Financial Accounting

Definition of Accounting:The art of recording, classifying and summarizing the

business transactions and finally to prepare the financial

statement i.e. Income statement and Balance sheet. From the above definition its obvious that accounting is mainly concerned with, 1) Recording of business data (Journal) 2) Classification of Recorded Data (Ledger) 3) Analysis of Summarized Data (Trial Balance) 4) Preparation of Statements & Reports

 Transaction:

an instance of doing business of some kind, e.g., a purchase made in a shop or a withdrawal of funds from a bank account.

The Main purpose of Accounting for business is to

determine the profit or loss for accounting period.

JOURNAL:When any transaction takes place. It is recorded in a book called as journal at the time of its accordance. It is also called as Day Book.

LEDGER:From journal, the transaction is posted in another book called as ledger. In this book the entries are classified under various leads of accounts. The ledger is balanced at frequent invest.

Trail Balance: The balance taken from the ledgers are written in a two

columns statement, which is called as Trial Balance. The trial balance is prepared to prove the accuracy of the record.

Financial Statement: It means the statement shows the financial position of

a business organization after a year are called financial statement.

Financial Statement
Income Statement
The main objectives of this Statement to show the either profit or loss in the end of accounting period, In short we can say that It is the summary of all Revenues and expenses Related to accounting Period.

Balance Sheet

Balance sheet show the Financial position of the firm on certain fixed date Usually at the closed of the financial period.

The ACCOUNTING CYCLE

Transaction

(Business Documents)

Financial Statements

Journals

(Income Statement & Balance Sheet)

(Original Records)

Trial Balance

Ledger

( Summarizing)

(Classification)

Accounting Terminologies
Accounts Receivables Vs Accounts Payable:
A person to whom goods are sold on credit by business

organization is called Accounts Receivables or debtors.

A person from whom a business organization or

individual purchased goods on credit is called Creditor.

Discount Vs Commission
Discount may be trade discount or cash discount,

trade discount when concession or rebate is given by seller to buyer on list or scheduled prize of goods at the spot of sale is called trade discount and there is no account of trade discount.
Cash Discount which is allowed or received at the

time of cash payment on credit sale or purchase is called cash discount. It has two types : Discount Received or Discount Allowed:

Discount Vs Commission
Commission
Remuneration for services performed by one person to another. Normally on the percentage basis is called commission

Assets & Equities

Assets refers to all the valuable properties , possessed by the business. Such as, land, building, machinery, furniture, cash, account receivable /debtor, equipment, Bank, Equities Means the claim against these assets. Equities are further divided into Capital and liabilities.

Capital refer to the owner equity which means the right of the owner in the assets of the firm. And liability refer to outside equities which means the right of the outsider in the asset of the firm.

Balance Sheet Equation

Asset = Liability + Capital 100 = 40 + 60 Transaction The act of buying and selling of goods is called transaction. OR any dealing between two parties (seller and buyer) about goods is called transaction. Types of transaction There are two types of transaction. 1. Cash transaction. 2. Credit transaction.

Cash Transaction:whenever you purchase or sale the goods on cash. For example Mr. ALI purchase goods on cash. That is cash transaction. Credit Transaction:whenever you purchase or sale goods on credit or on account. For example Mr. ALI purchase goods on credit. Account:It is a device, which contains a systematic record of increase or decrease in an item during a certain/particular period of time.

Stock:Goods or merchandise on hand, that is goods remaining unsold, is called stock, Inventory or Stock in trade. Bad debts:The amount, which cannot be received from debtors, is called bad debts or uncollectibles. Current assets:Which are either cash or easily convertible into cash. The life of current assets is less than one year. The examples of such assets are Cash, Bank, Accounts receivable, Notes receivable, and Stock etc.

Fixed Assets:These assets are acquired to retain and use in business operation e.g. Land, Building, Plant & Machinery, Furniture & Fixtures, Motor Vehicles etc. The life of fixed assets are more than one year. Owners equity/Capital:The money which is invested by owner in the business is called capital. It is the claim of the owners on the assets of the business organization. It is also internal equities or owners fund. Liability:It is the claim of the outsiders against the assets of the enterprise. The liabilities also called external equities.

Drawings:The cash or commodities withdraw by the owner for his personal uses from business are known as drawings. Proprietor/ Owner:The owner of the business is called proprietor. He invests capital (cash, goods and services) in the business, gives his time and attention to it. Voucher:-

A written evidence in support of a transaction is called a voucher. The voucher may be cash memo, bill, invoice etc.

Cash memo:-

Any written proof evidence for the goods purchased from a particular seller is called cash memo. For example: if we purchase a book from bookseller, he gives a cash memo or bill. The cash memo is a voucher for the payment. Invoice:A written evidence /document given by the seller to the buyer for credit sale of goods is called invoice.
Business:Any legally activity undertaken to earn profit is called Business.