Unit-1

Introduction to Financial
Accounting

DR PANKAJ KUMAR
VIT BUSINESS SCHOOL
VIT BHOPAL UNIVERSITY
Accounting in India

 In India, the system of Accounting was practiced centuries ago as

it is clear from the book named “Arthasasthra” written by
Kautilya, minister of King Chandra Gupta.

 Kautilya’s Arthshastra covers accounting principles and

standards, role and responsibilities of accountants and auditors,
the methodology of accounting, auditing and fraud risk
management, and the role of ethics in managing financial
activities.
Modern System of Accounting

 The modern system of accounting based on the principles of

double entry system owes its origin to ‘Pacioli’ (Father of
Accounting) who first published the principles of double entry
system in 1494 at Venice in Italy.

 In Simple words, accounting is the process of collecting,

recording, classifying, summarizing and communicating
financial information to the users for judgment and decision-
making.
Meaning & Definition Accounting

 Accounting is a discipline which records, classifies, summarizes

and interprets financial information about the activities of a
concern so that intelligent decisions can be made about the
concern.

 “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.”

…….American Institute of Certified Public Accountants

Objective of Accounting

 To keeping systematic record

 To ascertainment and computation of profit & loss.
 To ascertain the financial position of the business
 To protect business properties
 To facilitate rational decision – making
Functions of Accounting

Recording

Classifying

Summarising

Analysing and Interpreting

Communicating
Users of Accounting Information

• Owners
• Management
Internal Users
• Employees

• Investors
• Creditors
External Users
• Government
Advantages of Accounting

 Maintaining systematic records

 Meeting legal requirements
 Protecting and safeguarding business assets
 Facilitates rational decision-making
 Communicating and reporting
 Comparison of results
 Decision making
Limitation of Accounting

 No records of non-monetary transactions

 It is based only on estimates
 The record is of historical in nature
 No information about the present value of the business
 Accounting information is not natural or unbiased
 Unrealistic accounting information
 Historical information only
Branches of Accounting

• Deals with the preparation of financial

Financial statements to provide information to
the interested parties.
Accounting

• Provides the detailed cost information

that management needs to control
Cost Accounting current operations and plan for the
future

• Deals with the presentation of accounting

Management information is such a way as to assist
management in the creation of policy and the
Accounting day-to-day operation of an undertaking
Interrelation of Accounting with other Diciplines

 Accounting and Management

 Accounting and Economics
 Accounting and Mathematics
 Accounting and Computer Science
 Accounting and Statistics
 Accounting and Law
Accounting cycle

Identification
of
transactions

Preparation Recording of
of final transactions
in journal
accounts

Passing of
Posting into
adjustment
ledger
entries

Preparation
of trail
balance
Meaning and Definition
of Book- Keeping
Definition of Book-keeping

“The art keeping permanent record of business transactions is book

keeping.”

J. R. Batliboi: “book-keeping is an art of recording business dealings in a

set of books”.

R. N. Carter: “Book-keeping is the science and art of correctly recording in

the books of accounts, all those business transactions that results in
transfer of money’s worth”.
Features of book-keeping

 It is the process of recording business transactions.

 Monetary transactions are only recorded.
 Recording is made in given set of books of accounts.
 Record is prepared for a specific period but presented for future
references.
 It is an art of recording business transactions scientifically.
 Difference b/w book-keeping and accounting

Point of Book-keeping Accounting

distinction
1. Objective The object of book-keeping The object of accounting is to
is to prepare original books record, classify, summarize,
of accounts, trial balance analyze, and interpret the
and to maintain systematic business transactions and
record of financial results. ascertain financial results and to
communicate to various parties.

2. Scope It has a limited scope It has a wider scope

3. Level of It is restricted to clerical It is concerned with all levels of
work work Management.
4. Mutual It has to depend on It has to depend on book-
dependence accounting Principles keeping
Point of Book-keeping Accounting
distinction
5. Results of the It shows the net result It analyses the operating
business and financial position. and financial position of
the business
6. Stages Book-keeping is a Accounting is secondary
primary stage stage
7. Nature of job The job of book keeper The job of accountant is
is routine analytical in nature
8. Knowledge Book keeper not The accountant must
required required to have higher have higher level of
level of knowledge knowledge

9. Staff for Book keeping work Accounting work is

performing performed by junior performed by senior
staff Staff
 Single Entry System
 Double Entry System
Difference between Single Entry and Double Entry

BASIS FOR SINGLE ENTRY DOUBLE ENTRY

COMPARISON SYSTEM SYSTEM
The accounting system,
The system of
in which every
accounting in which
transaction affects two
only one sided entry is
Meaning accounts
required to record
simultaneously is
financial transactions is
known as the Double
Single Entry System.
Entry System.

Nature Simple Complex

Type of recording Incomplete Complete

Errors Hard to identify Easy to locate

Basic Terminologies of Accounting

 Assets  Fictitious Assets

 Liabilities  Stock
 Capital  Purchases
 Fixed Assets  Sales
 Current Assets  Expenses
 Current Liabilities  Revenue
 Sundry Debtors  Invoice
 Sundry Creditors  Voucher
 Intangible Assets
Accounting Equation

ASSETS
 Items owned by a business that will provide future benefits.
MUST BE “OWNED”NOT RENTED
Examples:
 Cash
 Furniture
 Fixtures
 Machinery
 Buildings
 Land
 Accounts Receivable
Accounts Receivable
The amount of money owed to the business by its customers
as a result of making sales “on account” or “on credit”.

Accounts Payable
Simply, customers who have promised to pay sometime in the
future.
 An unwritten promise to pay a supplier for assets purchased
or services rendered.
 Referred to as making a purchase “on account” or “on credit”
Liabilities
A probable future outflow of assets as a result of a past
transaction or event.
IN OTHER WORDS, DEBTS OR OBLIGATIONS OF THE
BUSINESS THAT CAN BE PAID WITH CASH, GOODS, OR
SERVICES.
Examples:
 Accounts Payable
 Notes Payable
Owner’s equity
Every business transaction will have an effect on a company's financial
position. The financial position of a company is measured by the following
items:
 Assets (what it owns)
 Liabilities (what it owes to others)
 Owner's Equity (the difference between assets and liabilities)

The accounting equation (or basic accounting equation) offers us a

simple way to understand how these three amounts relate to each other.
The accounting equation for a sole proprietorship is:

Assets = Liabilities + Capital

 Accounting
Principles
Mode of Learning Accounting
Learn Accounting Concepts
(Ten Fundamental Accounting Concepts)
Understand Accounting Conventions
(Four major conventions)
Classify the Accounting Events
(Capital, Revenue, Deferred Revenue Expenditure)
Apply the Accounting Rules
(Personal, Real and Nominal Rules)
Record the Transaction as a Journal
(Entering the Debit and Credit Side of Transaction)
Classify the Transaction
(Asset, Liability, Revenue or Expense)
Summarize the Transaction
Prepare Trial Balance, Trading, P&L and Balance Sheet)
Accounting Concepts/Conventions(US GAAP/UK
GAAP/IFRS/SOX)

 The Concepts and conventions of accounting are developed by

IASC (International Accounting Standards Committee) which is in-
charge of releasing International Accounting Standards (IAS)

 The IASC Decides the preferred Accounting practices worldwide

and encourages the worldwide acceptance

 There are 41 International Accounting Standards

 Now IFRS (International Financial Reporting Standards) and SOX

(Sarbanes Oxley) Act gain more importance which came up from
US GAAP and UK GAAP
Accounting Concepts and Conventions

Accounting Principles

Accounting
Accounting Concepts
Conventions
Accounting Concept

 Business entity concept

 Money measurement concept
 Going concern concept
 Cost concept
 Dual Aspect concept
 Accounting Period concept
 Matching concept
 Realisation concept
Accounting Convention

 Convention of Full Disclosure

 Convention of Materiality
 Convention of consistency
 Convention of Conservatism
Pro forma of Journal