M.M.S.

- SEM I FINANCIAL ACCOUNTING

Faculty: Subhash Dalvi

 1.2. Financial Accounting 100 marks

COURSE CONTENTS 1. Introduction to Accounting : Concept and necessity of Accounting An Overview of Income Statement and Balance Sheet. 2. Introduction and Meaning of GAAP; Concepts of Accounting: Impact of Accounting Concepts on Income Statement and Balance Sheet. 3. Accounting Mechanics: Process leading to preparation of Trial Balance arid Financial Statements; Preparation of Financial Statements with Adjustment Entries 4. Revenue Recognition and Measurement: Capital and Revenue Items: Treatment of Income & Expenses. Preproduction Cost, Deferred Revenue Expenditure etc.

5. Fixed Assets and Depreciation Accounting. 6. Evaluation and Accounting or inventory 7. Preparation and Complete Understanding of Corporate Financial Statements : T Form and Vertical Form of Financial Statements 8. Important Accounting Standard 9. Corporate Financial Reporting Analysis of Interpretation thereof with reference Ratio Analysis. Fund Flow, Cash Flow. 10. Inflation Accounting 11. Ethic Issue in Accounting

Reference text: 1 Financial Accounting. Text & Case. Daardon & Bhattacharya 2 Financial Accounting (or Managers T P Ghosh 3 Financial Accounting Reporting & Analysis 50cc & Diamond 4 Financial Accounting. R Narayanaswamy 5 Full Text of Indian Accounting standard Taxman Publication

MEANING & DEFINITIONS of BOOK KEEPING

Book Keeping means keeping a written record of business transactions in a set of books. Book Keeping is the art of recording business dealings in a set of books ----- J R Batliboi Book Keeping is the science and art of correctly recording in the books of accounts all those business transactions that result in the transfer of money or moneys worth ----- R N Carter

NEED OF BOOK KEEPING

To have permanent record of all the business transactions To know names of customers & suppliers To know net profit & net loss, assets & liabilities of the business To have important information for legal & tax matters

ACCOUNTING
AICPA (American
Association of Certified Public Accountants)

AAA (American
Association of Accounting)

Accounting is the art of recording, classifying and summarising, in terms of money, financial transactions and events and interpreting the results thereof

Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information

OBJECTIVES OF BOOK KEEPING

To have date-wise record To have account-wise record To calculate & know yearly profit or loss To know year-end financial position To analyse, interpret & communicate the accounting information

PERSONS INTERESTED IN ACCOUNTING

OWNER EMPLOYEES LENDERS CUSTOMERS SUPPLIERS GOVERNMENT SOCIETY SHAREHOLDERS

TERMINOLOGY
TRANSACTION Exchange between two parties. It involves Give & Take CASH TRANSACTION Goods or services are exchanged for cash CREDIT TRANSACTION Goods or services are exchanged for cash receivable or payable at future

 GOODS things, articles or commodities exchanged in a business transaction SERVICES Service means the work done for money. They do not involve any article or commodity PROFIT Excess of Income over expenditure LOSS Excess of Expenses over Income INCOME Amount earned by sale of goods & services

 EXPENSES Amount paid for goods & services used in the business ASSETS Properties owned by the business like Building, Plant, Machinery, Computers, Motor Cars, Furniture & Fixtures etc. LIABILITIES Loans borrowed from banks, relatives, friends etc. which must be paid back in future are called liabilities CONTINGENT LIABILITY Future liability. It may or may not become an actual liability. It is not recorded in the books, but is shown by way of a note in the balance sheet

 CAPITAL Money put in the business by the owner. It also includes goods or assets brought in the business by the owner DRAWINGS If the owner withdraws any money, goods or assets from the business for his own use, such withdrawals are called as drawings. Such drawings reduce the amount of capital of the owner NET WORTH Difference between total assets and total outside liabilities. Net Worth = Assets Liabilities

 DEBTOR A debtor buys goods & services from us and promises to pay the price to us on an agreed date in future. Debtor is a person who owes money to business. CREDITOR A creditor sells goods & services to us and agrees to receive the price in future. Creditor is a person to whom we owe money. EXPENDITURE Payment made by a business to obtain some benefit i.e. assets, goods or services

 CAPITAL EXPENDITURE Expenditure for obtaining an asset is known as capital expenditure. It is an expenditure having future benefits. It is an expenditure with long term use (more than 1 year) REVENUE EXPENDITURE Expenditure on obtaining goods and services is known as revenue expenditure. It is an expenditure for running the business. It is an expenditure with short term use (1 year or less than 1 year)

 DEFERRED REVENUE EXPENDITURE To defer means to postpone. It is that expenditure which is carried forward as it will be of benefit over subsequent period e.g. heavy advertisement expenditure to launch a new product. The proportionate cost related to current year is taken as expense. The balance cost is carried forward and written off in next year. ACCOUNTING YEAR Period of 12 months normally starting in April & ending in March of next year. Normally profit is found out for an accounting year.

TYPES OF ACCOUNTS
PERSONAL ACCOUNTS Accounts of all persons like Dena Bank a/c, Garware Institute A/c, Mumbai University A/c, Sachin Tendulkar A/c etc. REAL ACCOUNTS Accounts of all properties & assets like CASH Account, Plant & Machinery A/c, Building A/C etc. NOMINAL ACCOUNTS Accounts of all expenses & losses and Incomes & gains like Telephone charges a/c, Interest Recd A/C, Electricity charges a/c, Salary account etc.

GOLDEN RULES
PERSONAL ACCOUNT DEBIT - THE RECEIVER CREDIT THE GIVER REAL ACCOUNT DEBIT WHAT COMES IN CREDIT WHAT GOES OUT NOMINAL ACCOUNT DEBIT ALL EXPENSES & LOSSES CREDIT ALL INCOMES & GAINS

DOUBLE ENTRY ACCOUNTING

Recording of transactions & events follows a definite rule. Each transaction or event has two aspects DEBIT (Dr.) & CREDIT (Cr.) Every Debit has an equal & opposite Credit Every transaction should be recorded in such a way that it affects two sides DEBIT & CREDIT

ACCOUNTING CYCLE 1. SELECTION OF TRANSACTION Select only those transactions which are - Financial in nature and - Which arise in the course of the business

2. ANALYSIS OF TRANSACTION Analyse the transaction to find out a. Whether the business has received any benefit such as goods, services or assets and in return , any amount is paid in cash or is payable b. Whether any such benefit has gone out of business and in return any amount is received in cash or is receivable

3. CLASSIFICATION OF ACCOUNTS Find out which items or persons are involved in the transaction and classify them in to 3 main types such as a. Personal A/c b. Real A/c c. Nominal A/c

4. APPLYING RULES OF DEBIT OR CREDIT Depending upon the nature of a transaction a. DEBIT The A/c receiving the benefit or amount

b. CREDIT The A/c giving the benefit or amount

 5. RECORDING IN JOURNAL OR SUBSIDIARY BOOKS Transactions are recorded as and when they occur, in a daily book called Journal including subsidiary books like Cash Book, Bank Book, Purchase Register, Sales Register etc. 6. POSTING AND TOTALLING OF LEDGER ACCOUNTS From the journal, the amounts debited or credited are transferred (posted) to the debit and credit of the concerned accounts in a book called Ledger

 7. TRIAL BALANCE At the end of the year trial balance is prepared which shows the closing balances of all accounts in the ledger 8. PROFIT & LOSS A/C The balances of Income and Expenses accounts at the end of the year are summarised in the P/L A/c. The difference between the income & expenses shows the profit or loss for the year 9. BALANCE SHEET The balances of assets, liabilities and capital accounts at the end of the year are summarised in the Balance Sheet.

BRANCHES OF ACCOUNTING
FINANCIAL ACCOUNTING COST ACCOUNTING MANAGEMENT/MANAGERIAL ACCOUNTING AUDITING TAXATION

FINANCIAL ACCOUNTING
Original Form of Accounting Confined to Preparation of Financial Statements Objective is to Calculate Profit / Loss made during the year & to exhibit Financial Position of the Business

COST ACCOUNTING
Function of cost accounting is to ascertain the cost of the product and to help the management in the control of cost Costing is a technique of ascertaining cost of a particular product or service

MANAGEMENT ACCOUNTING
It is an accounting for management Provides information to the management It is reproduction of financial accounts in such a way as will enable the management to take decisions & control various activities

AUDITING
Examination of books, accounts, vouchers and other records by a practicing Chartered Accountant appointed for the purpose Reporting to the members / management whether the B/S & P/L A/c as on particular date shows true & fair view of the state of affairs of the business

TAXATION
Computation of Taxable Income & Tax Payable thereon Reconciliation between accounting profit & taxable profit Statutory compliance

ACCOUNTING CONCEPTS
Elephant, Monkey, Cat, Goat, Parrot & Ant Playing Match Entity Matching Money Measurement

Prudence

Cost

Accrual Periodicity

Going Concern

ACCOUNTING CONCEPTS EXPLAINED

The Entity Concept A business is an artificial entity distinct & separate from its owner. For accounting purposes a business & its owner are two separate persons Money Measurement Concept For accounting purposes each transaction & event must be expressible in monetary terms.

 The Cost Concept - Assets such as Land, Buildings, Plant & Machinery etc. and obligations such as Loans, Public Deposits etc. should be recorded at historical cost (acquisition) The Going Concern Concept It is assumed that the business organization would continue its operations for a long time

 Periodicity Concept The results of operations of entity are measured periodically i.e. in each accounting period. Calendar Year January to December Fiscal Year April to March As per Income Tax Act, Accounting Period should always be starting from April March

 Accrual Concept Incomes & Expenses should be recognized as and when they are earned and incurred, irrespective of whether the money is received or paid in connection thereof. E.g. Rent paid for 15 months in advance on January 2009. In this case Rent for 3 months should be recognized in FY 08-09 & Rent for 12 months should be recognized in FY 09-10

 Concept of Prudence It states that anticipate no profits but provide for all possible losses. Prudence is the inclusion of a degree of caution in the judgment of estimates. Expected losses should be accounted for but not anticipated gains

 Matching Concept Revenue earned in an accounting year is matched with all the expenses incurred during the same period to generate that revenue. Matching concept suggest that to find out the profitability, the expenses incurred to generate revenue are to be matched against that revenue

ACCOUNTING SEQUENCE
Preparation Of Financial Statements Trading A/C, Profit & Loss A/C, Balance Sheet etc. Transaction / Event Preparation Of Vouchers

Preparation Of Trial Balance

Recording in Primary Books JOURNAL Postings in Secondary Books LEDGER

VOUCHER PREPARATION
After the event is happened, physical vouchers based on certain documents like Bill, Delivery Challan, Receipt, Reports, Purchase Order, Quotations etc. are prepared & the same are filed for future reference

RECORDING IN PRIMARY BOOK

All the events are recorded in primary book called JOURNAL in a double entry system of book keeping. Format of JOURNAL is as follows

Sr.No.

Date 24.04.2009

Particulars Plant & Machinery A/C To Cash (Being Purchase of Machinery for cash from Mr. Sam)

Dr. / Cr. Dr. Cr.

Dr. Vr. No. L/F Amt 1 1 12 14 500

Cr. Amt.

500

SECONDARY BOOKS - LEDGER

DR. Date 24.04.09 Particulars To Cash JF Plant & Machinery Account Amount Date Particulars By Balance JF 500 30.04.09 500 CR. Amount 500

500

DR. Date 30.04.09 Particulars To Balance JF

Cash Account Amount Date Particulars By P&M JF 500 24.04.09 500

CR. Amount 500

500

TRIAL BALANCE
It is a list of various accounts showing their balances (either DR. or CR.) as on particular date. Based on such TB financial statements are prepared.
Trial Balance as on 31.03.2009 Sr.No. Name of the Account 1 Plant & Machinery 2 Cash Dr. Bal. 500 500 Cr.Bal.

Total

500

500

Trading Account
TRADING A/C for the year ended 31.03.2009

Dr. Particulars (Trad Exp) To Opening Stock To Purchases To Wages To Gross Profit c/d Amount xx xx xx xx xxx Particulars (Trad Income) By Sales By Closing Stock

Cr. Amount xx xx

xxx

Profit & Loss Account

PROFIT & LOSS A/C for the year ended 31.03.2009 Dr. Particulars (Expenses) To Salary To Printing & Station To Telephone To Advertisement To Electricity To Postage To Fax Exp To Net Profit c/d Amount xx xx xx xx xx xx xx xx xxx xxx Particulars (Incomes) By Gross Profit b/d By Commission Recd By Discount Recd By Interest Recd By Remuneration Recd By Profit on Sale of Asset Cr. Amount xx xx xx xx xx xx

JOURNAL
Journal means a daily book Journal means a book to record daily transactions As soon as any financial transaction takes place, it is recorded in the Journal. Hence it is called the book of First, Original or Prime entry Journal entry is passed according to the rules of Debit & Credit.

LEDGER
JOURNAL Date wise record LEDGER Account wise record Ledger A/c is a statement showing the summary of transactions and the final balance in respect of a person or an item. Each A/c is kept on a separate page or folio. All the pages/folios are bound together in a book called LEDGER

FORMAT OF LEDGER A/C

DR. DATE . A/c (Name of the Ledger A/c) PARTICULARS J/F AMT DATE PARTICULARS J/F CR. AMT

xx

To .. A/c

xxx

xx

By .. A/c

xxx

xxxx

xxxx

TRIAL BALANCE
TRIAL BALANCE is a statement containing the list of the balances of all Ledger Accounts on a particular day It is a concise summary of ledger balances It gives an idea of balances of various accounts of persons, assets, income and expenses at a glance It is a link between ledger and the final accounts

FORMAT OF TRIAL BALANCE

TRIAL BALANCE OF . AS ON Sr.No . 1 2 3 4 5 6 7 8 9 10 11 Debit Amt xx xx xx xx xx xx xx xx xx xx xx xxxx xxxx Credit Amt

Particulars / Name of the Ledger A/c Purchases A/c Sales A/c Purchase Returns A/c Sales Returns A/c Cash A/c Bank A/c Capital A/c Salaries A/c Furniture A/c Sundry Debtors A/c Sundry Creditors A/c Total

L/F

STEPS IN EXTRACTING TRIAL BALANCE

RECORDING - the transactions in Journal POSTING - the transactions in Ledger BALANCING - the Ledger Accounts TRIAL BALANCE writing the balances of the Ledger Accounts

Ledger Accounts Normally Having Dr. & Cr. Balances

DR. BALANCES 1. Drawings 2. Sundry Debtors 3. Bills Receivable 4. Bank 5. Loans Given 6. Deposits Given 7. Advances Given 8. Cash A/c 9. Assets A/c 10. Purchases 11. Return Inwards 12. Opening Stock 13. Expenses & Losses CR. BALANCES 1. Capital A/c 2. Sundry Creditors 3. Bills Payable 4. Bank Overdraft 5. Loans Taken from 6. Deposits Taken from 7. Advances Taken from 8. Sales 9. Return Outwards 10. Income & Gains

INDIVIDUAL PROJECT/ASSIGNMENT
TOPIC ACCOUNTING STANDARDS ISSUED TILL DATE - Meaning, Who sets, Factors considered, Points Covered, Objective, Benefits etc. - List along with AS-No. - Explanation in full details for any 4 accounting standards Submission Date 16th October, 2010 Neatly typed /printed/handwritten & spiral bounded Specify the name, roll no. division, subject etc. Total Marks 40