Financial Accounting

Principles, Concepts and Conventions

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 What is Accounting?

“The main purpose of accounting is to ascertain profit or loss during

a specified period, to show financial condition of the unit on a
particular date and to have control over the unit’s property. Such
accounting records are required to be maintained to measure the
income of the unit and communicate the information so that it may
be used by various interest groups”, hence;

“Accounting is a discipline which records , classifies, summarizes

and interprets financial information about the activities of a concern
so that intelligent decisions may be taken about the concern and
the various interest groups interested in the concern”

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 What is Accounting?

“The financial accounting is an art of recording, classifying and

summarising 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”.

- American Institute of Certified Public Accountants

“Accounting is the process of identifying, measuring and

communicating economic information to permit informed
judgments and decisions by users of information”

- American Accounting Association

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 Objectives & Systems of Accounting

Objectives
• Making decisions concerning use of limited resources
• Identification of crucial decision areas and deciding objectives
and goals
• Effective directing and controlling of unit’s resources
• Maintaining and reporting on the custodianship of resources
• Facilitating social functions and control

Systems
• Cash System
• Mercantile (Accrual) system

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 Double Entry Accounting System
• Originated in 1494 by Italian Merchant Fra Luco Pacioli

• ‘De Computis et Scripturis’ the first Book on System by

Pacioli

• Every business traction has two aspects

• The method of writing every traction in two accounts is

known as DEAS

• One account is given debit the other account is given

credit with equal amount

• On any date the total of all debits must be equal to all

credits because every debit has a corresponding credit

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 Accounts under Double Entry Accounting
System

• Personal Account

Rule: Debit the receiver credit the giver

• Real Account

Rule: Debit what comes in Credit what goes out

• Nominal Account

Rule: Debit all expenses and losses credit all incomes and gains

• Accounting Equation : Assets = Liabilities + Capital

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Generally Agreed Accounting Principles
(GAAP)
Concepts and Conventions of Accounting
Concepts of Accounting: Assumptions
• Business Entity Concept
• Going Concern Concept
• Accrual Concept
• Money Measurement Concept
• Cost Concept
• Dual Aspect Concept
• Accounting Period Concept
• Matching Concept
• Realization Concept
• Objective Evidence Concept

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 Conventions (Traditions) of
Accounting

• Convention of Consistency

• Convention of Disclosure

• Convention of Conservatism (Prudence)

• Convention of Materiality

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 Accounting Process
• Transaction
• Journal
• Ledger
• Trial Balance
• Profit & Loss Account
• Balance Sheet

Some other additional Statements

• Profit and Loss Appropriation Account

• Fund Flow Statement
• Cash Flow Statement

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 Journals (First Book of Accounting)

• Purchase Book
• Sale Book
• Purchase Return Book
• Sale Return Book
• Bills Receivables Book
• Bills Payable Book
• Cash Book
• Journal Proper

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 Profit & Loss Account

• Nominal Account

• Expenses decrease Capital and Income Increase Capital

• Income is shown on Credit Side and Expenses are shown on Debit

Side of the Account

• No Opening Balance but certainly Closing Balance as profit or loss

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Trading and Profit & Loss Account of XYZ Ltd. For
the Year Ending on 31.12.2010

Particulars Amt. Particulars Amt.

(Dr.) (Cr.)
To Direct Expenses By Sales
To G/P By Closing Stock
----- -----
To Indirect Expenses By G/P
By Other Incomes
To N/P
--------
-----

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 Balance Sheet

• Prepared in Two Ways

• Shows Capital or General Fund

• Special Funds are also Shown

• Beginning Capital is Worked Out if not Given by

preparing Beginning Balance Sheet

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 Balance Sheet of XYZ Ltd. as on 31.12.2010

Liabilities & Amt. Assets Amt.

Capital
Share Capital Fixed Assets
Add N/P
Reserves &
Surplus

Long Term
Liabilities Currents Assets

Current Liabilities

------ -----

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