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Financial accounting

by

Amit kumar Arora

B. Com, M. Com, I.C.W.A, M.B.A.(Finance), M.A.(Economics)

Author of the books Financial Management & Management of Working Capitalfor M.B.A.

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Basic accounting termsCapital

Owner/Proprietor/BusinessmanAssets

Fixed Assets

Current Assets

Tangible Assets

Intangible Assets

Wasting Assets

DebtorsStock or Inventory

Bills Receivables (B/R)

Goodwill

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LiabilitiesShort Term Liability

Long Term Liabilities

CreditorsBills Payable

PurchasePurchase Return/Return Outward

Sales

Sales Return/Return Inward

Voucher

DiscountTrade Discount

Cash Discount

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DrawingsTransaction

Book Keeping

Accounting :Accounting is the art ofrecording, classifying andsummarizing in a significant manner in terms ofmoney, transaction and events which are in part atleast of a financial character and interpreting the

result thereof.Difference between B.K. and Acc.Account

DebitCreditDepreciationSolvent

Insolvent

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Objectives of Accounting

To Know Profit or Loss

To Know Financial Position

To Facilitate Management for Control

Provides Accounting Information to Users

Maintenance of Businss Records

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Use r of Accounting Information1)Internal Users

Owner

Management

Employees or Workers2)External Users

Investors

Creditors

Government

Banks and Financial Institutions

Foreigners

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Limitations of Accounting

Accounting is not fully Exact

Accounting does not Indicate theRealisable Values

Accounting Ignores the QualitativeElements

Accounting Ignores the Effect of

Price Level Accounting may Lead to Window

Dressing

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Branches of Accounting

Financial Accounting

Cost Accounting

Management Accounting

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ACCOUNTING PRINCIPLES

Accounting Principles may be definedas those rules of action which areadopted by accountants universally

while recording transactions. "Principles of Accounting are general

laws or rules adopted or proposed as

a guide to action, a settled ground orbasis of conduct or practice." The American Institute of Certified

Public Accountants

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The term 'Concepts' includesthose basic assumptions orconditions upon which theaccounting is based.

The Business Entity Concept The Money Measurement Concept

The Going Concern Concept

Accounting Period Concept The Cost Concept

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The Dual Aspect Concept

The Revenue Recognition Concept

The Matching Concept

The Accrual Concept

The Verifiable Objective Concept

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ACCOUNTING CONVENTIONS

Convention of Full Disclosure

Convention of Consistency

Convention of Prudence or

Conservatism

Materality Convention

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Journal

A primary book of accounts in whichtransactions are originally recorded ina chronological order. The process ofrecording a transaction in a journal isknown as journalizing.

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Rules of Entries

Personal Account :

Debit the receiver & credit the giver

Ex. : Ram sold goods to Mohan.

Mohan Receiver Dr

Ram Giver Cr

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Real A/c :

Debit what comes in & Credit whatgoes out.

Ex. : Machine purchase for cash.

Machine is Coming Dr

Cash

is Going

Cr

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Nominal A/c : Dr all the losses and exps. and Cr

all the gain and incomes.

Ex. :Rent PaidExpenseDr.

(Rent)

Rent Received Income Cr.(Rent)

Rule for Assets : Debit increas invalue of assets and credit decreasin value of assets.

Rules for Liability : Debit decrease

in value of liability and credit

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Steps of Journalising

1. Identify the things betweenwhich transaction taken place.

2. Classifying these things

(Personal, Real, Nominal) 3. Apply the rules of entry.

4. Prepare Entry : First show debit

and than credit in second line usingthe word 'To'.

ACCOUNTING EQUATION

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ACCOUNTING EQUATION

An Accounting Equation is based on

the dual aspect concept. In the dualaspect concept, we discussed thatevery business transaction has a two-sided effect, that is, on the assets andalso claims on assets. The total claims(those of outsiders and of theproprietors) will always equal the total

assets of the firm.

Assets = Liabilities + Capital

T ti Aff ti T

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Transactions Affecting TwoItems

Transactions affecting opposite sideare :

Increase in Asset, Increase in

Liability Decrease in Liability, Decrease in

Asset

Increase in Asset, Increase inOwner's Equity

Decrease in Owner's Capital,

Decrease in Asset

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