Unit-1 :- Introduction of Financial Management Accounting, Book

Keeping & Recording

Meaning of Accounting:

• Book-keeping is a part of Accounting. Accounting is part of Accountancy.

• Accounting means recording, summarising, analysing and reporting financial transactions.
• Accountancy on the other hand refers to the interpretation of financial data collected
through accounting and communicating it in the form of financial statements to all concerned parties.
Importance of Accounting

1. It serves as a historical record.

2. It facilitates the preparation of financial statements.
3. It supplies information to interested persons
4. It helps the management in taking important business decisions.
5. It facilitates comparative study of the performance of business over different periods.
6. It provides evidence in case of disputes.
7. It helps to forecast the future.
8. It provides information for judging the efficiency of business.
9. It is useful in getting loans.
10. It helps in valuation of good will.
11. It helps in controlling expenses.
12. It helps in controlling employees.
13. It helps in prevention and detection of errors and frauds. Accounting Concepts,

Conventions and Principles

Some of the important concepts are as follows:

1) Business Entity: This concept implies that a business unit is separate and distinct from the owner
or owners, that is, the persons who supply capital to it. Based on this concept, accounts are prepared from
the point of view of the business and not from the owner's point of view. Hence, the business is liable to
the owner for the capital contributed by him/her.

According to this concept, only business transactions are recorded in the books of accounts. Personal
transactions of the owners are not recorded.

2) Money Measurement: This concept implies that only those transactions, which can be expressed
in terms of money, are recorded in the books of accounts. Since money serves as the medium of exchange
transactions expressed in money are recorded and the ruling currency of a country is the measuring unit for
accounting.

Transactions which do not involve money will not be recorded in the books of accounts.
3) Cost Concept: An asset is recorded in the books on the basis of the historical cost, that is, the
acquisition cost. It does not mean that the asset will always be shown at cost. It is recorded at cost at the
time of its purchase, but is systematically reduced in its book value by charging depreciation.

4) Consistency Concept: Any policy adopted for accounting should be continuous or consistent
throughout the business and it need not be changed generally unless and until circumstances demand.

5) Conservatism: While recording the business transactions we have to anticipate no profit but
provide for all possible losses. It encourages the certain secret reserves by making excess provision to
prevent losses.

6) Going Concern: It is the basic assumption that business is a going concern and will continue its
operations for future. Going concern concept influences accounting practices in relation to valuation of
assets and liabilities, depreciation of the fixed assets, treatment of outstanding and prepaid expenses and
accrued and unearned revenues.

7) Realization: Income is recorded only when it is realized i.e. either it is received or earned.
Revenues are recorded only when sale are affected or the services are rendered.

8) Accrual: Income is recorded when it accrues (earned) and expenses are recorded when they accrue
(become payable). All expenses and revenues related to the accounting period are to be considered
irrespective of the fact the revenues are received in cash or not or expenses are paid in cash or not.

9) Dual Aspect: According to this concept, every transaction or event has two aspects, i.e., dual effect.
This is the concept which recognizes the fact that for every debit, there is a corresponding and equal credit.
This is the basis of the entire system of double entry book-keeping. From this concept the basic accounting
equation, arises that is, Capital + Liabilities = Assets.

10) Disclosure: The accounts must disclose all material information. The accounting reports should
disclose full and fair information to the related parties. The financial position and performance should be
disclosed very honestly to all the users. The financial position means the Balance Sheet of the business and
financial performance means business results in terms of profits or losses and income and expenses in profit
and loss account.

All the information disclosed should be relevant, reliable, comparable and understood by all the concerned
authorities.

11) Materiality: According to this convention, financial statements should disclose all material items
which might influence the decisions of the users of financial statements. Hence, any item which is not
significant and is not relevant to the users need not be disclosed in the financial statements.

12) Matching Concept: According to this concept, revenues during an accounting period are matched
with expenses incurred during that period to earn the revenue during that period.

Double Entry Book-Keeping System

Meaning and Definition:

Double Entry Book-keeping System is the most scientific method of recording all monetary transactions in
the books of accounts. This system of Bookkeeping is based on the fact that there are two aspects of every
business transactions. Every business transaction involves two persons or accounts or parties where in one
is the receiver of the benefit and the other is the giver of the benefit. If something comes into the business,
something goes out from the business. Recording of two aspects of monetary transactions in the Books of
Account in terms of Debit (Dr.) and Credit (Cr.) is called as "Double Entry" System of Book-keeping.

Meaning of Account:

An account is a summarized record of transactions relating to a particular person, asset, liability, particular
head of expense or income recorded at one place.

Definition of Account:

“An account is summarized record of transactions affecting one person, one kind of property or one class
of gain or loss.” – G.R.Batliboi Classification of Accounts:

Each type of accounts is explained below with examples-

1) Personal Accounts:

This account represents a person and group of persons with whom business deals. These accounts are
classified into following three categories:-

a) Natural Person's Account:

Accounts relating to individual human beings. for e.g. Rajesh’s A/c, Sumit's A/c, Sushma's A/c, Vaibhav’s
A/c etc.

b) Artificial Person's Account:

Artificial persons means includes accounts of organizations, associations which are created by law, for E.g.
Bank of Maharashtra A/c, ABC & Co A/c, Recreation Club A/c.

c) Representative Personal Account:

These Accounts represent a certain person or group of person in business dealing. Accounts relating to
outstanding and prepaid items are called representative personal account E.g. Outstanding Rent A/c, Income
received in advance A/c, Prepaid Wages A/c etc.

2) Impersonal Account:

Impersonal Accounts are classified into following two categories;-

1. Real Accounts:

This account represents assets and properties owned by the business. The following are the types of Real
Account.
a) Tangible Real Account:

Tangible real account means the Assets and properties, which can be seen, touched and felt. e.g. Machinery
A/c, Motor Car A/c, Stock of Goods A/c etc.

b) Intangible Real Account:

Intangible Real account means assets which cannot be seen, touched, or felt but they can be measured in
terms of money e.g. Goodwill A/c, Patents A/c, Trademark A/c, Copyright A/c etc.

2. Nominal Accounts:

The account of expenses, losses, income and gains are called as Nominal accounts e.g. Wages A/c,
Stationery A/c, Salary A/c, Depreciation A/c Commission Received A/c, Discount Received A/c etc.

Debit and Credit

1) Debit (Dr.): Left hand side of an Account is called Debit (Dr) side.

2) Credit (Cr): Right hand side of an Account is called Credit (Cr) side.

Golden Rules of Debit and Credit / Rules of Accounting:

Personal Accounts

• Debit the receiver

• Credit the giver

Real Accounts

• Debit what comes

• Credit what goes out

Nominal Accounts

• Debit all expenses and losses

• Credit all incomes and gains

Journal

Meaning:

The word “Journal” is derived from the French word “JOUR” which means a “Day”. Therefore journal
means a “daily record”. A journal contains a daily record of business transactions and hence it has been
named so, as soon as a transaction takes place its debit and credit aspects are analyzed and first of all
recorded chronologically i.e. In the order of their occurrence(taking place). Journal is a book of original
entry or primary entry.

Meaning of Ledger

Ledger is the Principal Book of accounts. It is also called as book of final entry. It is summarized record
which contains all the accounts e.g. Assets A/c, Liabilities A/c, Capital A/c, Revenue A/c, Expenses A/c.

Meaning of trial balance

A trial balance is a list of all the general ledger accounts contained in the ledger of a business. This list will
contain the name of each nominal ledger account and the value of that nominal ledger balance. Each nominal
ledger account will hold either a debit balance or a credit balance.