Financial Accounting and Costing: Faculty

FINANCIAL ACCOUNTING AND COSTING
Course code: 17IM7DCFAC Credits: 04

L: P: T: S: 4: 0: 0: 0 CIE Marks: 50
Exam Hours: 03 SEE Marks: 100
Total Hours: 50
Faculty:
Rajesh S M
Asst.Prof. Dept. of IEM, DSCE
Dept. of IEM, DSCE, Bangalore

1
Unit Course Content Hours Cos
1 Financial Accounting: Introduction to Book keeping: double-entry 12 CO1
CO2
accounting, journal & ledger posting. CO3
Financial Statements & Analysis: Trial balance, preparation of
Trading and Profit & Loss account, and Balance sheet, problems
2 Ratio Analysis: Balance sheet ratios, profit loss account ratios, and 8 CO1
CO2
combined ratios, problems CO3
3 Costing: Objectives of costing, Elements of costing, methods of 10 CO2

CO3
costing, preparation of cost sheet (job costing), process costing, CO4
Marginal costing and absorption costing, problems
Standard Costing: Material, labor, overhead cost variance,
problems
4 Working Capital Management: Requirement of working capital, 10 CO3
CO4
Factors influencing working capital requirement, determination CO5
of operating cycle and working capital, problems
5 Budgeting: Budgets, Classification, ZBB, Sales budget, production 10 CO4
CO5
budget, selling and administrative expense Budget, and Master CO6
budget, problems

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TEXT BOOKS:
1. Cost Accounting - Khan M Y and Jain P K, Tata McGraw-Hill,
4thEdition.
2. Financial Management - Prasanna Chandra; Tata McGraw-Hill,4th
Edition. 1998.
3. Management Accounting & Costing - PRASAD .N.K
4. Financial Management and Policy - James. C Vanhorne , Pearson
education, 12th edition.
REFERENCE BOOKS:
1. Elements of Accountancy - B.S Raman,
2. Practical Costing - Ahuja, Pandey, Khanna and Arora, , S. Chand & Co.
Ltd 2005
3. Financial Management & Costing - KHAN & JAIN, TMH – 2000

3
UNIT-1
Financial Accounting: Introduction to Book keeping:
double-entry accounting, journal & ledger posting.
Financial Statements & Analysis: Trial balance,
preparation of Trading and Profit & Loss account, and
Balance sheet, problems

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5
Why Financial Accounting ?
To know financial status of any business.
 Financialaccounting deals with the preparation of financial

statements for the basic purpose of providing information to
Creditors,
Banks,
Shareholders,
Financial institutions,
Government and Consumers.
Financial statements, i.e. the income statement and the
balance sheet indicate the way in which the activities of the
business have been conducted during a given period of time.
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Accounting is often called the language of business
Accounting statements or reports are needed by various

groups such as shareholders, creditors, potential investors,
columnist of financial newspapers, proprietors and others.
Accounting could become an intelligible and commonly

understood language if it is based on generally accepted
accounting principles.

7
What is Financial Accounting ?
It is an art and scientific method of recording ,classifying
and summarizing business transactions of financial
character of any business.

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Principles of Accounting
1) Money Measurement Concept
2) Dual Aspect Concept
3) Business Entity Concept
4) Cost Concept
5) Accounting Period Concept
6) Going concern Concept

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Financial Accounting Procedure

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Business Transactions

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a) Debtor : A person who has to pay to the business for getting
goods and services on credit is known as debtor. A debtor is a
person who owes money to the business.
b) Creditor: A person to whom business has to pay for getting

goods or services on credit is known as creditor. A creditor is a
person to whom business owes money.
c) Bad Debts : An irrecoverable amount from a debtor is known as

"Bad Debts". It is a revenue loss to the business.

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Assets, Liabilities, Net Worth:
i) Assets : Any physical thing or right owned that has a monetary value is
called as an asset. The ownership of the Asset must be with business unit. E.g
Land, Goodwill, Patents, Computers etc.
ii) Types of Assets:
a) Fixed Assets/Non current Assets : The assets which give long term benefit
to the business are known as fixed assets e.g Land and Building, Plant & Machinery,
Goodwill etc. These assets may be tangible or intangible.
b) Current Assets : Assets which are held in the business for the operating
year and can be converted into cash very easily are called as current assets. e.g
Debtors, Bills Receivable Cash in Hand, Cash at Bank, Stock etc.
c) Fictitious Assets : These assets are not represented by tangible possession

or property.
They are imaginary assets but do not have any realizable value. e.g Deferred revenue
expense like advertisement paid for 4 years.

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iii) Liabilities: Amount payable by the business to others is
known as liability. It is a debt or amount due from the business
to others for the benefit received by the business unit. e.g Loan
taken, Creditors, Bank Overdraft, Outstanding Expenses etc.
iv) Types of Liabilities:

a) Fixed Liabilities : One of the major source of funds in the
business is fixed liabilities.
It may be in the form of capital, secured loans, long term loans
from banks and from
financial institutions etc.
b) Current Liabilities: Short term liabilities payable within a

year are called current
liabilities. Current liabilities arise in the regular current
operations of the business. These liabilities are not normally
secured. E.g. Creditors, Bills Payable etc.
15
Debit and Credit Rules
Type of Accounts Rules for Debit Rules for Credit
Personal
Account Debit the receiver Credit the giver
Real Account Debit what comes in Credit what goes out
Nominal Debit all expenses and Credit all incomes and

Account losses gains

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Book-keeping:
In simple words, the ‘Book-keeping’ means recording of the
business transactions in the books of accounts in a
systematic way. All the monetary transactions are recorded
date wise for accurate business results from such records at
the end of accounting year. Book-keeping is an art or science
of systematic recording, classifying and summarizing the
financial transactions of business for a particular period,
generally one year.

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Features of Book-keeping:
1) It is the method of recording day to day business
transactions.
2) Only financial transactions are recorded.
3) All records are prepared for a specific period which are
useful for future references.
4) Records of transactions are based on rules and regulations.
5) It is an art of recording business transactions scientifically.

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Objectives of Book-keeping:
1) The main objective of book-keeping is to keep a complete and
accurate record of all the financial transactions in a
systematic, orderly and logical manner.
2) 2) All the business transactions are to be recorded date wise
and account wise.
3) Book-keeping serves as a permanent record of the monetary
transactions of an enterprise business and it can be produced as
an evidence, whenever and wherever required.

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4) To know the profit or loss of the business during the
financial year.
5) To know the total assets and liabilities of the enterprise.
6) To know what the businessman owes to others and what
others owe to him.
7) Businessman comes to know the current year’s progress
over previous year and compares its financial results with
other business enterprise in similar line

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Importance of Book-keeping
1) Record : It is not possible for anyone to remember all transactions. But Book-keeping
maintains records of all the transactions permanently and systematically in the books
of accounts. 2) Financial Information: Book-keeping is useful to get information related
to Profit, Loss, Assets, Liabilities, Investments and Stock, etc, at any given time. 3)
Decision Making: Book-keeping provides financial information to the businessman for
decision making.

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4) Controlling: Book-keeping enables the executives of the
business to control the activities of the business.
5) Evidence: Businessman needs financial evidence to be
produced in the Court of law in case of any disputes.
6) Tax Liability: Book-keeping is useful to find out the tax
liabilities e.g. : Income Tax, Property Tax, GST, etc

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Difference between Book-Keeping and Accountancy
Point Book-keeping Accountancy
Meaning It is concerned with recording and It is related with recording,
classifying the business transactions. classifying, summarizing,
analyzing and interpreting
the financial data.
Stage Book-keeping is the primary stage in Apart from the primary

accounting. It is the base for accounting stage, it includes secondary
stage of analysis and
interpretation.
Objectives The objective of Book Keeping is to keep The objective of accounting

the records of all financial transactions in is to prepare the financial
proper and systematic manner. statement and further
communicate the
information to the relevant
authorities.

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Point Book-keeping Accountancy
Responsibil Junior staff is responsible for keeping Senior staff is responsible
ity records. for keeping accounts.
Outcomes Book-keeping basically results in Journal and
The results of Accountancy
Ledger. is Profit and Loss A/c and
Balance sheet.
Period Book-keeping gives day to day details. Accountancy gives details of
entire year.
Analysis The process of Book Keeping does not Accountant uses Book
require any analysis Keeping information to
analyse and interpret the
data and then compiles it
into reports.
Decision Management cannot take a decision based on Depending on the data
Making the data provided by bookkeeping. provided by the
accountants, the
management can take
critical business decisions.

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Methods of Recording accounting information
Single Entry System: This system of accounting records only
Cash book and Personal accounts.
It is unscientific method and also known as an incomplete
recording system, because it changes with the convenience of
business for recording transactions.
This system of accounting does not provide accurate
information about the financial position of business and it is
suitable for small business.

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Double Entry System:
Double Entry System is the most scientific method of
recording all business transactions in the books of accounts.
Under this system double or two fold effects of each
transaction is recorded.
According to Double Entry Book-keeping System, one
account is to be debited and another account is to be credited
with equal amount

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Journal Entry
Everyday businessmen performs large number of transactions.

These transactions cannot be remembered at a glance. Therefore
these transactions must be recorded in different types of books.
 He keeps different accounting records. The number of books

depends upon the size and nature of business and volume of
transactions but important books of accounts which must be
maintained by every businessmen are Journal and Ledger.
Journal is a book employed to classify or sort out transaction in a

form convenient for their subsequent entries in Ledger Journal
keeps record of daily financial transaction . It is also known as Book
of Original Entry. When the Journal transactions are

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The word “Journal” is derived from the French word “JOUR”
which means a “Day”.
Journal means a “daily record”. A journal contains a daily
record of business transactions and hence it has been named
so, as soon as a transaction takes place its debit and credit
aspects are analyzed and first of all recorded chronologically i.e.
In the order of their occurrence(taking place). Journal is a

book of original entry or primary entry.

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Importance of Journal:
1) This is the principal book of account. It includes all types of
accounts of business
2) It shows all necessary information regarding transactions.
3) The Journal has date wise record of all the transactions with
details about accounts it helps to understand the events

when its took place.
4) The Journal is subsidiary book in which all the day to day
transactions are recorded first in chronological order in
debit
and credit form and with the amount of each transaction. 30
5) Accounting procedure is followed on the basis of
accounting documents.
6) The narration provides a brief explanation about the
transactions .It helps to increase the clarity of every
transactions.
7) It helps to find and prevent errors.
8) It helps to check arithmetical accuracy of the transactions.
9) It helps in preparation of Final Accounts.

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Format of Journal

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Steps for Journalizing:
1) Find out the accounts involved in a particular
transaction.
2) Find out the types of account involved.
3) Apply the rules of debit and credit for each of the
accounts involved.
4) Find out the account to be debited and the account to
be credited.
5) Record the date of the transaction in the “Date column”.

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6) The name of the account to be debited is to be written in
“Particulars” column. On first it is written close to the date column
and name of the account to be credited is written on the next line
after leaving short space from the date column.
7) The word ‘Dr.’ is written against the name of the account debited
and the name of the account to be credited is preceded by the word
‘To’.
8) Write the amount of transaction in debit column and credit
column.
9) A brief explanation of the entry is given in the bracket just below
the entry.
10) After each Journal entry a line is to be drawn in particulars
column only to keep the
entries of the transactions distinctly separate from each other.
11) L.F.(Ledger Folio) The page number on which the particular
account is opened in the Ledger is stated under the L.F. Column to
facilitate easy reference.
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Analyze the following transactions.
(a) Ramesh started his business with cash
(b) Borrowed from Nikhil
(c) Purchased furniture
(d) Purchased furniture from Mohan on
credit
(e) Purchased goods for cash
(f) Purchased goods from Ram on credit
(g) Sold goods for cash
(h) Sold goods to Hari on credit
(i) Received cash from Hari
(j) Paid cash to Ram
(k) Deposited into bank
(l) Withdrew cash for personal use
(m) Withdrew from bank for office use
(n) Withdrew from bank for personal use
(o) Received cash from a customer, Shyam

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(p) Paid salary by cheque
(q) Received donation in cash
(r) Paid to Ram by cheque
(s) Paid salary
(t) Paid rent by cheque
(u) Goods withdrawn for personal use
(v) Paid an advance to suppliers of goods
(w) Received an advance from customers
(x) Paid interest on loan
(y) Paid installment of loan
(z) Interest allowed by bank.
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Ledger:
Ledger is the Principal Book of accounts. It is also called as book of

final entry. It is summarized record which contains all the accounts
e.g. Assets A/c, Liabilities A/c, Capital A/c, Revenue A/c, Expenses
A/c.
The word ‘LEDGER’ is derived from Latin word ‘Ledger’ which

means ‘to contain’ As the ledger is the collection of all the accounts
so ‘it contains’ and hence the name signifies.

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1. “ A Ledger Account may be defined as a summary, statement of all
the transactions relating to persons, assets, expenses or incomes
which have taken place during a given period to time and shows
their net effect”.- S. P. Jain, K. L. Narang –Advanced Accountancy
2. “Main record of the accounts of a business, traditionally, a ledger

was a large book with separate pages for each account. In modern
systems ledger may consist of separate cards or computer records’-
Oxford Dictionary
3. “ A Ledger containing accounts in which all the transactions of a

business enterprises or other accounting units are classified either in
detail or in summary form”- E. L. Kohler- A Dictionary for
Accountants

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Importance of Ledger
1. It is the summarized record of all the transactions in form of Asset

A/c, Liabilities A/c, Expenses A/c, Income A/c etc.
2. The ultimate object of Book-Keeping is to ascertain with the least

trouble, what is the amount owed to the supplier, what is the amount
receivable from the customer and so on.
In the process of posting information collected is condensed in form of
Debtors A/c ,Creditors A/c to get the ready results
3. It is necessary for preparation of Trial Balance.
4. The financial position of the business can be easily known with the
help of various types of Assets A/c and Liabilities A/c

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5. It is possible to prepare various types of income statement on the
basis of balances shown by different ledger Accounts.
6. Ledger can be used as a control tool as it shows accounts of

various expenses with the balance.
7. On the basis of the results shown in the Ledger it is useful for the
management to forecast or plan the future plan of action.

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Ledger format

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Typical Journal entry and Ledger posting

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Preparation of Financial statements
Tail Balance
Trading Account
Profit & Loss Account
Balance Sheet.

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A trial balance is a statement showing the balances, or total of debits
and credits, of all the accounts in the ledger with a view to verify the
arithmetical accuracy of posting into the ledger accounts.
Trial balance is an important statement In the accounting process as

it shows the final position of all accounts and helps In preparing the
final statements.
The task of preparing the statements is simplified because the

accountant can take the balances of all accounts from the trial balance
instead of going through the whole ledger.

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Trail Balance Format

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Trading Account:
Trading Account is a Nominal Account. Trading Account is
opened in the trading organization for the purpose to find out
the Gross Profit or Gross Loss incurred during the year.
In the debit side of this account all direct expenses are recorded
and in the credit side of account all direct incomes of the firm’s
are recorded. If the trading account’s credit side is more than
debit side then account shows the Gross Profit and vice versa.
The Gross Profit or Loss is transferred to Profit and Loss

Account.
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Profit and Loss Account
Profit and Loss Account is the type of Nominal Account. Profit and
Loss account is a main account of income statement.
It is prepared to ascertain the Net Profit earned or Net Loss

suffered by a business concern during the accounting year.
All indirect expenses are to be recorded to the debit side where as

all indirect incomes are to be recorded to the credit side of this
account.
The credit balance on this account shows Net Profit which is to be

transferred to Capital Accounts credit side or added in capital.
The debit balance of this account shows. Net Loss which is to be

transferred to Capital Account debit side or deducted from Capital.

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Balance Sheet:
Balance Sheet is a statement showing financial position of the firm
on a particular day.
All liabilities are recorded to its left hand side where as all Assets
are recorded to its right hand side.
The Balance Sheet is not an account but a statement showing the

financial position of a firms, as on a given date in the form of Assets
and liabilities.

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Important Points:
1) Each item from Trial Balance will be included only once in the Final
Accounts i.e. either in Trading or in Profit & Loss A/c or in Balance Sheet
or in working section.
2) Each adjustment has two effects for the similar amount.
3) Debit balances of Trial Balance will appear on the debit side of Trading
Account or Profit & Loss A/c or on the asset side of the Balance Sheet.
4) Credit balances of Trial Balance will appear on the credit side of
Trading Account or Profit & Loss A/c or Capital Account or on the
Liabilities Side of the Balance Sheet.
Dept.5of IEM, DSCE, Bangalore

101
5) If Salaries and Wages are given as separate items, Wages are
shown on the debit side of Trading Account while salaries are
shown on the debit side of Profit and Loss A/c.
If the item is “Wages and Salaries”, it is shown on the debit side

of Trading A/c and if the items is “Salaries & Wages”, it is shown
on the debit side of Profit & Loss A/c.

102
6) If the Trial Balance contains only “Trade Expenses”, the item will be
shown on the debit side of Profit & Loss A/c. If the Trial Balance contains
‘Trade Expenses” and also other items like “Sundry Expenses” or “Office
Expenses” or “General Expenses” or “Miscellaneous Expenses”. the item
“Trade Expenses” is shown on the debit side of Trading A/c while the other
items of expenses are shown on the debit side of Profit & Loss Ale.
7) The adjustment for Bad Debts and Provision for Bad and Doubtful Debts
should be effected after other adjustments for Debtors are given effect to.
Such adjustments can be unrecorded sales, drawings included in Debtors,
drawings treated as sales. etc.

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8) Reserve for Discount on Debtors should be given effect after the
adjustments for Bad Debts and Provision for Bad and Doubtful Debts.
9) Reserve for Discount on Creditors should be given effect after

making all the other adjustments concerning Creditors.
10) Hidden / Self-explanatory adjustments are to be given effect even

if there is no special instruction in the problem in this respect.
11) Closing Stock should be taken at Cost or Market Price. whichever

is less.”

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Steps for solving problem :
1) Prepare the necessary accounts, including the working notes.

2) Place some mark on Trial Balance items for external as well as
internal adjustments.
3) Go through Trial Balance items and give only one accounting
effect sequentially.
4) Go through Adjustments and give two accounting effects.

5) Close Ledgers in the working notes. except capital.
6) Find Gross Profit, Net Profit and transfer it to individual capital

accounts.
7) Find the closing balance in capital and transfer it to Balance
Sheet.
8) Tally the Balance Sheet.

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Adjustment and Additional Information:
(I) Closing Stock 40.000.

(2) Depreciate Building and Machinery at 5% and 3% respectively.
(3) Bills Receivable included dishonoured bill of Rs 3000.
(4) Goods worth 1000 taken by Daya for personal use was not entered
in the books of accounts.
(5) Write off Rs1800 as Bud debts and maintain R.D.D. at 5% on
Sundry Debtors.
(6) Goods of Rs 6000 were sold but no entry was made in the books of
accounts.

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FINANCIAL ACCOUNTING AND COSTING

Course code: 17IM7DCFAC Credits: 04

Dept. of IEM, DSCE, Bangalore

3 Costing: Objectives of costing, Elements of costing, methods of 10 CO2

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

 Financialaccounting deals with the preparation of financial

Accounting statements or reports are needed by various

Accounting could become an intelligible and commonly

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

b) Creditor: A person to whom business has to pay for getting

c) Bad Debts : An irrecoverable amount from a debtor is known as

Dept. of IEM, DSCE, Bangalore

ii) Types of Assets:

c) Fictitious Assets : These assets are not represented by tangible possession

Dept. of IEM, DSCE, Bangalore

iv) Types of Liabilities:

b) Current Liabilities: Short term liabilities payable within a

Type of Accounts Rules for Debit Rules for Credit

Real Account Debit what comes in Credit what goes out

Nominal Debit all expenses and Credit all incomes and

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

Stage Book-keeping is the primary stage in Apart from the primary

Objectives The objective of Book Keeping is to keep The objective of accounting

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

Everyday businessmen performs large number of transactions.

 He keeps different accounting records. The number of books

Journal is a book employed to classify or sort out transaction in a

Dept. of IEM, DSCE, Bangalore

In the order of their occurrence(taking place). Journal is a

Dept. of IEM, DSCE, Bangalore

details about accounts it helps to understand the events

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

Dept. of IEM, DSCE, Bangalore

Ledger is the Principal Book of accounts. It is also called as book of

The word ‘LEDGER’ is derived from Latin word ‘Ledger’ which

Dept. of IEM, DSCE, Bangalore

2. “Main record of the accounts of a business, traditionally, a ledger

3. “ A Ledger containing accounts in which all the transactions of a

Dept. of IEM, DSCE, Bangalore

1. It is the summarized record of all the transactions in form of Asset

2. The ultimate object of Book-Keeping is to ascertain with the least

3. It is necessary for preparation of Trial Balance.

Dept. of IEM, DSCE, Bangalore

6. Ledger can be used as a control tool as it shows accounts of

Dept. of IEM, DSCE, Bangalore