Financial accounting

#Meaning of financial accounting

Financial accounting is the systematic procedure of recording, classifying, summarising, analysing and reporting
transactions. The primary objectives is to reveal the profits & losses of a business.
Financial accounting provides a true and fair evaluation of a business . It, therefore, safeguards the interests of
stakeholders.

Art of recording. Journal

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Classifying Leisure

Summarizing. Trail balance

Analysing. Balance sheet

Interpreting Ratios and financial statements

Communicating. Reports

• American institute of certified public accountate (AICPA)

↳ The art of recording ,classifying & summarising in a signi cant manner in terms of money transaction
& events which in part , at least of a nancial character & interpreting the results thereof.

• Characteristic of financial accounting

↳ systematic record of business transaction

↳ protecting the property of the business

↳communicating results to interested party

↳compliance with legal requirement

Whether it is a science or art

↳ accounting is both a science as well as art but before we decide it is important to understand the
concept of both terms.

Art is the application of knowledge comprising of accepted theories rules and principles. It helps us to
achieve our goals & guides us the manner in which we may attain our objective.

On the other hand, science may be defined as a systematic kind of knowledge based on certain principle
which are universally same. It establishes a relationship of cause and effect about any occurrence.

Since, accounting is a science as well as an art because recording classifying and summarising of
business transaction is done on a basis of certain principles such as principle of DOUBLE ENTRY
SYSTEM

Double entry systems

A double entry accounting system refers to the bookkeeping method where two entries
are made simultaneously into two different accounts, indicating a firm’s cash inflow and
outflow. The purpose is to tally both the accounts and balance the credit and the debit
side. This accounting system helps organisations assess their overall performance in a
financial year.

Conclusion

To this extent accounting is an art it tells us the manner in which certain objectives of the business can be
achieved on the basis of a particular data

Branches of accounting

1) Financial accounting

2)Cost accounting

3)Management accounting

4)Financial management accounting

5)Corporate accounting

Advantages of accounting
↳Replacement of memory
As information is recorded in the books of the accounts so, there is no need for users to remember each and every
information in brain.
↳ Evidence in court
It is an appropriate way of presenting evidence relating to the financial affairs of a company which claims to have
suffered a loss. Their evidence assists a Court in understanding transactions which involve complex accounting
treatments.
↳ settlement of taxation liability
Every business has to deal with various government departments like income tax, sales tax, custom and excise etc.
Various periodic returns are to be filed with these departments. Accounting helps in preparation and filing of such
returns.
↳ comparative study ratio
It helps in determining how efficiently a firm or an organisation is operating. It provides significant information to
users of accounting information regarding the performance of the business. It helps in comparison of two or more
firms. It helps in determining both liquidity and long term solvency of the firm.
↳ sale of business
Accounting helps the management to make better decisions with respect to selling price, deduction of cost, and
increase in sales etc. True and fair valuation of the business is calculated. Accounting helps in attaining the correct
picture depicted in the balance sheet and this is used to determine the purchase price
↳ assistance to the insolvent person
The biggest role of an accountant is the preparation of financial statements. Accountants are expected to prepare
the financial statement of an insolvent party on a break-up basis. This is the opposite of the normal concerns
related to accounts which are generally prepared.
]↳ assistance to various parties [ investors, govt. , Public

Limitations of accounting
↳ It only records monetary transactions
↳ No realistic information→ accounting information may not be realistic as these are
prepared by following basic concepts & convention which is a subjective matter
↳ Personal bias of the accountant
• Importance of accounting
• Owners →
• Creditor →
• Investors →
• Employees →
• Government →
• Public →
• Manager →
• Research scholar →

• Basic terms in accounting

• Debtor → a debtor is a person who owns money The many due from him is called debt
• Creditor → a person to whom the money is payable
• Capital → The amount with which business is started
• Assets → any physical thing that has a money value is an asset. In other-word an
asset is that expenditure which results in acquiring of some property or benefit of
a lasting nature
• Drawings → The amount withdrawn by the businessman for his Personal use.
• Voucher→ any written document in support of a business transaction.

Role of accountancy in society

→ An accountant with his education, training, analytical mind and experience with the
best his knowledge to provide multiple needs based services to the society


The main role of accountant in today's era may include

1. To maintain the proper books of accounts
2. To provide information and report of the management
3. To act as a statutory auditor
4. To provide a financial advise
5. To act as a service provider to assist in share assistance
6. MOU- memorandum of understanding.
7. To act as an internal auditor
8. To act as a tax consultant

Accounting principles
The term principles refers to fundamental rule as a general truer which one established does not change.
↳ accounting principles are guidelines to establish standard for sound accounting practices and procedure in
reporting the financial states and periodic performance of a business .

Characteristics of accounting principles

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↳ The General acceptance of a accounting principles usually depends upon these

three-
1. Relevance
2. Objectively
3. Feasibility
Relevance- a principle is relevant to the extent that it results in information that is
useful to that's who wants to know something about certain business

Objective- a principle is objective to that the accounting information is not influenced by

the personal bias of those who furnished the information

Feasibility- The accounting information given in the financial statement should be free
from the personal bias of the person and accounting principle should be feasible to that
extent that it can be applied without undue complexity and cost

classification of accounting principles

accounting principles

a
Concepts. Conventions

101 Y
Accounting concepts
↳ these are the basic assumptions or conditions upon which the
science of accounting is based.

1 money measurement concept-

↳ money is the only practical units of measurement that can b employed to achieve
homogeneity of the financial data.so accounting records only those transactions which
can be measured in terms of money
↳ The advantage of expressing business transactions in tern of money is that money
serves a common denominator by means of which heterogeneous fact about a business
can be expressed in terms of numbers which are capable of additions and subtractions.

2. Going concern concept

↳ “A man may come, a man may go but the companies go for over”

↳ It means the admission , retirement, death, insolvency of any person in the

organisation does 't affect the working of the company.

3. Accounting period concept

↳ The life of a business is divided into accounting periods so, as business be able to
know the profit or loss of each such period and the financial position at the end of such
period and the financial position at the end of such period
Normally accounting period is of l year as it helps to take any corrective action ,the pay
income tax, to absorb the seasonal fluctuation and for reporting to the outsider

4. Business entity concept

↳ this concept implies that a business unit is separate and distinct from a person who
supply capital to it
irrespective of the form of organisation a business unit has got its own individuality as
distinguished from the person who own it.
[ ownership is with share holders and management is in hand of board of directors]

Business is kept separate so that transaction of business may be recorded separately.

5. Cost concept-
This concept is closely related to going concern concept as an asset is recorded in
the books at the price paid to acquire it and this cost is the basis for all the asset. This
means that cost becomes basis for all future accounting for the asset
Asset is recorded at cost at the time of its purchase .

6. Dual concept
this is the basic concept of accounting.
ACC. To this concept every financial transaction involves 2-fold aspect.
1) yielding of a benefit
2) The giving of that benefit

Eg. If a asset is acquired in a business, one asset must be given up.

Thus, a given necessary implies a receiver and a receiver necessary implies a gives

7. Realisation process
ACC. To this concept revenue is considered as being earned on the date at which it is
Released. That is on the date when The property passes to the buyer and he become
Legally liable to pay the amount.
Eg. 1) customer places an order on first January
2) manufacturer delivers the goods on first February
3) Carter makes the payment an 1st March( after enjoying the credit period of 1st
Month)
8. Objective evidence concept
entries in the books of account must be based on objectively determined evidence . In
order to a certain the correctness of the information reported.
Evidence should be such which will minimise the possibility of error and intentional fraud

9. Matching concept
This concept is based on the accounting period concept.
Under this concept revenue recognised during the period should be matched with the
cost to be allocated for the period to obtain that revenue
Equity should be equal to capital
Assets= capital. , Assets = liability + capital. , Capital =assets-liability

10 Accrual concept
ACC. to this concept expenses are recognised in the accounting period in which they
help in earning the revenue whether cash is Paid or not.

Accounting conventions
↳1).Conventions of consisting
ACC. To this accounting rule, practises and conventions should be
continuously observed and applied.
I.e-there should not be any change from 1 year to another because the results of
different years will be comparable only when accounting rules are continuously
same from year to year.
2) convention of full disclosure
ACC. To this convention all accounting statement should be
Honestly prepared and to that and full disclosure of call significant
information which is of material interest , creditors, proprietors and
investors should disclose in accounting statement. If there is no
detailed disclosure of all the information than it may not be possible
to give true and fair view of financial statements.

3) convention of conservatism
conservatism means wearing a risk proof jacket and to
Follow the rule and I:e anticipate, no profit, but provide for all losses

4) Convention of materiality
whether something is disclosed or not in the financial statements
will depend upon whether it is materialistic or not. Materiality
depends upon the amount involved in the transaction.
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