Introduction to Financial

Accounting

Why study financial

accounting

Users
Capital market: Investors, Lenders,
Analysts
Product market: Competitors, Suppliers
& Customers
Regulatory forces: Securities
Regulators, Government
Labour market: Managers & Employees
Civil Society

Assumptions underlying accounting

measurement

Accounting entity
Going concern
Periodicity
Money measurement

The set of conventions, rules and

procedures that define accepted
accounting practice is referred to as
generally
accepted
accounting
principles (GAAP)

The accounting Equation

Assets = Liabilities + Equity

Assets: resources from which future benefits are

expected
Liabilities:

Obligations to be paid in future

Equity: Owners claim

Owns

= Owes

Assets? Liabilities? Equity?

Cash
Debtors
Supplies or inventory
Loan payable
Equity
Equipment
Building
Land
Expenses payable

Examples
Hot Choc. has assets of Rs. 87000 and
liabilities of Rs. 53000. How much is its
equity?
Rs. 34000

Examples
ABC co. on Sept 30 has following items
cash 10000, Inventory 10000, Equity 15000
What is the amount of expenses payables
Cash + Inventory = Equity + Expenses payable
10000 + 10000 = 15000 + Expenses payable
5000 = Expenses payable

Examples
Athicas equity is twice its liabilities. Its
assets are worth Rs. 81000. How much
are its liabilities
Assets = liabilities + equity
Assets = liabilities + 2*liabilities
Assets = 27000

Effect of transactions
On March 1, Suresh starts Signity
Software Solutions by investing Rs.
50000 in cash

Balance sheet on March 1

Liabilities and
Equity
Equity
Total
50000

Assets

50000 Cash
Total
50000

50000

On March 2, he takes bank loan of Rs.

20000 for business

Balance sheet on March 2

Liabilities
and Equity

Amount Assets
(Rs.)

Amount
(Rs.)

Equity
Bank Loan

50000 Cash
20000

70000

Total

70000 Total

70000

On March 3, Signity Software Solutions

buys computers worth Rs. 30000

Balance sheet on March 3

Liabilities
and Equity
Equity
Bank Loan
Total

Amount Assets
(Rs.)
50000 Cash
20000 Compute
rs
70000 Total

Amount
(Rs.)
40000
30000
70000

On March 4, Signity Software Solutions

purchases computer supplies for Rs.
12000.
The supplier agreed to give credit for 3
days.

Balance sheet on March 4

Liabilities
and Equity
Equity
Bank Loan
Creditor
Total

Amount Assets
(Rs.)
50000 Cash
20000 Compute
rs
12000 Supplies
82000 Total

Amount
(Rs.)
40000
30000
12000
82000

On March 5, Signity sells its first

software for Rs. 25000. The buyer pays
in cash

Balance sheet on March 5

Liabilities
and Equity
Equity
Bank Loan
Creditor
Total

Amount Assets
(Rs.)
75000 Cash
20000 Compute
rs
12000 Supplies
107000 Total

Amount
(Rs.)
65000
30000
12000
107000

On March 7, its pays off the creditor

Balance sheet on March 7

Liabilities
and Equity
Equity
Bank Loan

Total

Amount Assets
(Rs.)
75000 Cash
20000 Compute
rs
Supplies
95000 Total

Amount
(Rs.)
53000
30000
12000
95000

On March 8, it sells software worth Rs.

20000 to Amby retail. Payment to be
received in 7 days

Balance sheet on March 8

Liabilities
and Equity
Equity
Bank Loan

Total

Amount Assets
(Rs.)
95000 Cash
20000 Compute
rs
Supplies
Debtors
115000 Total

Amount
(Rs.)
53000
30000
12000
20000
115000

On March 9, it pays salary of Rs. 25000

and rent of Rs. 16000

Balance sheet on March 9

Liabilities
and Equity
Equity
Bank Loan

Total

Amount Assets
(Rs.)
54000 Cash
20000 Compute
rs
Supplies
Debtors
74000 Total

Amount
(Rs.)
12000
30000
12000
20000
74000

On March 10, owner withdraws Rs.

7000 for personal use

Balance sheet on March 10

Liabilities
and Equity
Equity
Bank Loan

Total

Amount Assets
(Rs.)
47000 Cash
20000 Compute
rs
Supplies
Debtors
67000 Total

Amount
(Rs.)
5000
30000
12000
20000
67000

Processing Transactions
Accounts: An account is an individual
record of increase or decrease in an
item that is likely to be of interest
and importance
Ledger: is a collection of entire group
of accounts of a business

Classification of commonly used

accounts
Assets
Land
Building
Plant & Machinery
Office equipment
Furniture
Prepaid expenses
Advance to suppliers account
Debtors: separate accounts for individual debtors
Bills receivable
Cash

Liabilities
Bills Payable
Creditors : separate accounts for
individual debtors
Unearned revenue
Advances from customers
Payable A/cs like Salary payable, rent
payable etc.
Long term liabilities: Bank loan,
debentures etc.

Equity Accounts
Share Capital
Retained earnings
Revenues and expenses: revenues
increase equity, expenses decrease
equity
Drawings
Dividends

The T Account
Title of account
Debit

Credit

The difference in amounts between total debits

and total credits is called balance
If total debits exceed total credits account has
debit balance
If total credits exceed total debits account has
credit balance

Rules for debit and credit

Assets
Debit to increase

Liabilities
Credit to increase

Equity
Credit to increase

Fashion concepts company

On June 1, Rakesh invested Rs. 50000 and received
5000 shares in share capital of the company
On June 2, bought office supplies for cash Rs. 2000
On June 3, paid office rent, Rs. 1500
June 4: Bought office equipment from Agarwal
Company for Rs. 9000 with down payment of Rs. 3000
and agreed to pay the balance in six equal monthly
installments on last day of the month beginning June
June 5: signed an agreement with Ethnic wear to make
a new design for payment of fee of Rs. 12000 on
completion of work

 June 6: paid Rs. 720 for fire insurance policy that

would expire next may
June 7, received fee for design supplied, Rs. 2000
June 8, collected from Kidswear, a customer, for
services to be provided later, Rs. 1500
June 9: Bought office supplies on credit from
Mohan Co., Rs 3500
June 10: Billed shah co. for designs completed, Rs.
9000
June 14: Paid Mohan co. on account, Rs 1000

 June 18: Collected from shah co., Rs 4000

June 21: Appointed office manager at monthly
salary of Rs. 1500
June 27: Received and paid telephone bill, Rs. 200
June 28: Paid office assistants salary for June Rs.
800
June 29: Received but not paid electricity bill of
Rs. 150
Jun 30: Paid Agarwal co. on account, Rs 1000