INTERNATIONAL SCHOOL OF BUSINESS AND RESEARCH, BANGALORE-100 COURSE: SMU

SUBJECT: Financial Accounting

Meaning of Business: Business refers to economic activity concerned with Production and sales of goods and services for the purposes of earning profits.

1.Introduction 2.Language
WHAT HE OWNS & WHAT HE OWES.

DEFINITIONS:
1. AICPA-1941 Accounting is the process of recording, classifying , summarizing data in a significant manner and in terms of money, transactions, or events which are financial character and interpretating the results thereby

2. AAA-1966 (American Accounting Association):

Accounting is the process of identifying, measuring and communicating economic information and decisions by users information.

3.APB of the AICPA-1971

(Accounting Principles Board)

The function of accounting is providing quantitative information, primarily of financial nature about economic entities.

Accounting Means:
Accounting is the process of recording, classifying, summarizing data in a significant manner and in terms of money, transactions, and events, which are financial character and interpretating the results thereby.

BUSINESS TRANSACTION: (B.T)

Business Transaction means transfer of money or moneys worth from one Person to another person which effects the financial position of the business.

NEED FOR ACCOUNTING

PROFIT TO A BUSINESS IS LIKE FOOD TO HUMAN BODY

ORIGIN OR ANTECEDENTS OF ACCOUNTING:

B&L
The Chinese Europe.

about 3000 B.C.

some 2000 years in

King-Chandra Gupta Maurya.

KAUTILYA ARTHASHASTHRA

The first professional organization of accountant was founded in VENICE in 1581.

LUCA DE BARGO PACIOLI -15TH CENTURY

BOOK SUMMA IN ITALIAN LANGUAGE IN 1494 D.E.P DE COMPUTIET SCRIPTURIES

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 were discussed.

As business and society become more complex over the years, accounting developed new techniques and concepts to meet the increasing needs for financial information.

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.

BOOK-KEEPING: Book- Keeping is an important Branch of Accounting. B-K is regarded as the Foundation of accounting.

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 in nature.

FUNCTIONS OF ACCOUNTING 1.RECORDING - Journal 2.CLASSIFYING -Ledger 3.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 & INTERPRETATIONrearrangements

7.COMMUNICATING - results

ACCOUNTING IS CALLED THE EYES AND EARS OF THE BUSINESS

BRANCHES OF ACCOUNTING 1.Financial Accounting 2.Management accounting 3.Cost accounting

Financial Accounting: It is an important branch of accounting It helps in recording, classifying and summarizing business transaction. Financial statements are prepared under financial accounting such as P&L A/C. AND B/S.

Management Accounting: It is accounting for the management ie., accounting which provides/Furnish accounting information to managers to take appropriate decisions for better Management of business.

M.A. covers various areas like cost accounting, budgetary control, inventory control, Statistical methods, internal auditing etc.

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.

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=owners equity) 5.Assets (French word ASSEZ means enough or sufficient)

Classification of assets: 1.Fixed Assets 2.Current assets 3.Liquid/quick/circulating/floating/ Fluctuating Assets 4.Wasting Assets 5.Fictitious / Nominal Assets 6.Tangible Assets and 7)Intangible assets

Classification of assets:
1.Fixed Assets L&B, P&M, Furniture etc.

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

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

3.Liquid or quick Assets:

Converted into cash Easily or quickly. Cash in hand cash at bank, B/R, Sundry Drs. Etc.

4.Wasting Assets depleted or lose their value

mines, oil-wells, patents, copyrights etc.

5.Nominal or Fictitious assets no real value

Preliminary exp, debit Bal. of P&L A/c. Deferred revenue exp. Etc.

6.Tangible assets eg. Building, Furniture, Machinery etc. 7. Intangible assets G/w, patents, copy Rights, Trade mark and technical knowledge.

Valuation of assets:

1.Fixed Assets are valued at cost less depreciation. 2.Current assets are valued at cost or market price which ever is lower.

LIABILITIES:

Liabilities are obligations of the business to pay outside parties arising from events. In simple liabilities are claims against the assets due to purchases, funds received, service rendered.

Classification of liabilities:

1.Long term liabilities

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

2.Short term liabilities

(BOD, B/P, O/S etc.,)

3.Contingent liabilities

occurrence or uncertain that might arise in the future.

Debtors Debtor is a person who owes money to the business. A debtor constitutes an assets for the business.

Creditor - Creditor is a person to whom the

business owes money. A creditor constitutes a liability for the Business.

Debt - The amount of business due from

a person to the business.

Debit an entry on the left side of an account is called debit. Credit- an entry on the right side of an account is called credit. Voucher: a documentary evidence of Ts.
Goods: goods are physical commodities, usually movable & consumed after production.

Purchase- refers to obtaining goods exchange for money or on credit. Drawings - refers to the amount of cash or goods withdrawn by the proprietor for his personal or domestic use is known as drawings.

Account: means a summarized record of all the transactions relating to a particular person, thing, or a service which have taken place during a given period of time.

Generally Accepted Accounting Principles (GAAP) Financial accounting follows a set of accounting principles is presenting financial information. These principles are Called GAAP.

GAAP guide the accounting profession in the choice of accounting techniques & in the preparation of Financial Statements considered good for Practicing accountancy. In India-The Accounting Standards Board-ASB;
-The Institute of Chartered Accountants of India ICAI -Department of Company Affairs, GOI- DCA

-SEBI , -ICWAI (Institute of Cost & Works Accountants of India), GAAP are primarily relevant to financial accounting. The guide the selection of accounting principles are:

1.Accurate Presentation. 2.Conservatism. 3.Profit Maximization.

1. Accurate presentation accounting information 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 method LIFO, Cost flow prices are anticipated.

3.Profit Maximization: Maximize reported earnings. This is opposite of conservatism and therefore, accordingly revenue should be recognized as quickly as possible and recognition of expenses should be postponed as long as possible. Therefore, the straight line method depn. Would be used. The FIFO cost flow assumption would be made.

4. Income Smoothing: Under this system/method the section of accounting methods that result on the smoothest earnings trend over time. The firm must consider the pattern of its operations before selecting the appropriate accounting principles.

 THE END

 Accounting Principles, Concepts & Conventions

Meaning:
A principle is a Rule of Action OR Guide to action. So, accounting principles are Broad 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.

Accounting Principles.
1.Accounting Concepts 2.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 1.Money Measurement concept/common denominator concept. 2.Business Entity Concept/Separate/ Economic/Accounting entity concept. 3.Going concern Concept/Continuity concept 4. Dual aspect concept/Equation/ Accounting equation concept.

5. Cost/Historical concept. 6. Accounting period/Periodicity concept. 7. Matching/Periodical matching Concept (Compared)

8. Accrual Concept (Recognition of Revenue & Expenses) 9. Realization concept (Revenue realization) 10.Objective evidence concept
(source of documents invoice vouchers etc)

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

1.Convention of Consistency 2.Convention of Full Disclosure 3.Convention of Materiality 4.Convention of Conservatism

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.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.Going concern concept:

According to this concept the business will continue for a fairly long period of time. A business will have an indefinite life unless it is likely to be sale in the near future.

All that it means is that a business enterprises will continue to operate for a fairly long period of time.

Dual Aspect concept: This is the basic concept of accounting. According to this concept every Business transaction has a dual aspect.

Dual means two.

It signifies that every business transaction in accounting has two aspects. 1.Receiving of some benefit of some value and 2.Giving of some benefit of equal value.

Cost/Historical concept:
This concept is closely related to going concern concept. 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.

Cost concept: Both fixed & current assets are acquired at cost. But under this concept only Fixed 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.

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 income earned at the time of the Business.

Therefore, transactions are recorded in the books of accounts on Assump tion that profit out of those transactions is to be Ascertained for a specified
period 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

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 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 receivables right 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.

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 expenses called profit or income. If Expenses exceeds Revenue- called Loss.

ACCURAL CONCEPT: Some thing that becomes due especially an 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.: According to this concept revenue is recognized when the goods are delivered to customers or services are rendered. When revenue should be recorded in the books of accounts. It says that revenue should be recorded when it has been realized. Revenue is said to have been when cash has been received or right to receive.

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:
The work consistency refers to continuity in methods or practices. In Accounting consistency means followers using the same accounting methods or practices year after year.

A businessman follows the following practices or methods generally year after year.
Eg. Depn. Methods -SLM; WDVM; RM, etc.

Convention of Full Disclosure:

This convention refers to full disclose of all the financial information about the business organization to the owners and Various interested persons.

Therefore, this convention implies that accounts must be honestly prepared and all the material information must be adequately disclosed therein. Eg. Owners, Creditors, Lenders.

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 profits are not recorded. Profits are recorded only when the same has been earned.

THE END FOLLOW ASSIGNMENT

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

Under the theoretical or traditional system of accounting, after all the transactions are journalized or recorded, the entries in the single journal are posted or transferred to the appropriate accounts in the ledger.

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, 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 of all the transactions in a duly classified form. A ledger book contains Various accounts 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 quarterly depending upon the convenience and the requirements of the business, to know the exact position of each account on any particular date.

WHY TRANSACTIONS ARE NOT ENTERED STRAIGHTAWAY IN THE LEDGER?

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 the ledger will be difficult, if there are number of transactions.

2. If transactions are straightaway recorded in the ledger, it will become really difficult to locate 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 a transaction are entered in two different accounts. As a result, the information about the transaction is disconnected or separated or not available in one place.

4.If transactions are recorded in the ledger directly, the details concerning a transaction will be inadequate. 5.Making of entries directly in the ledger more scope for errors, as a result the detection and location of errors more difficult.

 In view of the above limitations or difficulties involved in the recording of transactions directly in the ledger, it is better that the transactions 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:
The term ledger is derived from the DUTCH word LEGGER which means to lie. Ledger therefore means a book where the various accounts lie (are kept). A ledger is a book in which all the accounts of a trader whether Personal or Real or Nominal accounts are kept for record.

 In Ledger, one separate account is opened for each and every particular type of transaction. For every journal entry, one ledger account is to be debited and another ledger account is to be credited. Every Ledger account is divided into two sides. The left-side is known as the debit side and the right-side as the credit side.

LEDGER
ACCOUNT:
Meaning of Account: It is a summarized record of all the transactions relating to the particular person, thing (Assets) or a Service (Expenses or Income) which have taken place during a given period of time.

OR

 An account or ledger Account is a summary statement of all the transactions relating to a particular persons, assets, expenses or income which have taken place during a given period of time showing their net effect is known as Account.

Definitions:
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.
The book which contains a classified and permanent record of all the transactions of a business called a Ledger.

FEATURES OF A LEDGER: The main features of a ledger are: 1. It is an analytical record of Transactions: As transactions of the same nature are brought together in one place in the ledger.

2. It is a derived or secondary record,

-as the entries in the ledger are derived from the entries in the journal.

3. It is a book of original entry. In the words of William Pickles, Ledger is the destination of the entries made in the subsidiary books or journals.
All business transactions are first recorded in the journal or subsidiary books and are finally entered in the ledger.

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 that businessman can obtain the final information relating to the profit or loss and the financial position of his business.

Advantages of ledger:
1.It is only the book which gives a properly arranged, classified and condensed form of all the necessary information regarding the working of our business. 2.It is a permanent record of all the transaction of a business.

3. It helps to find out the main item of revenue expenses. 4. It provides a means of easy reference of same nature. 5. In the ledger all the transactions of same nature will be recorded on one page only. 6. It helps to prepare a final account.

SRUCTURE OF AN ACCOUNT

Date

Particular

J Amt Date Particular J Amt F F

Total

xxx

Total

LEDGER

THE END
PRACTICAL PROBLEMS