introduction to financial accounting jan 2014

Introduction
to
Financial
Accounting

What is Accounting?

Accounting is an art of recording, classifying and summarizing all financial transactions and interpreting the results.

Groups interested in
Accounting Information

Owners/Proprietors

Management

Potential Investors

Creditors

Employees

Government

Researchers

Citizens / communities

Why is Accounting Required?

To Know -

Whether business is making a profit or loss (for a non-profit institution this would be surplus / deficit of income over expenditure)

The financial position of business / institution

What to pay ? (Liability)

Whom to pay?

How much to pay?

Why is Accounting Required? Contd..

What to collect? (Asset)

From whom to collect?

How much to collect?

From where is the money coming?

Where is it going?

What are the Costs?

What is the Revenue?

What decisions to take?

Kinds of Accounts

Personal (accounts of a person or institution)

Impersonal (all other accounts)

Kinds of Accounts
Contd...

Personal Account

Proprietor CreditorsDebtors

RamyaKarnataka BankIndian Institute of Science etc.

Kinds of Accounts
Contd...

Impersonal

Real Nominal(Tangible- what you(Intangible what cannot

Can touch and feel)be touched or seen)

.

Kinds of Accounts
Contd...

Real

Assets Goods(meant for use) (meant for resale)

.

cash, furniture,

Assets are usually classified into Fixed Assets (life/ use > 1 year) like Building, Furniture and Current Assets (life/ use > 1 year) like cash, stamps etc.

Kinds of Accounts
Contd...

Nominal

Expenses & Income & Losses Gains

.

conveyance, Interest recd. refreshment etc.. Sales

Rules for Debit & Credit

PERSONAL ACCOUNTS

Debit the receiver. Credit the giver

REAL ACCOUNTS

Debit what comes in. Credit what goes out

Rules for Debit & Credit
Contd...

NOMINAL ACCOUNTS

Debit all expenses & losses Credit all gains & income

IN DOUBLE ENTRY SYSTEM, EVERYTRANSACTION HAS TWO ASPECTS - DEBIT & CREDITThe sum of debit always = sum of credit for EVERY transaction

Books of Accounts

Journal (Book of first or original entry, maintained date wise)Purchase Day Book

Sales Day Book

Ledger (party wise record)Debtors Ledger

Creditors Ledger

General Ledger

Cash Book (this is both journal and ledger)

In modern computerised systems, transaction is recorded once and both the Journal and Ledger are reports

The Accounting Transaction
Moves from the Source Document to Books of
Accounts

1. Source Document

2. Voucher

3. Recording in Journal / Cash Book / Purchase / Sales Book

4. Posting in Ledgers

5. Preparation of Trial Balance and financial statements

Flow of transaction

Accounting Concepts

Entity

Going concern

Consistency

Accrual - Mercantile & Cash system

Materiality

Cost

Accounting Conventions

Conservatism

Disclosure

Accounting policies - Indian

International Accounting standards

Inventory valuation

Depreciation

Revenue recognition

Pass Accounting Entries For

Cash paid - Rs.5,000/- to customer Ramya

Fee of Rs.20,000/- recovered from Malini

by cheque

Rs.20,000/- transferred from Ravis A/c to Ganesh's A/c

Salary Rs.6,000/- paid to Raji by cash

Contd....

Rent for June paid Rs.4,000/- by cheque

Computer purchased for Rs.100,000/- on 30 days credit from IBM

Printing expenses of Rs.10,000/-

provided for

Conveyance paid to Anita Rs.250/- cash

Contd....

Furniture purchased for Rs.5,000/- paid by cheque

Sold software for Rs.50,000/- and received cash for the same

Test

1. Ramya A/c To Cash A/c2. Bank A/c To Fees A/c3. Mr. Ganeshs A/c To Mr. Ravis A/c4. Salaries A/c To Cash A/c

DR CR 5,000 5,00020,00020,00020,00020,000 6,000 6,000

TestContd...

5. Rent A/c To Bank A/c6. Computers A/c To I.B.M. A/c7. Printing exp A/c To accrued Expenses A/c

DR CR 4,000 4,000100,000100,000 10,000 10,000

TestContd...

8. Conveyance exp To cash 9. Furniture To Bank10. Cash To Sales A/c

DR CR 250 2505,000 5,00050,000 50,000

Ledger Accounts
Cash Book

Dr.Cr.

Date ParticularsAmt Date Particulars Amt

To Sales A/c50000 By Ramya 5000 By Salaries 6000 By Conveyance 250 By Balance c/f 38750_____ _____50000 50000 ===== =====To Bal. b/f38750

Ledger Accounts
Bank Book

Dr.Cr.


To fees20000 By Rent 4000 By Furniture 5000 By Balance c/f 11000_____ _____20000 20000 ===== =====To Bal. b/f11000

Ledger Accounts
Ram A/c

Dr.Cr.


To cash 5000 By Balance c/f 5000_____ _____ 5000 5000 ===== =====To Bal. b/f 5000

Ledger Accounts
Fees A/c

Dr.Cr.


To Balc/f 20000 By Bank 20000_____ _____ 20000 20000 ===== ===== By Bal b/f 20000

Ledger Accounts
Ganesh A/c

Dr.Cr.


To Ravi A/c 20000 By Bal c/f 20000_____ _____ 20000 20000 ===== =====To Bal b/f 20000

Ledger Accounts
Ravi A/c

Dr.Cr.


To Bal c/f 20000 By Ganesh 20000===== ===== By Bal b/f 20000

Ledger Accounts
Salaries A/c

Dr.Cr.


To cash 6000 By Bal c/f 6000===== =====To Bal b/f 6000

Ledger Accounts
Rent A/c

Dr.Cr.


To bank 4000 By Bal c/f 4000===== =====To Bal b/f 4000

Ledger Accounts
Computer A/c

Dr.Cr.


To IBM a/c 100000 By Bal c/f 100000===== =====To Bal b/f 100000

Ledger Accounts
IBM A/c

Dr.Cr.


To Bal c/f 100000 By computers 100000===== ===== By Bal b/f 100000

Ledger Accounts
Printing Expense A/c

Dr.Cr.


To Accrued 10000 By Bal c/f 10000 expenses ===== ====To Bal b/f 10000

Ledger Accounts
Accrued Expenses A/c

Dr.Cr.


To Bal c/f 10000 By Printing 10000===== expenses ==== By Bal b/f 10000

Ledger Accounts
Conveyance Expense A/c

Dr.Cr.


To cash 250 By Bal c/f 250==== ===To Bal b/f 250

Ledger Accounts
Furniture A/c

Dr.Cr.


To Bank 5000 By Bal c/f 5000==== ===To Bal b/f 5000

Trial Balance

When all the accounts of a concern are

balanced off, then they are put in a list called Trial Balance

The first column is the Particulars which consists of name of each account

The second column is the Debit which consists of debit balance

The third column is the Credit which consists of all credit balance

Trial Balance Format Contd....

Particulars

Debit

Credit

Sl.No.

1Share Capital 1,90,0002 Commission 2,60,0003 Fixed Deposits 1,50,0004 Reserve Fund 1,40,0005 Audit Fees 5,0006 Salaries 2,15,000

Total 4,80,000 4,80,000

Trial Balance Contd....

The total of the debit side must be equal to that of its credit side.

This is based on the principle that in Double Entry System, for every debit there must be a credit.

The Trial Balance is the basis for the preparation of the financial statements - Balance Sheet and Profit & Loss Account

Balance Sheet

Statement of Assets and Liabilities andhence made as atA predetermined date of a month or year Balance Sheet as at 31.12.1997 Balance sheet as at 31.03.1998

Profit & Loss Account

Statement showing Profit or Loss for a period ending on A Month, A Quarter, A Year Profit & Loss Account for the year ended 31.12.1997 Profit & Loss Account for the period Jan to June 96

Assets

Current Assets

Cash

Investments

Accounts Receivable

Prepaid Expenses

Raw Materials

Work in Progress

Finished Goods

Assets Contd...

Fixed Assets

Land

Buildings

Plant & Machinery

Assets Valuation

Do I value at Cost?Do I value at Market Price?Do I consider what the Asset will Realise?OrIs it Cost Less Depreciation??

CURRENT ASSETS

AtCost or Market Value

FIXED ASSETSAtCost or RevaluationLESSAccumulated Depreciation

Liabilities

Current Liabilities

Accounts Payable

Provisions

Fixed Liabilities

Loans - Unsecured

Loans - Secured

Shareholders Funds

Share Capital

Reserves

Shareholders Funds

Owners Funds

Initial Investment

Profits from Business