This document provides an introduction to financial accounting. It defines accounting as recording, classifying, and summarizing financial transactions and interpreting results. Key groups interested in accounting information are identified. Accounting is required to determine profit/loss, financial position, amounts owed and due, and information for decision making. The document outlines the basic types of accounts, rules for debit and credit entries, books of accounts, accounting concepts and conventions, and the preparation of trial balance, balance sheet and income statement.

1. Introduction
to
Financial
Accounting

2. What is Accounting?
Accounting is an art of recording, classifying and
summarizing all financial transactions and
interpreting the results.

3. Groups interested in
Accounting Information
●
●
●
●
●
●
●
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Owners/Proprietors
Management
Potential Investors
Creditors
Employees
Government
Researchers
Citizens / communities

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

7. Kinds of Accounts
Contd...
Personal Account
Proprietor
Creditors
Ramya
Karnataka Bank
Indian Institute of Science etc.
Debtors

8. Kinds of Accounts
Contd...
Impersonal
Real
●
(Tangible- what you
●
Can touch and feel)
Nominal
(Intangible – what cannot
be touched or seen)
.

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. Kinds of Accounts
Contd...
Nominal
Expenses &
Losses
conveyance,
refreshment etc..
Income &
Gains
.
Interest recd.
Sales

11. Rules for Debit & Credit
●
●
PERSONAL ACCOUNTS
Debit the receiver. Credit the giver
REAL ACCOUNTS
Debit what comes in. Credit what goes
out

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. 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. The Accounting Transaction
Moves from the Source
Document to Books of
Accounts

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

17. Accounting Conventions
●
●
●
●
Conservatism
Disclosure
Accounting policies - Indian
International Accounting standards
– Inventory valuation
– Depreciation
– Revenue recognition

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Assets
Current Assets
●
Cash
●
Investments
●
Accounts Receivable
●
Prepaid Expenses
●
Raw Materials
●
Work in Progress
●
Finished Goods

44. Assets Contd...
Fixed Assets
●
Land
●
Buildings
●
Plant & Machinery

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. CURRENT ASSETS
At
Cost or Market Value
FIXED ASSETS
At
Cost or Revaluation
LESS
Accumulated Depreciation

47. Liabilities
Current Liabilities
●
Accounts Payable
●
Provisions
●
Fixed Liabilities
●
Loans - Unsecured
●
Loans - Secured
●
Shareholder’s Funds
●
Share Capital
●
Reserves

48. Shareholders Funds
Owners Funds
●
Initial Investment
●
Profits from Business