Financial Accounting

Roshna Varghese, MBA, PhD

Asst Prof, RCBS
Email: roshna@rajagiri.edu;
roshnavarghese@gmail.com

1
2
Sesn No
Topic(s)
1-2
Introduction
Financial accounting Concept, need, importance and
scope, accounting principles: Concepts and conventions
3-8
Journal
Recording of transactions - writing Journal entries of
business transactions
9-12
Ledger
Recording of transactions - preparing Ledger Accounts
13-15
Trial Balance
Recording of transactions - preparation of Trial Balance
16-18
Final Accounts
Final accounts with out adjustments
Outline of your PGDM Financial
Accounting
Module 1 : Introduction, Accounting concepts,
Journal, Ledger and Trial Balance

Module 2 : Preparation of Final accounts

Module 3 : Accounting Standards

Module 4 : Cash Flow Statement

Module 5 : Corporate financial statements


3
References
o T.S Reddy and Y.Hariprasad Reddy (2008). Financial and
Management Accounting, 4
th
ed., Chennai : Margham
Publications.

o S.N. Maheshwari. (2006). Financial and Management
Accounting, 5
th
ed., New Delhi : Sulthan chand & Sons.

o M.C.Shukla, T.S Grewal and V.C Gupta(2008). Advanced
Accounts. New Delhi : S. Chand & Company

4
Accounting Definitions
Accounting is the process of keeping accounts
A system of recording financial transactions- analysing,
verifying and reporting transactions
Simply put Accounting is the language of Business

5
Purpose of Accounts
Provide
information
Monitor
Activities
Transparency

Reduce
chances of
Fraud
6
Who needs Accounting???
Any Individual Partnership firm





Corporate Entity Government



Types of Business Structure
Sole Proprietorship
Partnership
Corporation (Company)

7
Accounting...
8
is the language of business.
Backbone of Accounting
Financial Accounting is more than numbers. It is the backbone
of operations of a business. If money is involved, there is
accounting.

In order to manage a business effectively from financial
perspective , it is always important to measure
o What business owns & what it owes??
o Whether it earned a profit or loss
o What is the financial position?

Accounting creates a clear financial image on the basis of
which managers, creditors, bankers and the government can
take decisions.
9
Accounting
Meaning
- a process of identifying, recording, summarizing,
and reporting economic information to decision
makers in the form of financial statements.

Definition (most popular definition)
the art of recording, classifying, and summarising,
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.
Committee on Terminology of the American
Institute of Certified Public Accountants (AICPA)


10
End Result of Accounting
Financial Statements
Balance Sheet
Statement of Profit and Loss
Cash flow Statement
11
Accounting Process
12
1. Analyse transactions
and Source documents
2. Record in General
Journal
3. Post Information to
Ledger
4. Prepare Trial Balance
5. Prepare Financial Statements
B/S, P&L & CFS
13
14
owners
managers
employees
15
EXTERNAL USERS
Financial Accounting
investors
creditors
regulators
customers
competitors
o Owners
o Managers
o Employees
INTERNAL USERS
Financial Accounting
Users of Accounting Information
Certain short forms used
Account (A/C)
Balance sheet (B/S)
Profit and Loss account (P/L or P&L a/c)


16
Accounting Concepts and
Conventions
17
18
Accounting:
Principles and Concepts
The rules that govern accounting are called GAAP
(generally accepted accounting principles).
Accountants follow professional guidelines.
These generally accepted accounting principles
lay down accepted assumptions and guidelines
Accounting concepts &
Accounting conventions
oAccounting concepts
oBasic assumptions or conditions upon which
the science of accounting is based

oAccounting conventions
oThose customs or traditions which guide the
accountant while preparing the accounting
statements
19
Accounting Principles
concepts & conventions
Concepts
Separate Entity Concept
Going Concern Concept
Money Measurement Concept
Cost Concept
Dual Aspect Concept
Accounting Period Concept
Periodic Matching of cost and
revenue Concept
Realisation concept
Conventions

Convention of Conservatism
Convention of Full Disclosure
Convention of Consistency
Convention of Materiality


20
Accounting Concepts : Separate Entity
o Separate Existence for the business
o Distinct Legal Identity
o E.g.
o Any private and personal incomes and expenses of the owner(s)
should not be treated as the incomes and expenses of the business
o Any payments for the owners personal expenses by the business will
be treated as drawings and reduced the owners capital contribution
in the business





o Life of infinite duration
o As per this concept, fixed assets are recorded at their
original cost & depreciation is charged on these assets.
o Because of this concept, outside parties enter into long
term contracts with the enterprise.

22
1 4 7 10 20

Lifespan in years
Microsoft Corporation
Accounting Concepts : Money Measurement
All transactions of the business are recorded in terms
of money
It provides a common unit of measurement
Transactions of qualitative nature, even though of
great importance to business are not considered
o E.g.
oHuman resources are assets but not recorded
oMarket conditions, technological changes and the
efficiency of management would not be disclosed
in the accounts


Historical Cost concept
o Generally all transactions recorded at cost and
not market value

Example
The cost of fixed assets is recorded at the date of
acquisition cost. The acquisition cost includes all
expenditure made to prepare the asset for its intended use.
It included the invoice price of the assets, freight charges,
insurance or installation costs
Land


24
Dual Aspect
oEvery transaction has two aspects
oE.g. increase in one asset & decrease in another
oE.g. increase in one asset increases a liability


25
Accounting Concepts
o Accounting period/Periodicity concept
oOne year period is taken up for measuring performance
and appraisal of financial position
o Yearly/quarterly
o Matching concept
oAlso known as periodic matching of cost and revenue
concept
oMatching of income with expenses of the same period
o Realisation concept
oWhen revenue is to be recognised and how much??
oChange in value of an asset is recorded only when
business realises it.

The Matching Principle
27
Revenue Expense = Net income
The Matching Principle
28
Revenue Expense = (Net loss)
Accounting Conventions
Conservatism
Selecting the method of measurement which
yields the gloomiest immediate results
Anticipate no immediate gains but provide
for all possible losses
E.g. Inventory valuation -Lower of cost or
market price

Full Disclosure
Accounting reports should disclose fully and
fairly the information they represent
Transparency; material information
Companies Act, 1956 - prescribed form for
balance sheet; P&L account


Accounting Conventions
Materiality
Trivial assets of small value may be written off as
expenses
Materiality depends on the size and nature of the
item
E.g.
Small payments such as postage, stationery and cleaning expenses
should not be disclosed separately. They should be grouped
together as sundry expenses
The cost of small-valued assets such as pencil sharpeners and
paper clips should be written off to the profit and loss account as
revenue expenditures, although they can last for more than one
accounting period
Accounting Conventions
Consistency
Similar treatment of transaction e.g. depreciation
methods, inventory valuation etc.
Changes can be made but should be disclosed
with their effects
E.g.
If a company adopts straight line method and should
not be changed to adopt reducing balance method in
other period


31
Single Entry and Double Entry
Single Entry
One account entry for each transaction
maintains only cash book and personal accounts of
debtors and creditors.
trail balance cannot be prepared.

Double Entry Two account entries for each
transaction
One debit and one credit

32
33



One debit One credit
Each transaction is recorded with at least:
Total debits must equal total credits.
The Double Entry System
Accounting Records
Journal, Ledger and Trial Balance
34
Accounting terms
Business transaction
Economic event that has some effect on the
resources of firm or on the sources of firms
assets.


o Goods
o Things in which a business deals
o Goods are bought for resale
oE.g. stationery articles are goods for a stationery shop
oFurniture an asset in a grocery shop but goods for a
furniture making company

Accounting terms
o Cash and credit transactions
o Cash transaction Involves immediate payment /receipt of
cash. Payment/receipt of cash is postponed in a credit
transaction
o E.g.

o Debtor and creditor
o Debtor : one who owes something of value to the business
o Creditor: one to whom something of value is owed
o Suppliers : creditors
o Customers : debtors




36
Accounting terms
o Assets, Liabilities and Capital
o Economic resources owned by a firm are called assets
o e.g. cash, stock, amounts receivable from customers, L&B,
machinery,.
o Something that company owes is called liability.
oTwo contexts
o Liability including outsiders and owners claims
o Liability including only outsiders claims
o Capital or owners equity
oDifference between assets and outsiders claims
o Revenue, expenses and net income
o Net income = revenue - expenses




38
The Accounting Equation
The Accounting Equation
39
Economic
Resources
Claims to
Economic Resources
Assets = Liabilities + Owners Equity
Analyse
source
documents.
Journalise
transactions in
the general
journal.
Post entries to
the accounts
in the general
ledger.
Prepare financial
statements.
Prepare a trial
balance.
Steps in The Accounting Cycle
41
Record transactions
in the journal.
42
Journal
o Journal
o It is a list in chronological order of all the financial
transactions for a business
o Journal is the book of original record /primary
entry
o Each entry is called Journal Entry
o On double entry system

o Journalising : It is the process of entering
transactions into the journal

Journal
oSteps
oIdentify transaction from source documents
oSpecify accounts affected.
oApply debit/credit rules.
oRecord transaction with description

43
Say whether financial transaction or not
o Appointment of Mr Varma as a manager of
a department
o Payment of wages
o Agreement with trade union regarding a
dispute
o Sale of goods
o Purchase of goods
44
45

Journal entry

What does a journal entry include?
date of the transaction
title of the account debited
title of the account credited
amount of the debit and credit
description of the transaction (narration)

Specimen of a journal
Date
Particulars L.F. Debit
amount
Credit
amount
Title of the account debited Dr
To Title of the account credited

46
(Being commencement of
business)
(Furniture bought)
(Being rent paid)
47
Classification of Account
o Account - Meaning
o Summary of all transactions relating to
one person or asset or expense or income


o Classification
1. Real account
2. Personal account
3. Nominal account
48
49
Classification of Account
o Real account
oAccounts of assets or properties
o Tangible or intangible
o Personal account
oAccounts in the name of persons, firms or companies.
o Natural person
o Artificial person
o Representative person
o Nominal account
oAccounts of all expenses, losses, incomes and gains


Nominal and personal account
Nominal account Personal account
1. Rent account

2. Interest account


3. Salary account

4. Insurance account


5. Commission account
1. Rent prepaid account; outstanding
rent account
2. Outstanding interest, interest
received in advance, prepaid interest

3. Outstanding salaries account, prepaid
salaries account
4. Outstanding insurance account,
prepaid insurance account

5. Outstanding commission account,
prepaid commission account

Journal entry Rules
Real Account Debit what comes in
Credit what goes out

Personal Account Debit the Receiver
Credit the Giver

Nominal Account Debit all Expenses/Losses
Credit all Incomes/Gains


52
Find out the nature of account and which account
should be debited and which should be credited
Rent paid
Salaries paid
Interest received
Dividends received
Furniture purchased for cash
Machinery sold
Outstanding for salaries
Telephone charges paid
Paid to Suresh
Received form Mohan (The proprietor)
Lighting


Sl
No
Transaction A/Cs
involved
Classification
of a/cs
Debit/Credit
1 Rent paid
Rent
Cash
Nominal
Real
Debit
Credit
2 Salaries paid
3 Interest received
4 Dividends received
5 Furniture purchased for cash
6 Machinery sold
7 Outstanding for salaries
8 Telephone charges paid
9 Paid to Suresh
10 Received from Mohan (The
proprietor)
11 Lighting charges paid
What we learned so far
Meaning and definition of accounting
Types of Business Structure
Concepts and Conventions of Accounting
Journal
Types of accounts
Rules of debit and Credit
55
Points to remember
o Goods account
oSales account, purchase account, sales returns,
purchase returns all are real accounts
oPurchase of goods purchase account
But purchase of asset respective asset account
o Sales of goods -- sales account
Sale of machinery machinery account

o Payment of expenses
oDebited to respective expenses (the persons to whom
money is paid should not be debited even if their
names are given)



Points to remember
o Assumptions regarding sales and purchases
oIf names of supplier or customers are given without
specifying whether cash/credit transaction, they should
be assumed to be on credit basis
o Expenditure on acquisition of assets
oTreated as capital expenditure and added to asset cost.
E.g. freight, loading/unloading charges, installation
expenses etc

57
Points to remember
o Compound entry
o Simple entry - an entry for a transaction that
affects only two accounts
o Compound entry - an entry for a transaction that
affects more than two accounts
o Remember: whether the entry is simple or
compound, the debits (left side) and credits (right
side) must always equal.

o Trade discount
o Amount of trade discount to be reduced from
sales or purchases

Cash Discounts
o Deduction in the amount of invoice
o When goods are bought on credit
o To encourage the buyer to make before the end of credit period
o No cash is received/paid; Just an adjustment in price
o Discount types
o Discount allowed, i.e., discount on sales
o Discount received, i.e., discount on purchases

o NB : Trade discounts is different from cash discount. Allowed by
wholesalers to retailers. Only the net invoice price is treated as
value of purchase or sale.
Points to remember
o Owners transactions
o Money invested is capital (Personal account)
o If owner withdraws money or goods or assets for
personal use treated as drawings

Banking transactions
Bank account is treated as a personal account
1. When cash is deposited in the bank
2. When cash is withdrawn from the bank
3. When bank allows interest on deposit
4. When bank charges expenses against the deposit a/c
5. When cheque is issued to supplier on account
6. When cheque is received from a customer on a/c
7. When a cheque received from customer is deposited in
bank for collection
8. When a loan is granted by the bank




o When cheque is received from a customer

o 2 situations
o A cheque received from a customer and sent to the bank at a
later date
o Cash a/c Dr
To Customers a/c

When sent for collection
Bank a/c Dr
To Cash a/c
o A cheque received from a customer and sent to the bank the
same day
o Bank a/c Dr
To Customers a/c

o In the absence of any specific instructions in the Qn, assume that
cheque received from a customer was sent to the bank on the
same day



Opening Entry
o In case of a running business, the assets and
liabilities in the previous years B/S are
brought forward to the current year Journal.
The entry is called Opening entry

o All assets are debited and all liabilities are
credited

o The excess of assets over liabilities is ?????

Journal Entries - Exercises
Gupta and Ramaswamy. Advanced
Accountancy. P. 1.6.5 Illustration 2
S.N. Maheshwari. Accounting for
Management. P.1.41, Practical problems 1
S.N. Maheshwari. Accounting for
Management. P.1.34, illustration 3.4
S.N. Maheshwari. Accounting for
Management. P.1.38, illustration 3.6

64
Capital Assets Liabilities
To increase each
item
CREDIT DEBIT CREDIT
To decrease each
item
DEBIT CREDIT DEBIT
Formula for Journalising
Debit Credit
Increase in Assets
Decrease in Liability
Decrease in Capital
Increase in Expenses/Losses
Decrease in Assets
Increase in Liability
Increase in Capital
Decrease in Expenses/Losses

67
Ledger
Ledger Accounts
Ledger
a group of related accounts kept in a systematic
manner
oPosting
o It is the transfer of information from the journal to the
appropriate accounts in the ledger.

Think of ledger as a book with
one page for each account.


68
Ledger
69
Cash
Ledger
Capital
Accts. Payable
Ledger
A
B C D
Customer Accounts
Accts. Receivable
A
B C D
Creditor Accounts
Ledger Accounts
o A simplified version of a ledger account is T-account.

o The account is divided into two sides for recording
increases and decreases in the accounts.
Debit (dr.): an entry or balance on the left side of an a/c
Credit (cr.):an entry or balance on the right side of an a/c
Remember:
Debit is always the left side!
Credit is always the right side!

70
The Account
71
Account Title
Debit Credit
LEFT SIDE
The Account
72
Account Title
Debit Credit
RIGHT SIDE
73

Proforma for Account

Dr Cr
Balancing of an account
o Technique of finding out the net balance of an
account
o Totals both debits and credits and find out the balance
o Balance is put on the side of the account which is smaller
o Reference is given that balance has been carried down (c/d)
or carried forward
o In the next period reference is given that opening balance
has been brought down (b/d) or brought forward (b/f)

o Done monthly/quarterly/yearly
o Helpful in knowing the position of an account
Ledger Accounts
Balance - difference between total left-side amounts
and total right-side amounts at any particular time
Assets have left-side balances.
Increased by entries to the left side
Decreased by entries to the right side

Liabilities and Owners Equity have right-side balances.
Decreased by entries to the left side
Increased by entries to the right side
75
76

Proforma for Account

Dr Cash account Cr





TRIAL BALANCE
77
TRIAL BALANCE
o Listing of all the accounts with their related
balances.

o Purpose of Trial Balance
oTo help check on accuracy of posting by
proving whether the total debits equal the
total credits

oTo establish a convenient summary of
balances in all accounts for the preparation of
formal financial statements

78
Exercises :
Ledger & Trial Balance
o S.N. Masheswari, Accounting for
Management, p.1.48, Illustration 4.2
o Maheswari, p. 1.51, illustration 4.3
o Maheswari, p. 1.57, Practical Problems 4

Subsidiary Books/
Subdivision of Journal
Subsidiary Books
Journal is the book of original entry

For large scale firms
Subdivision of journal into many special journals

Important subsidiary books Or
subdivision of Journal
Cash Journal/Book:
It is used to record all cash receipts and payments.
Purchases Journal/Book:
It is used to record all credit purchases.
Sales Journal/Book:
It is used to record all credit sales
Purchases returns Journal/book:
It is used to record all goods returned by us to our suppliers.
Sales Returns Journal/Book:
It is used to record all goods returned to us by our customers.
General Journal / Journal Proper:
It is used for recording those transactions for which there is no
separate book.

Advantages of subsidiary Journals
1. Easier preparation of Ledger
2. Division of Labour
3. Availability of classified information
4. Accuracy

Cash Book
Book of original entry in which transactions relating only to
cash receipts and payments are recorded in detail.

When cash is received it is entered on the debit or left hand
side. Similarly, when cash is paid out the same is recorded
on the credit or right hand side of the cash book.

The cash book, though it serves the purpose of a cash book
of original entry viz., cash journal really it represents the
cash account of the ledger separately bound for the sake of
convenience.
It is more a ledger than a journal. It is journal as cash
transactions are chronologically recorded in it.
It is a ledger as it contains a classified record of all cash
transactions.
The balances of the cash book are recorded in the trial balance
and the balance sheet.
Always debit balance

Format
Date Particulars L
F
Amount
Date
Particulars L
F
Amount
Cash Book - Types
Single column cash Book
Double column cash Book
Triple column cash Book
Types of cash book
1. Single column cash book records only cash
receipts and payments.
2. A double column cash book or two column cash
book is one which consists of two separate columns
on the debit side as well as credit side for recording
cash and Bank (discount)
3. Triple Column Cash Book : Three columns on each
side
Cash column for cash received and cash paid
Discount column
Bank column



Triple Column Cash Book
Date Particulars L.F Dis.
Rs.
Cash
Rs.
Bank
Rs.
Date Particulars L.F Dis.
Rs.
Cash
Rs.
Bank
Rs.
Contra Entry
o Transactions where both cash and bank are
involved
Exercises
Reddy, p.3.75, Exercises 27
Reddy, p.3.75, Exercises 29
Maheshwari p.1.68; Illustration 5.3
Maheshwari p.1.68; Illustration 5.4
Maheshwari p.1.85 Practical problems 4
Purchase Journal
Maheshwari p.1.73 , Illustration 5.6
Sales Journal
Maheshwari p. 1.74 illustration 5.7

Posting:

The cash columns will be posted in the same way as single
column cash book.

But as regards discount column, each item of discount
allowed (Dr. side of the cash book) will be posted to the
credit of the respective personal accounts. Similarly each
item of discount received will be posted to the debit of the
respective personal account. Total of the discount column
on the debit side of the cash book will be posted to the
debit side of the discount account in the ledger and the
total of discount column on the credit side of the cash book
on the credit side of the discount account. The discount
columns are not balanced like cash column of the tow
column cash book.

Petty Cash Book
o Maintained by business to record petty (small)
cash expenses of the business
o E.g. expense on postage, stationery, cleaning charges

o Under Imprest system
o A fixed amount is advanced to the petty cashier at the
beginning of the period
o Petty cashier submits his accounts at the end of the
period

Important subsidiary books Or
subdivision of Journal
Cash Journal/Book:
It is used to record all cash receipts and payments.
Purchases Journal/Book:
It is used to record all credit purchases.
Sales Journal/Book:
It is used to record all credit sales
Purchases returns Journal/book:
It is used to record all goods returned by us to our suppliers.
Sales Returns Journal/Book:
It is used to record all goods returned to us by our customers.
General Journal / Journal Proper:
It is used for recording those transactions for which there is no
separate book.

Purchase Journal
o Also known as Purchases Day Book or Bought
Day Book
o Records credit purchase of goods


Date Invoice
No.
Particulars L.F Amount
Rs
Total
Amount
Rs.
Sales Journal
o Also known as Sales Day Book or Sold Day
Book
o Records credit sales of goods


Date Invoice
No.
Particulars L.F Amount
Rs
Total
Amount
Rs.
Purchase Returns and sales returns
Journal
Date Invoice
No.
Particulars L.F Amount
Rs
Total
Amount
Rs.
General Journal/Journal Proper
E.g.
Purchase of fixed assets on credit
Opening entries
Closing entries
Adjustment entries
Rectification entries
Exercises
Maheshwari, p. 1.73; Illustration 5.6
Maheshwari, p. 1.74; Illustration 5.7
Maheshwari, p. 1.77; Illustration 5.8

Suspense Account
o Temporary account in which difference in
trial balance is placed.

o Removed when errors are located and
corrected.
Exercises
M.C.K Nambiar
p.1.223, E.g. A 54
P.1.224. e.g. A5
p. 1.226, e.g. A 56
Jain & Narang, p.92, Illustration1

101
TWO METHODS
Reporting Revenue and Expense
Cash Basis of Accounting
Accrual Basis of Accounting
Accrual Basis and cash basis

102
Cash Basis of Accounting
Revenue reported when cash is received
Expense reported when cash is paid
Does not properly match revenues and
expenses
103
Accrual Basis of Accounting
Revenue reported when earned
Expense reported when incurred
Properly matches revenues and expenses in
determining net income
Requires adjusting entries at end of period