Unit – 2

 Financial Statements & Ratio Analysis:

 Introduction to Financial Accounting - Double-entry
system – Journal – Ledger - Trail Balance – Final
Accounts (with simple adjustments) – Ratio Analysis
(Simple problems).
Accounting & Book Keeping
 Book Keeping:
 Book – Keeping involves the chronological recording of
financial transactions in a set of books in a systematic
manner
 Accounting:
 Accounting is concerned with the maintenance of
records, the preparation of reports and the
interpretation of the reports
Accounting Definitions
 Accounting is a means of measuring and reporting the
results of economic activities.
 Accounting system is a means of collecting
summarizing, analyzing and reporting in monetary
terms, the information about the business.
 The art of recording, classifying and summarizing 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. Given by AICPA
Branches of Accounting
 Financial Accounting
 Cost Accounting
 Management Accounting
 Human Resources (HR) Accounting
Users of Accounting
 Owners
 Managers
 Workers
 Creditors
 Suppliers
 Government
 Investors
 Public
 Researchers
Objectives of Financial
Accounting
 To Ascertain Profit & Loss of a Business Organization.
 To Ascertain Financial Position of a Business
Organization.
Advantages of Accounting
 Provides a Systematic way of Recording
 Facilitates the preparation of Financial Statements.
 Provides control over the assets
 Provides required information to users
 Comparative study
 Less scope for fraud or theft
 Helpful to management
 Find out the value of the business
 Documentary evidence
Limitations of Accounting
 Does not record all the events
 Record only monitoring transactions
 Does not reflect the current values
 Estimates based on personal judgment
 Historical data only available
Key Terms
 Transaction
 Credit
 Debit
 Goods
 Creditors
 Debtors
 Expenses
 Revenue
 Discounts
Key Terms Cont…
 Assets
 Liabilities
 Drawings
 Accounting Period
 Accounting Year
 Bills Receivable
 Bills Payable
 Overdraft
 Accrued or Outstanding Expences
Key Terms Cont…
 Sales Returns
 Purchase Returns
Double Entry Book Keeping
 In financial accounting, there are two systems of book
keeping.
 Single-entry Book keeping
 Double-entry book keeping
 Double entry book keeping is a scientific way of
recording transactions.
 In this for every debit, there is a corresponding and
equivalent credit.
 Under this system both debit and credit aspects of the
transaction are being recorded.
Advantages of Double Entry
Book Keeping
 Information about every account
 Helps to know the receivables and payables
 Arithmetical accuracy
 Helps to locate errors
 Helps to ascertain Profit / Loss
 Helps to know the Financial Position
 Monitoring and Auditing made easier
Accounting Cycle
Transactions
preparation
The process
Financial of
ofTrading
preparation
Transactions & Profit
have of
to
First we have to identify
Trail Balance is a statement
Final Accounts the
&record
Loss
accounts
a/c
in and
from
the Balance
the journal
Journal. Sheet
This on
is
Journal
of Financial
Debit andTransactions
Credit Balances
into ledger
nothing a particular
butisthe
calleddate
posting.
Journalizing

Trail Balance
Ledger
Types of Accounts
There are 3 types of accounts. They are

Personal Account
Debit
all expenses
Debit
Debit What and losses
the Receiver
Comes In
Real Account Credit
Credit
Credit
What
thegoes
GiverOut
all incomes and gains
Nominal Account
Journal
 Journal is the first book in which transactions are
recorded in a chronological order (Date Wise).
 It is also called as the Day Book.
 Recording entries in journal is called journalizing
 The journal format is
 In the books of …………..
Date Particulars LF Debit Credit
Journal
 Goods purchased 2000

purchase
Cash account
Debit
is an expense
is
SoThere
Cash
cashaccount
is
aregoing
two on
Debit
all expenses
Real
so
What
Rule
account
debitComes
for
and
the&
losses
In
Rule
accounts
for
that
and
real
isinwhy
account
this
Credit
Purchases
purchases
nominalWhat
Credit
account
account
goes
account
Out
is
Credit
purchases
transaction
the Cash
account
account
all
Nominal
incomesAccount
and gains
Now the Journal Entry for this
transaction is
 In the books of …………..
Date Particulars LF Debit Credit
Purchases a/c Dr. 2000
To Cash a/c 2000
(Being good purchased)
Ledger
 Ledger is a book that contains several accounts
 The process of preparation of accounts from the
journal into ledger is called posting.
 The examples for the ledger accounts include sales a/c,
purchases a/c, cash a/c, bank a/c etc.,
 The format of ledger account looks like a T shape
 The format of ledger account is
Dr.
Name of the Account Cr.

Date Particulars JF Amount Date Particulars JF Amount

Ledger
 Now we will post the previous transaction in the
ledger.
 The entry is
 In the books of …………..
Date Particulars LF Debit Credit
Cash a/c Dr. 2000
To Sales a/c 2000
(Being good Sold)

Now the posting in two accounts is

Dr.
Sales Account Cr.

Date Particulars JF Amount Date Particulars JF Amount

By Cash a/c 2000
Dr.
Cash Account Cr.

Date Particulars JF Amount Date Particulars JF Amount

To Sales a/c 2000
Balancing of Accounts
 Calculate the totals on each side of the account.
 Check up on which side the total is higher.
 Put the total on the higher side of the account first.
 Then see by how much the other side is lesser.
 Put the difference on the lesser side writing clearly
balance carried down or balance c/d.
Dr.
Sales Account Cr.

Date Particulars JF Amount Date Particulars JF Amount

To Balance c/d 2000 By Cash a/c 2000

2000 2000

By Balance b/d 2000

Dr.
Cash Account Cr.

Date Particulars JF Amount Date Particulars JF Amount

To Sales a/c 2000 By balance c/d 2000

2000 2000

To Balance b/d 2000

Trail Balance
 After posting the journal entries into the respective
ledger accounts and balancing them, the next step is
preparation of trail balance.
 Trail balance is a statement containing debit and credit
balances of various accounts taken out from ledger
books as on a particular date.
 A trail balance must agree as on that date.
 Significance of Trail balance
 Errors that can be disclosed by trail balance.
 The format of trail balance is
 Trail Balance as on ……….
Name of the account Debit (Rs.) Credit (Rs.)

Now writing accounts balances are

 Trail Balance as on ……….
Name of the account Debit (Rs.) Credit (Rs.)
Purchases 2000
Trail Balance Example
 Capital 50000
 Cash in hand 10000
 Cash at bank 20000
 Purchases 20000
 Sales 30000
 Salaries 10000
 Rent paid 5000
 Sundry debtors 25000
 Sundry creditors 10000
 Trail Balance as on ……….
Name of the account Debit (Rs.) Credit (Rs.)
Capital 50000
Cash in hand 10000
Cash at Bank 20000
Purchases 20000
Sales 30000
Salaries 10000
Rent 5000
Sundry Debtors 25000
Sundry Creditors 10000
90000 90000
Final Accounts
 Preparation of Final accounts involved 2 stages.
1. Preparation of Trading & Profit & Loss account
2. Preparation of Balancesheet
So first we will see the Trading account
Using trading account we can ascertain the gross profit.
 Trading account of _________
Dr. for the year ended__________ Cr.

Particulars Amount Particulars Amount

Now the Trading account
example is
 Profit & Loss account of ________
Dr. for the year ended__________ Cr.

Particulars Amount Particulars Amount

Now the Profit & Loss

account Format is
Profit & Loss Account
 Using this account we can ascertain the net profit.

Now the example of

Profit & Loss account is
Balance Sheet
 A balance sheet is an item wise list of assets, liabilities
and proprietorship of a business at a certain state.
 A balance sheet is a statement with a view to measure
exact financial position of a business at a particular
date.
 The format of balance sheet is
 Balance Sheet of ____ As on ______
Liabilities Amount Assets Amount

Long term Liabilities Fixed Assets

Current Liabilities Current Assets

Capital Intangible Assets

Now the example of
balance sheet is
 1
Adjustments in Final Accounts
 CLOSING STOCK :-
(i)If closing stock is given in Trail Balance: It should be
shown only in the balance sheet “Assets Side”.

(ii)If closing stock is given as adjustment:

 First, it should be posted at the credit side of “Trading
Account”.
 Next, shown at the asset side of the “Balance Sheet”.
 2
Adjustments in Final Accounts
 OUTSTANDING EXPENSES:-
(i)If outstanding expenses given in Trail Balance: It
should be only on the liability side of Balance Sheet.
(ii)If outstanding expenses given as adjustment:
 First, it should be added to the concerned expense at
the debit side of profit and loss account or Trading
Account.
 Next, it should be added at the liabilities side of the
Balance Sheet.
 3
Adjustments in Final Accounts
 PREAPID EXPENSES:-
(i)If prepaid expenses given in Trial Balance: It should be
shown only in assets side of the Balance Sheet.
(ii)If prepaid expense given as adjustment :
 First, it should be deducted from the concerned
expenses at the debit side of profit and loss account or
Trading Account.
 Next, it should be shown at the assets side of the
Balance Sheet
 4
Adjustments in Final Accounts
 INCOME EARNED BUT NOT RECEIVED [OR]
OUTSTANDING INCOME [OR] ACCURED INCOME :-
(i)If incomes given in Trial Balance: It should be shown
only on the assets side of the Balance Sheet.

(ii)If incomes outstanding given as adjustment:

 First, it should be added to the concerned income at
the credit side of profit and loss account.
 Next, it should be shown at the assets side of the
Balance sheet.
 5
Adjustments in Final Accounts
 INCOME RECEIVED IN ADVANCE: UNEARNED
INCOME:-
(i)If unearned incomes given in Trail Balance : It should
be shown only on the liabilities side of the Balance
Sheet.
(ii)If unearned income given as adjustment :
 First, it should be deducted from the concerned
income in the credit side of the profit and loss account.
 Secondly, it should be shown in the liabilities side of
the Balance Sheet
 6
Adjustments in Final Accounts
 DEPRECIATION:-
(i)If Depreciation given in Trail Balance: It should be
shown only on the debit side of the profit and loss
account.
(ii)If Depreciation given as adjustment
 First, it should be shown on the debit side of the profit
and loss account.
 Secondly, it should be deduced from the concerned
asset in the Balance sheet assets side.
 7
Adjustments in Final Accounts
 INTEREST ON LOAN [OR] CAPITAL:-
(i) If interest on loan (or) capital given in Trail balance: It
should be shown only on debit side of the profit and
loss account.
(ii)If interest on loan (or)capital given as adjustment :
 First, it should be shown on debit side of the profit and
loss account.
 Secondly, it should add to the loan or capital in the
liabilities side of the Balance Sheet.
 8
Adjustments in Final Accounts
 BAD DEBTS:-
(i)If bad debts given in Trail balance: It should be shown
on the debit side of the profit and loss account.
(ii)If bad debts given as adjustment:
 First, it should be shown on the debit side of the profit
and loss account.
 Secondly, it should be deducted from debtors in the
assets side of the Balance Sheet.
 8 Cont….
Adjustments in Final Accounts
 Reserve for BAD and doubtful DEBTS:-
(i)If bad debts given in Trail balance: It should be shown
on the debit side of the profit and loss account.
(ii)If bad debts given as adjustment:
 First, it should be shown on the debit side of the profit
and loss account.
 Secondly, it should be deducted from debtors in the
assets side of the Balance Sheet.
 9
Adjustments in Final Accounts
 INTEREST ON DRAWINGS:-
 (i)If interest on drawings given in Trail balance: It
should be shown on the credit side of the profit and
loss account.
 (ii)If interest on drawings given as adjustments:
 First, it should be shown on the credit side of the profit
and loss account.
 Secondly, it should be deducted from capital on
liabilities side of the Balance Sheet.
 10
Adjustments in Final Accounts
 INTEREST ON INVESTMENTS:-
(i)If interest on the investments given in Trail balance: It
should be shown on the credit side of the profit and
loss account.
(ii)If interest on investments given as adjustments:
 First, it should be shown on the credit side of the profit
and loss account.
 Secondly, it should be added to the investments on
assets side of the Balance Sheet.