Post on 08-Aug-2018
8/22/2019 Session 1_Introduction to Financial Accounting
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Background and Meaning
Business
is all about
money
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Branches of Accounting Process of
communicating social
and environmentalimpacts of business
actions
Post mortem of
Businesstransactions
Cost estimation,
Cost controlAccounting
for
Management
FINANCIAL
ACCOUNTING
SOCIAL
ACCOUNTING
ACCOUNTINGCOST
ACCOUNTING
MANAGEMENT
ACCOUNTING
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Financial Accounting Basic
Principles
PRINCIPLES
CONCEPTS CONVENTIONS
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Concepts
It means basic rules and regulations.
Different Concepts
- Business Entity
- Going Concern
- Dual Aspect
Business and owners are separate
Business = artificial legal entity
Business has a long indefinite life
Every thing of business has two equal
sides/ two equal fold impact
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- Accounting Period
- Matching
- Money Measurement
Standard period of 12 months at the
end of which evaluation will be done
Expenses are recognized in the same
accounting period when the related
revenue is recognized.
Accounts only deal with items to
which a monetary value can be
attributed.
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- Cost
- Accrual
- Revenue Recognition
An asset is entered into the accounting
records at the price paid to acquire it.
The idea that income and expense
items must be included in financial
statements as they are earned orincurred
Revenue recognized only when itis realizable or earned or realized
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Conventions
It means basic assumptions.- Disclosure
- Consistency
- Conservatism
- Materiality
To inform both current and potential
investors of the accounting strategies and
methods used when developing periodic
corporate
Be consistent = no change in method
unless forced
Play safe
Relating to the importance/ significance
of an amount, transaction or
discrepancy.
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MCQs
The immediate recognition of loss is supported
by the underlying principle of:
- Matching
- Consistency
- Judgment
- Conservatism
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The determination of the expenses for an
accounting period is based largely on the
application in which principle?
- Cost
- Consistency
- Matching
- Time period
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Assigning revenues to the accounting period in
which the goods were delivered or the services
performed and expenses to the accountingperiod in which they were used to produce
revenues is known as the:
- Accounting period
- Continuity assumption
- Matching rule
- Revenue recognition
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Generally accepted accounting principles:
- Define accounting practice at a point in time- Are similar in nature to the principles of chemistry
or physics
- Are rarely changed
- Are not affected by changes in the way business
operate
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Account
Personal - Accounts of individuals andartificial persons. E.g. Mr. A , B , C , ABC Ltd.
Z Ltd. etc.
Impersonal - Accounts of Others i.e. those
who are not individuals and artificial persons.
Further classified into two types.
- Real- Nominal
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Real and Nominal Account
Real Nominal
Tangible Real Account:
Account of assets that can be
seen, touched i.e. which are
real.Eg: Cash, Furniture, Car,
Mobile, Machinery etc.
Intangible Real Account:
Account of assets that
cannot be seen and touched.
Eg: Trade Mark, Goodwill
etc.
Accounts of things that can
only be felt, imagined but
cannot be seen or touched.
Eg: Wages, Salary,Electricity charges,
Telephone charges etc.
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Question Classify the following into Personal, Real and Nominal
Account:
- Stationery Account
- Cash Account
- Goodwill Account
- Capital Account- Freight Account
- Rent Account
- Interest Account
- Account of Govind, a customer
- Bank Loan Account
- Depreciation
Th G ld R l f D bit
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Three Golden Rules for Debit
and Credit
PERSONAL
DebitThe Receiver
CreditThe Giver
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Example
Received cash Rs.500 from Mr. A- Mr. A, a Personal account
- A is the giver of the money
- So As account will be credited.
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REAL
DebitWhat comes in
CreditWhat goes out
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Contd: the same example Received cash Rs.500 from Mr. A
- Cash is coming into the business
- Cash will be debited applying the rule.
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NOMINAL
Debit
All Expenses
and Losses
CreditAll Incomes and
Gains
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Example
Received cash from Mr. A as Commission
- Here commission is a nominal account
- In the given transaction Commission is
Income
- Applying the rule commission will be
credited.
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Business transactions
In order to record the business transactions we
follow certain steps:
- Identify the nature of transaction i.e. Cash or
Credit
- If it is a Cash transaction, then one accountgetting affected is Cash or Bank (Cheque)
- Next question WHY?
- If no answer to the previous question then
next question WHOM?
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- In case of Credit Transaction, one account
getting affected is Personal account.
- Next question WHY
- Example
Purchased Furniture from Furniturewala and Sons
Rs.20000- Credit Transaction as no money is coming in or
going out
- So Furniturewala and Sons Account gettingaffected
- WHY = Purchase of Furniture
- Second account getting affected is Furniture
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Question
Point out the accounts which will be debitedand credited for each one of the following
transactions.
1. Cash received from X
2. Cash paid to Y
3. Credit sale to Z
4. Salary paid to clerk by means of cheque.5. Payment of cash to Landlord for Rent.