INTRODUCTION TO FINANCIAL

ACCOUNTING FOR IIPM

R.S.SIVARAMAN
M.Sc; M.Com; ACA;DISA(ICAI);PGDCA
Chartered Accountant
BASIC CONCEPTS OF
ACCOUNTING-contents
 INTRODUCTION TO ACCOUNTING
 CONCEPTUAL FRAME WORK OF
ACCOUNTING
 DOUBLE ENTRY SYSTEM OF BOOK KEEPING
 JOURNAL
 LEDGER
 TRIAL BALANCE
 FINAL ACCOUNTS
INTRODUCTION TO
ACCOUNTING
 Accounting is the Language of business.
 Early Ages only barter system so no accounting

 After Industrial revolution recording of business

transaction has become an important feature

 Now thanks to Information &technology

Accounting system has undergone remarkable

changes .we are using Accounting packages like Tally
etc and ERP –SAP,Oracle,Microsoft Dynamics etc
HISTORICAL FACT ABOUT
DOUBLE ENTRY SYSTEM OF
BOOK KEEPING
 In 4th century BC ,Kautilya’s famous
Arthasastra not only relates to politics
and economics but also explain the art
of book keeping
 Gives details about account
keeping,methods of supervising and
checking of accounts and also about
capital,revenue,income and expenditure
Importance of Accounting
 Person starts business –Main aim is to
earn profit
 To know the exact position of business

Accounting is important
Accountancy,Accounting&Book
keeping
 ACCOUNTANCY
Refers to systematic knowledge of accounting.
It explain “why to do” and “how to do” of
various aspect of accounting
It tell us why and how to prepare the books of
accounts and how to summarize the
accounting information and communicate to
interested parties.
Accountancy,Accounting&Book
keeping
 ACCOUNTING
Refers to the actual process of preparing
and presenting the accounts.
It is the art of putting the academic
knowledge of accountancy in to
practice.
Accountancy,Accounting&Book
keeping
 BOOK KEEPING
It is part of accounting and is concerned
with record keeping or maintenance of
books of accounts
It is often routine and clerical nature
 Book Keeping

Accounting

Accountancy

Relationship between Accountancy, Accounting& Book-keeping

DEFINITION OF ACCOUNTING
 AICPA definition
Accounting is the process of identifying,
measuring and communicating
economic information to permit
informed judgement and decision by
users of information.
 PROCESS OF ACCOUNTING

Process of
accounting

Input Process Output

Identifying
Recording
Business Classifying
Transactions Summarising Information to users
(Monetary Value) Analysing
Interpreting
Communicating
Objective of Accounting
 1.To Maintain Accounting Records

 2.To Calculate the results of operations

 3.To ascertain the financial position

 4. To communicate the information to users

Accounting Cycle
Balance
Sheet Transaction
(opening)

Balance
Sheet Journal
(Closing)

P&L
Ledger
Account

Trading Trial
Account Balance
Users of Accounting
Information

Users of Accounting
Information

Internal Users External Users

Users of Accounting
Information
Owners

Researchers Management

Regulatory Employees&
Agencies Accounting Trade Union
Information

Govt& Creditors,,
Tax Banks&
Authorities

Potential Present
Investors Investors
Branches of Accounting
Accounting

Financial Cost Management

Accounting Accounting Accounting

PolicyPlanning
Business
Cost of Production Control/
Transaction
Decision Making
Basic Accounting Terms
 Transactions
Activities of business which involves
transfer of money or goods or services
between two persons or two accounts
Types
Cash Transactions
Credit Transactions
Basic Accounting Terms
 PROPRIETOR
Who owns a business & contribute capital
CAPITAL
Amount invested by the proprietor in the
business
ASSETS
Property of every description belonging to the
business .Types Tangible and intangible
LIABILITES
Financial obligation of a business
Basic Accounting Terms
 DRAWINGS
Amount of cash or value of goods withdrawn from the
business by the proprietor
DEBTORS
A person who receives a benefit without giving money
or money’s worth immediately but liable to pay
future or in due course of time
CREDITORS
A person who gives a benefit without receiving money
or money’s worth immediately but to claim in future
Basic Accounting Terms
 PURCHASES
Amount of goods bought by a business for
resale or use for production
Type cash & credit
SALES
Amount of goods sold that are already bought
or manufactured by the business
STOCK
Goods unsold on a particular date
Type opening stock and closing stock
Basic Accounting Terms
 REVENUE
Amount receivable or realised from saleof goods
& earning from interest/dividend /commission
etc
EXPENSES
Amount spent in order to produce & sell the
goods & services eg.purchase of raw
material, salary payment etc
INCOME
= REVENUE- EXPENSES
Basic Accounting Terms
 VOUCHER
Written document in support of transaction
 INVOICE

Business document for one sell goods to another

RECEIPT
Acknowledgement of cash received
ACCOUNT
Brief history of financial transactions of a
particular person or item
Conceptual Frame work of
Accounting

Frame work of
Accounting

Assumptions Concepts Conventions

 Basic Assumptions of
Accounting
 Accounting /Business entity Assumption

 Money measurement Assumption

 Accounting period Assumption

 Going Concern Assumption

Basic Concepts of Accounting
 Dual Aspect Concept
 Revenue Realisation Concept
 Historical Cost concept
 Matching Concept
 Full Disclosure concept
 Verifiable & Objective evidence concept
Accounting Conventions
 Materiality
 Consistency
 Prudence
 TYPES OF
ACCOUNTING STANDARDS

Accounting
Standards

International
Indian
IAS US GAAP
AS
(IFRS)
MEANING &PURPOSE OF
ACCOUNTNG STANDARDS
 Meaning of Accounting standards(AS)
AS are policy document issued by recognised expert accounting
body relating to various aspects of measurement, treatment and
disclosure of accounting transactions and events.
 PURPOSE :To promote world wide uniformity in published
accounts
 ADVANTAGES
 Hormonisation (Standardisation)of Accounting practices
 Uniformity
 Inter firm comparision
ACCOUNTING PROCESS-
DOUBLE ENTRY SYSTEMS

DOUBLE ENTRY
TWO ASPECTS

CREDIT ASPECT
DEBIT ASPECT
Giving Aspect/
Receiving/incoming
Outgoing/income
/expenses/loss
/gain
Features of Double entry
systems
 Every business transaction affects two
accounts
 Each transaction –two aspects debit
and credit
 Based upon accounting assumptions
concepts and principles
 Helps in preparing Trial balance and
final accounts
 Double Entry system of
Book keeping
Approach to
Recording
Transactions

Accounting Equation Traditional

Approach Approach
(American Style) (British Style)

Two Aspects
Asset=Liabilities+Capital
Receiving&Giving
ACCOUNTING EQUATION
METHOD
S.N ELEMENTS OF DEBIT CREDIT
ACCOUNTING
EQUATION
1 ASSET INCREASE DECREASE
2 LIABILITIES DECREASE INCREASE
3 CAPITAL DECREASE INCREASE
4 REVENUE/ DECREASE INCREASE
INCOME
5 EXPENSES/LOSS INCREASE DECREASE
ACCOUNTING EQUATION
 ASSETS = EQUITIES
 ASSETS=CAPITAL+LIABILITIES
 CAPITAL=ASSETS-LIABILITIES
 LIABILITIES=ASSETS-CAPITAL
CLASSIFICATION OF
ACCOUNTS
ACCOUNTS

PERSONAL IMPERSONAL

Natural Artificial Representative Real Nominal

Tangible

Intangible
GOLDEN RULES for Debits and
credits
 1.PERSONAL ACCOUNTS

A) Debit the receiver

B) Credit the giver

 2.REAL ACCOUNTS
A) Debit what comes in
B) credit what goes out

 3.NOMINAL ACCOUNTS
A) Debit all expenses and losses
B) credit all incomes and gains
 GOLDEN RULES OF ACCOUNTS-
Traditional Approach
S.N Name of Debit Credit
Account Aspect Aspect
1 Personal The Receiver The Giver

2 Real What comes in What goes out

3 Nominal All Expenses & All Incomes &

Losses Gains
Terms in accounting cycle
 Transactions
These are activities of business involves transfer
of money or goods or services between two
persons or two accounts
Journal
Date wise record of all the transaction with the
details of all the accounts debited and
credited and amount of each transactions.
Source documents
 Evidences of business transactions
 Provide info about the nature of
transactions,date,amount and parties
involved.
 Transactions are supported by source
documents
 Required for audit and tax assessments
Common source documents
 Cash memo  Good sold for cash
 Invoice or bill  Goods sold for credit
 Receipts  Receives cash/cq
 Debit Note  Prepared by buyer
 Credit note  Prepared by seller
 Pay in slip  Deposit of money
 Cheque  Document for payment
 Vouchers  Written document for
business transaction
prepared by accountant
BOOKS OF ORIGINAL ENTRY
FORMAT OF JOURNAL
DATE PARTICUL L.F Debit Credit
ARS Amount Amount
Rs Rs
STEPS IN JOURNAL
Eg:Jan 1,2004-siva started business with Rs 100000
Step 1 Determine the Cash Capital
accounts Account Account

Step Classify the Real Account Personal

2 accounts under Account
personal,real or
nominal
Step Find out the rules 2(a) Debit 1(b)credit
3 of debit and credit what comes the giver
in
Step Identify which Cash A/C is Capital A/c is
4 account is to be To be to be
debited & Credited debited credited
 Solution-Journal
DATE PARTICULARS L.F Debit Credit
Amount Amount
Rs Rs
2004 Cash A/c Dr 12 100000
Jan 1 To capital A/c 100000
(Being the
amount
invested in the
business)
GOLDEN RULES for Debits and
credits
 1.PERSONAL ACCOUNTS

A) Debit the receiver

B) Credit the giver

 2.REAL ACCOUNTS
A) Debit what comes in
B) credit what goes out

 3.NOMINAL ACCOUNTS
A) Debit all expenses and losses
B) credit all incomes and gains
LEDGER & TRIAL BALANCE
 LEDGER
It is a book which contain all the accounts
whether personal/real/nominal which are first
entered in journal or special purpose
subsidiary books
TRIAL BALANCE
It is a statement which shows debit balance and
credit balance of all accounts in ledger to test
arithmetic accuracy of books
FINAL ACCOUNTS
 FINAL ACCOUNTS
 TRADING ACCOUNT

Trading means buying and selling .Trading account

shows the results of buying and selling of goods.
PROFIT & LOSS ACCOUNT
Shows the result net profit or loss
BALANCE SHEET
It is a statement which sets out the assets and liabilities
of a business firm and which serves to ascertain the
financial position of the same on any particular date.