FINANCIAL

ACCOUNTING
 WHAT IS FINANCIAL ACCOUNTING?
• Accounting is a tree while Financial Accounting one of its branch
• Accounting often referred as the language of business

• Accounting - a process of identifying, recording, summarizing, and reporting economic

information to decision makers in the form of financial statements.
• Financial Accounting - focuses on the specific needs of decision makers external to the
organization, such as stockholders, suppliers, banks, and government agencies.

• Accounting Helps to know the financial position of the business enterprise as on the last date of
the accounting period
 BRANCHES OR DIVISIONS OF
ACCOUNTING
• Financial Accounting
• Management Accounting
• Cost Accounting
• Human Resource Accounting
• Social Accounting
• Government Accounting
• Green Accounting
 QUALITATIVE CHARACTERISTICS OF
FINANCIAL STATEMENTS
• The Institute of Chartered Accountants of India in its Framework for the Preparation of Financial Statements
(Issued in July 2000) provides four principal qualitative characteristics:

1. UNDERSTANDABILITY
2. RELEVANCE
3. RELIABILITY
4. COMPARABILITY
– Horizontal (within Industry),
- Diagonal (Across Industries),
- Over the time
 FUNCTIONS OF FINANCIAL
ACCOUNTING
• Maintaining systematic records – Not Haphazard
• Communicating the financial results
• Meeting legal needs
• Protecting business assets
• Accounting assists the management in the task of planning , control and
coordination of business activities
• Stewardship or Trusteeship
• Fixing Responsibility
ADVANTAGES OF ACCOUNTING
1. Maintenance of records 7. Ascertainment of value of
rather than memory the business
2. Preparation of financial 8. Raising loans
statements 9. Control over assets
3. Comparison of results 10.Prevention of errors or
4. Assistance to management frauds
5. As legal evidence 11.Communication to
6. Helps in taxation matters external users
 LIMITATIONS OF ACCOUNTING
• No recording of non-monetory transactions
• No information about the present value of the business
• Use of estimates or personal judgement
• Window dressing
• Not the sole test of managerial efficiency
• Disclosure of only material items
• Historical Information only
 BASES OF ACCOUNTING-
CASH BASIS AND ACCRUAL BASIS OF
ACCOUNTING
 ACCRUALS :
• An accrual is a financial obligation that is
created when one of the parties in a transaction
fulfills its obligation but is yet to receive its
compensation. It is a source of future income for
a company when it has made the obligation,
whereas, it is a source of future expense, when
it is yet to pay for the obligation. Since accruals
are expected to lead to future cash flows, they
are recorded as assets or liabilities on the
balance sheet. We will discuss this in detail in
the next segment of this section
EXAMPLES (ACCRUALS) :
• Assume a company operates from a rented office space. The monthly rent is Rs.2.5 lakh.
However, for the previous month, the company has only been able to pay Rs.2 lakh. On
the income statement, the company will show a rent expense of Rs.2.5 lakh because the
company has already used the premises during the period. However, on the balance
sheet, cash will only be reduced by Rs. 2 lakh. The remaining Rs.50,000 will be recorded
on the liabilities side as an adjusting entry called accrued rent. As the company keeps
paying this, the cash amount will keep reducing, along with the accrued rent amount.
• Say a company makes sales worth Rs.1,000 crore in a financial year. Till the last day of
the year, it only receives Rs.600 crore out of this. On the income statement, the company
will record sales of Rs.1,000 crore because it has genuinely made these sales. However,
on the balance sheet, under cash, it can only report Rs.600 crore because this is all it has
received in cash. The remaining Rs.400 crore will be recorded as another asset called
accounts receivable on the balance sheet. This is called the adjusting entry. As and when
this amount is recovered, accounts receivable will reduce. We will explain the rationale
behind recording accrued revenue as an asset later in this section.
METHODS OF ACCOUNTING
 METHODS OF ACCOUNTING
• Financial accounts are prepared by each company individually, in isolation with others. Allowing
companies complete freedom with respect to accounting would lead to differently structured
financial statements for each company. This will make it hard for the investors to compare them.
• To overcome this, a uniform set of accounting standards is developed and each company is
required to follow it.
• In India, this set of standards is called Indian Accounting Standards (IAS).
• Ind AS is a modified IFRS or converged IFRS. The difference between Ind AS and IFRS / IAS is
known as Carve outs / Carve ins.
• Internationally, two sets of accounting rules are popular – International Financial Reporting
Standards (IFRS) and US Generally Accepted Accounting Principles (US GAAP).
• US GAAP is followed by companies domiciled or listed on exchanges within the US, whereas IFRS
is used in most other countries to varying degrees.
 IND AS
• In the presentation of the Union Budget 2014–15, the Honorable Minister for Finance, Corporate Affairs
and Information and Broadcasting proposed the adoption of Ind AS.
• On 16 February 2015, the MCA notified the Companies Accounting Standards rules 2015 laying down the
roadmap for application of IFRS converged standards.

• (i) The above road map is not applicable to NBFC, Banks, Insurance Companies.
• (ii) The above road map is also not applicable to SME listed with the Stock Exchange.
• (iii) Subsidiary includes sub – subsidiary.
• (iv) Once Ind AS is adopted reverting back is not allowed.
 IND AS (CONTD.)

• The Institute of Chartered Accountants of India (ICAI), the apex body of accountancy in India,
has developed a new set of standards Ind AS (Indian Accounting Standards) converging with
IFRS.
• Although Ind AS are the same as IFRS, there are certain differences between the two set of
standards which are known as ‘carve-outs.’
• The carve-outs are nothing but the differences between the IFRS and Ind AS, which bring out a
major change in accounting treatment.
Ind AS 1 Presentation of This standard sets out overall requirements for presentation of AS 1
financial statements, guidelines for their structure and minimum
Financial Statements requirements for their content to ensure comparability.

Ind AS 2 Inventories Accounting Its deals with accounting of inventories such as measurement of AS 2
inventory, inclusions and exclusions in its cost, disclosure
requirements, etc.

Ind AS 7 Statement of Cash It deals with cash received or paid during the period from operating, AS 3
financing and investing activities. It also shows any change in the cash
Flows and cash equivalents of any entity.

Ind AS 8 Accounting Policies, It prescribes criteria for selecting and changing accounting policies AS 5
together with accounting treatments and disclosures.
Changes in Accounting
Estimates and Errors
Ind AS 10 Events after Reporting It deals with any adjusting or non-adjusting event occurring after AS 4
reporting date and
Period
Ind AS 12 Income Taxes This standard prescribes accounting treatment for income taxes. The AS 22
principal issue in accounting for income taxes is how to account for
the current and future tax

Ind AS 16 Property, Plant and This standard prescribes accounting treatment for Property, Plant And AS 10
Equipment (PPE) such as recognition of assets, determination of their
Equipment carrying amounts and the depreciation charges and impairment losses
to be recognised in relation to them.
Ind AS 116 Leases This standard prescribes appropriate accounting policies and principle for lessees and AS 19
lessors.
Ind AS 19 Employee Benefits This standard prescribes accounting and disclosure requirements relating to employee AS 15
benefits.

Ind AS 20 Accounting for This Standard shall be applied in accounting for and in disclosure of, government grants AS 12
Government Grants and in disclosure of other forms of government assistance.
and Disclosure of
Government
Assistance
Ind AS 21 The Effects of Changes This Standard prescribes how to include foreign currency transactions and foreign AS 11
in Foreign Exchange operations in the financial statements of an entity and how to translate financial
Rates statements into a presentation currency.

Ind AS 23 Borrowing Costs It provides borrowing cost incurred on qualifying asset should form part of that asset, it AS 16
also guides on which finance cost should be capitalised, conditions for capitalisation, time
of commencement and cessation of capitalisation of borrowing cost.

Ind AS 24 Related Party This standard ensures that an entity's financial statements contains necessary disclosures AS 18
Disclosures to draw attention to the possibility that its financial position and profit or loss may have
been affected by the existence of related parties and by transactions and outstanding
balances.
Ind AS 27 Separate Financial This Standard prescribes accounting and disclosure requirements for investments in AS 13
Statements subsidiaries, joint ventures and associates when an entity prepares separate financial
statements.

Ind AS 28 Investments in This standard prescribes accounting for investments in associates and to set out AS 23, AS 27
Associates and Joint requirements for the application of equity method when accounting for investments in
Ventures associates and joint ventures.
Ind AS 29 Financial Reporting in This standard will gives inclusive list of characteristics that will categorise an N.A.
Hyperinflationary economy as hyper inflationary and reporting of operating results and
Economies financial position.
Ind AS 32 Financial Instruments: This Standard establishes principles for presenting financial instruments as AS 32
Presentation liabilities or equity and for offsetting financial assets and financial liabilities.

Ind AS 33 Earnings per Share This Standard prescribe principles for the determination and presentation of AS 20
earnings per share
Ind AS 34 Interim Financial This Standard prescribes minimum content of an interim financial report and AS 25
Reporting principles for recognition & measurement in complete or condensed
financial statements for an interim period.
Ind AS 36 Impairment of Assets This Standard prescribe procedures that an entity applies to ensure that an AS 28
asset’s carrying amount is not more than its recoverable amount.
Ind AS 37 Provisions, Contingent This Standard ensures that appropriate recognition criteria and AS 29
Liabilities and measurement bases are applied to provisions, contingent liabilities and
Contingent Assets contingent assets and proper disclosures are made in the notes to enable
users to understand their nature, timing and amount.
Ind AS 38 Intangible Assets This Standard prescribes accounting treatment for intangible assets. It AS 26
specifies conditions for recognition of intangible asset and how to measure
carrying amount at which intangible asset should be recognised.

Ind AS 40 Investment Property This Standard prescribes accounting treatment for investment property and AS 13
related disclosure requirements.
Ind AS 41 Agriculture This Standard prescribes accounting treatment and disclosures related to N.A.
agricultural activity.
 Ind AS Objective/ Deals with Relevant AS or
Guidance note

Ind AS First-time adoption of Its main objective is to prepare first financial statements as per Ind AS containing high N.A.

101 Ind AS quality information that is transparent, comparable and prepared at economical cost,
suitable starting point for accounting in accordance with Ind AS.

Ind AS Share Based payments It deals with accounting of share-based payment transactions and reflect effect of such Guidance note on
Employee Share
payment on profit or loss and financial statements of entity.
102 Based Plans

Ind AS Business Combination It applies to transaction or other event that meets the definition of a business AS 14

combination. This standard helps in improving the relevance, reliability and

103 comparability of the information that a reporting entity provides in its financial
statements about a business combination and its effects.
Ind AS Insurance Contracts This standard specifies financial reporting for insurance contracts by insurer entity. N.A.

104
Ind AS Non-Current Assets This standard specifies accounting for assets held for sale, and presentation and AS 24

105 Held for Sale and disclosure of discontinued operations.

Discontinued
Operations
Ind AS Exploration for and This standard specifies financial reporting for exploration and evaluation of mineral N.A.

106 Evaluation of Mineral resources.

Resources

Ind AS Financial Instruments: This standard require entities to provide disclosures related to financial instruments AS 32

107 Disclosures that will enable users to evaluate significance of financial instruments for entity's
financial position and performance and nature and extent of risks arising from financial
instruments to which the entity is exposed during the period and at the end of the
reporting period, and how the entity manages those risks.
Ind AS 108 Operating Segments This standard discloses information to enable users of its financial statements to evaluate AS 17
the nature and financial effects of the business activities in which it engages and the
economic environments in which it operates.

Ind AS 109 Financial This Standard establish principles for financial reporting of financial assets and financial AS 30, AS 31 and
Guidance note
Instruments liabilities that will present relevant and useful information to users of financial on derivative
contract
statements for their assessment of the amounts, timing and uncertainty of an entity's
future cash flows.
Ind AS 110 Consolidated This standard establish principles for the presentation and preparation of consolidated AS 21

Financial Statements financial statements when an entity controls one or more other entities.

Ind AS 111 Joint Arrangements This standard establish principles for financial reporting by entities that have an interest AS 27

in arrangements that are controlled jointly (known as joint arrangements).

Ind AS 112 Disclosure of This standard requires an entity to disclose information that enable users of its financial AS 21, AS 23 and
AS 27
Interests in Other statements nature risk and effect of such interest in other entities.
Entities
Ind AS 113 Fair Value This standard defines fair value, set outs framework for measuring fair value and N.A.

Measurement disclosures about fair value measurements. Such fair measurement principle will apply
when another Ind AS requires or permits use of fair value.
Ind AS 114 Regulatory Deferral This Standard specifies financial reporting requirements for regulatory deferral account Guidance note
on accounting
Accounts balances that arise when an entity provides goods or services to customers at a price or for rate
regulated
rate that is subject to rate regulation. activities

Ind AS 115 Revenue from This Standard establishes principles that an entity shall apply to report useful information AS 7 & AS 9
Contracts with to users of financial statements about nature, amount, timing and uncertainty of revenue
Customers and cash flows arising from a contract with a customer.
 ACCOUNTING CONCEPTS AND
CONVENTIONS
• Accounting Concepts
• •Business entity • Accounting Conventions
• •Money Measurement • •Full Disclosure
• • Accrual concept • •Conservatism/ Prudence
• • Going Concern • •Materiality
• •Accounting Period/ Periodicity • •Consistency
• •Cost Concept
• •Matching Concept
• •Realization
 ACCOUNTING CONCEPTS

• Accounting concepts define the assumptions on the basis of

which financial statements of a business entity are prepared.
• Concepts are those basic assumptions and conditions which
form the basis upon which the accountancy has been laid.
• Business Entity

• •The business and its owner(s) are two separate existence entity
• •Any private and personal incomes and expenses of the owner(s) should not
be treated as the incomes and expenses of the business

• Money Measurement

• •All transactions of the business are recorded in terms of money

• •It provides a common unit of measurement
• Going Concern

• •The business will continue in operational existence for the foreseeable future
• •Financial statements should be prepared on a going concern basis unless management either
intends to liquidate the enterprise or to cease trading, or has no realistic alternative but to do so

• Accounting Period Concept

• This concept is a result the assumption of Going Concern Concept. According to going concern
concept, business will continue for a long time, it will be very difficult to measure the income
and analyse of financial position of the business after a very long period and would not be
helpful in taking corrective action when it is actually required.
• This concept divides the life of business into periodic intervals which are known as Accounting
Period. This period is normally of twelve months starting on 1st April and ends on 31st March of
next calendar year. At the end of each accounting period final accounts including Income
Statements and Balance Sheet are prepared to find out the profit and loss for the accounting
period and financial position at the end of the period.
• Cost Concept

• Assets should be shown on the balance sheet at the cost of purchase

instead of current value

• Matching Concept

• Income determination or measurement of income is a matter of

matching the revenues earned during the accounting period with the
expenses that were incurred in the process of earning these revenues.
• Realization Concept

• •Revenues should be recognized when the major economic activities have been completed
• •With this convention, accounts recognise transactions (and any profits arising from them) at
the point of sale or transfer of legal ownership - rather than just when cash actually changes
hands.
• For example, a company that makes a sale to a customer can recognise that sale when the
transaction is legal - at the point of contract.The actual payment due from the customer may
not arise until several weeks (or months) later - if the customer has been granted some credit
terms.

• Accruals Concept

• •Revenues are recognized when they are earned, but not when cash is received
• •Expenses are recognized as they are incurred, but not when cash is paid
• •The net income for the period is determined by subtracting expenses incurred from revenues
earned
 ACCOUNTING CONVENTIONS

• Accounting conventions are guidelines used to help companies determine how

to record business transactions not yet fully covered by accounting standards.
• They are generally accepted by accounting bodies but are not legally binding.
• If an oversight organization sets forth a guideline that addresses the same
topic as the accounting convention, the accounting convention is no longer
applicable.
• There are four widely recognized accounting conventions: conservatism,
consistency, full disclosure, and materiality.
• Convention of Full Disclosure

• •Financial statements should be prepared to reflect a true and fair view of the
financial position and performance of the enterprise
• •All material and relevant information must be disclosed in the financial
statements

• Convention of Materiality

• •Immaterial amounts may be aggregated with the amounts of a similar nature or

function and need not be presented separately
• •Materiality depends on the size and nature of the item
• Convention of Prudence/Conservatism

• •Revenues and profits are not anticipated. Only realized profits with reasonable certainty are
recognized in the profit and loss account
• •However, provision is made for all known expenses and losses whether the amount is known for
certain or just an estimation
• •This treatment minimizes the reported profits and the valuation of assets

• Convention of Consistency

• •Companies should choose the most suitable accounting methods and treatments, and consistently
apply them in every period
• •Changes are permitted only when the new method is considered better and can reflect the true
and fair view of the financial position of the company
• •The change and its effect on profits should be disclosed in the financial statements
THE ACCOUNTING PROCESS
PRINCIPLES OF DOUBLE ENTRY SYSTEM

• It is based upon the fact that just as every business

transaction involves at least two parties or two
items so the record of each transaction must be
made in at least two accounts.
 TYPES OF ACCOUNTS
1. PERSONAL ACCOUNT
1. Accounts recording business transactions with persons and other business enterprises are
called the personal account.
2. Natural person account, artificial or legal person account, groups or representative
personal accounts
3. Example: Sachin’s Account, DSM account, etc.

2. REAL ACCOUNT
1. Such accounts consists of the accounts of the properties and possessions in which are real,
tangible and intangible.

3. NOMINAL ACCOUNT
1. The account of incomes, expenses, losses and gains
2. Example: Salary Account, Rent, Wages, Bad Debts.
 APPLICATION OF DEBIT-CREDIT
RULES TO ACCOUNTS
• PERSONAL ACCOUNTs:
Debit-The Receiver ;
Credit- The Giver

• REAL ACCOUNTS
Debit- What comes in ;
Credit- What goes out

• NOMINAL ACCOUNTS
Debit- All Expenses and loses ;
Credit- All incomes and gains
EXAMPLES OF CLASSIFICATION OF
ACCOUNTS
 RECORDING TRANSACTIONS
1. PURCHASES ACCOUNT 10. CASH PAID FOR SERVICES

2. SALES ACCOUNT RENDERED

3. PURCHASE RETURN ACCOUNT 11. TRADE DISCOUNT

4. SALES RETURN ACCOUNT 12. CASH DISCOUNT

5. STOCK ACCOUNT 13. SALE/ PURCHASE OF INVESTMENTS

6. CAPITAL 14. BAD DEBTS

7. DRAWINGS

8. LOAN FROM WIFE/ HUSBAND

9. CASES OF PURCHASES OF GOODS

 ANALYSIS OF SOME BUSINESS
TRANSACTION

• 1. Harry commences business with a capital Rs. 20,00,00

trading under the name of Krish General Store.

• 2. Paid into Punjab National Bank Rs. 3,00,000

 ANALYSIS OF SOME BUSINESS
TRANSACTION

• 3. Bought Good for Rs. 5,00,000

• 4. Borrowed from bank Rs. 1,00,000

 TYPES OF JOURNAL ENTRIES
• 1. Simple Entry
Example : Business firm purchases goods worth Rs. 20,000 from Kamla:
➔Purchases A/c ……. Dr. 20,000
To Kamla’ Account 20,000
• 2. Single Compound Entry
Example : business enterprise pays rent Rs 20,000, Trade Expenses Rs. 1,500
➔ Rent Account …… Dr. 2,000
Trade Expenses Account …..Dr. 1,500
To Cash Account 3,500
3. Double Compound Entry
Business Enterprise receives payment of Rs. 50,000 consisting of Rs. 30,000 cash and cheque of Rs. 20,000 in
return for sale of goods for Rs. 40,000 and a second hand machine of Rs. 10,000 on January 1, 2019.
➔Cash A/c ….Dr. 30,000
Bank A/c … Dr. 20,000
To Sales A/c 40,000
To Machine A/c 10,000
QUESTION:
QUESTION :
 LEDGER
• A ledger is a book or register in which all the accounts are put together.
• Posting to the ledger is the process of transferring the information contained in the journal to
the ledger.
• Utility of the Ledger- Being the principal book of account, it contains all the information
regarding various accounts. It helps in preparing the final accounts.
• Both Journal and Ledger are essential for a complete and efficient accounting system.
• Balancing the Accounts means totalling the two sides of the accounts and writing the
difference between the two on the side with the smaller total. In the case of Real accounts and
Personal Accounts the difference is carried forward to the credit side – if the credit side is
greater, by writing “By Balance b/d” and to the debit side, if the dev=bit side is greater, by
writing, “To Balance b/d”.
• Personal and real accounts are balanced but nominal accounts are closed at the end of the
period by transfer to Trading Account or Profit and Loss A/c.
• Trial Balance: A trial Balance is a statement in which the Debit and Credit balances of all
accounts are recorded with a view to ascertaining accuracy of the books of accounts.
EXAMPLE:
QUESTION:
 SOLUTION: Ledger of Manish Gupta
Dr. SUBRAT MUKHERJEE Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2018 To Balance b/d 5,000 2018 By Rebate A/c 600
April 1 April 5
April 6 To Sales A/c 10,000 April 5 By output CGST A/c 48
April 6 To output CGST A/c 600 April 5 By output SGST A/c 48

April 6 To output SGST A/c 600 April 5 By Bank A/c 3904

April 30 To Bank A/c (Cheque 9500 April 5 By Discount Allowed A/c 200
returned)
April 30 To Discount Allowed A/c 500 April 20 By Bank A/c 9500

April 20 By Discount Allowed A/c 500

April 30 By Balance c/d 11200
25200 25200

Notes: 1. Discount already allowed is cancelled due to return of cheque. 2. Rebate is reduction in sales value due to
reasons other than for which trade discount is allowed. Hence, GST charged at the time of sale id reversed.
SPECIAL PURPOSE BOOKS –
OTHER BOOKS
SPECIAL PURPOSE BOOK –
CASH BOOK
PURCHASE BOOK VS. PURCHASE
ACCOUNT
QUESTION (PURCHASE BOOK):
SALES BOOK VS. SALES ACCOUNT
QUESTION (SALES BOOK):
CASH BOOK
QUESTION:
QUESTION:
QUESTION:
QUESTION:
QUESTION (CONTINUED)..