UNIT-IV

FINANCIAL ACCOUNTING

 Accounting concepts and Conventions

 Accounting Equation, Double-Entry system of Accounting
 Rules for maintaining Books of Accounts
 Journal
 Posting to Ledger
 Preparation of Trial Balance
 Elements of Financial Statements
 Preparation of Final Accounts
 Review
 Review

FINANCIAL ACCOUNTING
 The main object of any business is to make profits. It is may be a
business engaged in the purchase and sales of goods or it may be
engaged in the production of goods or provision of services whatever be
it’s nature, the main object is to earn profits.
A businessman enters into business in order to earn profits. in
the businessman wishes to find out how much profit he has made during
a given period, he must be able to remember all the transactions that
have taken place in his business. But it is not possible for any
businessman to remember all the transactions that have takes place in
his business. So he has to record them in his books of accounts.
Book-keeping is the art of recording all business transactions in
the books of account maintained by businessman for that purpose.
Keeping a separate book to recording all the business transaction
by using principle of accounting is also called Book-keeping.
Accounting is an art as well as sciences of identifying, analyzing,
recording, classifying and summarizing of business transactions which
are of a financial character and are expressed in terms of money. It also
includes interpretation aspect of the recorded information and the result
of accounts can be submit to the require persons in the business
(Accountants)
Objectives of Book keeping & Accountancy:-
 To ascertainment of financial position of the business organization.
To determine the profit and loss of organization
 To knowing the information about capital employed in the business.
 To know the value of asset of the organization
 Calculation of amounts due to and due by others.
 To know how much tax to pay to the government
 To comparison between the current year and the previous years
records.
 To plan the organization
 To make the financial decisions of the business
DOUBLE ACCOUNTING SYSTEM
Double entry system of Book-keeping is simple and universal in its
application. It has the test of four hundred years continuous use. It may
be claimed that it is the only system worthy of adoption by the practical
businessman. To understand the system of double entry system of book-
keeping all that we need to remember is the fundamental rule:
“Debit the account which receives the benefit.”
“Credit the account which gives the benefit”

Types of account
1) Personal Account
2) Real Account
3) Nominal Account

RULES FOR DEBIT & CREDIT.

1) Personal Account: - This account deals with the individuals of the
organization these includes accounts of natural persons in varied
capacities likes suppliers and buyers of goods, lenders and borrowers of
loans etc. “Debit the receiver”
“Credit the giver”
2) Real Account: - This account deals with the group of individuals of
the organization these include combinations of the properties or assets
are known as real account.
“Debit what comes in”
“Credit what goes out”
3) Nominal Account: - Nominal accounts relate to such items which
exist in name only. These items pertain to expenses and gains like
interest, rent, commission, discount, salary etc,
“Debit all expenses and losses”
“Credit all incomes and gains”

JOURNAL
In the early evaluation of book-keeping traders used to record the
business transactions in a simple manner in the Waste book or Rough
book. The waste book is a book in which a businessman briefly notes
down each transaction as soon as it takes place. Transaction is writing in
this very first so it is also called Book of Prime or First Entry Book.
Journal format

Date Particulars Dr Amount Cr Amount

 LEDGER
Ledger is the secondary book of accounts all business
transactions are recorded in the first instance in the journal, but they
must find their place ultimately in the accounts in the ledger in a duly
classified form. This ledger are also called final entry book. OR
Transferring of all journals in to accounts by using accounting principles
is called ledger.
DR ledger format CR

Date Particulars L F.N Amount Date Particulars LFN Amount

CASH BOOK
Every businessman receives cash and pays cash practically every
day. All the receipts and payments of cash are recorded in a separate
book called the “Cash book” in modern times cash includes not only legal
tender money like notes and coins but also other forms of money like
cheque bank, drafts. Etc.
KINDS OF CASH BOOKS
The following are the most common ones
 Simple or single column cash book

 Two or Double column cash book

 Three or Triple column cash book

Single Column Cash Book: The single column cash book are also called
simple cash book it has only one amount column representing cash with
the office. This cash book is ruled just like on ordinary ledger account.
The following is the format of simple cash Book.
DR Cash Book CR

Date Particulars Amount Date Particulars Amount

Double Column cash Book:
This book contains one extra column for discount on either side of
the cash book in addition to the usual columns of a simple cash book.
Since cash received and discount allowed on the debit side of the cash
book. Similarly as discount received and cash paid on the credit side of
the cash book. As there will be two amount column now one for the
discount and the other for cash, the cash book of this type is referred to
as two column or double column cash book. The format is given below. .
DR Double Column cash Book CR
A R
Date Particular Dis Amount Date Particulars Dis Amount

Triple Column Cash Book: In case the business man maintains an

account with the bank the above mentioned two kinds of cash book do
not suit his need or requirements cash book should keep a full record not
only of cash and discount but also of bank transactions for this purpose a
‘Bank” column is added to either side of the cash book just after cash
column. As this cash and Bank column it is called three columns “Cash
Book”. The format of a three column cash book is given below.

DR Triple Column Cash Book CR

Date Particular Dis C B Date Particulars Dis C B

** C: CASH B: BAN
CONTRA ENTRIES
Contra, in Latin, means the other side. If the double entry of a
transaction is complete in the cash book itself such entry is called
‘Contra Entry’ contra entry arises only when cash account and bank
account are simultaneously involved in a transactions.
 It happens only when either cash is deposited in the bank or cash is
withdrawn from it for office use. In both cases entries have to be made in
‘cash’ as well as ‘Bank’ columns.
TRIAL BALANCE
Trail balance is a statement containing closing balances of the
ledger accounts. It is prepared to verify the arithmetical accuracy
whether the totals of the debit column and the credit column are equal or
not.
When all the ledger accounts are balanced the account which is
showing debit balance will be entered on debit side of trial balance and
the account which is showing credit side will be entered on the credit
side of trial balance. The totals of debit side must be equal to the total of
credit side. However, even if the two sides are equal it does not show the
conclusive proof of the correctness of books.
Characteristic of a Trial Balance:
1. It is a statement prepared in tabular form.

2. Trial balance is a statement of closing balance but it is not an

account. It is prepared to verify the arithmetical accuracy.

3. Preparation of trial balance will leads to preparation of final

accounts. General format of Trial Balance

Debi
Particulars Particulars Credit
t
Opening stock Sales
Purchases Commission receive
Carriage inwards bad debts reserve
wages interest received
All factory & commission receiv
manufacturing interest on drawing
exp (factory rent discount on creditors
factory Capital
Insurance factory Bank loan
lighting.) Bank overdraft
Oil, water. Gas. Income received in
Coal. Fuel, power advance
excise duty.octroi Creditors
trade expenses Bills payable
Salaries All other loans
Rent rates & taxes
Advertising
Audit fees, legal
charges
Insurance
Bad debts
Repairs
Discount allowed
Printing& stationary
Postage& telegrams
Commission paid (dr)
Interest on capital
Interest on loan
Carriage outwards
All depreciations
All management exp
All office exp
General exp
Discount on debtors
Selling exp
Cash in hand
Cash at bank
Debtors
Furniture
Buildings
Good will patents
Copy rights.
Bills receivable
Machinery
Motor car
Freehold premises
All fixed variable
assets
Closing stock

XX
XXXX
XX

ELEMENTS OF FINANCIAL STATEMENTS

ASSETS
Assets are probable future economic benefits obtained or controlled by a particular entity as a
result of past transactions or events.

LIABILITIES
Liabilities are probable future sacrifices of economic benefits arising from present obligations
of a particular entity to transfer assets or provide services to other entities in the future as a
result of past transactions or events.

EQUITY
Equity or net assets is the residual interest in the assets of an entity that remains after
deducting its liabilities.

COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It includes all
changes in equity during a period except those resulting from investments by owners and
distributions to owner.

REVENUES
Revenues are inflows or other enhancements of assets of an entity or settlements of its
liabilities (or a combination of both) from delivering or producing goods, rendering services,
or other activities that constitute the entity’s ongoing major or central operations.

EXPENSES
Expenses are outflows or other using up of assets or incurrences of liabilities (or a
combination of both) from delivering or producing goods, rendering services, or carrying out
other activities that constitute the entity’s ongoing major or central operations.

GAINS
Gains are increases in equity (net assets) from peripheral or incidental transactions of an
entity and from all other transactions and other events and circumstances affecting the entity
except those that result from revenues or investments by owners.

LOSSES
Losses are decreases in equity (net assets) from peripheral or incidental transactions of an
entity and from all other transactions and other events and circumstances affecting the entity
except those that result from expenses or distributions to owners.

FINAL ACCOUNTS

One of the main objects of maintaining accounts is to find out the

profit or loss made by the business during a period and to ascertain the
financial position of the business as a given date. In order to know the
profit or loss made by the business, Trading and profit and loss Account
is prepared. The position of the business on the last date of the financial
year will be revealed by the Balance sheet. The trading and profit and
loss account and balance sheet prepared by the businessman at the end
of the trading period are called Final accounts.
In order to ascertain its income and also to assess the position of
assets and liabilities statements are prepared are know as financial
statement. These statements are also called with their traditional name
as Final Accounts
Final statements are divided in two parts. i.e., income statements
and position statements. The term income statement is traditionally
known as Trading and Profit and Loss account and position statements
are known as Balance sheet.

Preparation of Final Accounts:

There are three following stages of preparing final accounts of a trading
concern.
 Trading Account
 Profit and Loss Account
 Balance Sheet
Trading Account:-
Trading account is prepared mainly to know the
“Profitability” of the goods brought and sold by the businessman. It show
the result of trading i.e. buying and selling of goods called “Gross Profit
or Gross Loss”
“The difference between the sales and cost of goods sold is Gross
Profit or Gross Loss”
Trading account is prepared in “T”form just like any other accounts
expect the date and journal folio column are not provided.
Profit and Loss Account:-
The profit and loss account is an account, which shows the net
Profit or net loss of a business for a particular period. All indirect
expenses such as Administrative or Management expenses, selling and
Distribution Expenses. Financial expenses and other items such as
depreciation, etc are taken debit side. Gross profit and all other income
items are taken credit side. Such as interest received, discount received,
ect. The difference between two sides is either Net profit or Net Loss,
which is transferred to Capital Account.
Balance Sheet: -
Balance sheet is prepared to know the financial position of a
business on a particular date. It is a statement, which shows the assets
and liabilities of a business as on a particular date. It shows” what a
business owns and what it owes” Balance sheet is a statement and not an
account it does not have Debit and Credit sides. It is divided in to two
sides left side and right side. The left side is called the liabilities side and
the right side is called the assets side.
ADJUSTMENTS
An adjustment is a transaction which has not been taken into consideration while
preparing the trial balance. But now considered for the purpose of preparing final accounts
If any item of adjustment appears outside the trial balance. it will e shown at two
places in the final accounts. The treatment of such item has been shown as follows.
Treating of Adjustments
The treatment of such main items is as follows
1) CLOSING STOCK
IN THE TRADING ACCOUNT CR SIDE
IN THE BALANCE SHEET ASSET SIDE
2) OUTSTANDING WAGES
IN THE TRADING ACCOUNT ADD TO WAGES
IN THE BALANCE SHEET LIABILITIES
 3) OUTSTANDING SALARIES
IN THE TRADING ACCOUNT ADD TO SALARIES
IN THE BALANCE SHEET LIABILITIES SIDE
4) PREPAID INSURANCE
IN THE P & L A/C LESS FROM INSURANCE
IN THE BALANCE SHEET ASSETS SIDE
5) INTEREST ON CAPITAL
IN THE P & L A/C DR SIDE
IN THE BALANCE SHEET ADD TO CAPITAL

PROFORMA OF FINAL ACCOUNTS

Dr Trading and Profit & Loss Account Cr
Particulars Amount Particulars Amount
To opening stock By sales
To purchases Less: sales returns
Less: pur. Returns By stolen goods
To carriage inwards By closing stock
To wages By Gross loss (transfer
Add. Out standings to p &l a/c
To all factory &
manufacturing exp
(factory rent factory
insurance factory
lighting.)
To oil, water. Gas.
To coal. Fuel, power
To excise duty.octroi
To trade expenses
To Gross profit
(transfer to p &la/c)
By Gross loss
To Gross profit By commission received
To salaries By bad debts reserve
Add outstanding By interest received
To rent rates & taxes By commission received
To Advertising By interest on drawings
To Audit fees, legal By discount on creditors
charges
To Insurance
Less prepaid insurance
To bad debts
To repairs
To discount allowed
To printing& stationary
To postage& telegrams
To commission paid (dr)
To interest on capital
To interest on loan
To carriage outwards
To all depreciations
To all management exp
To all office exp
To general exp
To discount on debtors By Net loss (transfer to
To selling exp capital a/c)
To Net profit (transfer to
capital a/c)

BALANCE SHEET
Liabilities Assets
Amouts Amount
s
Capital Cash in hand
Add :Int on cap Cash at bank
Add :Net profit Debtors
or Less Bad debts
Less: Net loss Furniture
Less depreciation
Less: drawings Buildings
Less: Int on Less depreciation
drawings Good will patents
Bank loan Copy rights.
Bank overdraft Bills receivable
Income received in Machinery
advance Less Depreciation
Creditors Motor car
Less Discount on Less depreciation
creditors Prepaid
Bills payable expenses(insurance)
All other loans Freehold premises
Outstanding wages, All fixed variable assets
salaries Closing stock