FINANCIAL ACCOUNTING

Introduction Understanding the terminology

Any doubts ?
• Don‟t hesitate to interrupt and stop me to ask your doubt or seek clarification.

Entity & Business Entity
• A thing or a person having a definite separate existence. • “Business Entity” means a specially identifiable business enterprise, • i.e. having a separate existence from that of the owners of the enterprise.

Proprietor or Owner
• The person who invests money or money‟s worth into the business as capital, and bears all the risks of the business. • He will enjoy the profits of the business and, by default, also bears the losses of the business.

“The residual interest in the assets of the enterprise after deducting all its liabilities. • Equity = Assets minus (outside) liabilities. .” • It is the difference between enterprise‟s assets and liabilities.Equity • The claims against the assets of an enterprise or rights in the assets of an enterprise.

Equity • Types: 1. . • 2. • Important – claims of outsiders on assets of business entity will always have priority over claims of owners on assets of business enterprise. Owners‟ equity – claims of the owner against assets of the enterprise. Outsiders‟ equity – Claims of outsiders against assets of the enterprise.

stock of goods. etc. it is „stock‟. machinery.” One unit of capital is a share and in US.Capital • The amount of money or money‟s worth say. invested or introduced by proprietors or partners or investors into the business is capital. furniture. Share capital is the amount contributed by shareholders towards company‟s share capital and is entered in company‟s “Share Capital A/c. .

Total liabilities. • NW or Net Assets is always at any point of time and not for any period (say year or month or week). . • Net Worth = Total assets .Net Worth or Net Assets • Net Worth is the excess of the total assets of a business over its total liabilities at a particular point of time.

taken away) by the proprietor or partner from his business for his personal or private or domestic use or purpose.e. • It is deducted from capital at the end of the year. unless specifically repaid by proprietor or partner earlier to year end date. goods or other asset withdrawn (i.Drawings • This refers to cash. .

Liabilities • Claims of outsiders against business concern which binds the business concern to others. In other words. settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.” . liabilities are outsiders‟ equity. A liability is “a present obligation of the enterprise arising from past events.

“Resources controlled by the enterprise as a result of past events.Assets • Economic resources (enough / sufficient) owned by the business concern for carrying on the business. Assets are either cash or should be able to generate cash. . from which future economic benefits are expected to flow to the enterprise.” Assets are what an enterprise own and realizes by receiving cash or other assets.

Assets – types and examples • Real properties / Tangible assets: Land. Building. • Assets = Liabilities + (Capital +Revenues – Expenses – Drawings – Dividends) . called Intellectual Property Right or IPR) possessed or owned by the business. Plant and Machinery. Copyrights. etc.e. • Intangible assets: Rights in certain things having money value – i. Patents. Goodwill. Trade Marks. Furniture.

Accrued Income. • Bills Receivable means Bills of Exchange drawn by seller of goods and accepted by purchaser of goods and it has legal validity under Negotiable Instruments Act. Debt : The amount of a business transaction due from a person (i. Bills Receivable.e.Assets . . Debtor) to the business is called debt.Debts Receivable • Debts or amount due to the business from others – Sundry Debtors.

• 2. Debtor for services rendered on credit. .Debtors • Debtors: A person who owes money to the business. 4. Debtor for assets sold. Loan debtor. • Debtors constitute of : 1. 3. because he has received some benefit from the business earlier.Trade debtor.

Book Debt • The amount due to the business from a debtor as per the books of accounts. • Bad Debt: Debt which is irrecoverable. • Doubtful Debt: Refers to a debt whose realization or recovery is uncertain or doubtful. • Good Debt: Refers to a debt which can be collected in full and there is no doubt about its record. .

. • Creditors consist of: Trade creditor. Creditors for Capex).Creditor • A person to whom the business owes money because he has given some benefit to the business earlier. Loan creditor. and • Creditor for assets purchased on credit (last category of creditor is also called creditors for capital expenditure – abb. Expense creditor.

Solvent • Solvent: A businessman is said to be solvent when he is able to pay liabilities in full and on time. • Other words for insolvent – bankrupt or pauper. • Insolvent: A businessman is said to be insolvent when he is not able to pay his liabilities in full. .

• Purchases: Value of goods purchased by a business are called purchases. articles or things in which a trader deals. It is revenue or income for the business. and these are normally meant for sale or use in manufacture of products or for use in providing services. commodities. . • Sales: Value of goods sold by a business are called sales. products.Goods • Goods refers to merchandise. and which are meant for sale.

.Purchase Returns • Also called Returns Outwards or Returns to Suppliers : Goods returned by business to its suppliers out of the purchases already made (may be excess supply or rejection or not conforming to the specifications as required by business or expired goods in case of pharmaceutical goods or cosmetics or products from food processing industries).

• Goods returned by the customers out of sales already made to them.Sales Returns • Also called Returns Inwards or Returns from Customers. expired goods. not as per specifications. for any reason: rejection for quality. etc. . excess supply.

Inventory or stock • Inventory or stock refers to the stock of finished goods held for sale in the ordinary course of business. . partly finished goods or semi-finished goods) held for consumption in the production of finished goods for sale or stock of consumable stores.e. or the stock of raw materials and work-in-process (i. held for use in the production process or packing materials.

components and spare parts are also part of inventory. „stock‟ means shares in the corporation or company. held by an investor. .Inventory or stock • In case of machinery manufacturers or automobile industry. • As per US usage. the word „stock option‟ refers to shares and not inventory. In India also.

In short. • Loss: refers to money or moneys‟ worth given up (spent) without getting any economic benefit in return. .Expenses and Loss • Expenses: means the cost incurred or amounts spent in the process of earning revenues in an accounting period (usually a year). it is the cost of economic resources used up for achieving sales.

• Gain: Refers to the revenue which is not generated through routine or regular business activities.Revenue/Income/Gain/Profit • Refers to the earning of a business from sale of goods or from rendering of services to the customers during an accounting period (year). . • Profit: Excess of revenue over the expenses of a business during a given period of time. usually a year.

.) • Means what is due (Latin word – debere). It is the amount owned by or due from an account or charged to an account for the benefit received by the account.Debit (Dr. It refers to an increase in value of an asset or decrease in fair value of liabilities. or an expense. • Debit is entry on the left hand side (LHS) of account.

Credit (Cr. • Credit is an entry on the right hand side (RHS) of an account. It is the amount owned to an account for the benefit given by that account in the belief that its value will be returned at a later date. It refers to an increase in value of liabilities & decrease in value of assets. . or an income.) • Means trust or belief (Latin word credere).

strictly in chronological order.Account and entry • An account is a record in a book called Ledger in a summarized form. or sequence. . • Entry: Record of transaction in books of accounts is known as an entry. of all the transactions that have taken place with particular person or value specified. • Folio: refers to the page of a journal or the page of Ledger (page number).

at the time of balancing it. . to indicate that the account has been carried down to the next period. • Usually abbreviated as C/d or B/d.. at the end of an accounting period.Carried down or brought down • It is written in a ledger a/c.

we write the abbreviation „b/f‟. The subsequent page on top indicates the totals of the previous page and to indicate this. are carried forward to the next page. In such cases. on LHS of the total. . totaling done at the end of each page of the journal.Carried or Brought Forward • Where journal entries extend to many pages. the abbreviation „c/f‟ is written at the bottom.

(i. • 3. Loans. Assets show debit balance. A business necessarily has certain assets. • 4.e. . Refers to things and rights of value owned by a business and amount due to the business from others. Deposits with others. • 2. Assets are useful to the business. Advances. etc.More about ASSETS • 1. 5. Debtors. Only certain assets.) make others indebted to the business.

More about LIABILITIES • 1. • 3. Refers to the amount owned by a business to others (i. • 5. . Liabilities show credit balance. • 2. Liabilities are burden to the business. All liabilities make the business indebted to others.e. • 4. outsiders). A business may or may not have liabilities.

.Assets versus Liabilities • These two slides explain the difference between assets and liabilities or their distinguishing features.

. Capital cannot be secured by a charge on asset. • 2. 3. Owners‟ contribution may have a credit or debit balance (if drawings for personal purposes are more than capital contributed + profits earned and retained). It is long term fund. 4. 5.More about CAPITAL • 1. May or may not be repaid. Capital is repaid only after all liabilities are repaid.

. Must be repaid by the business. • 3. Must be repaid before repaying capital. • 4. • 5. Outsiders‟ contribution always has a credit balance. Liabilities can be secured by a charge on asset. • 2. Long term as well as short term fund.More about LIABILITIES • (features distinguishing it from capital) • 1.

Capital Versus Liabilities • These two slides explain the difference between capital and liabilities or their distinguishing features. .

e. • Assets = Capital + Liabilities.Accounting equation • The accounting equation may be stated as a statement of equality between the resources (i. assets and the sources of finance) • Accounting equation: • Resources = Sources of finance. .

• 2) How to tackle emergencies. .Advice to become “Professional” • To be a good “Professional”: • Always start to study late for the examinations. and. • In short. you will be an expert in “Time Management” & “Disaster Management”. • It teaches you (or you will learn) : • 1) How to manage time.

. I will study. I watch a movie. Tails.Theory of Probability • • • • A student grabs a coin & flipped in the air: Heads. • Good luck to you. I go to sleep. If it stands on edge.

What next ? • In the next class. • Thank you. .

• Assets (Cash) = Liabilities (none) + Capital • Rs.000.700000 = NIL +700000.Assignment 3 • Show the following transaction in accounting equation: for example: • Mohan commenced business with cash – Rs.7.00. .

15000. • 5. • 3.1700. • 4.14000.7. Sold goods on cash: Rs.4000. • 2. Purchased goods on credit: Rs.000. Paid wages:Rs.300.10000. .Assignment 3 • 1. Withdrew cash for private use: Rs. Mohan commenced business with Rs. • 7. Sold goods on credit: Rs. • 6. Purchased goods for cash: Rs.00.

10.5000 . Received from customer on account: Rs. Purchased furniture for cash: Rs.Assignment 3 (continued) • • • • • • 8. Rent paid in advance: Rs. Paid to creditors: Rs. Outstanding salary : Rs. 11. 12. 9.400.10000.500. 13.500. Depreciation on furniture: Rs.20.

1500.15000. 5000. • 2) Purchased securities for cash:Rs. giving cash Rs. • 3) Purchased building for Rs. liabilities and capital: • 1) Invested cash in business : Rs. and balance through loan from bank. Use the accounting equation to show their effect on assets.1500000. • 4) Sold securities for Rs.7500.1000 at Rs.Assignment 4 • A. .

• 7) Paid cash for household expenses: Rs. • 6) Paid cash for loan installment : Rs. • 8) Received dividend on securities : Rs. .8000.Assignment 4 (continued) • 5) Purchased an old bike for Rs.3000.3000. and paid cash Rs.18750 for one month.5000 and interest Rs.200 by cheque and deposited in loan account.

350000 and owner‟s capital is Rs. Calculate her capital. Renuka has assets of Rs.150000. Total Liabilities of a business are Rs.400000 and liabilities of Rs. .Assignment 4 (continued) • B. • C. Calculate total assets of the business.275000.

Liabilities Rs. Liabilities Rs.5000. Capital Rs. using accounting equation: • 1) Assets Rs.15000. Assets ? • 3) Assets Rs.Assignment 4 (continued) • D.20000. Capital ? • 2) Capital Rs.20000. Calculate missing amounts. Liabilities ? .80000.25000.

Sign up to vote on this title
UsefulNot useful