Financial Accounting

MBA Semester I
Syllabus
Unit Topic

1 Introduction to Accounting

2 Journal & Ledger

3 Trial balance

4 Final Accounts

5 Depreciation Accounting

6 Bank Reconciliation Statement

COURSE LEARNING OUTCOMES:
Upon completion of course, the students will be able to:
• CO1: Gain familiarity with the basic concepts of Accounting.
• CO2: Apply accounting principles to record and classify business transactions.
• CO3: Analyse the impact of accounting transactions on financial statements.
• CO4: Determine the impact of accounting adjustments on financial statements.
• CO5: Prepare financial statements for businesses of varying complexity.
Introduction to Accounting
UNIT I
Unit 1: Introduction to Accounting
• Introduction to Book-keeping and Accounting
• Need and importance of Accounting
• GAAP-Accounting Assumptions, Principles and Concepts
• Indian Accounting Standards (Ind-AS) and IFRS (IAS)
• Basic Terminology of Accounting
• Concept of Accounting Equation
Introduction
• Wherever money is involved, accounting is required to account
for it.
• Accounting is referred to as the language of business.
• The basic purpose of any language is to serve as a means for
communication.
• Accounting serves this function.
Accountancy, Accounting & Book-
keeping
• Accountancy:
• It refers to a systematic knowledge of accounting. It explains ‘why to
do’ and ‘how to do’, of various aspects of accounting. How to prepare
books of accounts, summarise accounting information and
communicate it to interested parties.
• Accounting:
• It refers to the actual process of preparing and presenting accounts. It
is the art of putting knowledge into practice.
• Book-Keeping:
• It is a part of accounting and is concerned with record-keeping or
maintenance of books of accounts.
Book-keeping
• The art of keeping permanent records of business transactions is book-
keeping.
• Book-keeping is the art of recording business dealings in a set of books. –
J. R. Batliboi
• Book-keeping is the science and art of correctly recording in the books of
accounts, all those business transactions that result in the transfer of
money’s worth. – R. N. Carter.
• Book-keeping is an activity concerned with recording and
classifying financial data related to business operations in order
of occurrence.
• Book-keeping involves:
• Collection of basic financial information
• Identification of events and transactions with financial character, i.e.,
economic transactions
• Measurement of economic transactions in terms of money
• Recording of financial effects of economic transactions in order of its
occurrence
• Classifying effects of economic transactions
• Preparing organized statement known as Trial Balance
Definition
• Accounting is “the 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”. - American Institute of
Certified Public Accountants (‘AICPA’)
• Accounting, also known as accountancy, is the measurement,
processing, and communication of financial and non financial
information about economic entities such as businesses and
corporations. Accounting, which has been called the “language
of business”, measures the results of an organization’s economic
activities and conveys this information to a variety of
stakeholders, including investors, creditors, management, and
regulators. Practitioners of accounting are known as
accountants. The terms “accounting” and “financial reporting”
are often used as synonyms.
Meaning of Accounting

• Accounting as an information system is the process of

identifying, measuring, and communicating the economic
information of an organisation to its users, who need this
information for decision-making.
Book-keeping v/s Accounting
Activities covered under Accounting

Communicati
Identifying Measuring Recording Classifying Summarizing Analysing Interpreting
ng
Activities covered under Accounting

Identifying Measuring Recording Classifying Summarizing Analysing Interpreting Communicating

Attributes of Accounting

Accounting is an Art

It involves recording, classifying

and summarizing

It records transactions in terms

of money

It records only those transactions

and events which are of financial
character

It is the art of interpreting the

results of operations
Objectives of Accounting
• Providing Information to the Users for Rational Decision making
• Systematic Recording of Transactions
• Ascertainment the results of above Transactions
• Ascertain the Financial Position of Business
• To Know the Solvency Position
Accounting Cycle
Journalising –Recording in Journal

Posting – Transferring to Ledger

Balancing – Ledger Accounts

Trial Balance – Preparing Trial Balance

Income Statement – Prepare Trading and P&L Account

Primary Objectives of Accounting
• To maintain records
• To calculate results
• To ascertain the financial position
• To communicate the results to users
Users of Accounting Information
• Creditors
• Investors
• Management
• Employees
• Tax Authorities
• Customers
• Government
• Public
Qualitative Characteristics of Financial
Statements

Understandability Relevance

Reliability Comparability
Basic Accounting Terminologies
• Entity
• Event
• Transaction
• Voucher
• Entry
• Assets
• Liabilities
• Capital
• Drawings
• Purchases
• Sales
• Stock
• Trade debtors
• Trade creditors
• Receivables
• Payables
• Expenditure
• Income
• Gains
• Losses
• Revenue
• Net Profit
• Net Loss
Book-Keeping Systems

Single Entry Book-Keeping System

Double Entry Book-Keeping System

Accounting Concepts
• Accruals Concept - Accrual basis accounting is an accounting method that records revenue and
expenses when they are earned or incurred, rather than when cash is received or paid.
• Conservatism Concept - Revenue is only recognized when there is a reasonable certainty that it
will be realized. In contrast, expenses are recognized sooner when there is a reasonable possibility
that they will be incurred.
• Consistency Concept - Once a business chooses a specific accounting method, it should continue
using it on a go-forward basis.
• Economic Entity Concept - The transactions of a business are to be kept separate from those of
its owners.
• Going Concern Concept - Financial statements are prepared assuming the business will remain
in operation for years.
• Matching Concept - The expenses related to revenue should be recognized in the same period in
which the revenue was recognized.
• Materiality Concept - Materiality is an accounting principle which states that all items that are
reasonably likely to impact investors’ decision-making must be recorded or reported in detail in a
business’s financial statements using GAAP standards.
Types of Accounts

These are accounts related

Personal Account
to persons

These are accounts related

Types of Accounts Real Account to assets or properties or
possessions

These accounts are related

Nominal Account to expenses or losses and
incomes or gains
Golden Rules of Accounting
Personal Real Nominal
Account Account Account
Debit what Debit all
Debit the
comes into expenses or
receiver
business losses

Credit what Credit all

Credit the
goes out of income or
giver
business gains
GAAP
• GAAP, or Generally Accepted Accounting Principles, is a commonly recognized set of
rules and procedures designed to govern corporate accounting and financial reporting in
the United States (US).
• The US GAAP is a comprehensive set of accounting practices that were developed jointly
by the Financial Accounting Standards Board (FASB) and the Governmental Accounting
Standards Board (GASB), so they are applied to governmental and non-profit accounting
as well.
• In India, financial statements are prepared on the basis of accounting standards issued by
the Institute of Chartered Accountants of India (ICAI) and the law laid down in the
respective applicable acts (for example, Schedule III to Companies Act, 2013 should be
compulsorily followed by all companies).
GAAP - Accounting Assumptions

Accounting Money Accounting

Going Concern
Entity Measurement Period
Assumption
Assumption Assumption Assumption
GAAP - Principles and Concepts
• Duality Principle
• Revenue Recognition Principle
• Historical Cost Principle
• Matching Principle
• Full Disclosure Principle
• Objectivity Principle