INTRODUCTION

TO
FINANCIAL ACCOUNTING

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 What is Finance:
Money
Allocation of assets
Provide funding for (a person or enterprise).

 What is Financial:
The management of large amounts of money,
something related to finance.

 What is Accounting:
Accounting is considered as a system which collects and
processes financial information of a business.
Accounting, which has been called the "language of
business", measures the results of an organization's 2
economic activities and conveys this information to a
variety of users.
 NEED AND IMPORTANCE
 i. Where the money is invested?
 ii. What is the result of the business transactions?
 iii. What are the earnings and expenses?
 iv. How much amount is receivable from customers to whom goods
have been sold on credit?
 v. How much amount is payable to suppliers on account of credit
purchases?
 vi. What are the nature and value of assets possessed by the
business concern?
 vii. What are the nature and value of liabilities of the business
concern?

These and several other questions are answered with the help of
accounting. The need for recording business transactions in a clear
and systematic manner is the basis which gives rise to Book- 3

keeping.
BOOK KEEPING
 Book-keeping is that branch of knowledge which
tells us how to keep a record of business
transactions.
 It is often routine and clerical in nature.

 It is important to note that only those transactions

related to business which can be expressed in terms
of money are recorded.
 The activities of book-keeping include recording in
the journal, posting to the ledger and balancing of
accounts.
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 DEFINITION OF ACCOUNTING

Accounting is the process of Recording,

Classifying, and Summarizing, money
transactions and events in a significant
manner and Analysing & Interpreting
the results thereof and Communicating it
to the people who are interested in such
kind of information.”

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PROCESS

Input Process Output

Recording
Business Classifying
transactions Summarizing Information
(monetary Analyzing to Users
value) Interpreting
Communicating

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 RECORDING: The function of accounting is to
keep a systematic record of all business
transactions, which are identified in an orderly
manner, soon after their occurrence in the journal
or subsidiary books.

 CLASSIFICATION: This is concerned with the

classification of the recorded business transactions
so as to group the transactions of similar type at
one place. i.e., in ledger accounts.

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 SUMMERIASATION: The classified information
available from the ledger is summarized in trial
balance. This information is then used to prepare
profit and loss account and balance sheet in a
manner useful to the users of accounting
information.

 ANALYSIS: It establishes the relationship

between the items of the profit and loss account
and the balance sheet. The purpose of analyzing is
to identify the financial strength and weakness of
the business. It provides the basis for
interpretation.
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 INTERPRETATION: It is concerned with
explaining the meaning and significance of the
relationship so established by the analysis.
Interpretation should be useful to the users, so as
to enable them to take correct decisions.

 COMMUNICATION: The results obtained from

the summarized, analyzed and interpreted
information are communicated to the interested
parties.

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USERS OF ACCOUNTING INFORMATION
 Internal users: Internal users are those individuals
or groups who are within the organization like
owners, management, employees and trade unions.

i. Owners: To know the profitability and financial

soundness of the business.

ii. Management: To take prompt decisions to manage

the business efficiently.

iii. Employees and Trade unions: To form judgment

about the earning capacity of the business since their
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remuneration and bonus depends on it.
 External users: External users are those individuals
or groups who are outside the organization like
creditors banks and other lending institutions,
present and potential investors, Government and tax
authorities, regulatory agencies and researchers

i. Creditors, banks & other lending institutions: To

determine whether the principal the interest thereof
will be paid in when due.

ii. Present investors: To know the position, progress

and prosperity of the business in order to ensure the
safety of their investment.
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iii. Potential investors: To decide whether to invest in
the business or not.

iv. Government and Tax Authority: To know the

earnings in order to assess tax liabilities of the
business.

v. Regulatory agencies: To evaluate the business

operation under the regulatory legislation.

vi. Researchers: To use in their research work.

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CLASSIFICATION OF ACCOUNTING

Accounting

Financial Cost Management

Accounting Accounting Accounting
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 Financial Accounting
Involves recording, classifying and summarizing
transactions of financial nature. The primary
intention is to prepare financial statements for
revealing operating results and financial position of
an enterprise.

 Cost Accounting
It shows classification and analysis of cost on the
basis of functions, processes, products etc. it also
deals with cost computation, cost saving and cost
control.

 Management Accounting
Deals with processing of data generated from 14
financial accounting and cost accounting for
managerial decision making.
MEANING OF ACCOUNTING CYCLE
Balance Balance
sheet sheet
(Closing) (Opening)

Profit and
Loss Transaction
Account

Trading
Journal
Account

Trial 15
Ledger
Balance
BASIC TERMS IN ACCOUNTING

Capital
 Capital generally refers to the amount invested in an
enterprise by its owners. For example if Mr. Anand
starts business with Rs.5,00,000, his capital would be
Rs.5,00,000.

Assets
 Assets are the properties of every description
belonging to the business. Cash in hand, plant and
machinery, furniture and fittings, bank balance,
debtors, bills receivable, stock of goods,
investments, Goodwill are examples for assets.
Assets can be classified into tangible and
intangible.
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Tangible Assets
 These assets are those having physical existence. It
can be seen and touched. For example, plant &
machinery, cash, etc.

Intangible Assets
 Intangible assets are those assets having no physical
existence but their possession gives rise to some rights
and benefits to the owner. It cannot be seen and
touched. Goodwill, patents, trademarks are some of
the examples.

Assets refer to the tangible objects or intangible rights

owned by an enterprise and carrying probable future 17
benefits.
Liability
 Liabilities refer to the financial obligations of a
business. These denote the amounts which a
business owes to others, e.g. loans from banks or
other persons, creditors for goods supplied, bills
payable, outstanding expenses, bank overdraft etc.

Inventory/Stock
 Inventory includes tangible property held for sale
in the ordinary course of business, or in the process
of the production for such sale, or the consumption
in the production of goods or services for sale,
including maintenance supplies and consumables.

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Sales
 Sales refers to the amount of goods sold that are already bought
or manufactured by the business. When goods are sold for cash,
they are cash sales but if goods are sold and payment is not
received at the time of sale, it is credit sales. Total sales includes
both cash and credit sales.

Sundry Debtor
 Sundry debtors are persons from whom amounts are due for
goods sold or services rendered or in respect of contractual
obligations. These are also termed as debtor, trade debtor and
account receivable.

Sales Return or Returns Inward

 When goods are returned from the customers due to defective
quality or not as per the terms of sale, it is called sales return or
returns inward. To find out net sales, sales return is deducted 19
from total sales.
Purchases
 Purchases refers to the amount of goods bought by a business for
resale or for use in the production. Goods purchased for cash are
called cash purchases. If it is purchased on credit, it is called as
credit purchases. Total purchases include both cash and credit
purchases.

Sundry Creditor
 Sundry creditor is the amount owed by an enterprise on account
of goods purchased or services received or in respect of
contractual obligations. It is also termed as trade creditor or
account payable.

Purchases Return or Returns Outward

 When goods are returned to the suppliers due to defective quality
or not as per the terms of purchase, it is called as purchases
return. To find net purchases, purchases return is deducted from20
the total purchases.
Cost of Goods Sold
 In manufacturing operations, it includes the following:
Cost of materials
Labour
Overheads

Expenditure
 Expenditure includes incurring a liability, disbursement
of cash or transfer of property for the purpose of
obtaining assets, goods or services.

Profit
 Profit is a general term for the excess of revenue over
related cost. When the result of this computation is
negative, it is referred to as loss. 21
Profit and Loss Statement
 Profit and loss statement is a financial statement which
presents the revenue and expenses of an enterprise for an
accounting period and shows the excess of revenue over
expenses (or vice versa). It is also known as profit and loss
account.

Balance Sheet
 Balance sheet is a statement of financial position of an
enterprise at a given date. It exhibits a company’s assets,
liabilities, capital, reserves and other account balances at their
respective book value.

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CAPITAL & REVENUE EXPENDITURE AND
INCOME
 Capital Transactions
 The business transactions, which provide benefits or supply services to
the business concern for more than one year or one operating cycle of the
business, are known as capital transactions.

 Capital Expenditure
 Capital expenditure consist of those expenditures, the benefit of which is
carried over to several accounting periods. In other words the benefit of
which is not consumed within one accounting period. It is non-recurring
in nature.

 Capital Receipt
 Capital receipt is one which is invested in the business for a long period.
It includes long term loans obtained from others and any amount realized
on sale of fixed assets. It is generally non-recurring in nature. 23
 Revenue Transactions
 The business transactions, which provide benefits or supplies
services to a business concern for an accounting period only, are
known as revenue transactions. Revenue transactions can be
Revenue Expenditure or Revenue Receipt.

 Revenue Expenditure
 Revenue expenditures consist of those expenditures, which are
incurred in the normal course of business. They are incurred in
order to maintain the existing earning capacity of the business. It
helps in the upkeep of fixed assets. Generally it is recurring in
nature.

 Revenue Receipt
 Revenue receipt is the receipt of income which is earned during
the normal course of business. It is recurring in nature. 24