M.M.S.

- SEM I FINANCIAL ACCOUNTING
Faculty: 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 inventory 7. Preparation and Complete Understanding of Corporate Financial Statements : µT ¶Form and Vertical Form of Financial Statements 8. Important Accounting Standard 9. Corporate Financial Reporting ² Analysis of Interpretation thereof with reference Ratio Analysis. Fund Flow, Cash Flow. 10. Inflation Accounting 11. Ethic Issue in Accounting

Text & Case. R Narayanaswamy 5 Full Text of Indian Accounting standard ² Taxman Publication . Daardon & Bhattacharya 2 Financial Accounting (or Managers ² T P Ghosh 3 Financial Accounting ² Reporting & Analysis² 50cc & Diamond 4 Financial Accounting.Reference text: 1 Financial Accounting.

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 ----.MEANING & DEFINITIONS of BOOK KEEPING ‡ Book Keeping means keeping a written record of business transactions in a set of books.R N Carter . ‡ Book Keeping is the art of recording business dealings in a set of books ----.

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 .

in terms of money.ACCOUNTING ‡ AICPA (American Association of Certified Public Accountants) ‡ AAA (American Association of Accounting) Accounting is the art of recording. measuring and communicating economic information to permit informed judgements and decisions by users of the information . financial transactions and events and interpreting the results thereof Accounting is the process of identifying. classifying and summarising.

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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 .

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TERMINOLOGY ‡ TRANSACTION ± Exchange between two parties. It involves ³Give & Take´ ‡ CASH TRANSACTION ± Goods or services are exchanged for cash ‡ CREDIT TRANSACTION ± Goods or services are exchanged for cash receivable or payable at future .

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 . articles or commodities exchanged in a business transaction ‡ SERVICES ± Service means the work done for money.‡ GOODS ± things.

relatives. It may or may not become an actual liability. It is not recorded in the books. which must be paid back in future are called liabilities ‡ CONTINGENT LIABILITY ± Future liability. Plant.‡ EXPENSES ± Amount paid for goods & services used in the business ‡ ASSETS ± Properties owned by the business like Building. but is shown by way of a note in the balance sheet . Computers. friends etc. ‡ LIABILITIES ± Loans borrowed from banks. Machinery. Motor Cars. Furniture & Fixtures etc.

goods or assets from the business for his own use. Such drawings reduce the amount of capital of the owner ‡ NET WORTH ± Difference between total assets and total outside liabilities. Net Worth = Assets Liabilities . such withdrawals are called as drawings.‡ 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.

‡ DEBTOR ± A debtor buys goods & services from us and promises to pay the price to us on an agreed date in future. assets. ‡ CREDITOR ± A creditor sells goods & services to us and agrees to receive the price in future. goods or services . ‡ EXPENDITURE ± Payment made by a business to obtain some benefit i. Debtor is a person who owes money to business. Creditor is a person to whom we owe money.e.

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) .‡ CAPITAL EXPENDITURE ± Expenditure for obtaining an asset is known as capital expenditure. It is an expenditure having future benefits.

‡ DEFERRED REVENUE EXPENDITURE ± To defer means to postpone. ‡ ACCOUNTING YEAR ± Period of 12 months normally starting in April & ending in March of next year. 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. Normally profit is found out for an accounting year. . It is that expenditure which is carried forward as it will be of benefit over subsequent period e.g.

‡ NOMINAL ACCOUNTS ± Accounts of all expenses & losses and Incomes & gains like Telephone charges a/c. Building A/C etc. Mumbai University A/c. Electricity charges a/c. Plant & Machinery A/c. Interest Recd A/C. Garware Institute A/c. ‡ REAL ACCOUNTS ± Accounts of all properties & assets like CASH Account. . Sachin Tendulkar A/c etc. Salary account etc.TYPES OF ACCOUNTS ‡ PERSONAL ACCOUNTS ± Accounts of all persons like Dena Bank a/c.

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 .GOLDEN RULES PERSONAL ACCOUNT DEBIT .

DOUBLE ENTRY ACCOUNTING ‡ Recording of transactions & events follows a definite rule.) ‡ Every Debit has an equal & opposite Credit ‡ Every transaction should be recorded in such a way that it affects two sides ± DEBIT & CREDIT . ‡ Each transaction or event has two aspects DEBIT (Dr.) & CREDIT (Cr.

SELECTION OF TRANSACTION ± Select only those transactions which are .Financial in nature and .ACCOUNTING CYCLE 1.Which arise in the course of the business .

Whether any such benefit has gone out of business and in return any amount is received in cash or is receivable .2. ANALYSIS OF TRANSACTION ± Analyse the transaction to find out a. any amount is paid in cash or is payable b. Whether the business has received any benefit such as goods. services or assets and in return .

Personal A/c b. Real A/c c. Nominal A/c .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.

APPLYING RULES OF DEBIT OR CREDIT Depending upon the nature of a transaction a. CREDIT ± The A/c giving the benefit or amount . DEBIT ± The A/c receiving the benefit or amount b.4.

RECORDING IN JOURNAL OR SUBSIDIARY BOOKS ± Transactions are recorded as and when they occur. ‡ 6. the amounts debited or credited are transferred (posted) to the debit and credit of the concerned accounts in a book called Ledger . Purchase Register. POSTING AND TOTALLING OF LEDGER ACCOUNTS ± From the journal. in a daily book called Journal including subsidiary books like Cash Book.‡ 5. Bank Book. Sales Register etc.

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. .‡ 7. BALANCE SHEET ± The balances of assets. TRIAL BALANCE ± At the end of the year trial balance is prepared which shows the closing balances of all accounts in the ledger ‡ 8. The difference between the income & expenses shows the profit or loss for the year ‡ 9. liabilities and capital accounts at the end of the year are summarised in the Balance Sheet.

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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 .

accounts.AUDITING ‡ Examination of books. 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. Cat. Goat. Parrot & Ant Playing Match Entity Matching Money Measurement Prudence Cost Accrual Periodicity Going Concern . Monkey.

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.

Plant & Machinery etc. Buildings.Assets such as Land. and obligations such as Loans.‡ The Cost Concept . 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 .

in each accounting period.‡ Periodicity Concept ± The results of operations of entity are measured periodically i. Accounting Period should always be starting from April March . Calendar Year ± January to December Fiscal Year ± April to March As per Income Tax Act.e.

irrespective of whether the money is received or paid in connection thereof. Rent paid for 15 months in advance on January 2009.‡ Accrual Concept ± Incomes & Expenses should be recognized as and when they are earned and incurred. 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 .g. E.

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

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

Balance Sheet etc. Profit & Loss A/C. Transaction / Event Preparation Of Vouchers Preparation Of Trial Balance Recording in Primary Books JOURNAL Postings in Secondary Books LEDGER .ACCOUNTING SEQUENCE Preparation Of Financial Statements Trading A/C.

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

Vr. Sam) Dr.04. / Cr. Cr. Amt.No.RECORDING IN PRIMARY BOOK ‡ All the events are recorded in primary book called ³JOURNAL´ in a double entry system of book keeping. Dr. No. Date 24. Dr.2009 Particulars Plant & Machinery A/C To Cash (Being Purchase of Machinery for cash from Mr. L/F Amt 1 1 12 14 500 Cr. 1 500 . ‡ Format of JOURNAL is as follows Sr.

Amount 500 500 .04.09 Particulars To Cash JF Plant & Machinery Account Amount Date Particulars By Balance JF 500 30.04.09 500 CR.04.09 Particulars To Balance JF Cash Account Amount Date Particulars By P&M JF 500 24. Date 24.04.LEDGER DR. Date 30.SECONDARY BOOKS .09 500 CR. Amount 500 500 DR.

TRIAL BALANCE ‡ It is a list of various accounts showing their balances (either DR.No.03. or CR.Bal. Total 500 500 . Name of the Account 1 Plant & Machinery 2 Cash Dr.2009 Sr. Bal.) as on particular date. Based on such TB financial statements are prepared. Trial Balance as on 31. 500 500 Cr.

Amount xx xx xxx .03.Trading Account TRADING A/C for the year ended 31.2009 Dr. Particulars (Trad Exp) To Opening Stock To Purchases To Wages To Gross Profit c/d Amount xx xx xx xx xxx Particulars (Trad Income) By Sales By Closing Stock Cr.

Profit & Loss Account
PROFIT & LOSS A/C for the year ended 31.03.2009 Dr. Particulars (Expenses) To Salary To Printing & Station To Telephone To Advertisement To Electricity To Postage To Fax Exp To Net Profit c/d Amount xx xx xx xx xx xx xx xx xxx xxx Particulars (Incomes) By Gross Profit b/d By Commission Recd By Discount Recd By Interest Recd By Remuneration Recd By Profit on Sale of Asset Cr. Amount xx xx xx xx xx xx

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.

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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. All the pages/folios are bound together in a book called LEDGER . Each A/c is kept on a separate page or folio.

DATE «««««. AMT xx To ««. A/c - xxx xx By ««. A/c - xxx xxxx xxxx ... A/c (Name of the Ledger A/c) PARTICULARS J/F AMT DATE PARTICULARS J/F CR.FORMAT OF LEDGER A/C DR.

income and expenses at a glance ‡ It is a link between ledger and the final accounts . assets.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.

FORMAT OF TRIAL BALANCE TRIAL BALANCE OF ««««. 1 2 3 4 5 6 7 8 9 10 11 Debit Amt xx xx xx xx xx xx xx xx xx xx xx xxxx xxxx Credit Amt Particulars / Name of the Ledger A/c Purchases A/c Sales A/c Purchase Returns A/c Sales Returns A/c Cash A/c Bank A/c Capital A/c Salaries A/c Furniture A/c Sundry Debtors A/c Sundry Creditors A/c Total L/F .No . AS ON «««« Sr.

the transactions in Journal ‡ POSTING .the transactions in Ledger ‡ BALANCING .STEPS IN EXTRACTING TRIAL BALANCE ‡ RECORDING .the Ledger Accounts ‡ TRIAL BALANCE ± writing the balances of the Ledger Accounts .

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Capital A/c 2. Opening Stock 13. Purchases 11. Drawings 2. & Cr. Return Inwards 12. Sundry Debtors 3. Sales 9. Bills Receivable 4. Bills Payable 4. Deposits Given 7. Advances Given 8.Ledger Accounts Normally Having Dr. Bank 5. Assets A/c 10. Bank Overdraft 5. Advances Taken from 8. Return Outwards 10. Income & Gains . Expenses & Losses ‡ CR. Cash A/c 9. Deposits Taken from 7. Sundry Creditors 3. Loans Taken from 6. BALANCES 1. Loans Given 6. BALANCES 1. Balances ‡ DR.

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INDIVIDUAL PROJECT/ASSIGNMENT ‡ TOPIC ACCOUNTING STANDARDS ISSUED TILL DATE .Explanation in full details for any 4 accounting standards ‡ Submission Date 16th October. Factors considered. 2010 ‡ Neatly typed /printed/handwritten & spiral bounded ‡ Specify the name. . ‡ Total Marks 40 . roll no. subject etc. division. .Meaning.List along with AS-No. Benefits etc. Points Covered. Objective. Who sets.

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