M.M.S. - SEM IM.M.S. - SEM I

FINANCIAL ACCOUNTINGFINANCIAL ACCOUNTING

Faculty: Subhash DalviFaculty: Subhash Dalvi

• 1.2. Financial Accounting 100 marks • COURSE CONTENTS

1. Introduction to Accounting : Concept and necessity of Accounting An Overview of Income Statement and Balance Sheet.

2. Introduction and Meaning of GAAP; Concepts of Accounting: Impact of Accounting Concepts on Income Statement and Balance Sheet.

3. Accounting Mechanics: Process leading to preparation of Trial Balance arid Financial Statements; Preparation of Financial Statements with Adjustment Entries

4. Revenue Recognition and Measurement: Capital and Revenue Items: Treatment of Income & Expenses. Preproduction Cost, Deferred Revenue Expenditure etc.

5. Fixed Assets and Depreciation Accounting.6. Evaluation and Accounting or inventory7. Preparation and Complete Understanding of Corporate Financial Statements : ‘T ’Form and Vertical Form of Financial Statements8. Important Accounting Standard9. Corporate Financial Reporting — Analysis of Interpretation thereof with reference Ratio Analysis. Fund Flow, Cash Flow.10. Inflation Accounting11. Ethic Issue in Accounting

Reference text:1 Financial Accounting. Text & Case. Daardon & Bhattacharya2 Financial Accounting (or Managers — T P Ghosh3 Financial Accounting — Reporting & Analysis— 50cc & Diamond 4 Financial Accounting. R Narayanaswamy5 Full Text of Indian Accounting standard — Taxman Publication

MEANING & DEFINITIONS of BOOK KEEPING

• Book Keeping means keeping a written record of business transactions in a set of books.

• Book Keeping is the art of recording business dealings in a set of books ----- J R Batliboi

• Book Keeping is the science and art of correctly recording in the books of accounts all those business transactions that result in the transfer of money or money’s worth ----- R N Carter

NEED OF BOOK KEEPING

• To have permanent record of all the business transactions

• To know names of customers & suppliers

• To know net profit & net loss, assets & liabilities of the business

• To have important information for legal & tax matters

ACCOUNTING• AICPA (AICPA (American American

Association of Certified Association of Certified Public Accountants)Public Accountants)

Accounting is the art of recording, classifying and summarising, in terms of money, financial transactions and events and interpreting the results thereof

• AAA (AAA (American American

Association of AccountingAssociation of Accounting))

Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information

OBJECTIVES OF BOOK KEEPING

• To have date-wise record

• To have account-wise record

• To calculate & know yearly profit or loss

• To know year-end financial position

• To analyse, interpret & communicate the accounting information

PERSONS INTERESTED IN ACCOUNTING

• OWNER• EMPLOYEES• LENDERS• CUSTOMERS• SUPPLIERS• GOVERNMENT• SOCIETY• SHAREHOLDERS

TERMINOLOGY

• TRANSACTION – Exchange between two parties. It involves “Give & Take”

• CASH TRANSACTION – Goods or services are exchanged for cash

• CREDIT TRANSACTION – Goods or services are exchanged for cash receivable or payable at future

• GOODS – things, articles or commodities exchanged in a business transaction

• SERVICES – Service means the work done for money. They do not involve any article or commodity

• PROFIT – Excess of Income over expenditure

• LOSS – Excess of Expenses over Income

• INCOME – Amount earned by sale of goods & services

• EXPENSES – Amount paid for goods & services used in the business

• ASSETS – Properties owned by the business like Building, Plant, Machinery, Computers, Motor Cars, Furniture & Fixtures etc.

• LIABILITIES – Loans borrowed from banks, relatives, friends etc. which must be paid back in future are called liabilities

• CONTINGENT LIABILITY – Future liability. It may or may not become an actual liability. It is not recorded in the books, but is shown by way of a note in the balance sheet

• CAPITAL – Money put in the business by the owner. It also includes goods or assets brought in the business by the owner

• DRAWINGS – If the owner withdraws any money, goods or assets from the business for his own use, such withdrawals are called as drawings. Such drawings reduce the amount of capital of the owner

• NET WORTH – Difference between total assets and total outside liabilities. Net Worth = Assets - Liabilities

• DEBTOR – A debtor buys goods & services from us and promises to pay the price to us on an agreed date in future. Debtor is a person who owes money to business.

• CREDITOR – A creditor sells goods & services to us and agrees to receive the price in future. Creditor is a person to whom we owe money.

• EXPENDITURE – Payment made by a business to obtain some benefit i.e. assets, goods or services

• CAPITAL EXPENDITURE – Expenditure for obtaining an asset is known as capital expenditure. It is an expenditure having future benefits. It is an expenditure with long term use (more than 1 year)

• REVENUE EXPENDITURE – Expenditure on obtaining goods and services is known as revenue expenditure. It is an expenditure for running the business. It is an expenditure with short term use (1 year or less than 1 year)

• DEFERRED REVENUE EXPENDITURE – To defer means to postpone. It is that expenditure which is carried forward as it will be of benefit over subsequent period e.g. heavy advertisement expenditure to launch a new product. The proportionate cost related to current year is taken as expense. The balance cost is carried forward and written off in next year.

• ACCOUNTING YEAR – Period of 12 months normally starting in April & ending in March of next year. Normally profit is found out for an accounting year.

TYPES OF ACCOUNTS

• PERSONAL ACCOUNTS – Accounts of all persons like Dena Bank a/c, Garware Institute A/c, Mumbai University A/c, Sachin Tendulkar A/c etc.

• REAL ACCOUNTS – Accounts of all properties & assets like CASH Account, Plant & Machinery A/c, Building A/C etc.

• NOMINAL ACCOUNTS – Accounts of all expenses & losses and Incomes & gains like Telephone charges a/c, Interest Recd A/C, Electricity charges a/c, Salary account etc.

GOLDEN RULES

PERSONAL ACCOUNT DEBIT - THE RECEIVER CREDIT – THE GIVER

REAL ACCOUNT DEBIT – WHAT COMES IN CREDIT – WHAT GOES OUT

NOMINAL ACCOUNT DEBIT – ALL EXPENSES & LOSSES CREDIT – ALL INCOMES & GAINS

DOUBLE ENTRY ACCOUNTING

• Recording of transactions & events follows a definite rule.

• Each transaction or event has two aspects DEBIT (Dr.) & CREDIT (Cr.)

• Every Debit has an equal & opposite Credit

• Every transaction should be recorded in such a way that it affects two sides – DEBIT & CREDIT

ACCOUNTING CYCLE

1. SELECTION OF TRANSACTION – Select

only those transactions which are

- Financial in nature and

- Which arise in the course of the business

2. ANALYSIS OF TRANSACTION – Analyse the transaction to find out

a. Whether the business has received any benefit such as goods, services or assets and in return , any amount is paid in cash or is payable

b. Whether any such benefit has gone out of business and in return any amount is received in cash or is receivable

3. CLASSIFICATION OF ACCOUNTS – Find

out which items or persons are involved in the

transaction and classify them in to 3 main

types such as

a. Personal A/c

b. Real A/c

c. Nominal A/c

4. APPLYING RULES OF DEBIT OR CREDIT

Depending upon the nature of a transaction

a. DEBIT – The A/c receiving the benefit or amount

b. CREDIT – The A/c giving the benefit or amount

• 5. RECORDING IN JOURNAL OR SUBSIDIARY BOOKS – Transactions are recorded as and when they occur, in a daily book called Journal including subsidiary books like Cash Book, Bank Book, Purchase Register, Sales Register etc.

• 6. POSTING AND TOTALLING OF LEDGER ACCOUNTS – From the journal, the amounts debited or credited are transferred (posted) to the debit and credit of the concerned accounts in a book called Ledger

• 7. TRIAL BALANCE – At the end of the year trial balance is prepared which shows the closing balances of all accounts in the ledger

• 8. PROFIT & LOSS A/C – The balances of Income and Expenses accounts at the end of the year are summarised in the P/L A/c. The difference between the income & expenses shows the profit or loss for the year

• 9. BALANCE SHEET – The balances of assets, liabilities and capital accounts at the end of the year are summarised in the Balance Sheet.

BRANCHES OF ACCOUNTING

• FINANCIAL ACCOUNTING

• COST ACCOUNTING

• MANAGEMENT/MANAGERIAL ACCOUNTING

• AUDITING

• TAXATION

FINANCIAL ACCOUNTING

• Original Form of Accounting

• Confined to Preparation of Financial Statements

• Objective is to Calculate Profit / Loss made during the year & to exhibit Financial Position of the Business

COST ACCOUNTING• Function of cost

accounting is to ascertain the cost of the product and to help the management  in the control of cost

• Costing is a technique of ascertaining cost of a particular product or service

MANAGEMENT ACCOUNTING• It is an accounting for

management

• Provides information to the management

• It is reproduction of financial accounts in such a way as will enable the management to take decisions & control various activities

AUDITING

• Examination of books, accounts, vouchers and other records by a practicing Chartered Accountant appointed for the purpose

• Reporting to the members / management whether the B/S & P/L A/c as on particular date shows true & fair view of the state of affairs of the business

TAXATION

• Computation of Taxable Income & Tax Payable thereon

• Reconciliation between accounting profit & taxable profit

• Statutory compliance

ACCOUNTING CONCEPTS Elephant, Monkey, Cat, Goat, Parrot & Ant Playing Match

Cost

Going Concern

Periodicity

Accrual

Prudence

MatchingEntity

Money Measurement

ACCOUNTING CONCEPTS EXPLAINED

• The Entity Concept – A business is an artificial entity distinct & separate from its owner. For accounting purposes a business & its owner are two separate persons

• Money Measurement Concept – For accounting purposes each transaction & event must be expressible in monetary terms.

• The Cost Concept - Assets such as Land, Buildings, Plant & Machinery etc. and obligations such as Loans, Public Deposits etc. should be recorded at historical cost (acquisition)

• The Going Concern Concept – It is assumed that the business organization would continue its operations for a long time

• Periodicity Concept – The results of operations of entity are measured periodically i.e. in each accounting period. Calendar Year – January to December

Fiscal Year – April to March

As per Income Tax Act, Accounting Period should always be starting from April - March

• Accrual Concept – Incomes & Expenses should be recognized as and when they are earned and incurred, irrespective of whether the money is received or paid in connection thereof. E.g. Rent paid for 15 months in advance on January 2009. In this case Rent for 3 months should be recognized in FY 08-09 & Rent for 12 months should be recognized in FY 09-10

• Concept of Prudence – It states that anticipate no profits but provide for all possible losses. Prudence is the inclusion of a degree of caution in the judgment of estimates. Expected losses should be accounted for but not anticipated gains

• Matching Concept – Revenue earned in an accounting year is matched with all the expenses incurred during the same period to generate that revenue. Matching concept suggest that to find out the profitability, the expenses incurred to generate revenue are to be matched against that revenue

ACCOUNTING SEQUENCE Transaction

/ Event

Preparation Of Vouchers

Recording in Primary Books

JOURNAL

Postings in Secondary

BooksLEDGER

PreparationOf

Trial Balance

PreparationOf FinancialStatements Trading A/C,

Profit & Loss A/C,Balance Sheet etc.

VOUCHER PREPARATION

• After the event is happened, physical vouchers based on certain documents like Bill, Delivery Challan, Receipt, Reports, Purchase Order, Quotations etc. are prepared & the same are filed for future reference

RECORDING IN PRIMARY BOOK• All the events are recorded in primary book called “JOURNAL”

in a double entry system of book keeping.• Format of JOURNAL is as follows

Sr.No. Date ParticularsDr. / Cr.

Vr. No. L/F

Dr. Amt

Cr. Amt.

1 24.04.2009 Plant & Machinery A/C Dr. 1 12 500  

    To Cash Cr. 1 14   500

   

(Being Purchase of Machinery for cash from Mr. Sam)          

SECONDARY BOOKS - LEDGER

DR. Plant & Machinery Account CR.

Date Particulars JF Amount Date Particulars JF Amount

24.04.09 To Cash   500 30.04.09 By Balance   500

               

      500       500

               

DR. Cash Account CR.

Date Particulars JF Amount Date Particulars JF Amount

30.04.09 To Balance   500 24.04.09 By P&M   500

               

      500       500

               

TRIAL BALANCE

• It is a list of various accounts showing their balances (either DR. or CR.) as on particular date. Based on such TB financial statements are prepared.

Trial Balance as on 31.03.2009

Sr.No. Name of the Account Dr. Bal. Cr.Bal.

1 Plant & Machinery 500  

2 Cash   500

       

  Total 500 500

Trading AccountTRADING A/C for the year ended 31.03.2009

Dr. Cr.

Particulars (Trad Exp) Amount Particulars (Trad Income) Amount

To Opening Stock xx By Sales xx

To Purchases xx By Closing Stock xx

To Wages xx    

To Gross Profit c/d xx    

  xxx   xxx

Profit & Loss Account

PROFIT & LOSS A/C for the year ended 31.03.2009

Dr.     Cr.

Particulars (Expenses) Amount Particulars (Incomes) Amount

To Salary xx By Gross Profit b/d xx

To Printing & Station xx By Commission Recd xx

To Telephone xx By Discount Recd xx

To Advertisement xx By Interest Recd xx

To Electricity xx By Remuneration Recd xx

To Postage xx By Profit on Sale of Asset xx

To Fax Exp xx    

To Net Profit c/d xx    

  xxx   xxx

JOURNAL

• Journal means a daily book• Journal means a book to record daily

transactions• As soon as any financial transaction takes

place, it is recorded in the Journal. Hence it is called the book of First, Original or Prime entry

• Journal entry is passed according to the rules of Debit & Credit.

LEDGER

• JOURNAL – Date wise record• LEDGER – Account wise record

• Ledger A/c is a statement showing the summary of transactions and the final balance in respect of a person or an item. Each A/c is kept on a separate page or folio. All the pages/folios are bound together in a book called LEDGER

FORMAT OF LEDGER A/C

DR. ……………. A/c (Name of the Ledger A/c) CR.

DATE PARTICULARS J/F AMT DATE PARTICULARS J/F AMT

               

xx To …….. A/c - xxx xx By …….. A/c - xxx

               

      xxxx       xxxx

               

TRIAL BALANCE

• TRIAL BALANCE is a statement containing the list of the balances of all Ledger Accounts on a particular day

• It is a concise summary of ledger balances • It gives an idea of balances of various accounts

of persons, assets, income and expenses at a glance

• It is a link between ledger and the final accounts

FORMAT OF TRIAL BALANCETRIAL BALANCE OF …………. AS ON …………

Sr.No. Particulars / Name of the Ledger A/c L/F

Debit Amt

Credit Amt

1 Purchases A/c   xx  

2 Sales A/c     xx

3 Purchase Returns A/c     xx

4 Sales Returns A/c   xx  

5 Cash A/c   xx  

6 Bank A/c   xx  

7 Capital A/c     xx

8 Salaries A/c   xx  

9 Furniture A/c   xx  

10 Sundry Debtors A/c   xx  

11 Sundry Creditors A/c     xx

  Total   xxxx xxxx

STEPS IN EXTRACTING TRIAL BALANCE

• RECORDING - the transactions in Journal

• POSTING - the transactions in Ledger

• BALANCING - the Ledger Accounts

• TRIAL BALANCE – writing the balances of the Ledger Accounts

Ledger AccountsNormally Having Dr. & Cr. Balances

• DR. BALANCES1. Drawings2. Sundry Debtors3. Bills Receivable4. Bank5. Loans Given6. Deposits Given7. Advances Given8. Cash A/c9. Assets A/c10. Purchases11. Return Inwards12. Opening Stock13. Expenses & Losses

• CR. BALANCES1. Capital A/c2. Sundry Creditors3. Bills Payable4. Bank Overdraft5. Loans Taken from6. Deposits Taken from7. Advances Taken from8. Sales9. Return Outwards10. Income & Gains

INDIVIDUAL PROJECT/ASSIGNMENT• TOPIC ACCOUNTING

STANDARDS ISSUED TILL DATE

- Meaning, Who sets, Factors considered, Points Covered, Objective, Benefits etc.

- List along with AS-No.- Explanation in full

details for any 4 accounting standards

• Submission Date

16th October, 2010• Neatly typed

/printed/handwritten & spiral bounded

• Specify the name, roll no. division, subject etc.

• Total Marks 40