M.M.S.

- SEM I

FINANCIAL ACCOUNTING

Faculty: Subhash Dalvi

• 1.2. Financial Accounting 100 marks
• COURSE CONTENTS

1. Introduction to Accounting : Concept and necessity of

Accounting An Overview of Income Statement and Balance
Sheet.
2. Introduction and Meaning of GAAP; Concepts of Accounting:
Impact of Accounting Concepts on Income Statement and
Balance Sheet.
3. Accounting Mechanics: Process leading to preparation of Trial
Balance arid Financial Statements; Preparation of Financial
Statements with Adjustment Entries
4. Revenue Recognition and Measurement: Capital and Revenue
Items: Treatment of Income & Expenses. Preproduction Cost,
Deferred Revenue Expenditure etc.
5. Fixed Assets and Depreciation Accounting.
6. Evaluation and Accounting or inventory
7. Preparation and Complete Understanding
of Corporate Financial Statements : ‘T
’Form and Vertical Form of Financial
Statements
8. Important Accounting Standard
9. Corporate Financial Reporting — Analysis
of Interpretation thereof with reference Ratio
Analysis. Fund Flow, Cash Flow.
10. Inflation Accounting
11. Ethic Issue in Accounting
Reference text:
1 Financial Accounting. Text & Case.
Daardon & Bhattacharya
2 Financial Accounting (or Managers — T P
Ghosh
3 Financial Accounting — Reporting & Analysis—
50cc & Diamond
4 Financial Accounting. R Narayanaswamy
5 Full Text of Indian Accounting standard — Taxman
Publication
MEANING & DEFINITIONS
of BOOK KEEPING
• Book Keeping means keeping a
written record of business
transactions in a set of books.
• 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 or
money’s worth ----- R N Carter
NEED OF BOOK KEEPING
• To have permanent record of
all the business transactions
• To know names of customers
& suppliers
• To know net profit & net loss,
assets & liabilities of the
business
• To have important information
for legal & tax matters
 ACCOUNTING
• AICPA (American • AAA (American
Association of Certified Association of Accounting)
Public Accountants)
Accounting is the
Accounting is the art of
process of identifying,
recording, classifying
measuring and
and summarising, in
communicating
terms of money,
economic information to
financial transactions
permit informed
and events and
judgements and
interpreting the results
decisions by users of the
thereof
information
OBJECTIVES OF BOOK KEEPING
• To have date-wise record
• To have account-wise record
• To calculate & know yearly
profit or loss
• To know year-end financial
position
• To analyse, interpret &
communicate the accounting
information
PERSONS INTERESTED IN
ACCOUNTING
• OWNER
• EMPLOYEES
• LENDERS
• CUSTOMERS
• SUPPLIERS
• GOVERNMENT
• SOCIETY
• SHAREHOLDERS
 TERMINOLOGY
• TRANSACTION – Exchange between two
parties. It involves “Give & Take”

• CASH TRANSACTION – Goods or services

are exchanged for cash

• CREDIT TRANSACTION – Goods or

services are exchanged for cash receivable or
payable at future
• GOODS – things, articles or commodities exchanged
in a business transaction

• SERVICES – Service means the work done for

money. They do not involve any article or commodity

• PROFIT – Excess of Income over expenditure

• LOSS – Excess of Expenses over Income

• INCOME – Amount earned by sale of goods &

services
• EXPENSES – Amount paid for goods & services used in the
business

• ASSETS – Properties owned by the business like Building,

Plant, Machinery, Computers, Motor Cars, Furniture & Fixtures
etc.

• LIABILITIES – Loans borrowed from banks, relatives, friends

etc. which must be paid back in future are called liabilities

• CONTINGENT LIABILITY – Future liability. It may or may

not become an actual liability. It is not recorded in the books,
but is shown by way of a note in the balance sheet
• CAPITAL – Money put in the business by the owner.
It also includes goods or assets brought in the
business by the owner

• DRAWINGS – If the owner withdraws any money,

goods or assets from the business for his own use,
such withdrawals are called as drawings. Such
drawings reduce the amount of capital of the owner

• NET WORTH – Difference between total assets and

total outside liabilities. Net Worth = Assets -
Liabilities
• DEBTOR – A debtor buys goods & services from us
and promises to pay the price to us on an agreed date
in future. Debtor is a person who owes money to
business.

• CREDITOR – A creditor sells goods & services to

us and agrees to receive the price in future. Creditor is
a person to whom we owe money.

• EXPENDITURE – Payment made by a business to

obtain some benefit i.e. assets, goods or services
• CAPITAL EXPENDITURE – Expenditure
for obtaining an asset is known as capital
expenditure. It is an expenditure having future
benefits. It is an expenditure with long term
use (more than 1 year)

• REVENUE EXPENDITURE – Expenditure

on obtaining goods and services is known as
revenue expenditure. It is an expenditure for
running the business. It is an expenditure with
short term use (1 year or less than 1 year)
• DEFERRED REVENUE EXPENDITURE – To defer
means to postpone. It is that expenditure which is
carried forward as it will be of benefit over
subsequent period e.g. heavy advertisement
expenditure to launch a new product. The
proportionate cost related to current year is taken as
expense. The balance cost is carried forward and
written off in next year.

• ACCOUNTING YEAR – Period of 12 months

normally starting in April & ending in March of next
year. Normally profit is found out for an accounting
year.
 TYPES OF ACCOUNTS
• PERSONAL ACCOUNTS – Accounts of all
persons like Dena Bank a/c, Garware Institute A/c,
Mumbai University A/c, Sachin Tendulkar A/c etc.

• REAL ACCOUNTS – Accounts of all properties &

assets like CASH Account, Plant & Machinery A/c,
Building A/C etc.

• NOMINAL ACCOUNTS – Accounts of all

expenses & losses and Incomes & gains like
Telephone charges a/c, Interest Recd A/C, Electricity
charges a/c, Salary account etc.
 GOLDEN RULES
PERSONAL ACCOUNT
DEBIT - THE RECEIVER
CREDIT – THE GIVER

REAL ACCOUNT
DEBIT – WHAT COMES IN
CREDIT – WHAT GOES OUT

NOMINAL ACCOUNT
DEBIT – ALL EXPENSES & LOSSES
CREDIT – ALL INCOMES & GAINS
 DOUBLE ENTRY ACCOUNTING
• Recording of transactions & events follows a
definite rule.
• Each transaction or event has two aspects
DEBIT (Dr.) & CREDIT (Cr.)
• Every Debit has an equal & opposite Credit
• Every transaction should be recorded in such a
way that it affects two sides – DEBIT &
CREDIT
 ACCOUNTING CYCLE

1. SELECTION OF TRANSACTION – Select

only those transactions which are
- Financial in nature and
- Which arise in the course of the business
2. ANALYSIS OF TRANSACTION – Analyse
the transaction to find out
a. Whether the business has received any
benefit such as goods, services or assets and
in return , any amount is paid in cash or is
payable
b. Whether any such benefit has gone out of
business and in return any amount is
received in cash or is receivable
3. CLASSIFICATION OF ACCOUNTS – Find
out which items or persons are involved in the

transaction and classify them in to 3 main

types such as

a. Personal A/c
b. Real A/c
c. Nominal A/c
4. APPLYING RULES OF DEBIT OR CREDIT

Depending upon the nature of a transaction

a. DEBIT – The A/c receiving the benefit or

amount

b. CREDIT – The A/c giving the benefit or

amount
• 5. RECORDING IN JOURNAL OR
SUBSIDIARY BOOKS – Transactions are
recorded as and when they occur, in a daily
book called Journal including subsidiary books
like Cash Book, Bank Book, Purchase
Register, Sales Register etc.

• 6. POSTING AND TOTALLING OF

LEDGER ACCOUNTS – From the journal,
the amounts debited or credited are transferred
(posted) to the debit and credit of the
concerned accounts in a book called Ledger
• 7. TRIAL BALANCE – At the end of the year trial
balance is prepared which shows the closing balances
of all accounts in the ledger

• 8. PROFIT & LOSS A/C – The balances of Income

and Expenses accounts at the end of the year are
summarised in the P/L A/c. The difference between
the income & expenses shows the profit or loss for
the year

• 9. BALANCE SHEET – The balances of assets,

liabilities and capital accounts at the end of the year
are summarised in the Balance Sheet.
 BRANCHES OF ACCOUNTING
• FINANCIAL ACCOUNTING

• COST ACCOUNTING

• MANAGEMENT/MANAGERIAL ACCOUNTING

• AUDITING

• TAXATION
FINANCIAL ACCOUNTING

• Original Form of Accounting

• Confined to Preparation of
Financial Statements
• Objective is to Calculate
Profit / Loss made during the
year & to exhibit Financial
Position of the Business
COST ACCOUNTING
• Function of cost
accounting is to
ascertain the cost of the
product and to help the
management  in the
control of cost
• Costing is a technique of
ascertaining cost of a
particular product or
service
MANAGEMENT ACCOUNTING
• It is an accounting for
management
• Provides information to
the management
• It is reproduction of
financial accounts in such
a way as will enable the
management to take
decisions & control
various activities
AUDITING

• Examination of books, accounts,

vouchers and other records by a
practicing Chartered Accountant
appointed for the purpose
• Reporting to the members /
management whether the B/S &
P/L A/c as on particular date
shows true & fair view of the
state of affairs of the business
TAXATION

• Computation of Taxable
Income & Tax Payable
thereon
• Reconciliation between
accounting profit &
taxable profit
• Statutory compliance
ACCOUNTING CONCEPTS
Elephant, Monkey, Cat, Goat, Parrot & Ant Playing Match

Entity
Matching Money
Measurement

Prudence Cost

Accrual Going
Concern
Periodicity
 ACCOUNTING CONCEPTS
EXPLAINED
• The Entity Concept – A business is an
artificial entity distinct & separate from its
owner. For accounting purposes a
business & its owner are two separate
persons
• Money Measurement Concept – For
accounting purposes each transaction &
event must be expressible in monetary
terms.
• The Cost Concept - Assets such as Land,
Buildings, Plant & Machinery etc. and
obligations such as Loans, Public Deposits
etc. should be recorded at historical cost
(acquisition)
• The Going Concern Concept – It is
assumed that the business organization
would continue its operations for a long
time
• Periodicity Concept – The results of
operations of entity are measured
periodically i.e. in each accounting period.
Calendar Year – January to December
Fiscal Year – April to March
As per Income Tax Act, Accounting Period
should always be starting from April -
March
• Accrual Concept – Incomes & Expenses
should be recognized as and when they
are earned and incurred, irrespective of
whether the money is received or paid in
connection thereof. E.g. Rent paid for 15
months in advance on January 2009. In
this case Rent for 3 months should be
recognized in FY 08-09 & Rent for 12
months should be recognized in FY 09-10
• Concept of Prudence – It states that
anticipate no profits but provide for all
possible losses. Prudence is the inclusion
of a degree of caution in the judgment of
estimates. Expected losses should be
accounted for but not anticipated gains
• Matching Concept – Revenue earned in
an accounting year is matched with all the
expenses incurred during the same period
to generate that revenue. Matching
concept suggest that to find out the
profitability, the expenses incurred to
generate revenue are to be matched
against that revenue
ACCOUNTING SEQUENCE
Preparation Transaction
Of Financial / Event
Statements
Trading A/C, Preparation
Profit & Loss A/C, Of Vouchers
Balance Sheet etc.

Recording in
Preparation Primary Books
Of JOURNAL
Trial Balance Postings in
Secondary
Books
LEDGER
 VOUCHER PREPARATION
• After the event is happened, physical
vouchers based on certain documents like
Bill, Delivery Challan, Receipt, Reports,
Purchase Order, Quotations etc. are
prepared & the same are filed for future
reference
 RECORDING IN PRIMARY BOOK
• All the events are recorded in primary book called “JOURNAL”
in a double entry system of book keeping.
• Format of JOURNAL is as follows

Dr. / Vr. Dr. Cr.

Sr.No. Date Particulars Cr. No. L/F Amt Amt.

1 24.04.2009 Plant & Machinery A/C Dr. 1 12 500  

    To Cash Cr. 1 14   500

(Being Purchase of
Machinery for cash from Mr.
    Sam)          
 SECONDARY BOOKS - LEDGER
DR. Plant & Machinery Account CR.
Date Particulars JF Amount Date Particulars JF Amount
24.04.09 To Cash   500 30.04.09 By Balance   500
               
      500       500
               

DR. Cash Account CR.

Date Particulars JF Amount Date Particulars JF Amount
30.04.09 To Balance   500 24.04.09 By P&M   500
               
      500       500
               
 TRIAL BALANCE
• It is a list of various accounts showing their
balances (either DR. or CR.) as on particular
date. Based on such TB financial statements
are prepared.

Trial Balance as on 31.03.2009

Sr.No. Name of the Account Dr. Bal. Cr.Bal.

1 Plant & Machinery 500  

2 Cash   500

       

  Total 500 500

 Trading Account
TRADING A/C for the year ended 31.03.2009

Dr. Cr.

Particulars (Trad Exp) Amount Particulars (Trad Income) Amount

To Opening Stock xx By Sales xx

To Purchases xx By Closing Stock xx

To Wages xx    

To Gross Profit c/d xx    

  xxx   xxx
 Profit & Loss Account
PROFIT & LOSS A/C for the year ended 31.03.2009

Dr.     Cr.

Particulars (Expenses) Amount Particulars (Incomes) Amount

To Salary xx By Gross Profit b/d xx

To Printing & Station xx By Commission Recd xx

To Telephone xx By Discount Recd xx

To Advertisement xx By Interest Recd xx

To Electricity xx By Remuneration Recd xx

To Postage xx By Profit on Sale of Asset xx

To Fax Exp xx    

To Net Profit c/d xx    

  xxx   xxx
 JOURNAL
• Journal means a daily book
• Journal means a book to record daily
transactions
• As soon as any financial transaction takes
place, it is recorded in the Journal. Hence
it is called the book of First, Original or
Prime entry
• Journal entry is passed according to the
rules of Debit & Credit.
 LEDGER
• JOURNAL – Date wise record
• LEDGER – Account wise record

• Ledger A/c is a statement showing the

summary of transactions and the final balance
in respect of a person or an item. Each A/c is
kept on a separate page or folio. All the
pages/folios are bound together in a book
called LEDGER
 FORMAT OF LEDGER A/C
DR. ……………. A/c (Name of the Ledger A/c) CR.

DATE PARTICULARS J/F AMT DATE PARTICULARS J/F AMT

               

xx To …….. A/c - xxx xx By …….. A/c - xxx

               

      xxxx       xxxx

               
 TRIAL BALANCE
• TRIAL BALANCE is a statement containing
the list of the balances of all Ledger Accounts
on a particular day
• It is a concise summary of ledger balances
• It gives an idea of balances of various accounts
of persons, assets, income and expenses at a
glance
• It is a link between ledger and the final
accounts
 FORMAT OF TRIAL BALANCE
TRIAL BALANCE OF …………. AS ON …………

Sr.No Debit Credit

. Particulars / Name of the Ledger A/c L/F Amt Amt
1 Purchases A/c   xx  
2 Sales A/c     xx
3 Purchase Returns A/c     xx
4 Sales Returns A/c   xx  
5 Cash A/c   xx  
6 Bank A/c   xx  
7 Capital A/c     xx
8 Salaries A/c   xx  
9 Furniture A/c   xx  
10 Sundry Debtors A/c   xx  
11 Sundry Creditors A/c     xx
  Total   xxxx xxxx
 STEPS IN EXTRACTING TRIAL
BALANCE
• RECORDING - the transactions in Journal

• POSTING - the transactions in Ledger

• BALANCING - the Ledger Accounts

• TRIAL BALANCE – writing the balances of

the Ledger Accounts
 Ledger Accounts
Normally Having Dr. & Cr. Balances
• DR. BALANCES • CR. BALANCES
1. Drawings 1. Capital A/c
2. Sundry Debtors 2. Sundry Creditors
3. Bills Receivable 3. Bills Payable
4. Bank 4. Bank Overdraft
5. Loans Given 5. Loans Taken from
6. Deposits Given 6. Deposits Taken from
7. Advances Given 7. Advances Taken from
8. Cash A/c 8. Sales
9. Assets A/c 9. Return Outwards
10. Purchases 10. Income & Gains
11. Return Inwards
12. Opening Stock
13. Expenses & Losses
INDIVIDUAL PROJECT/ASSIGNMENT
• TOPIC
ACCOUNTING • Submission Date
STANDARDS ISSUED 16th October, 2010
TILL DATE
• Neatly typed
- Meaning, Who sets,
Factors considered, /printed/handwritten &
Points Covered, spiral bounded
Objective, Benefits etc. • Specify the name, roll
- List along with AS-No. no. division, subject etc.
- Explanation in full • Total Marks 40
details for any 4
accounting standards