Introduction to

Financial Accounting
 Glimpse of the Session
• Definition
• Systems of Accounting
• Functions of Accounting
• Basis of Accounting
• Classification of Accounts
• Golden Rules of Accounting
• Examples
• Books of Accounts – Manual Vs Software
• Financial Statements -- Meaning and contents
• Reporting
Meaning and Definition of Accounting
American Institute of Certified Public Accountants
(1941) “Accounting is the art of recording,
classifying and summarizing in a significant manner
and in terms of money, transactions and events which
are, in part at least, of a financial character, and
interpreting the result thereof”.
American Accounting Association (1966) “The
process of identifying, measuring and communicating
economic information to permit informed judgments
and decisions by the users of accounting”.
 Accounting Definition
• Recording
• Classifying
• Summarizing
• Analyzing
• Interpreting
• Communicating
Transactions & Events in Monetary
Terms
Examples of Events/Transactions
o Received Loan from Uncle of Rs.8,00,000 through Cheque
o Opened Bank Account & deposited Cheque
o Purchased Land for Rs.4,00,000
o Given Advance for purchase of Godown Building
Rs.75,000
o Bought a Motorcycle for Rs.50000
o Given loan to friend Rs.1,00,000
o Started small business by investing Rs.50000 for
Tables/ Chairs/Furniture
o Purchased Goods for Rs.1,00,000
o Sold 80% of those Goods for Rs.1,20,000
o Friend repaid Rs.75,000 out of loan given by you within
1 month
o Paid Income Tax on Profit made during period
o Received Advance amount of Rs.50,000 from Customers
 Recordin
g
• Process in which the financial transactions
and events that are identified are recorded
in Books
• These typically would be
– Cash Book/ Bank Book
– Purchase and Sales Books
– Bills Receivable and Bills Payable Books
– Purchase and Sales Return Books
– Journal Book (other than above)
 Classifying
• Process where transactions or entries
of one or similar nature are grouped.
• The book containing classified
information is called “Ledger”.
• For Example, there may be separate
account heads for Sales, Purchases,
GST, Salaries, Rent, Office Expenses,
Taxes Paid, Advertisement expenditure
etc.,
 Summarizing
• Involves preparation and presentation of
the Classified Data in a manner useful to
various internal and external users.
• Leads to the preparation of the
following financial statements
o Trial Balance
o Profit and Loss Account
o Balance Sheet
o Cash-Flow Statement
 Analysis & Interpretation

• Includes analyzing and then interpreting

the financial data to make a meaningful
judgement of the profitability and financial
position of the business.
• The financial statement should explain not
only
– „what had happened‟ but also
– „why it happened‟ and also
– „what is likely to happen under
 Communicating

• It is concerned with the transmission of

analyzed and interpreted information to
the end-users to enable them to make
rational decisions
• This includes preparation and distribution
of accounting statements/Annual Reports
 Users of Financial information

INTERNAL USERS EXTERNAL USERS

• Board of Directors • Investors
• Partners • Lenders
• Managers • Suppliers
• Officers • Government
• Employees • Customers
Objectives of Accounting

1. Providing information to the users for rational

decision making
2. Systematic recording of transactions
3. Ascertainment of results of above transactions
4. Ascertain the financial position of business
5. To know the solvency position of the business
Advantages of Accounting

1. Maintenance of Business Records

2. Preparation of Financial Statements
3. Comparison of Results
4. Decision Making
5. Evidence in Legal Matters
6. Provides Information to Interested Parties
7. Helps in Taxation Matters
8. Valuation of Business
Limitations of Accounting

1. Accounting information is expressed in terms of

money
2. Accounting information may be
biased/manipulated
3. Fixed assets are recorded at the original cost
4. Money as a measurement unit changes in value
 Functions of Accounting
Measurement Measures past performance of the business
entity and depicts its current financial position
Forecasting Helps in forecasting future performance and financial
position of the enterprise using past data
Decision-making Provides relevant information to the users
of accounts to aid rational decision making
Comparison & Assesses performance achieved in relation to
targets which is important for predicting, comparing
Evaluation and evaluating the financial results
Control Defines weaknesses of the operational system
and provides feedbacks regarding effectiveness of
measures adopted to check such weaknesses
Govt. Regulation Provides necessary information to the government
to exercise control on the entity as well as in
& Taxation collection of tax revenues
 Basis of Accounting

Cash Basis Accrual Basis

 Comparison of Methods
CASH BASIS ACCRUAL BASIS
• Recognizes revenues when cash • Revenues and expenses are
is received and expenses when recorded when the are earned
they are paid. or Due, regardless of when the
• Does not recognize accounts money is actually is received
receivable or accounts payable or paid
• Beneficial in terms of tracking how • Gives a more realistic idea of
much cash the business actually income and expenses during a
has at any given time period of time, therefore
• Since the transactions are not providing a long term picture of
recorded until the cash is received the business that cash
or paid, the business‟s income is accounting can‟t provide
not taxed until it is in the bank • Most widely followed method,
mandatory for Companies etc.,
 DOUBLE ENTRY
SYSTEM OF BOOK
• KEEPING
This is the system of Keeping the Books of
Accounts world wide and now India is also
following the same
• It is based on the principle that “every business
transaction has two accounts in opposite
directions and if a complete record is to be made
of each such transaction, it would be necessary
to Debit one account and Credit one Account.”
• So “every Debit has corresponding Credit and
every Credit has corresponding Debit with
equal amount”
 Classification
of Accounts

Persona Real Nominal

l
 Personal Accounts
• Natural personal accounts: The elements or
accounts which represent persons. E.g. Kumar‟s
A/c, Asha A/c etc.
• Artificial personal accounts: Personal accounts
which are created artificially by law, such as
corporate bodies and institutions, are called Artificial
personal accounts. Ex. Private Ltd Companies, LLPs,
Clubs, Societies/Schools etc.
• Representative personal accounts: Accounts
which represent a certain person or a group directly
or indirectly. E.g. Outstanding expense a/c, Prepaid
expense a/c
Golden Rule for “Personal Accounts”

Debit the Receiver

Credit the Giver

Example :
Paid M/s Mitra Agencies Rs.25,000 by
Cheque

Accounts Debit/Credit Rule Applied

Involved
• Mitra • Debit • Personal
Agencies A/c a/c- Debit
the Receiver
• To Bank • Personal
• Credit
a/c- Credit
a/c
the Giver
 Real Accounts

• All assets of a firm, which are tangible or

intangible, fall under the category “Real Accounts“.

• Tangible real accounts are related to things that can be

touched and felt physically. Few examples of tangible
real accounts are Building, Machinery, Stock, Land etc.

• Intangible real accounts are related to things that can’t

be touched and felt physically.
Few examples of such real accounts are Goodwill,
Patents (new Invention), Trademarks (Brand
Name such as Chutneys, Chermas, Bata, Titan
etc.)
Golden Rule for “Real Accounts”

Debit what comes in

Credit what goes

out
Example :Purchased Furniture for Rs.10,000 in
cash

Accounts Debit/Credit Rule Applied

Involved
• Furniture a/c • Debit • Real a/c-Debit
what comes in
• To Cash • Credit • Real
a/c a/c-Credit
what goes out
 Nominal Accounts
• Accounts which are related to expenses, losses,
incomes or gains are called Nominal accounts.

• Nominal accounts do not really exist in physical form,

but behind every nominal account money is involved.
E.g. Purchase A/c, Salary A/c, Sales A/c,
Commission paid A/c, Commission received A/c

• The final result of all nominal accounts is either profit

or loss which is then transferred to the capital account.
Golden Rule for “Nominal Accounts”

Debit all expenses and losses

Credit all incomes and

gains
 Example : Paid Salaries of Rs.20,000 in
cash

Accounts Debit/Credit Rule Applied

Involved
• Salaries a/c • Debit • Nominal a/c-
Debit all
• Credit expenses
• To Cash
a/c • Real a/c-
Credit
what goes
out
Rules of Accounting

26
 Examples
1. Rent paid for the month 5th September 2022 of Rs.
5000
2. Salaries paid end of the month Rs. 10000
3. Interest received for the month October Rs. 3000
4. Dividend received for the month Rs. 1000
5. Furniture purchased for cash of Rs. 20000
6. Machinery sold for Rs. 30000
7. Paid to Mukesh Rs. 50000
8. Received cash from Hari of Rs. 100000
Flow of Accounting

27
 Financial
Statements
Financial Statements are Summary-level reports
about an organization's financial results, financial
position and cash flows.
Useful for:
• Determine the ability of a business to generate cash,
and the sources and uses of that cash.
• Determine whether a business has the capability to
pay back its debts.
• Track financial results on a trend line to spot any
profitability issues.
• Investigate the details of certain business transactions
Standard contents of a set of financial statements:

• Balance Sheet : Shows the entity's assets, liabilities,

and shareholders' equity as of the report date.

• Income Statement : Shows the results of the entity's

operations and financial activities for the reporting
period. It includes revenues, expenses, gains, and losses.

• Statement of Cash Flows : Shows changes in the

entity's cash flows during the reporting period.

• Supplementary Notes : Includes explanations of various

activities, additional detail on some accounts, and other
items as mandated by the applicable accounting
framework, worldwide
Structure of Accounting
Ledger Accounts

30
 Ledger Grouping

Income Groups Expenditure

Groups

Liability Group Asset Group

31
 Profit and Loss Account(P&L)

• Financial statement that summarizes the revenues,

costs, and expenses incurred during a specified
period, usually a year or even Quarterly (for Stock
Exchange Listed Companies).

• This Statement provide information about a

company's ability or inability to generate profit by
increasing revenue, reducing costs, or both.

• P&L Management refers to how a company handles

its Profit or Loss through revenue and cost
management, by taking suitable decisions.
 Profit & Loss Account Group

Income Expenditure

Direct Income Direct Expenses

Indirect Income Indirect Expenses
Sales Accounts Purchase
Accounts

33
 Balance Sheet
• A balance sheet is a financial statement that
reports a company's assets, liabilities and
shareholders' equity at a specific point in time,
and provides a basis for computing rates of return
and evaluating its capital structure.
• It is a financial statement that provides a snapshot
of what a company owns and owes, as well as the
amount invested by shareholders.
 Balance Sheet Group
Assets :
Liabilities : Fixed Assets
Capital
Reserves & Surplus Investments
Loans (Liability) Current
• Secured Loans Assets
•Unsecured Loans
Current Liabilities
– Bank Accounts
• Bank OCC/Bank OD – Cash in Hand
• Provisions – Sundry Debtors
• Sundry Creditors – Deposit (Assets)
– Loans & Advances 35
(Asset)
Accounting Concepts

1. Business Entity concept

2. Money Measurement Concept
3. Cost Concept
4. Going Concern Concept
5. Dual Aspect Concept
6. Realisation Concept
7. Accrual Concept
8. Accounting Period Concept
9. Revenue Match Concept
Types of Ownerships
State under what heading
1. Salary prepaid account
2. Salary outstanding account
3. Rent account
4. Bank account
5. Insurance unexpaired
6. Proprietor’s account
7. Bad debts account
8. Furniture account
9. Goodwill account
10. Patents account
Enter the following in the journal of
Arun for the month of September
2022
Sept 01 Arun commenced his business with a capital of
Rs. 10, 000
Sept 01 Bought machinery Rs. 5,000
Sept 02 Bought goods for cash from Ram Rs. 6,000
Sept 02 Sold goods for cash to Hari Rs. 4,000
Sept 03 Purchased goods from Jai on credit Rs. 2,200
Sept 04 Cash sales to Hari Rs. 2,000
Sept 05 Bought goods from Gowtham on credit Rs. 3,000
Sept 05 Credit sales to Hari Rs. 3,500
Sept 06 Paid trade expenses Rs. 1,000
Sept 12 Paid carriage outward to Hanuman Rs. 2,000
Journalize the following transactions
Jan 01 Gayathri started a business with cash Rs. 50,000
Jan 03 Goods purchased for cash Rs. 10,000
Jan 04 Bought of Pavan Rs. 5,000
Jan 08 Furniture purchased from Varun for cash Rs. 7,000
Jan 09 Furniture purchased from Venkat Rs. 8,000
Jan 012 cash paid to Pavan in full settlement of his
account Rs. 4,000
 Preparation of Trial Balance
Trial balance may be defined as a statement or a list of all
ledger account balances taken from various ledger books
on a particular date to check the arithmetical accuracy.
According to the Dictionary for Accountants by Eric. L.
Kohler, Trial Balance is defined as “a list or abstract of the
balances or of total debits and total credits of the
accounts in a ledger, the purpose being to determine the
equality of posted debits and credits and to establish a
basic summary for financial statements”.

According to Rolland, Trial Balance is defined as “The final

list of balances, totaled and combined, is called Trial
Balance”.
Methods of preparing a Trial Balance
There are three methods of preparing trial balance, these
are –
1. Total Method or Gross Trial Balance.
2. Balance Method or Net Trial Balance.

Total method: Here, entries from each debit and credit side
are summed up and then placed at the bottom of each side.
The total of each column should be the same.

Balance method: Here, the balances of every ledger

accounts are presented in the trial balance.
 Rule of Trial Balance
The trial balance rules that you have to follow while
preparing one is –

❖ All assets must be on the debit side

❖ All expenses and losses must be on the debit side
❖ All liabilities must be on the credit side
❖ All income and gain must be on the credit side
From the following balances extracted from the books of
Tata Motors Ltd, prepare Trial Balance as on 31st March,
2022.
Particulars Rs.
Cash in hand 4200
Cash at Bank 16800
Bills Receivable 18000
Bills Payable 16000
Sundry debtors 24600
Sundry creditors 32400
Capital 50000
Drawings 18000
Sales 105000
Purchases 75000
Carriage Inward 2700
Salaries 12000
Advertisement 2400
Insurance 1600
 Contin…

Particulars Rs.

Furniture 7500

Stock 18600

Office Rent 2000

 Journalize the following transactions, post them in the
ledger and balance the accounts on 31st March 2022
1. Ram started business with a capital of Rs. 10000
2. He purchased goods from Mohan on credit Rs. 2000
3. He paid cash to Mohan Rs. 1000
4. He sold goods to Suresh Rs. 2000
5. He received cash from Suresh Rs. 3000
6. He further purchased goods from Mohan Rs. 2000
7. He paid cash to Mohan Rs. 1000
8. He further sold goods to Suresh Rs. 2000
9. He received cash from Suresh Rs. 1000
Journalize the following transactions in the books of
Varun, post them into ledger and prepare trial balance
for June 2022
June 1: Gaurav started business with Rs. 10,00,000 of which 25% amount
was borrowed from Indian Bank.
June 4: Purchased goods from Nikhil worth Rs. 40,000 at 20% TD and 1/5th
amount paid in cash.
June 7: Cash purchases Rs. 25,000.
June 10: Sold goods to Rajesh Rs. 30,000 at 30% TD and received 30%
amount in cash.
June 12: Deposited cash into bank Rs. 20,000.
June 15: Uninsured goods destroyed by fire Rs. 5,500.
June 19: Received commission Rs. 3,500.
June 22: Paid to Nikhil Rs. 25,500 in full settlement of A/c.
June 25: Cash stolen from cash box Rs. 1,000.
June 27: Received from Rajesh Rs. 14,500 and discount allowed Rs. 200.
June 30: Interest received Rs. 2,400 directly added in our bank account.
Journalize the following transactions in the books of M/s Tata &
Sons, post them into ledger and prepare trial balance for April
2022:
Apr. 1: Commenced business with Rs. 40,000.
Apr. 4: Bought goods for cash Rs. 4,000
Apr. 7: Sold goods Rs. 700
Apr. 10: Bought goods from M/s Siemens Ltd Rs. 3,000 at 10% trade discount.
Apr. 14: Purchased machinery of Rs. 5,000 from M/s Kirloskar Bros.
Apr. 16: Paid for transportation of machinery Rs. 500 & installation charges Rs. 300 on it.
Apr. 20: Paid quarterly interest on borrowed amount of Rs. 5,000 at 12% p.a.
Apr. 24: Supplied goods to M/s Jindal Steels Rs. 3,500.
Apr. 27: Paid to M/s Siemens Ltd Rs. 2600 in full settlement of account.
Apr. 28: M/s Jindal Steels returned goods worth Rs. 300 & paid for Rs. 1,200 on account.
Apr. 29: Received commission Rs. 250.
Apr. 30: Paid conveyance to manager Rs. 450.
 Accounting Cycle

When complete sequence

of accounting procedure is
done which happens
frequently and repeated
in same directions during
an accounting period, the
same is called an
accounting cycle.