FA AV Session 3 and 3 16AUG 2022

Financial Accounting
Dr. Ashish Varma, Ph.D

Associate Professor
Institute of Management Technology, Ghaziabad.
Dr Ashish / FA / 2022 / IMT 1

WHAT ARE
CAPITAL
MARKETS ?

And who are these men?

Charlie Munger and Warren Buffet…. Have illustrated the enormous benefit
from the use of financial information coupled with non financial information.
They also exemplify sound judgment and behavioral qualities which one can
benefit from.
I strongly recommend ;
1.The intelligent Investor ; Ben Graham

2.Common stocks and Uncommon Profits ; Philip Fischer

AND THUS THE NEED TO UNDERSTAND ACCOUNTING AND ITS
OUTPUT…

Double-Entry Bookkeeping
Although the method dates back at least to

Genoa in the 14th century, the first written
description seems to be a 1458 manuscript
by Benedetto Cotrugli (Benedikt Kotruljevic,
of Dubrovnik).
The mathematician Luca Pacioli included this technique in De

Computis et Scripturis, part of his Summa de Arithmetica, Geometria,
Proportioni et Proportionalita, printed on a Gutenberg press in Venice
in 1494.

Definition of Accounting
 Process of:
 Identifying
 Measuring
 Communicating
 Economic information.
 To make decisions.

7
Dual Aspect: Balance Sheet
(Fundamental Accounting Equation)
 Assets = Liabilities + Owners’ equity.
• Amounts invested in resources = how these

amounts were financed.
• Resources = financed by creditors + financed by

owners.

8-15
Balance Sheet Items: Shareholders Funds

 Shareholders Funds comprise of two broad
items:
 Share Capital
 Reserves and Surplus

8-16
Reserves and Surplus
 Reserves are normally created by

appropriating retained earnings to meet
unforeseen future contingencies.

8-17
Loan
 Secured Loan (e.g., term loan)

 Unsecured Loan

8-18
Fixed Assets are now PPE

 Gross block denotes original cost of assets.
 Net block represents depreciated value of fixed
assets.
 Capital work in progress denotes assets under
construction.

8-19
Investments
 Investments denote investments outside the company in
various financial instruments.

8-20
Current Assets, Loans and Advances

 Current assets are short-term assets which are ideally
realisable within twelve months from the date of the
balance sheet.
 Loans are essentially long term loans given to other
corporate and/or to employees. Loans carry interest.
 Advances are short-term facilities and hence normally do
not carry interest.

8-21
Current Liabilities and Provisions

 Current liabilities are short-term obligations payable
within next twelve months. Such liabilities do not
normally carry interest.
 Provisions are estimated liabilities. They are estimated
on the basis of available information (e.g., provision for
tax, proposed dividend)

1-9
Accounting Concepts:
 Entity Concept:
 A business entity is an economic unit distinct from its
owner(s). Such entity owns its assets and has its own
obligations. Only those transactions and events which
affect the financial position of the business entity will be
recorded in its books of accounts.
 Money Measurement Concept:
 Only transactions and events which are measurable in
monetary terms should be recorded.
Financial Accounting: An introduction

1-10
 Accrual Concept:
 Income and expenses should be recognised as and
when they are earned and incurred, irrespective of
whether money is received or paid in connection thereof.
 An alternative of accrual basis of accounting is “cash
basis” where transactions are recorded only when cash
is received or paid.
 Cost Concept:
 Assets and liabilities should be recorded at historical
cost.

1-11
 Going Concern Concept:
 An entity is said to be a going concern if it has ‘neither
the intention nor the necessity of liquidation or of
curtailing materially the scale of the operations’. The
valuation principles of assets and liabilities depend
on this concept.
 Periodicity Concept:
 Accounts are prepared for a defined accounting period.
Such period could be a quarter, half year, a year or, in
exceptional circumstances, more than one year. This
concept is essential to measure financial performance.

1-12
 Matching Concept:
 While measuring periodic financial results, revenue
earned during an accounting period is matched with
expenses incurred (to earn the revenue) in the same
accounting period. Thus, expenditure incurred during
construction phase should be withheld till the business
starts commercial activity and earns revenue.
 Prudence Concept / Conservatism :
 This concept suggests that all possible expenses and
losses should be estimated and recorded, but
anticipated gains should be ignored. This concept is also
called the concept of ‘conservatism’.

1-13
Consistency:
 A business entity frames accounting policies that lay down
rules for presentation of financial statements. Accounting
policies, once framed, should be consistently followed.
However, such policies may be changed if circumstances
so warrant.

Before we are ready for further
discussion on HUL ,
We need to look at MAYNARD A
And
MAYNARD B
1-5
Events and Transactions

• An event is a happening of consequence to an
entity.
• A transaction is an “External event” that affects the

financial position of an entity. So a company
cannot have a transaction with itself , ( Well that’s
simple …. Why do people get it wrong??? )

GAAPs - Sources
 Companies Act , 2013
 Regulatory Authorities’ Directions
 ICAI
 Accounting Standards
 Guidance Notes on Accounting
 Expert Advisory Committee of ICAI Opinions
 Judgments

8-2
 Every company is required to maintain proper books of

accounts at the company’s registered office unless the
Board of Directors decide to keep these books at
another place in India.
 Only proper books of accounts can provide a true and
fair view of the financial state of affairs of a company.
 Two essential conditions of proper books of accounts:
 Double entry principle is followed.
 Accrual basis is followed.

Deferral: Delay in the recognition on
an expense already paid or a revenue
already received.
Accrual : Recognizing an expense

that has not been paid or a revenue
that has not been received.

Double-entry system Account Title
Debit: left side of an Debit Credit
account
Credit: right side of an
account
Debits = Credits

 An account is an individual record of increase or
decrease in an item that is of importance.
 A ledger is a set of all accounts.
 ( The trial balance is not an accounting record)

3-4
Account Format
 In the good old days…An account in the ledger
had the following format:
Dr. Ledger Account Cr.

Date Particulars JF Amount Date Particulars JF Amount
Where,
Dr. stands for Debit and Cr. Stands for Credit
JF stands for Journal Folio
Postings in the Secondary Books

Debits and Credits:
Balance Sheet Accounts
Increase Decrease
Assets Debit Left Credit Right
Liabilities Credit Right Debit Left
Equity Credit Right Debit Left
30
Dr Ashish / FA / 2022 / IMT
Debits and Credits:
Revenues, Expenses, and Dividends
Increase Decrease
Revenues Credit Right Debit Left
Expenses Debit Left Credit Right
Dividends Debit Left Credit Right
31
Transaction 1
Investment of $700,000
cash into the business.
1 Cash A/c………………dr 7,00,000

To Equity Capital 7,00,000
( Being Business Started)

Posting
 Posting involves transferring the the debits

and credits from the journal entries to the
individual accounts
 Posting is purely mechanical in nature and
requires no analysis
 The collection of all of a company’s
accounts is called a ledger

Example:
Posting Transaction 1
 Cash 700,000
Paid-in Capital 700,000
Cash Paid-in Capital

700,000 700,000

Transaction 2
Borrowed $300,000
cash from the bank.
2 Cash 300,000
Bank Loan Payable 300,000

Transaction 3
Purchased land costing $50,000
and buildings costing $400,000.
Paid $100,000 in cash and
signed a mortgage for the
balance.
3 Land 50,000
Buildings 400,000
Cash 100,000
Mortage Payable 350,000

Transaction 4
Purchased equipment
for $650,000 in cash.
4 Equipment 650,000
Cash 650,000

Transaction 7
Purchased inventory costing
$90,000 for $10,000 in cash and
the remaining $80,000 on
account.
7 Inventory 90,000
Cash 10,000
Accounts Payable 80,000

Transaction 8
Paid $15,000 cash for an
insurance policy.
8 Prepaid Insurance 15,000

Cash 15,000

Transaction
Performed landscaping
consulting services and
billed clients $200,000
for these services.
11 Accounts Receivable 200,000

Consulting 200,000

Transaction
Collected $820,000 cash
from customers as
payment on their
accounts.
14 Cash 820,000
Accounts Receivable 820,000

Transaction
Paid $1,200,000 in cash to
suppliers as payment on
account.
15 Accounts Payable 1,200,000

Cash 1,200,000

Transaction
Paid cash of $150,000 for
advertising, utilities, and
office supplies.
18 SG&A Expense 150,000

Cash 150,000

Transaction
Paid cash
dividends of
$5,000.
23 Dividends 5,000
Cash 5,000

Trial Balance
 A trial balance is a listing of all of the

ledger accounts and their balances
 The total of the debit balance accounts
should equal the total of the credit balance
accounts
DR = CR
 The equality of the debits and credits
provides some assurance that the posting
process has been completed correctly
Veda Landscape Solutions
Trial Balance
December 31, 2006
Debit Credit
Cash $130,400
Accounts receivable 120,000
Inventory 490,000
Prepaid insurance 0
Land 50,000
Buildings 380,000
Equipment 520,000
Accounts payable $180,000
Wages payable 40,000
Unearned franchise revenue 50,000
Interest payable 58,000
Bank loan payable 300,000
Mortgage payable 350,000
Paid-in capital 700,000
Retained earnings (beginning of year) 0
Sales revenue 1,100,000
Consulting revenue 200,000
Landscaping revenue 500,000
Cost of goods sold 800,000
Landscaping supplies expense 100,000
Wages expense 500,000
Selling, general, and administrative expense 174,600
Interest expense 58,000
Depreciation expense 150,000
Dividends 5,000
Totals $3,478,000 $3,478,000
Permanent Accounts
 Balance sheet accounts.
 Reported on balance sheet.
 Carried forward into next period:
 In this sense, they are permanent.

1-47
Temporary Accounts
 Revenue and expense accounts.
 Details of income statement and changes in
retained earnings (RE).
 Helps summarize operating activity.
 Avoids cluttering RE account.
 At end of accounting period, amounts are
totaled, combined and transferred to RE.
 Balances at beginning of each period are 0.

1-48

FA AV Session 3 and 3 16AUG 2022

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Financial Accounting

Dr. Ashish Varma, Ph.D

Dr Ashish / FA / 2022 / IMT 1

Dr Ashish / FA / 2022 / IMT 2

Dr Ashish / FA / 2022 / IMT 3

1.The intelligent Investor ; Ben Graham

Dr Ashish / FA / 2022 / IMT 4

Dr Ashish / FA / 2022 / IMT 5

Although the method dates back at least to

The mathematician Luca Pacioli included this technique in De

Dr Ashish / FA / 2022 / IMT 6

Dr Ashish / FA / 2022 / IMT 7

 Assets = Liabilities + Owners’ equity.

• Amounts invested in resources = how these

• Resources = financed by creditors + financed by

Dr Ashish / FA / 2022 / IMT 8

Balance Sheet Items: Shareholders Funds

Dr Ashish / FA / 2022 / IMT 9

Reserves and Surplus

 Reserves are normally created by

Dr Ashish / FA / 2022 / IMT 10

 Secured Loan (e.g., term loan)

Dr Ashish / FA / 2022 / IMT 11

Fixed Assets are now PPE

Dr Ashish / FA / 2022 / IMT 12

Dr Ashish / FA / 2022 / IMT 13

Current Assets, Loans and Advances

Dr Ashish / FA / 2022 / IMT 14

Current Liabilities and Provisions

Dr Ashish / FA / 2022 / IMT 15

Dr Ashish / FA / 2022 / IMT 16

Financial Accounting: An introduction

Dr Ashish / FA / 2022 / IMT 17

Financial Accounting: An introduction

Financial Accounting: An introduction

Dr Ashish / FA / 2022 / IMT 19

Financial Accounting: An introduction

Dr Ashish / FA / 2022 / IMT 20

Financial Accounting: An introduction

We need to look at MAYNARD A

Events and Transactions

• A transaction is an “External event” that affects the

Dr Ashish / FA / 2022 / IMT 22

Financial Accounting: An introduction

Dr Ashish / FA / 2022 / IMT 23

 Every company is required to maintain proper books of

Dr Ashish / FA / 2022 / IMT 24

Accrual : Recognizing an expense

Dr Ashish / FA / 2022 / IMT 25

Dr Ashish / FA / 2022 / IMT 26

Dr Ashish / FA / 2022 / IMT 27

Dr. Ledger Account Cr.

Postings in the Secondary Books

Assets Debit Left Credit Right

Liabilities Credit Right Debit Left

Equity Credit Right Debit Left

Revenues Credit Right Debit Left

Expenses Debit Left Credit Right

Dividends Debit Left Credit Right

1 Cash A/c………………dr 7,00,000

Dr Ashish / FA / 2022 / IMT 32

 Posting involves transferring the the debits

Dr Ashish / FA / 2022 / IMT 33