
a) Transaction and events that cannot be measured in money term are not
recorded in the book of account.
b) The value of money is considered to have static value as the transaction are
recorded at the value as the transaction date.
3. Going Concern Concept 4. Cost concept:
It is the basic idea that business will Asset is ordinarily recorded in the
continue for a long time while recording and books at the price at which it was
reporting the business transactions. acquired i.e. at its cost price.
It is due to concept that Though recorded in the books at cost,
1. Proper distinction is made between capital in the course of time, they become
and revenue expenditure. reduced in value on account of
depreciation charges.
2. Assets are classified into current assets and
fixed assets. Also Known as historical cost concept.
3. Liabilities are classified into short term Assets do not reflect the real worth
liabilities and long term liabilities. i.e. Price level changes
4. Use its fixed Assets till the end of their
useful life.
5. Realisation principle
Revenues should be recognized when the major economic activities have been
completed
Sales are recognized when the goods are sold and delivered to customers or services
are rendered
Recognition of revenue
The realization concept develops rules for the recognition of revenue
The concept provides that revenues are recognized when it is earned, and not when
money is received
Since revenue is a principal component in the measurement of profit, the timing of its
recognition has a direct effect on the profit
6. Accrual Concept:
Accrual is concerned with expected future cash receipts and payments.
Make record of all expenses and incomes relating to accounting period whether
actual cash has been disbursed or received or not.
For e.g. purchases and sales of goods on credit, rent (not yet paid), salaries
outstanding etc.

7. Accounting period concept:

Divides entire indefinite life of business into smaller periods.
12 months considered as one accounting period. Reports the results of the activity
undertaken in ‘specific period’.
8. Convention of Consistency
Companies should choose the most suitable accounting methods and treatments,
and consistently apply them in every period.
Changes are permitted only when the new method is considered better and can
reflect the true and fair view of the financial position of the company.
The change and its effect on profits should be disclosed in the financial statements.

9. Convention of Conservative
It takes into consideration all prospective losses but not the prospective profits. The
application of this concept ensure that the financial statements present a realistic
picture of the state of affairs of the enterprise and do not paint a better picture than
what it actually is the concept of conservatism needs to be applied with more
caution and care so that the results reported are not distorted.
10. Convention of Materiality
The materiality Principle refers to the relative importance of an item or an event according
to the American accounting association “an item should be regarded as material if there is a
reason to believe that knowledge of it would influence the decision of an informed
investor". Thus, whether an item is material or not will depend on its nature and/or amount.
Only significant transactions recorded.
Insignificant transactions should find no place in thebooks of accounts.

11. Convention of Full Disclosure

“There should be complete and understandable reporting on the financial statement
of all significant information relating to the economic affairs of the entity” Apart
from legal requirements, good accounting practice require all material and
significant information should be disclosed whether information should be disclosed
or not always depends on materiality of the information.
Financial statements should be prepared to reflect a true and fair view of the
financial position and performance of the enterprise
All material and relevant information must be disclosed in the financial statements