Financial Accounting(15B1NHS435)

Introduction to Accounting
 COURSE OUTCOMES COGNITIVE LEVELS

C206-8.1 Understand the basic concepts of Accounting. Understanding level (C2)

C206-8.2 Apply accounting concepts for recording of business Applying level (C3)
transactions.

C206-8.3 Compare and reconcile the accounting records with other sources Analyzing level (C4)
of information.

C206-8.4 Evaluate the accounting records to identify and rectify the errors Evaluating level (C5)
made during accounting process.

C206-8.5 Construct the final accounts of a business Creating (C6)

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Module Subtitle of the Topics in the module
No. Module
1. Introduction to Definition of Accounting, Accounting cycle, Users of Accounting, Objectives & Limitations of Accounting ,
Accounting Relationship with other subjects
2. Understanding Elements of Financial Statements, Accounting Equation,
Accounting Generally Accepted Accounting Principles (GAAP)
Elements
3. Accounting Concepts and Conventions of Accounting:
Concepts Business entity concept, Money measurement concept, Going concern, Consistency, Matching concept, Cost
concept, Dual aspect concept, Materiality, Full disclosure
4. Journal Journal, Rules of Debit and Credit, Compound Journal entry, Opening entry
Transactions
5. Ledger Posting and Ledger, Posting, relationship between Journal and Ledger, Rules regarding Posting, Trial balance
Trial Balance
6. Rectification of Different types of errors, their effect on trial balance, rectification and preparation of suspense account
Errors
7. Recognition of Classification of Capital and Revenue expenditure
Capital and Revenue
8. Bank
Reconciliation Meaning of Bank Reconciliation Statement, technique
Statement of preparing BRS, Causes of difference

9. Final Accounts Trading account, Profit and Loss account, Balance sheet, Adjustment entries
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Evaluation (Lecture Course)

Exam % of Duration of Coverage / Scope

Marks Examination

(i) TEST-1 (T-1) 20 1 Hour Syllabus covered upto Test1

(ii) TEST -2 (T-2) 20 1 Hour Syllabus covered after Test-1 upto

Test-2.
(iii) END Term exams 35 2 Hours Whole syllabus

(iv) Teacher’s 25 Entire Semester Attendance

Assessment Class Discipline, Project
Continuous evaluation of tutorials

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Text Book
 Financial Accounting by Maheshwari and Maheshwari, Vikas Publication.
 Financial Accounting by P C Tulsian, Pearson Education.
 Financial Accounting by Ashok Banerjee, Excel Books.

Books for Reference

 Financial Accounting for Business Managers by Ashish Bhattacharya, Prentice
Hall of India.
 Financial Accounting-A Managerial Perspective by R. Narayanswamy, Prentice
Hall of India.
 Financial Accounting for management by Ambrish Gupta

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Learning Objectives:

• Definition of Accounting

• Accounting cycle

• Users of Accounting

• Objectives & Limitations of Accounting

• Relationship with other subjects

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Accounting...

is the language of business.

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Accounting..

is an information system that...

measures business activities,

processes information, and...

communicates financial information.

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Accounting may be define as, “A systematic recording of
information which involves analyzing, classifying, summarizing,
and interpreting business transactions.

Attributes of Accounting
 It is the art of recording business transactions
 It is the art of classifying business transactions
 The transactions or events of a business must be recorded in
monetary terms
It is the art of summarizing financial transactions
 The results should be communicated to users

* Father of Accounting is Luca Pacioli

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Definitions of Accounting

 “The process of identifying, measuring, and communicating economic

information to permit informed judgements and decisions by users of
the information.”
—American Accounting Association (AAA)

 “A service activity whose function is to provide quantitative

information, primarily financial in nature, about economic entities that
is intended to be useful in making economic decisions.”
—American Institute of Certified Public Accountants (AICPA)

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Primary Functions of Accounting
 Recording data about business transactions-
In the Egyptian era they used a quill pen to record the data
and stored it on papyrus scrolls. Today we might use a bar
code and scan data into a computer system and store it on a
disk.
 Summarizing results of business activity into useful report-
The balance sheet and income statement have been standard
reports for many years. More recently we added a statement
of cash flows. However, managers in today's environment
demand more detailed reports like sales by district or sales by
product type.

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•Providing assurances that the business is
operating as intended and that the assets of the
organization are protected-
All parties to a business event have looked to
accountants to provide assurance that the
transaction is properly handled, accurately
recorded, and accurately reported. Throughout
most of this century the assurance has been
based on a system of internal controls and an
audit of the published financial statements.

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Accounting as an Aid to
Decision Making
 Accounting helps in decision making by showing where and when
money has been spent, by evaluating performance, and by showing the
implications of choosing one plan instead of another.

 Fundamental relationships in the decision-making process:

Accountant’s
Financial
Event analysis and Users
statements
recording
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Book Keeping

 Bookkeeping is the preservation of a systematic, quantitative record of an activity.

 Accounting process includes the bookkeeping function.

 Bookkeeping usually involves only the recording of economic events

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 The Flow of Accounting Information

1. Business transactions 2. Record, classify, 3. Businesses

occur and summarize 4. People make decisions
prepare reports to
Show the results of
their operations

.
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End Users of Accounting
 Proprietors : need to ensure that the business is doing well so
that they will have profit.

Bankers & Creditors : need to ensure that the business has

the ability to repay bills, loans and on a timely basis.

Government and Regulatory Bodies : need to ensure that the

business pays the correct amount of taxes .

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 Users of Accounting Information

• investors
Financial Accounting • creditors
• regulators
EXTERNAL USERS
• customers
• competitors
Financial Accounting
INTERNAL USERS  owners
• managers
 Management
• employees

Employees
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 Purpose of Accounting
Internal Users

Is cash sufficient to pay What is the cost of

bills? manufacturing each unit of
product?

Can we afford to give employees pay Which product line is the most
raises this year? profitable?

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 How does the company compare in size
and profitability with its competitors?
Is the company earning
satisfactory income?

What do we
do if they
catch us?

Will the company be able to pay its debts as they come due?
External Users

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Uses of Financial Information
An organization’s financial statements provides mangers with information
to determine present and future decisions. Such actions include:

• Granting Credit

• Making investments

•Borrowing money

• Adhering to regulations

• Determine executive compensation

• Evaluating competition

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Objectives of Financial Accounting

 To keep systematic record

 To protect business properties

 To ascertain the operational profit or loss

To ascertain the financial position of business

To facilitate rational decision making

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 OUTPUT OF THE ACCOUNTING CYCLE

The
Accounting
Cycle

Internal Reporting(Management Accounting)

External Reporting (Financial Accounting)

Financial reports for General-purpose financial Other external reports:

internal use statements for use by creditors, Special reports required by
by company management. investors, and other external regulatory
Examples: users. agencies, such as the SEBI
● budgets Examples: Example: registration statements
● cost analyses ● balance sheet Income tax forms required by the
● divisional performance ● income statement IRS and state and local
reports ● statement of cash flows governments.
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Example: corporate tax returns

Branches of Accounting

 Financial Accounting(Record Keeping)

Management Accounting (Analysis for decision making): It

measures and reports financial and nonfinancial information that
helps managers make decisions to fulfill the goals of an
organization

 Cost Accounting (Price fixation and Operating efficiency):

The process of accounting and controlling the cost of a product,
operation or function.

 Social responsibility accounting (Impact on society): The

accounting of social effects of business decisions. Accounting
for environment and ecology.
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Limitations of Accounting

• Records only monetary transactions

• Ignores the price level changes as financial statements prepared

on historical cost

• Personal bias of accountant affects the accounting statements

• Permits alternative accounting practices example LIFO and

FIFO

• Danger of window dressing

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 Stakeholder and Shareholder

Shareholders

 Hold shares in company -Shareholders are those who have

invested in a business or company by purchasing shares of that
business.
 Investors in the company Shareholders are interested in the
monetary valuation of a company or business, as that monetary
valuation directly affects that shareholder's investment.
 Share in the profits and losses of the company-
shareholders are keen to get increase in its share price,
increase dividends, and generally take actions that improve their
own financial positions.
 Directly or Indirectly control the decisions of the
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Stakeholders

 Have an interest in the activities of a business- Stakeholders

can be seen as anyone who has a stake in that company's success for a variety
of reasons, that can include stock prices but also can include customers that
rely on that company's services; communities that rely on that company to
employ its members; suppliers that rely on the a company to contract its
services; and employees, who rely on the company to provide them with
steady paychecks and gainful employment.

 Not necessarily control the business

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Relationship of Accounting to Other fields

 Everyone is engaged in business activity, from the youngest

employee to the manager and owner, comes into contact of
accounting. The higher the level of authority and responsibility, the
greater is the need for an understanding of accounting concepts and
terminology.

 The importance of understanding accounting is not limited to the

business world. Many employees with specialized training in non
business areas also make use of accounting data and should
understand accounting principles and terminology.
For eg. An engineer responsible for selecting the most desirable
solution to a technical manufacturing problem may consider cost
accounting data to be the decisive factor. Lawyers use accounting
data in tax cases and in lawsuits involving property ownership and
damages from breach of contract.
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Objectives Questions

Indicate whether each of the following statements are true or false:

1. Book keeping encompasses all steps in the accounting process.

(False. Bookkeeping involves only the recording step).

2.Accountants prepare, but do not interpret, financial reports.

(False. Accountants analyze and interpret information in reports as part of the
communication step).

3. The two main common types of external users are investors and company
officers.
( False. The two most common types of external users are investors and creditors).

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Multiple Choice Questions:

1. Which of the following is not a step in the accounting process?

a. Identification b. Recording c. Economic Identity d. Communication

2. The type or branch of accounting that generates reports for the use of
external parties such as creditors, investors and government agencies is known
as:
a. Financial Accounting b. Management Accounting
c. Tax Accounting d. Forensic Accounting

3. Bookkeeping provides the:

(A) Primary information (B) Secondary information (C) Final information (D)
None of these

4. The main function of Accounting is to

(A) Record economic data
(B) Provide informational basis for action
(C) Classify and record business transactions
(D) All of the above
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References:

1. Tulsian, P.C. , Financial Accounting, S. Chand &Co Ltd , India.

2. W. Steve Albrecht, Earl K. Stice, James D. Stice , Financial

Accounting, 10th ed, Thomson/South-Western, 2008

3. Maheshwari, S.N., Maheshwari, S.K., Financial Accounting, 10th

ed, Vikas Publishing House

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