Fin. Accounting.ppt

Data mining

1. Unit 1
Basics of Financial Accounting
Dr. PriyankaZala

2. What is Accounting?
Recording,
classifying
Summarizing
Communicating
financial
Information
to
various
users

3. ACCOUNTING:-
In1941,theAmericaninstituteofcertifiedpublic
accountant(AICPA)definedaccountingasfollows:-
“Accountingistheartofrecording,classifyingand
summarisinginsignificantmannerandintermsofmoney,
transactionsandeventswhichareinpartatleastofa
financialcharacterandinterpretingtheresultsthereof.”.

4. Objectives of Accounting:
1.Maintaining Business Records
Record financial transactions
-Trading account
-Profit and Loss account
-Balance Sheet
2. Ascertaining Profit/Loss
3. Ascertaining the Financial Position

5. 4. Facilitating Management
-Management often requires financial information for
decision-making, effective control, budgeting and
forecasting
5. Providing Accounting information to the users

6. Need for Financial Accounting
1.Needed for understanding profitability of the business
2.Records and reveal the financial position of the business
3.It helps understand overall efficiency of the business
4.It provides appropriate numerical information to the
creditors.
5.It is required to be submitted to various government
departments for payment of taxes such as income tax, sales
tax, excise duty etc.
6.It helps management of the business for taking appropriate
decision at right time

7. The Need for Accounting
Managers, investors, and other internal groups
want the answers to two important questions:
How well did
the organization
perform?
Where does
the organization
stand?

8. The Need for Accounting
Accountants answer these questions
with three major financial statements:
Income
statement
Balance
sheet
Statement of
cash flows

9. Difference between Book Keeping and Accountancy
Points Book-Keeping Accountancy
Definition Book-Keepingis a process of
recording day to day business
transactions in books of
original entry and posting them
into ledger
Accountancy is an art and
science of preparing summary
statements and interpreting the
results thereof
Basis The basis of book-keepingis a
transaction
The basis of accountingis
book-keeping
Scope The book-keeping has a
limited scope.
The scope of accountancy is
wide and includes book-
keepingand goes further than
recording transactions
Requiresspecial skills Any person who knows the
rule of double entry can
prepare booksof accounts. It
does not require expert
knowledge.
It involves analysis and
interpretation so requires
specialskill and expert
knowledge.

10. Difference between Book Keeping and Accountancy
Points Book-Keeping Accountancy
Useful for policy decision
making
It is not very useful for
managerial decisions.
It analyses and interprets
accounts, it can draw useful
conclusions from it.
It is very useful for
managerial decisions.
Development There is no scope of
development or any
changes in book-keeping
It has developed very fast
with the changing times.
Ex. Cost Accounting,
Management Accounting,
Human Resource
Accounting.

11. Internal and External Users of Accounting
Information
Internal
Users -
Management
Creditors
Current
and
Potential
Owners
Government
Agencies
Suppliers
Trade
Organizations
Financial
Analysts
Banks

12. Fundamental Accounting Equation
It shows,
(i)Assets and Liabilities of a firm are equal
(ii)It is based on the dual aspect of concept of accounting
Ex. A started business by bringing cash of Rs. 10,00,000
Cash comes in---------Increase in assets
Capital provided by the owner---------Capital of the owner increases

13. It can be expressed as:
Assets = Liabilities + Capital (A=L+C or A=C+L)
OR
Liabilities = Assets –Capital (L+A-C)
OR
Capital = Assets –Liabilities (C=A-L)

14. Types of Transactions
EconomicTransactions
-Thosetransactionsinwhichmoneyisexchangedorsuchthings
orservicesareexchangedwhichcanbemeasuredintermsof
moneyarecalledeconomictransactions
Non-EconomicTransactions
-Thosetransactionsinwhichmoneyisnotexchangedorthereis
anexchangeofsuchthingswhichcannotbemeasuredinmoney
arecallednon-economictransactions.

15. Forms of Economic Transactions
Forms of Economic
Transactions
Exchange of Goods
for
(1) Assets
(2) Services
Exchange of Cash for
(1) Goods
(2) Services
(3) Assets
(4) Debts
Exchange of Debts
for
Debt

16. Assets
Assets are property or legal rights owned by an individual or
business to which money value can be attached.
Types of Assets
1.Fixed Assets
2.Currents Assets
3.Tangible Assets
4.Intangible Assets
5.Wasting Assets
6.Fictitious Assets

17. Liabilities
Liabilities mean the amount which the business owes to the
outsiders.
Ex. Creditors, bank overdraft, bills payable, banks, debenture
holders etc.
1.Long term liabilities
2.Short term liabilities/ Current liabilities

18. Systems of Accounting
1.Cashsystemofaccounting
Itisasysteminwhichaccountingentriesmadeonlywhen
cashisreceivedorpaid.Noentryismadewhenapaymentor
receiptismerelydue.
Ex.Governmentsystemofaccounting
2.MercantileorAccrualSystemofaccounting
Itisasysteminwhichaccountingentriesaremadeonthebasis
ofamountshavingbecomedueforpaymentorreceipt.

19. Example
A firm closes its books on 31
st
December each year. A sum of Rs. 500 has
become due for payment on account of rent for the year 2016. The amount
has however, been paid in January ,2017.
Cash System of Accounting-No entry
Mercantile System of Accounting-
O/s Rent a/c Dr.
To Mr. A’s a/c
A’s a/c Dr.
To Cash a/c

20. Accounts
Personal
Debit
Receiver
Credit
Giver
Real
Debit
What
comes in
Credit
What goes
out
Nominal
Debit
Expenses
and Losses
Credit
Gains and
Income

21. PERSONALACCOUNTS
Natural Personal Accounts:-The term ‘Natural Persons’ means persons who are
creation of God. For example, mohan, Sohan, Abha etc.
ArtificialPersonalAccounts:-Theseaccountsincludeaccountsofcorporatebodies
orinstitutionswhicharerecognisedaspersonsinbusinessdealings.Forexample:-
theaccountofaLimitedcompany,theaccountofaCo-operativeSociety,the
accountofaClub,theaccountofGovernment,theaccountofanInsurance
Companyetc.

22. RepresentativePersonalAccounts:-Theseareaccountswhichrepresenta
certainpersonorgroupofpersons.Forexample:-iftherentisduetothe
landlord,anoutstandingrentaccountwillbeopenedinthebooks.
 “RULE:-”
 DEBIT THE RECEIVER CREDIT THEGIVER

23. REALACCOUNTS
TangibleRealAccounts:-TangibleRealaccountsarethosewhichrelatetosuch
thingswhichcanbetouched,felt,measuredetc.Examples:-buildingaccount,
furnitureaccount,stockaccount,etc.
IntangibleRealAccounts:-Theseaccountsrepresentssuchthingswhichcannotbe
touched.Ofcourse,theycanbemeasuredintermsofmoney.Ex.Patentsaccount,
goodwillaccount,etc.

24. “RULE”:-
DEBIT WHAT COMES IN CREDIT WHAT GOESOUT

25. NOMINALACCOUNTS
NominalAccountsarerecordingtransactionsofbusinessconnectedwith
expenses,incomes,profitorlossesetc.areknownasNominalAccount.For
example,RentAccount,SalariesAccount,andInterestAccount,etc.
“RULE:-”
DEBIT ALL EXPENSES AND LOSSES CREDIT ALL GAINS AND INCOMES

26. Summary
PersonalAccount:
RealAccount:
NominalAccount:
Debit the Receiver Credit
the Giver Debit what comes
in Credit what goes out
Debit all expenses and losses
Credit all incomes and gains
Debit the Receiver Credit
the Giver Debit what comes
in Credit what goes out
Debit all expenses and losses
Credit all incomes and gains

27. Types of Expenses and Incomes
Revenue Expenses:-
Revenue expenses are the expenses, the benefit of which will
not be available for more than one accounting year.
It does not lead to an increase in the profit earning capacity of
the business but it is incurred to carry on the normal activities of
the business.
Ex. Salary, wages, Rent, Depreciation, Insurance Premium,
Taxes and Legal Expenses

28. Capital Expenditure:
Capital expenditure is the expenses incurred for getting long
term benefits. The benefit of such expense is available for a
number of years.
These expenses are incurred to enhance the profit earning
capacity of the business.
Examples:
Purchase of land or any other fixed assets
Cost of addition or extensions to existing assets
Expenditure incurred on putting an asset into working condition

29. Difference between Revenue and Capital Expenditure
Revenue Expenses Capital Expenses
The benefits of these expenses are
available only for the current
The benefit ofthese expenses extends for
more than one year
It isincurred to maintain the fixed assets
in good condition
It is incurred for acquiring the fixedassets
intended for use in the business
It does not increase the earning capacity of
thebusiness
It increases the earning capacity of the
business
It is shown in trading and profitand loss
account
It is shown in the balance sheet

30. Deferred Revenue Expenditure
Theseareexpenseswhicharebasicallyrevenueinnaturebut
theirbenefitsisnotexhaustedinoneaccountingyear.
Examples;-
Preliminaryexpenses
Discountonissueofdebenturesandshares
Deferredadvertisementexpenses

31. Capital and Revenue Incomes
Revenue Income/Receipts
Revenue income are generated out of routine business
transactions or operating transactions
Examples:-
Cash received on account of sales
Collection from debtors
Discount received
Interest and dividend received on investments

32. Capital Income/Receipts
Capital receipts are those receipts which are generated
out of capital transactions.
Example:
Sale of fixed assets
Issue of shares and debentures

33. Difference between Capital and Revenue Receipt
Revenue Income Capital Income
It represents income such as sale of goods interest
received, dividend received
It represents capital brought in by the proprietor which
is not or recurring nature
Theyare recurring They are non-recurring in nature
They are gains to the concern Theyare not gains to the concern

34. Meaning and types of reserves
A reserve is an amount of money set aside until it is needed for some
particular purpose.
AccordingtoInstituteofCharteredAccountantofIndia(ICAI),
thetermReservemeans;“thatportionofearnings,receiptsor
othersurplusofanenterprise(whethercapitalorrevenue)
appropriatedbythemanagementforageneralorspecificpurpose
otherthanaprovisionfordepreciationordiminutioninthevalue
ofassetorforaknownliability.”

35. Types of Reserves
1.Revenue Reserves:-
These reserves are created out of revenue Profits of the business.
a.Specific Reserves: These reserves are created out of revenue profits for a
specific purpose.
Ex. Dividend Equalization Reserve, Debenture Redemption Reserve
b.General Reserves:
These are the reserves created only to strengthen the financial position of
the business and to keep the funds available for any future contingency or
expenditure that may be required.
Ex. Contingency Reserve, Undistributed balance of the P & L account

36. 2. Capital Reserve
These reserves are created out of the capital profits.
Ex. 1. Profit on sale of fixed assets
2. Premium on issue of shares or debentures
3. Profit on redemption of debentures
4. Surplus on revaluation of fixed assets or fixed
liabilities

37. 3. Secret Reserves:
Secret Reserves are the reserves the existence of which does not
appear on the face of the Balance Sheet.
In such a situation, net assets position of the business is stronger
than that disclosed by the balance sheet
Ex.
1. Excessive depreciation of an asset, or excessive over-
valuation of a liability
2. Complete elimination of an asset or under-valuation of an
asset
3. Charging capital expenditure to revenue
4. Permanent appreciation in a fixed asset

38. Accounting Principles
Accounting principle may be defined as ‘those rules of conduct or
procedure which are adopted by the accountants universally, while
recording the accounting transactions.’
Accounting
Principle
Accounting
concepts
Accounting
Conventions

39. Accounting Concepts
Thetermconceptreferstoassumptionsand
conditionsonwhichaccountingsystemisbased.

40. 1.Money Measurement Concept:-
Each transaction and event must
be expressible in monetary terms.
If an event cannot be expressed in
monetary terms, it cannot be
considered for accounting
purposes.
Ex.:-Business got a team of
dedicated and trusted employees.

41. 2. The Entity Concept:-
Business is considered to be a separate entity from the
proprietor.
A business entity may be in the form of sole
proprietorship, partnership or corporate entity.

42. Ex.
(1)WhenonepersoninvestsRs.10,000intobusinessitwillbe
deemedthattheproprietorhasgiventhatmuchofmoneytothe
business,whichwillbeshownasaliabilityinthebooksofthe
business.
(2)Profitsareshownasliabilitiesofthefirmastheyarepayable
totheowners.
(3)Withdrawals/drawings

43. Itiscommonfortheownertodrawmoneyor
goodsfromthefirmforpersonaluseanytime.
AccordingtotheAccountingEntityconcept,
wemustrecordtheeventeventhoughheisthe
ownerofthefirm.
What do you
call this?
Click me!

44. Itiscommonfortheownertodrawmoneyor
goodsfromthefirmforpersonaluseanytime.
AccordingtotheAccountingEntityconcept,
wemustrecordtheeventeventhoughheisthe
ownerofthefirm.
DRAWINGS
What about drawings
of goods?

45. 3. GOING CONCERN CONCEPT:-
It is assumed that the business will continue for a fairly long
time to come.
An entity is said to be a going concern if it has neither the
intention nor the necessity of the liquidation or curtailing
materially the scale of the operation.
Ex. Valuation of assets depends on this concept.

46. 4. The Cost Concept
An asset is ordinarily entered in the accounting records
at the price paid to acquire it, and
Ex.If a business buys a plot of land for Rs. 50,000. the
asset would be recorded in the books at Rs. 50,000.

47. 5. Dual aspect Concept:-
According to this concept every business transaction has a dual effect.
The entire system of double entry book keeping is based on this
concept.
Ex. 5 friends form the company by contributing Rs. 2 lakh in cash on
1
st
January 2008.
Balanceshet of ……….
Liabilities Amount Assets Amount
Capital 10,000,000 cash 10,00,000
10,00,000 10,00,000

48. 6. The periodicity/Accounting period concept:-
Theresultsofoperationsofandentityaremeasuredperiodically,i.e.ineach
accountingperiod.
Differentbusinessunitsmayfollowdifferentaccountingperiodsdependingon
convenience.
Ex.Calendaryear,fiscalyear.

49. 7. Prudence/conservatism Concept:-
The rule ‘anticipate no profit but provide for all possible losses’ while
recording business transactions.
Ex. The inventory is valued ‘at cost or market price whichever is less.’
Similarly a provision is made for possible bad and doubtful debts out of
current year’s profits.
But not to create provision for likely discounts to be received earned on
payments to creditors.

50. 8. Realization Concept:-
Accordingtotherealisationconcept,revenueshouldbeconsideredas
beingearned/realisedonthedatewhengoodsaresoldorservicesare
renderedtothecustomersinconsiderationforcashorclaimstocash(i.e.
debtors).
Goodslyingwithcustomersareshownatcostpriceandnotatthe
negotiatedpriceofsale.Thus,therealisationconceptpreventsthefirm
fromregistering/postingprofitson‘pending’sales.
Ex.Abusinessmanreceivesanorderon1
st
January,2014andsupplies
goodson10
th
Januaryandhereceivespaymenton15
th
January.
Inthistransaction,therevenuefromsaleofgoodsisrecordedon10
th
Januarybutneitherat1
st
Januarynoron15
th
January.

51. 9. Accrual Concept
•It indicates that the transactions of a particular
period are recorded in the books of accounts even if
they aren’t paid or received in cash.
•Ex. Mr. X is employee of ABC Ltd. his salary for
last month of the year, March 2015 is not paid till
the year end. Same salary will be recorded in the
books as oustanding salary.

52. 10. Verifiable evidence concept
•According to this concept all accounting
transactions should be evidenced and supported by
objective documents.
•Such supporting documents provide the basis for
making accounting entries and for making
verification by the auditor later on.

53. Convention
Accounting convention refers to the customs and traditions
followed by Accountants as guidelines while preparing
accounting statement
1.The Matching convention
2.The consistency convention
3.The Materiality convention

54. 1.Matching Convention
Matching concept involves two steps in computing net
income,
(1) To determine the revenues earned in a given accounting
period.
(2) To determine the expenses/costs incurred to realise
these revenues.
The expenses recognised in an accounting period, then, are
matched with the revenues recognised in that period.

55. 2. Convention of Consistency
•This principle implies that the basis followed in different
accounting period should be same.
•Method adopted in one accounting year should not be
changed in another year.
•Ex. Stock is valued under FIFO method in an year and it
should not be valued under LIFO method in another year.
If assets are depreciated under diminishing balance method,
it should be continued.

56. 3. Convention of materiality
•Important details of financial status must be informed to all
relevant parties, insignificant facts, which do not influence
any decisions of the investors or any interested group, need
not be communicated.
•EX. When we send statement to a debtor, all details have to
be presented. The same information about the debtors need
not be given in great detail, while sending the information to
the Registrar of companies.

57. 4. Convention of full Disclosure
•According to this principle all significant information about the
business should be disclosed.
•It means that any information of substance or of interest to the
average investors will have to be disclosed in the financial
statements.
•Ex. Liabilities of the business should be stated along with assets.