Fundamental of financial accounting

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Mr. R S Ch Murthy Chodisetty
M.Com., MBA (HR)., MBA (FIN)., (PhD).
Faculty of Management, Sreenidhi Institute of Science and Technology,
Hyderabad, Telangana.
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FUNDAMENTAL OF FINANCIAL ACCOUNTING
LECTURE-4

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ACCOUNTING :
Accounting or accountancy is the measurement, processing, and
communication of financial information about economic entities such as
businesses and corporations. The modern field was established by the Italian
mathematician Luca Pacioli in 1494

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NEED FOR ACCOUNTING:
® As you are aware, every trader generally starts business for purpose of
earning profit.
® While establishing business, he brings own capital, Then he purchases
machinery, furniture, raw materials and other assets.
® He starts buying and selling of goods, paying for salaries, rent and other
expenses, depositing and withdrawing cash from bank. Like this he
undertakes innumerable transactions in business.

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DEFINITION OF ACCOUNTANCY:
® Accountancy is the science of RECORDING and CLASSIFYING business
transactions and events, primarily of financial character and the art of
making significant SUMMARIES, ANALYSIS & INTERPRETATIONS of those
transactions and events, & COMMUNICATING the results to persons who
make decisions or form judgments”

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USERS OF ACCOUNTING INFORMATION:
The users of accounting can be divided in two board groups
(1). Internal users and
(2). External users.
Internal users External users
Managers Researchers
Investors Government
Workers Creditors

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OBJECTIVES OF ACCOUNTANCY:
® To keep permanent, accurate and complete record of business transactions
® To maintain records of incomes and expenses and losses in such a way that, the
Net profit/Loss for any specified period is ascertained
® To maintain records of Assets and Liabilities and in such a way that, the
Financial position of the business at any point is ascertained
® To provide information for legal & tax purposes.

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ACCOUNTING PRINCIPLES:
® Accounting principles are general rules adopted in accounting
® These principles enables standardization in recording & reporting of financial
information
® Accounting principles may be defined as those rules of conduct or procedures
which are adopted by the accountants universally while recording the
accounting transactions.

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ACCOUNTING PRINCIPLES:
Accounting principles are classified in to two categories
1.Accounting concepts
2.Accounting conventions

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ACCOUNTING CONCEPTS:
• Business entity concept
• Dual aspect concept
• Going concern concept
• Cost concept
• Money measurement concept
• Accounting period concept
• Matching concept
• Realization concept
Accounting concepts
means conditions or
assumptions upon
which accounting is
based.

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ACCOUNTING CONVENTIONS:
• Convention of Consistency
• Convention of Disclosure
• Convention of Materiality
• Convention of Conservatism
Accounting
conventions refers to
Customs or
Traditions followed by
accountants as a Guide
in preparation of
financial statements .

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DOUBLE ENTRY SYSTEM:
The term double-entry accounting refers to the rules by which transactions
and events are recorded. Double-entry accounting specifies that for every
entry appearing on the left side (debit) of an account, there needs to be a
corresponding entry on the right hand side (credit) of an account.

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DOUBLE ENTRY SYSTEM:

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ACCOUNTING STANDARDS :
Accounting standards are authoritative standards for financial reporting and
are the primary source of generally accepted accounting principles (GAAP). ...
In Canada, accounting standards for all entities outside the public sector are
issued by the Accounting Standards Board.

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ACCOUNTING STANDARDS :

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JOURNAL ENTRY :
A journal entry, into accounting, is the logging of a transaction in accounting
journal items. The journal entry can consist of several recordings, each of
which is either a debit or a credit. The total of the debits must equal the total of
the credits or the journal entry is said to be "unbalanced".

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LEDGER:
A ledger is the principal book or computer file for recording and totaling
economic transactions measured in terms of a monetary unit of account by
account type, with debits and credits in separate columns and a beginning
monetary balance and ending monetary balance for each account.

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LEDGER:
A ledger is the principal book or computer file for recording and totaling
economic transactions measured in terms of a monetary unit of account by
account type, with debits and credits in separate columns and a beginning
monetary balance and ending monetary balance for each account.

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TYPES OF LEDGERS:
® Debtors Ledger
® Creditors Ledger
® General Ledger
® Self Ledger

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JOURNAL:
In accounting and bookkeeping, a journal is a record of financial transactions in
order by date. A journal is often defined as the book of original entry. The
definition was more appropriate when transactions were written in a journal
prior to manually posting them to the accounts in the general
ledger or subsidiary ledger. Manual systems usually had a variety of journals
such as a sales journal, purchases journal, cash receipts journal, cash
disbursements journal, and a general journal.

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JOURNAL FORMAT:

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SUBSIDIARY BOOKS:
® Cash Book.
® Purchase Book.
® Purchase Return Book.
® Sales Book.
® Sales Return Book.
® Bills Receivable Book.
® Bills Payable Book.
® Journal Proper.