FINANCIAL ACCOUNTING

(MBA Sem I - FA&FM)

Santosh Gopalkrishnan
Faculty, Symbiosis Institute of Business Management
SEBI Certified Resource Person for Financial Education
Junior Research Fellow & NET in Management, UGC
MBA (Finance)
Pursuing CS – Institute of Company Secretaries of India
Pursuing Ph.D. – in Risk Management in the Banking Sector
 What are we here for:
Some Basics
• Course Objective
• Learning with Fun 
• Questioning Attitude
• A/cCountin’ Buddy!
• Mobile Phones
• Late Entry
Email: santoshg@sibmpune.edu.in
Tel.: 020 – 39116029 / 9766545439

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 Approach to Course
Foundation Course Main Course on Financial Accounting
• What is Accounting/Book–Keeping? Basics of Financial Accounting
• Branches of Accounting The Accounting Cycle
• Concepts and Conventions Completion of the Accounting Cycle
• Rules of Accounting Financial Concepts: Clarity
• Identification and Classification
• Types of Books of Records –
Subsidiary Books
• Journal and Journal Entries

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Let’s Start !

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 Our Exposure to Accounting?
• Are we exposed to Accounting?
• Have we ever done Accounting before?

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 Why Accounting?
• Collates financial information
• Related to Income & Expenditure
• Helps to analyse V–F–M, RoI, CBA etc.
• Statutorily required

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 Branches of Accounting
• Financial Accounting
• Management Accounting
• Cost Accounting

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 Cost Accounting
• Use of Financial Information for analysing Cost
Data.
• Types of Cost:
– Fixed
– Variable
– Sunk
– Historical

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 Management Accounting
• Use of Financial Information for Management
Information Systems
• BEP
• RoI
• Budgetary Analysis – Fixed and Flexible
Budgets

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 What is Financial Accounting?
• “The Art of Recording, Classifying and
Summarizing in a significant manner and in
terms of money, transactions and events
which are, in part at least, of a financial
character and interpreting the results
thereof”. (as defined by the American Institute
of Certified Public Accountants – AICPA)

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Process of Financial Accounting
Journal
& Subsidiary Books

Ledger

Trial Balance

Balance Sheet
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 Concepts and Conventions
• Business Entity / Economic Entity Concept: For accounting purposes, the 'business' is
treated as a separate entity from the proprietor. The accountant can keep an owner’s
business transactions separate from the owner’s personal transactions.

• Going Concern concept: The assumption that a company will remain in business for an
indefinite period of time and will carry out its objectives and commitments.

• Money Measurement concept: Only transactions or events that can be recorded in

terms of money are recorded in the books of accounts.

• Cost concept: An asset is recorded in the books at cost i.e. the price paid to acquire it.
Transactions are recorded at their cost (cash or cash equivalent at the time of the
transaction) and generally the amounts are not generally changed as their market
values change.
• Dual Aspect concept: Every transaction that takes place in an organization, has two
effects on the Balance Sheet equation (Total Assets = Owners' Capital + Liabilities to
outsiders) such that at any point of time the equation is always maintained.

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 Concepts and Conventions
• Accounting Period concept: The entire life of the business is divided into smaller
periods at the end of which the performance is reviewed and reported. The period
for which the final accounts of a company are prepared may be a year and is
known as an accounting period.

• Realization concept: The realization concept states that the amount recognized as
revenue is the amount that is reasonably certain to be realized.

• Accrual concept: The costs and the revenues, which are recorded in the financial
statements, should relate to the accounting period of the financial statements to
which they relate. The cash may or may not be received or paid in the same
accounting period.

• Conservatism concept: It refers to the policy of 'playing safe'. As per this

convention, all prospective losses are taken into consideration but not all
prospective profits. When doubt exists between two alternatives, choose the
alternative with the lower profit and lower asset amount. Example: inventory
valued at the lower of cost or market.

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 Concepts and Conventions
• Industry Practices Often, regulated businesses have unique
reporting requirements, e.g. Major Corporations report their
Plant Assets before their Current Assets.
• Comparability Allows readers to compare different
Corporations’ financial statements; aided by Accounting
Standards.
• Consistency Using the same method of accounting year after
year.
• Reliability Dependable and free from bias.
• Relevance Will make a difference to a decision maker; timely.
• GAAP Generally Accepted Accounting Principles; Accounting
Standards including Industry Practices.
• Materiality If an amount is insignificant, an accounting
principle could be violated, e.g. expensing a $60 printer
immediately instead of depreciating it over its useful life.
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 Concepts and Conventions
• Account:
– An account may be defined as a systematic and summarized record of
transactions pertaining to a person, property or one head of
expense/loss or gain. An account is given a suitable heading, which
may be of the person, property or an expense or a gain. An account is
always divided into two sides. The left hand side is known as the Debit
side and the right hand side is known as the Credit side.
– To Debit an account means to enter the amount of transaction on the
Left Side i.e. Debit Side; and to Credit an account means to enter the
amount of the transaction on the Right Side, i.e. Credit Side. An
account can also called as a ledger account which means that it is
opened in a ledger book. It is also called as a "T" Account, as the page
is divided vertically into two portions to accommodate the Debit Side
(on the left) and the Credit Side (on the right) which makes the
appearance look like the alphabet "T".

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 Concepts and Conventions
• Double Entry System of Book-Keeping: Every transaction needs a
minimum of two parties to be entered into. At the end of the year, with a
huge number of transactions and probably similar transactions occurring
over a given period of time, a company might find it very difficult to trace,
verify and check a certain transaction that had occurred in the past.
Hence, what we follow is known as a Double-Entry system of Accounting -
which has a two-fold effect on the Accounts involved. Thus, if you see:
– Every business transaction is split up into its two sub-aspects - the debit aspect
and the credit aspect.
– One party can be termed as the receiver of the benefit/transaction and the
other party can be termed as the giver of the benefit/transaction.
– Every debit has a corresponding credit of an equal amount, so that tallying and
cross-checking the entries at a later date become possible and easier.
– The Double-Entry system of Book-Keeping denotes that every business
transaction has its effect on at least two accounts or two parties. Recording
the details at both ends is the classic feature of the Double Entry System.

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 What is an Account?
• A “T” format representation of the financial
transactions pertaining to that respective
head of Accounts, which is useful to have
ready and at–a–glance access to financial
information about a particular head of
expense.

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 Understanding Accounts & its Types
• Personal Account: Relates to all persons –
Natural and Artifical

• Real Account: Relates to all Assets – Fixed,

Movable etc.

• Nominal Account: Relates to all Incomes,

Expenditures, Losses and Gains
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 Golden Rules of Accounting
• Personal Account
Debit the Receiver, Credit the Giver

• Real Account
Debit what comes In, Credit what goes Out

• Nominal Account
Debit all Expenses and Losses,
Credit all Incomes and Gains
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