Basics of Financial Accounting

- Dr. M. S. Pahwa
Accounting and Financial Reporting
 Accounting refers to systematic recording,
classifying and summarizing of financial
transactions of any business enterprise and
interpreting the results thereof.
 Accounting starts with recording and ends with
presentation of financial information in a manner
that facilitates informed judgments and decisions
by users.
 The basics of accounting are same for all the
organizations but the accounting is done keeping
in mind the type and structure of organization.
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Types of Organisations

 Sole Proprietorship
 Partnership Firm
 Company – Perpetual Succession (Geeta Shalok)

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What is Company… Mangal
Pandey?

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Accounting Trail

Identify a transaction

Recording
Record in Primary
Books

Record in Secondary
Books

Prepare Trial
Balance

Reporting Prepare Financial

Statements

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Recording of Transactions: The
Double Entry Principle
 Each transaction has two aspects (or side): Debit
and Credit.
 Every debit has an equal and opposite credit.
 Each transaction should be recorded in such a
way that it affects two sides- debit and credit-
equally.
 Thus, the first and foremost step in recording a
transaction is to identify the debit and credit
elements.

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Basic Accounting Concepts
 Accounting concepts underlying the recording of
transactions:
 Entity Concept

 Going Concern Concept

 Money Measurement Concept

 Accrual Concept

 Cost Concept

 Periodicity Concept

 Matching Concept

 Prudence

 Consistency

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Accounting Equation
 The relationship among three elements of the
balance sheet can be expressed through an
equation, known as fundamental accounting
equation:
Assets (A) = Liabilities (L) + Equity (E)
 The unique feature of the above equation is that
all transactions will affect the equation in such a
way that the equality will always be maintained.
 This happens due to double entry rule.

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 Journalize the following:

1. Started business with cash Rs. 50, 000, Furniture Rs. 40,000 and
equipment worth Rs. 50,000.
2. Rented a premise at rent Rs. 10,000
3. Purchased goods on credit from Ram Rs. 1,75,000.
4. Sold goods on credit to Shyam Rs. 1,50,000 worth Rs. 1,40,000
5. Cash sales Rs. 20,000 worth Rs. 15,000
6. Received cash from Shyam Rs. 1,45000 in full settlement of his dues.
7. Paid Rs. 170,000 to Ram and availed discount of Rs. 5,000.
8. Paid rent of Rs. 10,000.
9. Withdrawn money for personal use by the owner Rs.10,000.

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 Solution:
S. Transaction Cash Equip. Furnitr Stock Debtor Liablity Equities
N.
1. Started Business 50,000 50,000 40,000 -- -- -- 1,40,000

2. Rented Premises +10,000 -- -- -- -- -- +10,000

3. Credit Purch (St.) -- -- -- +1,75,000 -- +1,75,000 --

4. Credit Sales (St.) -- -- -- -1,40,000 +1,50,000 -- +10,000

5. Cash Sales +20,000 -- -- -15,000 -- -- +5,000

6. Cr. Sale Settled +1,45,000 -- -- -1,50,000 - 5,000

7. Cr. Purch Settled -1,70,000 -- -- -1,75,000 +5,000

8. Paid Rent -10,000 -- -- -- -- -- -10,000

9. Personal Drawing -10,000 -- -- -- -- -- -10,000

TOTALS 35,000 50,000 40,000 20,000 -- -- 1,45,000

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Thanks

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