Financial Accounting

Meaning of Accounting
Accounting may be defined as the process of recording classifying summarizing ,analyzing and interpreting the financial transactions and communicating the results thereof.

Functions of Accounting
Recording
Basic function of accounting Record all the transaction of financial character Orderly Manner Journal Subsidiary book

Classifying Group transaction or entries of same nature Ledger Summarizing Presentation of data so that understand by internal and external Trial Balance Income Statement Balance sheet

Analyzing and interpreting Analysis means methodic classification of data or put the data into simplified form Interpretation means explaining the meaning and significance of the data so simplified
Communicating

Difference between book keeping and accounting

Book Keeping 1. 2. 3. 4. 5. 6. 7. It is prepared first. The main objective is to record the financial transactions. The clerical staff perform the activity It is concerned with only recording and classifying of transactions. Bookkeeper may or may nor possess analytical skills It a routine and clerical work The bookkeeper does not supervise and check the work of accountant 1. Accounting Accounting is done after book Keeping. It starts where book Keeping ends The main objective is to calculate the profitability and soundness of the business Accountant perform the accounting work It is concerned with summarizing and analysis and interpretation An accountant should possess analytical skills An accountant job is of routine but analytical in nature . Accountant supervise and check the work of book keeper

2.

3.
4. 5. 6. 7.

Objectives of Accounting
To keep systematic records To ascertain operational profits or loss To ascertain the financial position of business To facilitate decision making Communicate the information to the users

Advantages of Accounting
Facilitate to replace the memory Facilitate to ascertain net results of operations facilitate in ascertain the financial position of business To facilitate decision making facilitate in comparative study Assist the management Facilitate in raising loans Act as a legal evidence Facilitate in settlement of tax liability

Difference between Management Accounting and Financial Accounting

Financial Accounting
1. Provide the information to the external users It shares the overall performance of the org It is mandatory It is prepared on periodical basis Main tools are income statement and B/S It is post mortem of past activities It is based of GAAP Unit of measurement is only money It is more objective as it is based on measurement Double entry system of book keeping is used for recording the transactions 1.

Management Accounting
Provide the information to the managers who are internal to the org for future planning It concentrate on individual division , product, market share It is not mandatory It is prepared on periodical basis Main tools are FFS, CFS Budgetary control, CVA etc It is related with future It is not related to accounting principles Unit of measurement is labour ,unit product etc It is more subjective as it is fundamentally base on judgments Not used

2. 3. 4. 5. 6. 7. 8. 9. 10.

2. 3. 4. 5. 6. 7.

8.
9. 10.

Limitation of accounting
Accounting is not fully exact. Ignores qualitative elements Danger of window dressing Ignores price level changes Not free from bias

Accounting Equation

Assets

Capital + Liability

Mr Ram started business with cash Rs 100000 Purchased machinery for cash Rs 50000 Purchased goods costing Rs 10000 Purchased goods costing Rs 7000 from shyam Sold goods costing Rs20000 for Rs30000 Paid rent Rs500 Receive commission Rs1000

Particulars
1. started business with cash Rs 100000

Assets = capital+ Liabilities

100000 =100000+0

2.

Purchased machinery for cash Rs 50000 New equation 1. Purchased goods costing Rs 10000 2. Purchased goods costing Rs 7000 from shyam 3. Sold goods costing Rs20000 for Rs30000 4. Paid rent Rs500 5. Receive commission Rs1000

50000 (50000) = 0+0

Classification of accounts
Traditional Approach

Personal accounts 1. Natural person 2. Artificial person 3. Representative person

Real accounts
1Tangible Assets 2 Intangible Assets Nominal accounts 1Expenses 2 losses 3 gains 4 incomes

Rules of Journalization
For personal accounts : Debit is the receiver Credit is the giver Real accounts Debit what comes in Credit what goes out Nominal accounts Debit all the expenses and losses Credit all the gains and incomes