UNIT 1

Financial Accounting

The American Institute of certified public accountants (AICPA) defined accounting as

“Accounting is 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”.

The Accounting System

Financial
Statements
Business Journal General Trial (Balance
Transaction Entry Ledger Balance Sheet, Income
Statement)

Cost accounting

Cost accounting is the process of accounting for costs from the point at which expenditure is
incurred or committed to the establishment of its ultimate relationship with cost centers and
cost units.

Management Accounting

Management Accounting is a system for gathering, summarizing, reporting and interpreting

accounting data and other financial information primarily for the internal needs of the
management decision making process.

Bookkeeping

Bookkeeping is correctly recording in books of accounts all those business transactions that
result in the transfer of money or money’s worth.

Scope of Book Keeping

Book Keeping is concerned with two important steps involved in the procedure of
accounting. They are:

(i) recording of all business transactions in a book known as Journal and

(ii) (ii) posting all recorded transactions into another book known as a ledger.

System of Book Keeping

i. Single Entry System

ii. Double Entry System

 Father of Double entry system

Luco Pacioli is the father of accounting who introduced Double Entry System of account
in 1494 at Venice in Italy.

Difference between Book keeping and Accounting:

Users of accounting information:

Accounting Principle: The body of doctrines commonly associated with the theory and
procedure of accounting.

Accounting Concept: Accounting postulates i.e. Necessary assumptions or conditions upon

which accounting is based.

Accounting Conventions: Convention signifies the customs or traditions which serve as a

guide to the preparation of accounting statements.

Accounting Standard: Standards to be observed in the presentation of financial statements.

Indian GAAP

US GAAP

i. Assumptions

 Business Entity
 Monetary Unit
 Periodicity
 Going Concern

ii. Principles

 Historical cost principle

 Revenue recognition principle
 Matching principle
 Full disclosure principle

iii. Constraints

 Materiality principle
 Objectivity principle
 Consistency principle
 Conservatism principle
 Cost Constraint

IFRS
International Financial Reporting Standards, usually called IFRS, are standards issued
by the IFRS Foundation and the International Accounting Standards Board (IASB) to provide
a common global language for business affairs so that company accounts are understandable
and comparable across international boundaries.
Types of Accounts

Golden Rules of Accounting

Journal

“Journal” is the word came from Latin word, it means daily recorded book. Recording is the
basic function of accounting.
“Entry” means a summary of business transaction. A journal entry is used to record
a business transaction in the accounting records of a business.

Ledger

A ledger records classified and summarized financial information from journals as debits and
credits, and shows their current balances.

Trial Balance

A trial balance is bookkeeping or accounting report that lists the balances in each of an
organization's general ledger accounts.

Final Accounts

Final accounts are summaries of ledger accounts prepared to show the profit or loss of the
business and financial position of the business at the end of the accounting year. It consists of
Trading A/c, Profit and loss A/c and Balance sheet. It is prepared to ascertain the true
financial position of the business.
Trading account

An account which shows only the result of trading with all direct expenses and direct
incomes called Gross Profit (G. P = Credit side>Debit side) or Gross Loss( G.L = Debit side
>Credit side).

Profit and Loss account

It is an account prepared with all the indirect expenses and indirect incomes to ascertain Net
profit or Net loss of the firm in a particular period.

Balance sheet

It is a statement of assets and liabilities of a business prepared at the end of the accounting
period with the object of ascertaining the financial position of the business.

Profoma of Balance Sheet.

Difference between Trial Balance and Balance Sheet

Expense: Item of cost applicable to an accounting period.

Cost Of Goods Sold: Opening stock + purchase + freight – closing stock.

Gross Profit: Excess of sales revenue over cost of goods sold.

Operating Expenses: Expenses incurred for running the business.

Operating Profit: Gross profit – operating expenses.

Non-Operating Expenses: Expenses which are not related to the activities of the business.

Net Profit: Amount of profit finally available to the enterprise for appropriation.

Retained Earnings: The term retained earnings means the accumulated excess of earnings
over losses and dividends.

Assets: costs which represent expected future economic benefits to the business enterprise.

Liabilities: Represent obligations which require settlement in the future.

Current Assets: Assets which are reasonably expected to be realized in cash or sold or
consumed during the normal operating cycle of the business enterprise or within one year,
whichever is longer.

Operating Cycle: The average period of time between the purchase of goods or raw materials
and the realization of cash from the sale of goods.

Fixed Assets: Tangible assets used in the business that are of a permanent or relatively fixed
nature.

Intangible Assets: Those assets which have no physical existence.

Fictitious Assets: They are not assets but appear in the asset side simply because of a debit
balance in a particular account not yet written off.

Current Liabilities: Liabilities due within an accounting period or the operating cycle of the
business.

Long Term Liabilities: Liabilities that becomes due for payment after one year.

Contingent Liabilities: Items which become a liability only on the happening of a certain
event.

Capital Or Owner’s Equity: This is the residual interest in the assets of the Enterprise.

Creditors: When the purchases are made on the credit, the person who supply the goods is
known as creditors.

Debtors: A person who takes the goods on credit is known as debtors.

Depreciation: value reduction in fixed assets.

Amortization: value reduction in Intangible assets.

 UNIT 3

Fund Flow statement

Fund Flow statement provide the information about the different source of funds and their
various uses or sources of inflows and outflows of the funds

As per accounting standard issued by ICAI, “A statement which summarizes for the period
covered by it the changes in financial position including the sources from which the funds
were obtained by the enterprises and the specific uses to which funds were applied”.

Uses of the fund flow Statements

 Helpful in Financial Planning & Financial

 Analysis Helpful to give the knowledge of managerial policies
 Useful in comparative analysis
 Helpful to know the business problems
 Economic Analysis.

Limitation of fund flow statement

 Ignores non fund items

 Historical Analysis
 Lack of information
 Misleading Conclusion

Steps in preparation of fund flow Statement

 Schedule of statement of changes in working capital

 Statement of source and uses of fund or funds flow from operation

Sources or uses of the fund

Statement of change in working capital

 Working capital will increase when there is increase in current assets and decrease in
current liability

 Working capital will decreases when there is decrease in the current assets and
increase in current liability.
Profoma of Adjusted Profit and loss Account

Cash flow statement

Cash flow is related to the cash inflows & cash outflows of cash and cash equivalents in
enterprises during a specified period of time. It summaries the reasons of changes in cash
position of a business enterprises.

 Cash includes cash & bank deposit.

 Cash equivalents mean short term highly liquid assets.

Classification of cash flows

 Cash Flow From operating activities

o Cash receipts from the sale of goods and the rendering of services
o Cash payment to suppliers of goods & services
o Cash payment to and behalf of suppliers
o Cash receipts and cash payment of an enterprises for premium
o Cash payments or refunds of income tax
o Cash receipt and payments relating to future contract forward contract option
contract and swap contract

 Cash flow from financing activity

o Cash from investing Activity

o Cash payments to acquire fixed assets
o Cash receipts from the disposal of fixed assets
o Cash advances and loans made to third Party

 Cash flow from investing activities

o Cash proceeds from issuing shares or other similar instrument

o Cash proceeds from issuing debenture loans notes bonds and other short or long
term borrowings
o Cash repayment of amounts borrowed such as redemption of debenture bonds
preference share.

Sources of Cash

 Internal Sources
o Depreciation
o Amortization of Intangible Assets
o Loss on Sale of Fixed Assets
o Gains from Sale of Fixed Assets
o Creation of Reserves

 External Sources
o Issue of New Shares.
o Raising Long-term Loans
o Purchase of Plant and Machinery on Deferred Payments.
o Short-term Borrowings
o Cash Credit from Banks.
o Sale of Fixed Assets, Investment etc.
Applications of Cash
 Purchase of Fixed Assets.
 Payment of Long-term Loans.
 Decrease in Deferred Payment Liabilities.
 Loss on Account of Operations
 Payment of Tax
 Payment of Dividend
 Decrease in Unsecured Loans, Deposits, etc.

Profoma of Cash flow Statement

 UNIT -4

Cost

Cost denotes the amount of money that a company spends on the creation or production of
goods or services.

Cost is usually a monetary valuation of (1) effort, (2) material, (3) resources, (4) time and
utilities consumed, (5) risks incurred, and (6) opportunity forgone in production and delivery
of a good or service. All expenses are costs, but not all costs are expenses.

Elements of cost:

 Materials
 Labour
 Expenses

Costing: System of computing cost of production or of running a business, by allocating

expenditure to various stages of production or to different operations of a firm.

Cost sheet

Cost sheet is a statement, which shows various components of total cost of a product. It
classifies and analyses the components of cost of a product.

Direct costs: Direct costs are generally directly associated with manufacturing process.

 Direct materials
 Direct expense
 Direct labour
Total direct costs are collectively known as Prime Costs

Indirect Costs: Indirect costs are those costs that are incurred in the factory but that cannot be
directly associated with manufacture.
 Indirect materials
  Indirect labour
 Indirect expenses
Total indirect costs are collectively known as Factory /Works Overheads.

Fixed Cost: Remain constant for all the level of outputs

Variable and Semi variable Cost: Variable cost varies in proportion to the output. Semi
variable Cost is partly fixed & partly variable.

Operating cost: Operating costs are day-to-day expenses, but are not classified as costs of
producing the products.

Opportunity Cost: Opportunity cost is the benefit given up when one decision is made over
another. For example, if a company decides to buy a new piece of manufacturing equipment
rather than lease it.

Sunk Costs: Sunk costs are historical costs that have already been incurred and will not make
any difference in the current decisions by management.

Cost center: A cost center is often a department within a company. The manager and
employees of a cost center are responsible for its costs.

Types of Cost center:

i) Production Cost Centers: Production cost centers are the cost centers directly involved in
the manufacturing operations. Examples include molding, machining, assembly, shaping,
welding, binding, cutting, etc.

ii) Service Cost Centers: Service cost centers are secondary to the production process as
products or cost units are not produced by them. Examples are canteen, personnel, stores,
boiler house and maintenance, etc.

Cost unit: A cost unit is the total expenditure incurred by a company to produce, store and
sell one unit of a particular product or service. Unit costs include all fixed costs, or overhead
costs, and all variable costs, or direct material and labour costs.

Profoma of Cost sheet

Particulars Amount Amount Amount
Direct Materials(Raw Materials Consumed) ***
Opening Stock of Raw Material ***
Add: Purchase of Raw materials ***
Add: Purchase Expenses ***
***
Less: Closing stock of Raw Materials ***
***
Direct Wages (Labour) ***
Direct Expenses ***
Prime cost (1) ***
Add :- FACTORY OVER HEADS:
Factory Rent ***
Factory Power ***
Indirect Material ***
Indirect Wages ***
Supervisor Salary ***
Drawing Office Salary ***
Factory Insurance ***
Factory Asset Depreciation ***
Works cost Incurred ***
Add: Opening Stock of Work-in-Progress ***
***
Less: Closing Stock of Work-in-Progress ***
Works cost/ Factory cost (2) ***
Add:- ADMINISTRATION OVER HEADS:-
Office Rent ***
Asset Depreciation ***
General Charges ***
Audit Fees ***
Bank Charges ***
Counting house Salary ***
Other Office Expenses ***
Cost of Production (3) ***
Add: Opening stock of Finished Goods ***
***
Less: Closing stock of Finished Goods ***
Cost of Goods Sold(4) ***
Add:- SELLING AND DISTRIBUTION OVER HEADS:-
Sales man Commission ***
Sales man salary ***
Traveling Expenses ***
Advertisement ***
Delivery man expenses ***
Sales Tax ***
Bad Debts ***
Cost of Sales (5) ***
Add :Profit ( sometimes balancing figure) ***
Sales ***
 UNIT - 5

Budget:

A budget is a quantitative plan used as a tool for deciding which activities will be chosen for
a future time period. Budgets are often a company's first step in financial forecasting

Definition:

The ICMA terminology defines a budget as “a plan quantified in monetary items, prepared
and approved prior to a defined period of time, usually showing planned income to be
generated and/or expenditure to be incurred during that period and the capital to be employed
to attain a given objective”.

George R. Terry defines budget as “an estimate of future needs arranged according to an
orderly basis, covering some or all the activities of an enterprise for a definite period of
time”.

Budgeting:

Budgeting for a business is the process of preparing detailed financial statements that cover a
given time period in the future.

Budgetary control:

Budgetary control refers to how well managers utilize budgets to monitor and control costs
and operations in a given accounting period.

Types of Budgets:

A cash budget sets out the expected cash/bank receipts and payments,

Zero Base Budgeting:

The name zero base budgeting derives from the idea that such budgets are developed from a
zero base: that is, at the beginning of the budget development process, all budget headings
have a value of ZERO. This is in sharp contrast to the incremental budgeting system in which
in general a new budget tends to start with a balance at least equal to last year's total balance,
or an estimate of it.
Definition of Zero Base Budgeting (ZBB)

“A method of budgeting whereby all activities are reevaluated each time a budget is set.
Discrete levels of each activity are valued and a combination chosen to match funds
available”.

Objectives and Benefits of ZBB

What zero base budgeting tries to achieve is an optimal allocation of resources that
incremental and other budgeting systems probably cannot achieve. ZBB starts by asking
managers to identify and justify their area(s) of work in terms of decision packages (qv).

An effective zero base budgeting system benefits organisations in several ways. It will

• Focus the budget process on a comprehensive analysis of objectives and needs

• Combine planning and budgeting into a single process

• Cause managers to evaluate in detail the cost effectiveness of their operations

• Expand management participation in planning and budgeting at all levels of the

organisation