Financial Accounting

Definition by 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 atleast of a financial character and interpreting the results thereof.

Importance of Accounting To remember all business transactions To make inter period and inter firm comparison To aid mgt. in decision making To comply with legal requirements To ascertain net results and value of business.

Difference
Book Keeping It is the science and art of correctly recording in the books of accounts all those transactions that result in the transfer of money or moneys worth. Accounting It is the actual process of preparing and presenting the financial information for the users of accounting information.

Accounting Book AAA Keeping

Systems of Book Keeping

Single Entry SystemIt records only cash and personal account transactions. The systems lacks reliability as it records incomplete information and is suitable only for very small business . This system is not recognized by tax dept. and courts. Double Entry SystemUnder this both the aspects of every transaction is recorded i.e. one debit and the other credit . Ex.If one person receives something , other person has given.

Systems of Accounting
Cash Basis-

Method of recording transactions only when it involves receipt or payment of cash . No recording of accruals. Accrual ( Mercantile ) BasisMethod of recording transactions by which revenues, costs, assets and liabilities are reflected in the accounts in the period in which they accrue.

Functions of Accounting Recordingsystematic recording of transactions in chronological order from source documents like sales bill, salary slip , exp. Bill etc(also called vouchers) in Journal Book. ClassifyingClassify the recorded information into related groups to put information in compact and usable form in ledger book.

SummarizingAccounts containing classified information in the ledger book are balanced and listed in the statement called Trial Balance . It gives summary of the ledger . Analysis & InterpretationDrawing meaningful conclusions from the information to draw financial statements and take meaningful decisions on its basis.

CommunicatingThe financial information generated is communicated to various user groups Owners Managers Creditors and Financial Institutions Customers Employees Investors and potential investors Government Researchers Public

Limitations
Records only financial transaction Price level changes are ignored Historical in nature Subjective choice of accounting policies Certain acc. estimates depend on personal Judgement of the accountant ex. Provisions, method of dep.,valuation of inventory etc. Window dressing Contradictory principles

Financial Accounting
It aims at ascertaining the profit or loss generated by the org. at the end of the period Info. Used by external parties Period of reporting is yearly, half yearly Mandatory Published for circulation among external parties

Management Accounting It aims at assisting in managerial decision making. . Info. Used by internal parties Short intervals as per reqt. Not mandatory Not published

Accounting mechanics

Journal

Ledger

Trial balance