Financial Accounting

By:
KavitaVijay
Definition of Accounting
According to AICPA
“Accounting is 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
result thereof”
Nature of Accounting
Accounting as a service activity
Accounting as a profession
Accounting as a social force
Accounting as a language
Accounting as science or art
Accounting as an information system
Objectives of Accounting
Providing Information to the Users for
Rational Decision-making
Systematic Recording of Transactions
Ascertainment of Results of above
Transactions
Ascertain the Financial Position of Business
To Know the Solvency Position
Functions of Accounting
Recordative Functions
Interpretative Functions
To meet legal requirements
To protect Business Assets
To Facilitate Decision-making
To communicate the Financial Results
Book-keeping
According to J.R. Batliboi, “ Book-
keeping is the art of recording business
transactions dealing in the books of
accounts.”
Book-keeping is a small part of
accounting
Management Accounting
Management needs detailed information on different aspects
to arrive at meaningful decisions. Financial accounting
provides some informations but these are not adequate.
Management accounting removes these limitations of
financial accounting.

Definition :- According to American Accountng

Association, “Management accounting includes the
methods and concepts necessary for effective planning, for
choosing among alternative business actions and for
control through the evaluation and interpretation of
performance.”
Nature of Management accounting
Both as a Science and an Art
Accounting Service
Integrated System
More Concerned with Future
Selective Nature
Rules not precise and universal
Supplies information and not decision
Achieving of Objectives
Functions of Management Accounting
1) Provides data
2) Modifies Data
3) Analysis and interpretation of data
4) Use of Qualitative Information also
5) To help in Planning
6) To help in Organising
7) To help in Motivation
8) To help in Co-ordination
9) Communication
10) To help in Control
11) To help in Decision Making
Scope of Management Accounting
Distinction between Cost Accounting and Management
Accounting
Cost Accounting Management Accounting
1. Objective : To determine the 1. Management Accounting
cost and control it. helps the management in
decision making through cost
and financial information.
2. Subject Matter :- Cost 2. Management accounting
accounting deals mainly with considers both cost and
cost data income aspects.

3. Scope :- Cost accounting

provides information relating 3. Management accounting has a
to cost of products only , so its wide scope as it collects
scope is narrow. information from fin. Acc,
cost acc and business finance.
Basis of Financial accounting Management
distinction accounting

. Primary user Outside parties and Business managers

manager
of the business

2. Decision Accounts are based on Comparison of costs

criterion generally accepted and benefits of
accounting principles proposed action

3. Behavioral Concern about Concern about how

implications adequacy of reports will affect
disclosure. Behavioral employee
implications are
secondary
behaviour

4. Time focus Past orientation Future orientation

5. Reports Summary reports Detailed reports on

regarding the parts of the entity
the whole entity
Utility of Management Accounting
1. It helps the management in effective planning and
decision-making.
2. Management accounting helps the management in
control through budgetary control, standard costing,
marginal costing.
3. Reporting system of management accounting helps in
establishing co-ordination.
4. Management accounting helps in creating cost centre and
profit centers and establishing internal audit and internal
control systems for these centers.
5. Communication plays most important role in decision
making and management accounting helps in this regard
through its reporting system.
Limitations of Management Accounting
1. Limitations of Cost and Financial Accounting
System
2. Persistence of Intuitive Decision
3. Wider Scope
4. Costly System
5. Psychological Resistance
6. Evolutionary
7. It is not Alternative to Management
Techniques of Management Accounting
i. Analysis of Financial Statements
ii. Ratio Analysis
iii. Fund Flow Statement
iv. Cash Flow Statement
v. Marginal Costing and Cost-volume Profit Analysis
vi. Budgetary Control and standard costing
vii. Management Reporting
viii. Statistical Techniques
ix. Value Added Statement
x. Accounting Price Level Changes
xi. Human Resource Accounting
 Types of Accounts
•Natural Person’s Personal Account: An account recording
transactions with an individual human being is known as a natural
person’s Personal Account. (eg. Krishna account)
•Artificial Person’s Personal Account: An account recording financial
transactions with an artificial person created by law or otherwise is called
an artificial person’s personal account. (eg. VSL College)
•Representative Person’s Personal Account: An account indirectly
representing a person or persons is known as a representative account.
(eg. Salaries account)
•Tangible Real Account: An asset which can be touched,seen, and
measured. (eg. Machinery Account)
•Intangible Real Account: An asset which can’t be touched physically
but can be measured in value. (eg. Goodwill)
JOURNAL,
LEDGER &
TRIAL
BALANCE
 Journal
•The word journal is derived from the Latin
word ‘Journ’ which means a day.
•Journal means a day book where in day-to-
day business transactions are recorded in a
chronological order.
•The process of recording a transaction in the
journal is called Journalisation.
• The entries made in the book are called
journal entries.
Points to be noted before journalizing
• Compound journal entry
• Cash or credit transaction
• Cash discount
• Trade discount
• Purchase of shares: When shares or securities are
purchased, the entry is made at market value and not at
face value. Brokerage paid on the purchase of such
investment is also added in the amount of investment.
• Sale of shares: If shares or securities are sold, the
entry should be passed at market value less brokerage,
if any, paid on such shares.
 Ledger
The mechanics of collecting,
assembling and summarizing all
transactions of similar nature at one
place can better be served by a book
known as 'ledger' i.e. a classified head
of accounts.
Utility of Ledger
The main utilities of a ledger are summarized as
under:
It provides complete information about all accounts
in one book.
It enables the ascertainment of the main items of
revenues and expenses
It enables the ascertainment of the value of assets and
liabilities.
It facilitates the preparation of Final Accounts.
Rules of posting
The following rules should be followed while posting business transactions to
respective accounts in the ledger from the journal :
 Enter the date and year of the transaction in the date column.
Open separate account in the ledger for each person, asset, revenue, liability,
expense, income and loss appearing in the Journal.
 The appropriate/relevant account debited in the Journal will be debited in the
ledger, but the reference should be given of the other account which has been
credited.
Similarly, the account credited in the Journal should be credited in the ledger, but
the reference has to be given of the other account which has been debited in the
Journal.
 The debit posting should be prefixed by the word 'To' and credit posting should be
prefixed by the word 'By'.
 In the Journal Folio (J.F.) column the page number of the book of original entry
(Journal) is entered.
Question 1
On 1st May 2018, Mohan started a business with a capital of Rs. 50,000. Below is the
transaction he made.
2018 Particulars ₹
April 3 Purchased goods 20,000
from Rima on credit
April 4 Cash paid to Rima 10,000
April 6 Goods sold to Ramon 25,000

April 8 Received cash from 20,000

Ramon
April 12 Goods purchased 12,000
from Rima
April 18 Cas paid to Rima 20,000
April 25 Goods sold to Ramon 10,000

April 30 Received cash from 6,000

Ramon

Prepare a journal and ledger for the account.

Pass the necessary Journal entries of M/s Nestle Traders, Bangalore from the following
transactions.
Post the same to the ledger.

2018 ₹.
April 1 Commenced business with cash 1,50,000
April 2 Opened a bank a/c with SBI 50,000
April 3 Purchased furniture 20,000
April 7 Bought goods from M/s. BritanniaTraders, Bangalore 30,000
April 8 Purchased goods from M/s. Cadbury Traders, Mysore 42,000
April 10 Cash sales 30,000
April 14 Sold goods on credit to M/s. Lindt Traders, Kerala 12,000
April 16 Rent paid 4,000
April 18 Paid electricity expenses 1,000
April 20 Received cash from Lindt Traders 12,000
April 22 Goods returned to Cadbury Traders 2,000
April 23 Cash paid to Cadbury Traders 40,000
April 25 Bought postage stamps 100
April 30 Salary paid to Priyata 4,000
Trial Balance
A Trial Balance is a statement of balances remaining
in each and every ledger account classified as to debit
and credit entry balances.
According to the principle of double entry accounting
system, the total of the debit side should be equal to
the total of credit side.
If both sides of the Trial Balance agree, it is an
indication that at least the accounts prepared
arithmetically correct.
Objectives of Trial Balance
To check the arithmetical accuracy of
books of accounts.
Helpful in preparing final accounts
To serve as an aid to the management
Methods of Trial Balance
Total method: In this method, the debit and credit
totals of each account are shown in the two amount
columns (one for the debit total and the other for the
credit total).
Balance Method: In this method, the difference of
each amount is extracted. If debit side of an account is
bigger in amount than the credit side, the difference is
put in the debit column of the Trial Balance and if the
credit side is bigger, the difference is written in the
credit column of the Trial Balance.
 Trial Balance Format
TRIAL BALANCE OF …………… AS ON

Serial No. Name of Dr. Cr.

Account Balance Balance
Rs. Rs.