INTRODUCTION

TO
FINANCIAL
ACCOUNTING

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 What is Finance:
Money
Allocation of assets
Provide funding for (a person or enterprise).

 What is Financial:
The management of large amounts of money, something
related to finance.

 What is Accounting:
Accounting is considered as a system which collects and processes
financial information of a business. Accounting, which has been
called the "language of business", measures the results of an
organization's economic activities and conveys this information to a
variety of users. 2
 NEED AND IMPORTANCE
 i. Where the money is invested?
 ii. What is the result of the business transactions?
 iii. What are the earnings and expenses?
 iv. How much amount is receivable from customers to whom goods have been
sold on credit?
 v. How much amount is payable to suppliers on account of credit purchases?
 vi. What are the nature and value of assets possessed by the business concern?
 vii. What are the nature and value of liabilities of the business concern?

These and several other questions are answered with the help of accounting.
The need for recording business transactions in a clear and systematic manner
is the basis which gives rise to Book-keeping.

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BOOK KEEPING
 Book-keeping is that branch of knowledge which tells us
how to keep a record of business transactions.
 It is often routine and clerical in nature.

 It is important to note that only those transactions related

to business which can be expressed in terms of money
are recorded.
 The activities of book-keeping include recording in the
journal, posting to the ledger and balancing of accounts.

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 DEFINITION OF ACCOUNTING

Accounting is the process of Recording,

Classifying, and Summarizing,
Summarizing money
transactions and events in a significant manner
and Analysing & Interpreting the results thereof
and Communicating it to the people who are
interested in such kind of information .”

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PROCESS

Input Process Output

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 RECORDING: The function of accounting is to keep a
systematic record of all business transactions, which are
identified in an orderly manner, soon after their occurrence
in the journal or subsidiary books.

 CLASSIFICATION: This is concerned with the

classification of the recorded business transactions so as to
group the transactions of similar type at one place. i.e., in
ledger accounts. In order to verify the arithmetical
accuracy of the accounts, trial balance is prepared.

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 SUMMERIASATION: The classified information
available from the trial balance are used to prepare profit
and loss account and balance sheet in a manner useful to
the users of accounting information.

 ANALYSIS: It establishes the relationship between the

items of the profit and loss account and the balance sheet.
The purpose of analyzing is to identify the financial
strength and weakness of the business. It provides the basis
for interpretation.

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 INTERPRETATION: It is concerned with explaining the
meaning and significance of the relationship so established
by the analysis. Interpretation should be useful to the
users, so as to enable them to take correct decisions.

 COMMUNICATION: The results obtained from the

summarized, analyzed and interpreted information are
communicated to the interested parties.

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USERS OF ACCOUNTING
INFORMATION
 Internal users: Internal users are those individuals or groups
who are within the organization like owners, management,
employees and trade unions.

i. Owners: To know the profitability and financial soundness of

the business.

ii. Management: To take prompt decisions to manage the

business efficiently.

iii. Employees and Trade unions: To form judgment about the

earning capacity of the business since their remuneration and
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bonus depends on it.
 External users: External users are those individuals or groups
who are outside the organization like creditors banks and other
lending institutions, present and potential investors,
Government and tax authorities, regulatory agencies and
researchers

i. Creditors, banks & other lending institutions: To determine

whether the principal the interest thereof will be paid in when
due.

ii. Present investors: To know the position, progress and

prosperity of the business in order to ensure the safety of their
investment.
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iii. Potential investors: To decide whether to invest in the
business or not.

iv. Government and Tax Authority: To know the earnings in

order to assess tax liabilities of the business.

v. Regulatory agencies: To evaluate the business operation

under the regulatory legislation.

vi. Researchers: To use in their research work.

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CLASSIFICATION OF
ACCOUNTING

Accounting

Financial Cost Management

Accounting Accounting Accounting
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 Financial Accounting
Involves recording, classifying and summarizing transactions
of financial nature. The primary intention is to prepare
financial statements for revealing operating results and
financial position of an enterprise.

 Cost Accounting
It shows classification analysis of cost on the basis of
functions, processes, products etc. it also deals with cost
computation, cost saving and cost control.

 Management Accounting
Deals with processing of data generated from financial
accounting and cost accounting for managerial decision
making. 14
MEANING OF ACCOUNTING CYCLE

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BASIC TERMS IN ACCOUNTING

Capital
 Capital generally refers to the amount invested in an
enterprise by its owners. For example if Mr. Anand starts
business with Rs.5,00,000, his capital would be
Rs.5,00,000.

Assets
 Assets are the properties of every description belonging to
the business. Cash in hand, plant and machinery, furniture
and fittings, bank balance, debtors, bills receivable, stock of
goods, investments, Goodwill are examples for assets.
Assets can be classified into tangible and intangible.
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Tangible Assets
 These assets are those having physical existence. It can be
seen and touched. For example, plant & machinery, cash, etc.

Intangible Assets
 Intangible assets are those assets having no physical existence
but their possession gives rise to some rights and benefits to
the owner. It cannot be seen and touched. Goodwill, patents,
trademarks are some of the examples.

Assets refer to the tangible objects or intangible rights owned

by an enterprise and carrying probable future benefits.

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Liability
 Liabilities refer to the financial obligations of a business.
These denote the amounts which a business owes to others,
e.g. loans from banks or other persons, creditors for goods
supplied, bills payable, outstanding expenses, bank
overdraft etc.

Inventory/Stock
 Inventory includes tangible property held for sale in the
ordinary course of business, or in the process of the
production for such sale, or the consumption in the
production of goods or services for sale, including
maintenance supplies and consumables.

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Sales
 Sales refers to the amount of goods sold that are already bought or
manufactured by the business. When goods are sold for cash, they are
cash sales but if goods are sold and payment is not received at the time of
sale, it is credit sales. Total sales includes both cash and credit sales.

Sundry Debtor
 Sundry debtors are persons from whom amounts are due for goods sold or
services rendered. or in respect of contractual obligations. These are also
termed as debtor, trade debtor and account receivable.

Sales Return or Returns Inward

 When goods are returned from the customers due to defective quality or
not as per the terms of sale, it is called sales return or returns inward. To
find out net sales, sales return is deducted from total sales.
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Purchases
 Purchases refers to the amount of goods bought by a business for resale or
for use in the production. Goods purchased for cash are called cash
purchases. If it is purchased on credit, it is called as credit purchases. Total
purchases include both cash and credit purchases.

Sundry Creditor
 Sundry creditor is the amount owed by an enterprise on account of goods
purchased or services received, or in respect of contractual obligations. It is
also termed as trade creditor or account payable.

Purchases Return or Returns Outward

 When goods are returned to the suppliers due to defective quality or not as
per the terms of purchase, it is called as purchases return. To find net
purchases, purchases return is deducted from the total purchases.

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Cost of Goods Sold
 In manufacturing operations, it includes the following:
Cost of materials
Labour
Overheads

Expenditure
 Expenditure includes incurring a liability, disbursement of cash or
transfer of property for the purpose of obtaining assets, goods or
services.

Profit
 Profit is a general term for the excess of revenue over related cost.
When the result of this computation is negative, it is referred to as
loss. 21
Profit and Loss Statement
 Profit and loss statement is a financial statement which presents the
revenue and expenses of an enterprise for an accounting period and
shows the excess of revenue over expenses (or vice versa). It is also
known as profit and loss account.

Balance Sheet
 Balance sheet is a statement of financial position of an enterprise at a
given date. It exhibits a company’s assets, liabilities, capital, reserves and
other account balances at their respective book value.

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 ACCOUNTANCY, ACCOUNTING AND
BOOK-KEEPING
 Accountancy: Accountancy refers to a systematic knowledge of
accounting. It explains “why to do” and “how to do” of various aspects
of accounting. It tells us why and how to prepare the books of accounts
and how to summarize the accounting information and communicate it
to the interested parties.

 Accounting: Accounting refers to the actual process of preparing and

presenting the accounts. In other words, it is the art of putting the
academic knowledge of accountancy into practice.

 Book-keeping: Book-keeping is a part of accounting and is concerned

with record keeping or maintenance of books of accounts.
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RELATIONSHIP BETWEEN
ACCOUNTANCY, ACCOUNTING AND
BOOK-KEEPING

Accountancy
Accounting

Book
Keeping

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FUNCTIONS OF A FINANCE
MANAGER
 The finance manager must collaborate across business functions in
order to determine how to best allocate and manage assets.
 The finance manager is responsible for knowing how much the
product is expected to cost and how much revenue it is expected to
earn so that he can invest the appropriate amount in the product.
 The finance manager uses a number of tools, such as setting the cost
of capital to determine the cost of financing.
 The financial manager must not just be an expert at financial
projections; he also must have a grasp of the accounting systems in
place and the strategy of the business over the coming years.
 The head of the financial department is the chief finance officer who
is responsible for all financial decisions and reporting done in the
company.
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ROLES OF A FINANCE
MANAGER
 Responsible for managing the budget.

 Figuring out the financial projections.

 Figure out if it's worth financing.

 Ensure that the business has enough cash to pay

upcoming financial obligations.

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