Introduction
to
Financial
Accounting
What is Accounting?
Accounting is an art of recording, classifying and
summarizing all financial transactions and
interpre...
Groups interested in
Accounting Information
●
●
●
●
●
●
●
●

Owners/Proprietors
Management
Potential Investors
Creditors
E...
Why is Accounting Required?
To Know ●
Whether business is making a profit or loss (for
a non-profit institution this would...
Why is Accounting Required?
Contd..
●
●
●
●
●
●
●
●

What to collect? (Asset)
From whom to collect?
How much to collect?
F...
Kinds of Accounts
●

●

Personal (accounts of a person or
institution)
Impersonal (all other accounts)
Kinds of Accounts
Contd...
Personal Account

Proprietor

Creditors

Ramya
Karnataka Bank
Indian Institute of Science etc.
...
Kinds of Accounts
Contd...
Impersonal

Real
●
(Tangible- what you
●
Can touch and feel)

Nominal
(Intangible – what cannot...
Kinds of Accounts
Contd...
Real

Assets
(meant for use)
●

cash, furniture,

Goods
(meant for resale)
.

Assets are usuall...
Kinds of Accounts
Contd...
Nominal

Expenses &
Losses
conveyance,
refreshment etc..

Income &
Gains
.

Interest recd.
Sale...
Rules for Debit & Credit
●

●

PERSONAL ACCOUNTS
Debit the receiver. Credit the giver
REAL ACCOUNTS
Debit what comes in. C...
Rules for Debit & Credit
Contd...
• NOMINAL ACCOUNTS
Debit all expenses & losses
Credit all gains & income
IN DOUBLE ENTRY...
Books of Accounts
●

Journal (Book of first or original entry,
maintained date wise)
–
–

●

Purchase Day Book
Sales Day B...
The Accounting Transaction
Moves from the Source
Document to Books of
Accounts
Flow of transaction
1. Source Document
2. Voucher
3. Recording in Journal / Cash Book / Purchase /
Sales Book
4. Posting i...
Accounting Concepts
●
●
●
●
●
●

Entity
Going concern
Consistency
Accrual - Mercantile & Cash system
Materiality
Cost
Accounting Conventions
●
●

●
●

Conservatism
Disclosure
Accounting policies - Indian
International Accounting standards
–...
Pass Accounting Entries For
Cash paid - Rs.5,000/- to customer Ramya
●
Fee of Rs.20,000/- recovered from Malini
by cheque
...
Pass Accounting Entries For
Contd....
●
●

●

●

Rent for June paid Rs.4,000/- by cheque
Computer purchased for Rs.100,000...
Pass Accounting Entries For
Contd....

●

●

Furniture purchased for Rs.5,000/- paid by
cheque
Sold software for Rs.50,000...
Test
1. Ramya A/c
To Cash A/c
2. Bank A/c
To Fees A/c
3. Mr. Ganesh’s A/c
To Mr. Ravi’s A/c
4. Salaries A/c
To Cash A/c

D...
Test
Contd...
5. Rent A/c
To Bank A/c
6. Computers A/c
To I.B.M. A/c
7. Printing exp A/c
To accrued Expenses
A/c

DR
4,000...
Test
Contd...
8. Conveyance exp
To cash
9. Furniture
To Bank
10. Cash
To Sales A/c

DR
250

CR
250

5,000
5,000
50,000
50,...
Dr.

Ledger Accounts
Cash Book

Date Particulars Amt
To Sales A/c

Date

Particulars

50000 By Ramya
By Salaries
By Convey...
Ledger Accounts
Bank Book
Dr.

Cr.

Date Particulars Amt
To fees

Date
20000

_____
20000
=====
To Bal. b/f 11000

Particu...
Ledger Accounts
Ram A/c
Dr.

Cr.

Date Particulars Amt
To cash

Date

5000
_____
5000
=====
To Bal. b/f
5000

Particulars
...
Ledger Accounts
Fees A/c
Dr.

Cr.

Date Particulars Amt
To Balc/f

Date

20000
_____
20000
=====

Particulars

Amt

By Ban...
Ledger Accounts
Ganesh A/c
Dr.

Cr.

Date Particulars Amt

Date

To Ravi A/c 20000
_____
20000
=====
To Bal b/f
20000

Par...
Ledger Accounts
Ravi A/c
Dr.

Cr.

Date Particulars Amt
To Bal c/f

20000
=====

Date

Particulars
By Ganesh
By Bal b/f

A...
Ledger Accounts
Salaries A/c
Dr.

Cr.

Date Particulars Amt
To cash
To Bal b/f

6000
=====
6000

Date

Particulars
By Bal ...
Ledger Accounts
Rent A/c
Dr.

Cr.

Date Particulars Amt
To bank
To Bal b/f

4000
=====
4000

Date

Particulars
By Bal c/f
...
Ledger Accounts
Computer A/c
Dr.

Cr.

Date Particulars Amt
To IBM a/c
To Bal b/f

Date

100000
=====
100000

Particulars
...
Ledger Accounts
IBM A/c
Dr.

Cr.

Date Particulars Amt
To Bal c/f

Date

100000
=====

Particulars
By computers
By Bal b/f...
Ledger Accounts
Printing Expense A/c
Dr.

Cr.

Date Particulars Amt

Date

To Accrued 10000
expenses =====
To Bal b/f

100...
Ledger Accounts
Accrued Expenses A/c
Dr.

Cr.

Date Particulars Amt
To Bal c/f

Date

10000
=====

Particulars

Amt

By Pr...
Ledger Accounts
Conveyance Expense A/c
Dr.

Cr.

Date Particulars Amt
To cash
To Bal b/f

Date

250
====
250

Particulars
...
Ledger Accounts
Furniture A/c
Dr.

Cr.

Date Particulars Amt
To Bank
To Bal b/f

Date

5000
====
5000

Particulars
By Bal ...
Trial Balance
When all the accounts of a concern are
balanced off, then they are put in a list
called Trial Balance
●
The ...
Trial Balance Format
Sl.No.
1
2
3
4
5
6

Particulars
Share Capital
Commission
Fixed Deposits
Reserve Fund
Audit Fees
Salar...
Trial Balance
●

●

●

Contd....

The total of the debit side must be equal to
that of its credit side.
This is based on t...
Balance Sheet
Statement of Assets and Liabilities and
hence made as at
“A predetermined date of a month or year”
Balance S...
Profit & Loss Account
Statement showing Profit or Loss for a
period ending on “A Month”, “A Quarter”,
“A Year”
Profit & Lo...
Assets
Current Assets
●
Cash
●
Investments
●
Accounts Receivable
●
Prepaid Expenses
●
Raw Materials
●
Work in Progress
●
F...
Assets Contd...
Fixed Assets
●
Land
●
Buildings
●
Plant & Machinery
Assets Valuation
Do I value at Cost?
Do I value at Market Price?
Do I consider what the Asset will Realise?
Or
Is it Cost ...
CURRENT ASSETS
At
Cost or Market Value
FIXED ASSETS
At
Cost or Revaluation
LESS
Accumulated Depreciation
Liabilities
Current Liabilities
●
Accounts Payable
●
Provisions
●
Fixed Liabilities
●
Loans - Unsecured
●
Loans - Secured
...
Shareholders Funds
Owners Funds
●
Initial Investment
●
Profits from Business
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Introduction to financial accounting jan 2014

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Introduction to Accounting (Social Studies Karnataka Class IX, chapter in Business studies)

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Introduction to financial accounting jan 2014

  1. 1. Introduction to Financial Accounting
  2. 2. What is Accounting? Accounting is an art of recording, classifying and summarizing all financial transactions and interpreting the results.
  3. 3. Groups interested in Accounting Information ● ● ● ● ● ● ● ● Owners/Proprietors Management Potential Investors Creditors Employees Government Researchers Citizens / communities
  4. 4. Why is Accounting Required? To Know ● Whether business is making a profit or loss (for a non-profit institution this would be surplus / deficit of income over expenditure) ● The financial position of business / institution ● What to pay ? (Liability) ● Whom to pay? ● How much to pay?
  5. 5. Why is Accounting Required? Contd.. ● ● ● ● ● ● ● ● What to collect? (Asset) From whom to collect? How much to collect? From where is the money coming? Where is it going? What are the Costs? What is the Revenue? What decisions to take?
  6. 6. Kinds of Accounts ● ● Personal (accounts of a person or institution) Impersonal (all other accounts)
  7. 7. Kinds of Accounts Contd... Personal Account Proprietor Creditors Ramya Karnataka Bank Indian Institute of Science etc. Debtors
  8. 8. Kinds of Accounts Contd... Impersonal Real ● (Tangible- what you ● Can touch and feel) Nominal (Intangible – what cannot be touched or seen) .
  9. 9. Kinds of Accounts Contd... Real Assets (meant for use) ● cash, furniture, Goods (meant for resale) . Assets are usually classified into Fixed Assets (life/ use > 1 year) like Building, Furniture and Current Assets (life/ use > 1 year) like cash, stamps etc.
  10. 10. Kinds of Accounts Contd... Nominal Expenses & Losses conveyance, refreshment etc.. Income & Gains . Interest recd. Sales
  11. 11. Rules for Debit & Credit ● ● PERSONAL ACCOUNTS Debit the receiver. Credit the giver REAL ACCOUNTS Debit what comes in. Credit what goes out
  12. 12. Rules for Debit & Credit Contd... • NOMINAL ACCOUNTS Debit all expenses & losses Credit all gains & income IN DOUBLE ENTRY SYSTEM, EVERY TRANSACTION HAS TWO ASPECTS - DEBIT & CREDIT The sum of debit always = sum of credit for EVERY transaction
  13. 13. Books of Accounts ● Journal (Book of first or original entry, maintained date wise) – – ● Purchase Day Book Sales Day Book Ledger (party wise record) – – ● Creditors Ledger – ● Debtors Ledger General Ledger Cash Book (this is both journal and ledger) In modern computerised systems, transaction is recorded once and both the Journal and Ledger are reports
  14. 14. The Accounting Transaction Moves from the Source Document to Books of Accounts
  15. 15. Flow of transaction 1. Source Document 2. Voucher 3. Recording in Journal / Cash Book / Purchase / Sales Book 4. Posting in Ledgers 5. Preparation of Trial Balance and financial statements
  16. 16. Accounting Concepts ● ● ● ● ● ● Entity Going concern Consistency Accrual - Mercantile & Cash system Materiality Cost
  17. 17. Accounting Conventions ● ● ● ● Conservatism Disclosure Accounting policies - Indian International Accounting standards – Inventory valuation – Depreciation – Revenue recognition
  18. 18. Pass Accounting Entries For Cash paid - Rs.5,000/- to customer Ramya ● Fee of Rs.20,000/- recovered from Malini by cheque ● Rs.20,000/- transferred from Ravi’s A/c to Ganesh's A/c ● Salary Rs.6,000/- paid to Raji by cash ●
  19. 19. Pass Accounting Entries For Contd.... ● ● ● ● Rent for June paid Rs.4,000/- by cheque Computer purchased for Rs.100,000/on 30 days credit from IBM Printing expenses of Rs.10,000/provided for Conveyance paid to Anita Rs.250/- cash
  20. 20. Pass Accounting Entries For Contd.... ● ● Furniture purchased for Rs.5,000/- paid by cheque Sold software for Rs.50,000/- and received cash for the same
  21. 21. Test 1. Ramya A/c To Cash A/c 2. Bank A/c To Fees A/c 3. Mr. Ganesh’s A/c To Mr. Ravi’s A/c 4. Salaries A/c To Cash A/c DR 5,000 CR 5,000 20,000 20,000 20,000 20,000 6,000 6,000
  22. 22. Test Contd... 5. Rent A/c To Bank A/c 6. Computers A/c To I.B.M. A/c 7. Printing exp A/c To accrued Expenses A/c DR 4,000 CR 4,000 100,000 100,000 10,000 10,000
  23. 23. Test Contd... 8. Conveyance exp To cash 9. Furniture To Bank 10. Cash To Sales A/c DR 250 CR 250 5,000 5,000 50,000 50,000
  24. 24. Dr. Ledger Accounts Cash Book Date Particulars Amt To Sales A/c Date Particulars 50000 By Ramya By Salaries By Conveyance By Balance c/f _____ 50000 ===== To Bal. b/f 38750 Cr. Amt 5000 6000 250 38750 _____ 50000 =====
  25. 25. Ledger Accounts Bank Book Dr. Cr. Date Particulars Amt To fees Date 20000 _____ 20000 ===== To Bal. b/f 11000 Particulars Amt By Rent 4000 By Furniture 5000 By Balance c/f 11000 _____ 20000 =====
  26. 26. Ledger Accounts Ram A/c Dr. Cr. Date Particulars Amt To cash Date 5000 _____ 5000 ===== To Bal. b/f 5000 Particulars Amt By Balance c/f 5000 _____ 5000 =====
  27. 27. Ledger Accounts Fees A/c Dr. Cr. Date Particulars Amt To Balc/f Date 20000 _____ 20000 ===== Particulars Amt By Bank By Bal b/f 20000 _____ 20000 ===== 20000
  28. 28. Ledger Accounts Ganesh A/c Dr. Cr. Date Particulars Amt Date To Ravi A/c 20000 _____ 20000 ===== To Bal b/f 20000 Particulars By Bal c/f Amt 20000 _____ 20000 =====
  29. 29. Ledger Accounts Ravi A/c Dr. Cr. Date Particulars Amt To Bal c/f 20000 ===== Date Particulars By Ganesh By Bal b/f Amt 20000 ===== 20000
  30. 30. Ledger Accounts Salaries A/c Dr. Cr. Date Particulars Amt To cash To Bal b/f 6000 ===== 6000 Date Particulars By Bal c/f Amt 6000 =====
  31. 31. Ledger Accounts Rent A/c Dr. Cr. Date Particulars Amt To bank To Bal b/f 4000 ===== 4000 Date Particulars By Bal c/f Amt 4000 =====
  32. 32. Ledger Accounts Computer A/c Dr. Cr. Date Particulars Amt To IBM a/c To Bal b/f Date 100000 ===== 100000 Particulars By Bal c/f Amt 100000 =====
  33. 33. Ledger Accounts IBM A/c Dr. Cr. Date Particulars Amt To Bal c/f Date 100000 ===== Particulars By computers By Bal b/f Amt 100000 ===== 100000
  34. 34. Ledger Accounts Printing Expense A/c Dr. Cr. Date Particulars Amt Date To Accrued 10000 expenses ===== To Bal b/f 10000 Particulars By Bal c/f Amt 10000 ====
  35. 35. Ledger Accounts Accrued Expenses A/c Dr. Cr. Date Particulars Amt To Bal c/f Date 10000 ===== Particulars Amt By Printing expenses By Bal b/f 10000 10 ==
  36. 36. Ledger Accounts Conveyance Expense A/c Dr. Cr. Date Particulars Amt To cash To Bal b/f Date 250 ==== 250 Particulars By Bal c/f Amt 250 ===
  37. 37. Ledger Accounts Furniture A/c Dr. Cr. Date Particulars Amt To Bank To Bal b/f Date 5000 ==== 5000 Particulars By Bal c/f Amt 5000 ===
  38. 38. Trial Balance When all the accounts of a concern are balanced off, then they are put in a list called Trial Balance ● The first column is the Particulars which consists of name of each account ● The second column is the Debit which consists of debit balance ● The third column is the Credit which consists of all credit balance ●
  39. 39. Trial Balance Format Sl.No. 1 2 3 4 5 6 Particulars Share Capital Commission Fixed Deposits Reserve Fund Audit Fees Salaries Total Contd.... Debit Credit 1,90,000 2,60,000 1,50,000 1,40,000 5,000 2,15,000 4,80,000 4,80,000
  40. 40. Trial Balance ● ● ● Contd.... The total of the debit side must be equal to that of its credit side. This is based on the principle that in Double Entry System, for every debit there must be a credit. The Trial Balance is the basis for the preparation of the financial statements Balance Sheet and Profit & Loss Account
  41. 41. Balance Sheet Statement of Assets and Liabilities and hence made as at “A predetermined date of a month or year” Balance Sheet as at 31.12.1997 Balance sheet as at 31.03.1998
  42. 42. Profit & Loss Account Statement showing Profit or Loss for a period ending on “A Month”, “A Quarter”, “A Year” Profit & Loss Account for the year ended 31.12.1997 Profit & Loss Account for the period Jan to June 96
  43. 43. Assets Current Assets ● Cash ● Investments ● Accounts Receivable ● Prepaid Expenses ● Raw Materials ● Work in Progress ● Finished Goods
  44. 44. Assets Contd... Fixed Assets ● Land ● Buildings ● Plant & Machinery
  45. 45. Assets Valuation Do I value at Cost? Do I value at Market Price? Do I consider what the Asset will Realise? Or Is it Cost Less Depreciation? ?
  46. 46. CURRENT ASSETS At Cost or Market Value FIXED ASSETS At Cost or Revaluation LESS Accumulated Depreciation
  47. 47. Liabilities Current Liabilities ● Accounts Payable ● Provisions ● Fixed Liabilities ● Loans - Unsecured ● Loans - Secured ● Shareholder’s Funds ● Share Capital ● Reserves
  48. 48. Shareholders Funds Owners Funds ● Initial Investment ● Profits from Business

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