Acc. Foundation

8/4/2019 Acc. Foundation

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INTERNATIONAL SCHOOL OFBUSINESS AND RESEARCH,

BANGALORE-100

COURSE:SMU

SUBJECT:

Financial Accounting


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Meaning of Business:

Business refers to economic activity

concerned with Production and sales of

goods and services for the purposes of

earning profits.


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1.Introduction

2.Language

WHAT HE OWNS&WHAT HE OWES.


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DEFINITIONS:

1. AICPA-1941

Accounting is the process of recording,

classifying , summarizing data in asignificant manner and in terms ofmoney, transactions, or events whichare financial character andinterpretating the results thereby


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2. AAA-1966(American Accounting Association):

Accounting is the process of

identifying, measuring and

communicating economic

information and decisions by

users information.


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3.APB of the AICPA-1971 (Accounting Principles Board)

The function of accounting is providingquantitative information, primarily offinancial nature about economic

entities.


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Accounting Means:

Accounting is the process of recording,classifying, summarizing data in a

significant manner and in terms of

money, transactions, and events, whichare financial character and interpretating

the results thereby.


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BUSINESS TRANSACTION: (B.T)

Business Transaction means

transfer of money or moneys

worth from one Person to another

person which effects the financialposition of the business.


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NEED FOR ACCOUNTING

PROFIT TO A BUSINESS IS LIKE

FOOD TO HUMAN BODY


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ORIGIN OR ANTECEDENTS OF ACCOUNTING:

B & L about 3000 B.C.

The Chinese some 2000 years in

Europe.

King-Chandra Gupta Maurya.

KAUTILYA ARTHASHASTHRA


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The first professional organization of

accountant was founded in VENICE in 1581.

LUCA DE BARGO PACIOLI -15TH CENTURY

BOOKSUMMAIN ITALIAN LANGUAGE IN 1494

D.E.P DE COMPUTIET SCRIPTURIES


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IN 1785 EDWARD JONES -

D.E.S called ENGLISH SYSTEM OF BOOK

KEEPING It was in this book that uses

many subsidiary book or Special Journals

and preparation of Trial Balance werediscussed.


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As business and society becomemore complex over the years,

accounting developed newtechniques and concepts to meetthe increasing needs for financial

information.


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Is Accounting an art or a science?

Art practical application of knowledge

A science Systematized body of

knowledge-certain principles. (BTs)

In conclude, accounting is an art as well as

a science. But it is not a pure or perfect

science.


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BOOK-KEEPING:

Book- Keeping is an important Branch of

Accounting. B-K is regarded as theFoundation of accounting.


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Meaning of B-K. Book keeping is the

art of recording BTs in a systematic

manner. The recording BTs is done by

a person is called as Book-keeper.

The book keepers work is clerical innature.


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FUNCTIONS OF ACCOUNTING

1.RECORDING - Journal

2.CLASSIFYING -Ledger3.SUMMARISINIG -format (T Bal, TPL a/c. B/S.)

4.IDENTIFYING- determining the BTs to be recorded.

5.MEASURING - EXPRESS THE VALUE OF BTs in terms of money.6.ANALYSIS & INTERPRETATION-

rearrangements

7.COMMUNICATING - results


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ACCOUNTING IS CALLED THE EYES AND

EARS OF THE BUSINESS

BRANCHES OF ACCOUNTING

1.Financial Accounting

2.Management accounting

3.Cost accounting


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Financial Accounting:

It is an important branch of accounting

It helps in recording, classifying andsummarizing business transaction.

Financial statements are prepared

under financial accounting such as P&L

A/C. AND B/S.


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Management Accounting:

It is accounting for the management ie.,

accounting which provides/Furnishaccounting information to managers to

take appropriate decisions for better

Management of business.


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M.A. covers various areas like cost

accounting, budgetary control,

inventory control, Statistical

methods, internal auditing etc.


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COST ACCOUNTING:

It is a special wing of Management

accounting. It involves calculation of the

cost of products and help management in

fixing a fair selling price.


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Basic terms or terminology

1.Transaction or Business Transaction

2.Proprietor or owner

3.Capital (owners capital)

4.Net worth or Net Assets. (A-L=ownersequity)

5.Assets (French word ASSEZ meansenough or sufficient)


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Classification of assets:

1.Fixed Assets

2.Current assets3.Liquid/quick/circulating/floating/

Fluctuating Assets

4.Wasting Assets5.Fictitious / Nominal Assets

6.Tangible Assets and 7)Intangible assets


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Classification of assets:

1.Fixed AssetsL&B, P&M, Furniture etc.

2.Current Assets/Circulating , Floating OrFluctuating assets within 1 year.

(Drs. Stock, investment, cash and Bank Bal.)


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3.Liquid or quick Assets:

Converted into cash Easily or quickly. Cash in

hand cash at bank, B/R, Sundry Drs. Etc.

4.Wasting Assetsdepleted or lose their value

mines, oil-wells, patents, copyrights etc.

5.Nominal or Fictitious assetsno real value Preliminary exp, debit Bal. of P&L A/c. Deferredrevenue exp. Etc.


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6.Tangible assets eg. Building,Furniture, Machinery etc.

7. Intangible assets G/w, patents, copy

Rights, Trade mark and technical

knowledge.


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Valuation of assets:

1.Fixed Assets are valued at cost

less depreciation.

2.Current assets are valued at costor market price which ever islower.

LIABILITIES


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LIABILITIES:

Liabilities are obligations of the

business to pay outside partiesarising from events. In simpleliabilities are claims against the

assets due to purchases, fundsreceived, service rendered.


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Classification of liabilities:

1.Long term liabilities-one year or more(Term loans from bank, FIs, etc)

2.Short term liabilitieswithin 1 year.(BOD, B/P, O/S etc.,)

3.Contingent liabilitiesoccurrence oruncertainthat might arise in the future.


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DebtorsDebtor is a person who owes money to thebusiness. A debtor constitutes an assetsfor the business.

Creditor - Creditor is a person to whom thebusiness owes money. A creditor constitutesa liability for the Business.

Debt-The amount of business due froma person to the business.


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Debit an entry on the left side of an

account is called debit.

Credit- an entry on the right side of anaccount is called credit.

Voucher: a documentary evidence of Ts.

Goods: goods are physical commodities,usually movable & consumed afterproduction.


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Purchase- refers to obtaining goodsexchange for money or on credit.

Drawings - refers to the amount of cash orgoods withdrawn by the proprietor for his

personal or domestic use is known asdrawings.


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Account: means a summarized record ofall the transactions relating to a

particular person, thing, or a servicewhich have taken place during a givenperiod of time.


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Generally Accepted Accounting

Principles (GAAP)

Financial accounting follows a set ofaccounting principles is presenting

financial information. These principles

are Called GAAP.


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GAAP guide the accounting profession in

the choice of accounting techniques & in

the preparation of Financial Statementsconsidered good for Practicing

accountancy.

In India-

-The Accounting Standards Board-ASB;

-The Institute of Chartered Accountants of

IndiaICAI

-Department of Company Affairs, GOI- DCA


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-SEBI ,

-ICWAI (Institute of Cost & Works Accountants of India),

GAAP are primarily relevant to financialaccounting. The guide the selection of

accounting principles are:

1.Accurate Presentation.

2.Conservatism.

3.Profit Maximization.


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1. Accurate presentation accountinginformation is useful if it is accurate.

2.Conservatism In choosing the

principles, A firm may select the set of

principles which provide the most

conservative measure of Net income.

Accelerated depreciation methodLIFO, Cost flow prices are anticipated.


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3.Profit Maximization:

Maximize reported earnings. This is oppositeof conservatism and therefore, accordinglyrevenue should be recognized as quickly aspossible and recognition of expenses should

be postponed as long as possible. Therefore,the straight line method depn. Would beused. The FIFO cost flow assumption wouldbe made.


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4. Income Smoothing:

Under this system/method the section of

accounting methods that result on thesmoothest earnings trend over time.The firm must consider the pattern of

its operations before selecting theappropriate accounting principles.


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THE END


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Accounting Principles,

Concepts & Conventions

M i


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Meaning:

A principle is a Rule of Action OR Guide

to action. So, accounting principles areBroad Guideline or Rules of action to be

adopted for the preparation of accounts

& for the presentation of financial

statements. In shorts, they constitute the

theory base of accounting.


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Accounting Principles.

1.Accounting Concepts2.Accounting conventions.

Concept means an idea or thought. So,accounting concepts are the Fundamental

ideas or basic assumptions underlying the

theory and practice of accounting.

Important accounting concept


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Important accounting concept

1.Money Measurement concept/commondenominator concept.

2.Business Entity Concept/Separate/

Economic/Accounting entity concept.3.Going concern Concept/Continuity

concept

4. Dual aspect concept/Equation/Accounting equation concept.


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5. Cost/Historical concept.

6. Accounting period/Periodicity concept.

7. Matching/Periodical matching Concept(Compared)

C


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8. Accrual Concept (Recognition of Revenue & Expenses)

9. Realization concept (Revenue realization)

10.Objective evidence concept(source of documentsinvoice vouchers etc)


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Accounting Conventions

Meaning:

Accounting conventions are the Customs

or Traditions (Practices) followed by

accountant as guidelines while preparing

accounting statements is called as

accounting conventions.

Important A/cing. Conventions


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Important A/cing. Conventions

1.Convention of Consistency2.Convention of Full Disclosure

3.Convention of Materiality4.Convention of Conservatism

1.Money measurement concept


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1.Money measurement concept

Under this concept, accounting records

Only those transactions which can be

Measured in terms money, though

important shall not be recorded.

Eg. Assets L&B are expressed in

terms of money and not in terms of area.

2 B i E tit t


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2.Business Entity concept.

In accounting business is considered

to be a Separate entity from the

proprietor (s).

Sole trading concern, Joint Stock company,

Partnership Firms is regarded as distinct unit or

entity.

3 G i t


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3.Going concern concept:According to this concept the

business will continue for a fairlylong period of time. A business

will have an indefinite life unless it

is likely to be sale in the nearfuture.


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All that it means is that a businessenterprises will continue to operate for

a fairly long period of time.

D l A t t


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Dual Aspect concept:

This is the basic concept of accounting.

According to this concept every Business

transaction has a dual aspect.

Dual means two.


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It signifies that every business

transaction in accounting has two

aspects.

1.Receiving of some benefit of some

value and2.Giving of some benefit of equal

value.


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Cost/Historical concept:

This concept is closely related to going concernconcept. According to this concept an ASSETS

acquired by a concern is recorded in the books of

accounts at cost (actual price paid). The market

price of the assets is ignored.


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Cost concept:

Both fixed & current assets are acquired

at cost. But under this concept onlyFixed Assets are shown at cost.

Current Assets are shown at cost price

or market price whichever is lower.Therefore, the cost of an assets is

stable while its market price is

variable.


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Accounting period concept:

According to this concept, the life of

the business is divided into appropriate

segments for studying the results. Profit,

in its ultimate sense, means the incomeearned at the time of the Business.

Th f t ti d d


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Therefore, transactions are recorded

in the books of accounts on Assump

tion that profit out of those transac-tions is to be Ascertained for a specifiedperiod is called as A.P.C.

One year, half yearly, yearly monthly

normally 1 year is taken as a

accounting year.

Matching/periodical m concept


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Matching/periodical m. concept

This is based on the accounting

period concept. The paramount

objective of running of a business

is to earn profit.

In order to ascertain the profit


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In order to ascertain the profit

made by the business during a

period, it is necessary that

REVENUES should be matched

with the COSTS (EXPENSES) of

the period.

Revenue is in flow of Assets like cash


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Revenue is in-flow of Assets, like cashreceivablesright to receive cash from

the customers.Revenue is related to the sale of goods

Or supply of services.

Eg. Sale of goods, building rent,

interest from bank, commission.

C


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M. Concept

Expenses are outflows of cash or

usage of goods for the purposes of

Generating revenue in a particular

period.Eg. Salary, postage, rent, depreciation-usage of machine,

carriage etc.

If revenue exceeds expensescalled profit or income.

If Expenses exceeds Revenue- called Loss.


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ACCURAL CONCEPT:

Some thing that becomes due especiallyan amount of money that is yet to be paid

or received at the end of the accounting

period.Revenue is realized at the time of sale of

goods or services irrespective of when

the cash is received.

Realization concept :


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Realization concept.:

According to this concept revenue is recognized

when the goods are delivered to customers orservices are rendered. When revenue should berecorded in the books of accounts.

It says that revenue should be recorded when ithas been realized. Revenue is said to have beenwhen cash has been received or right to receive.

Objective evidence concept:


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Objective evidence concept:

This concept means that all accounting

entries should be evidenced and supported

by sources of documents or business

documents such as invoice, vouchers, etc.

is called as objective evidence concept.

Convention of consistency


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Convention of consistency:

The work consistency refers to continuity inmethods or practices. In Accounting

consistency means followers using the

same accounting methods or practices yearafter year.

A businessman follows the following


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A businessman follows the following

practices or methods generally year

after year.

Eg. Depn. Methods -SLM; WDVM; RM, etc.


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Convention of Full Disclosure:

This convention refers to full disclose

of all the financial information about

the business organization to the

owners and Various interestedpersons.

Therefore, this convention implies that


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Therefore, this convention implies that

accounts must be honestly prepared and all

the material information must be adequatelydisclosed therein.

Eg. Owners, Creditors, Lenders.

Convention of conservatism:


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Convention of conservatism:

Con. of conservatism is a useful tool in

the situations of uncertainty and doubt.

All anticipated or probable losses are recorded

as and when they occur and anticipated profitsare not recorded. Profits are recorded only when

the same has been earned.


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THE END

FOLLOW ASSIGNMENT

LEDGER


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LEDGER(Ledger is a permanent store house of all the Transactions)

Under the theoretical or traditional systemof accounting, after all the transactions are

journalized or recorded, the entries in the

single journal are posted or transferred tothe appropriate accounts in the ledger.

It must be clear by now that every


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It must be clear by now that every

transaction, after first being recorded in a

book of original entry, finds its subsequent

destination in the Ledger.

It is in this book which is properly arranged


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It is in this book which is properly arranged,

classified and condensed/strong form of all

the necessary information regarding the

working of our business.

So, the ledger is designed to accommodate

the various accounts maintained by a trader.

It contains the final and permanent record


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It contains the final and permanent record

of all the transactions in a duly classified

form. A ledger book contains Variousaccounts to which entries are made from

the journal.

The entries in the journal are posted or

transferred to the appropriate accounts in

the ledger periodically,

say weekly fortnightly monthly or


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say, weekly, fortnightly, monthly or

quarterly depending upon the convenience

and the requirements of the business, toknow the exact position of each account on

any particular date.

WHY TRANSACTIONS ARE NOT


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WHY TRANSACTIONS ARE NOT

ENTERED STRAIGHTAWAY IN

THE LEDGER?

The reasons why transactions are not directly


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The reasons why transactions are not directly

entered in the ledger or the reasons why

transactions are first recorded in the journal,and then, posted there from to the ledger are:

1.Recording of transactions directly in theledger will be difficult, if there are number oftransactions.

2. If transactions are straightaway recorded in


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the ledger, it will become really difficult tolocate or trace a transaction after several

recordings (entries) in the account.

3. In the ledger, complete transactions are not

shown in one place. The 2 aspects of atransaction are entered in two differentaccounts. As a result, the information aboutthe transaction is disconnected or separated

or not available in one place.

4 If transactions are recorded in the


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4.If transactions are recorded in theledger directly, the details

concerning a transaction will beinadequate.

5.Making of entries directly in theledger more scope for errors, as a

result the detection and location oferrors more difficult.

In view of the above limitations or difficulties


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involved in the recording of transactions

directly in the ledger, it is better that thetransactions are, first, recorded in the journal

and then posted there from to the ledger.

In fact, in practice, only such a procedure is

followed by all business concerns.

MEANING OF LEDGER:


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The term ledger is derived from theDUTCH word LEGGER which means tolie. Ledger therefore means a bookwhere the various accounts lie (are kept).

A ledger is a book in which all theaccounts of a trader whether Personal orReal or Nominal accounts are kept for

record.

In Ledger, one separate account is


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g , popened for each and every particular typeof transaction.

For every journal entry, one ledgeraccount is to be debited and anotherledger account is to be credited.

Every Ledger account is divided into twosides. The left-side is known as the debitside and the right-side as the credit side.

LEDGER


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LEDGER

ACCOUNT:Meaning of Account: It is a summarized

record of all the transactions relating tothe particular person, thing (Assets) ora Service (Expenses or Income) whichhave taken place during a given periodof time.

OR


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An account or ledger Account is a

summary statement of all thetransactions relating to a particularpersons, assets, expenses or income

which have taken place during a givenperiod of time showing their net effect

is known as Account.

Definitions:


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According to

1.J.R. BATLIBOI:

A ledger is a book which contains

a classified and permanent manner

of all the Business transactions is

called ledger.

2. L.C. CROPER.


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2. L.C. CROPER.

The book which contains a classified

and permanent record of all thetransactions of a business called aLedger.

FEATURES OF A LEDGER:


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The main features of a ledger are:

1. It is an analytical record of Transactions:

As transactions of the same nature arebrought together in one place in the ledger.

2. It is a derived or secondary record,-as the entries in the ledger are derivedfrom the entries in the journal.

3 It is a book of original entry


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3. It is a book of original entry.

In the words of William Pickles, Ledger

is the destination of the entries madein the subsidiary books or journals.

All business transactions are first

recorded in the journal or subsidiarybooks and are finally entered in the

ledger.

4 It is the principal Book of accounts


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4.It is the principal Book of accounts.

It is straightly called the KING OF BOOKS

OF ACCOUNT.

It is the principal or main book of

accounts, because it from this book thatbusinessman can obtain the final

information relating to the profit or loss

and the financial position of his business.

Advantages of ledger:


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Advantages of ledger:

1.It is only the book which gives aproperly arranged, classified andcondensed form of all the necessary

information regarding the working ofour business.

2.It is a permanent record of all thetransaction of a business.


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SRUCTURE OF AN ACCOUNT


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Date Particular J

F

Amt Date Particular J

F

Amt

Total xxx Total

LEDGER


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THE END

PRACTICAL PROBLEMS

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