FINANCIAL ACCOUNTING

B.Com(Gen& Tax&AS)
 OBJECTIVES OF BUSINESS
Economic objectives Social objectives

• Earning profits • Supplying desired goods

• Creating customers at reasonable prices
• Innovations • Fair Remuneration to
employees
• Employment Generation
• Fair return to investor
• Social welfare
• Payment of Government
Dues
Human Objectives National Objectives

• Labour welfare • Optimum utilisation of

• Developing human resources
resources • National self-reliance
• Participative • Development of small
management scale Industries
• Labour management • Development of
cooperation backward areas
 Introduction to Accounting
• Most of the work is done through organizations
– groups of people who work together to
accomplish one or more objectives.

• In doing its work, an organization uses

resources – labor, materials, various services,
buildings, and equipment.
• These resources need to be financed, or paid
for.
• To work effectively, the people in an
organization need information about the
amounts of these resources, the means of
financing them, and the results achieved
through using them.

• Parties outside the organization need similar

information to make judgements about the
organization. Accounting is a system that
provides such information.
• Accounting use is not confined to the business
world alone, but spread over in all the ranges
of the society and in all professions.

• In any social institution or professional

institution, whether that is profit earning or
not, financial transactions must take place.
• So there arises the need for recording and
summarizing these transactions when they
occur and the necessity of finding out the net
result of the same after the expiry of a certain
fixed period
 Definition of Accounting
Accounting is an art of recording, classifying,
and summarizing in a significant manner, and in
terms of money and events which are, in part at
least, of a financial character and interpreting
the results thereof.
American Institute of Certified Public
Accountants (AICPA)

Accounting is treated as the language of business.

 ANALYSIS OF ACCOUNTING DEFINITION

1. Recording: It is essentially concerned with not only ensuring that

all business transactions of financial character are in fact recorded
but also they are recorded in an orderly manner.
Recording is done in the book called “ Journal” – also called
“Book of Prime entry”.

2. Classification: It is concerned with the systematic analysis of the

recorded data, with a view to group transactions or entries of one
nature at one place. The work of classification is done in the
book called “Ledger”. This book contains on different pages
individual account heads under which all financial transactions of
similar nature are collected. E..g. Ram’s A/c, Salary A/c, Capital
A/c
3. Summarizing: This involves presenting the classified data in a
manner which is understandable and useful to the internal as well
as external end-users of accounting statements. This process leads
to the preparation of the following statements:
(i) Trial Balance
(ii)Income statement and
(iii) Balance sheet

4. Dealing with financial transactions: Accounting records only

those transactions and events in terms of money which are of a
financial character. Transactions which are not of a financial
character though they are of significant impact on the
functioning of business are not recorded in the books of account.
E.g. dedicated and ethical values of employees of an
organization.
5. Analyzing and Interpreting: The recorded financial
data is analyzed and interpreted in a manner that the
end-users can make a meaningful judgment about
the financial condition and profitability of the
business operations.

6. Communicating: The accounting information is

communicated in a proper form and manner to the
proper person. This is done through preparation and
distribution of accounting reports, which includes
income statement (P&L A/c, (Profit and Loss
Account)) and Balance sheet
 Difference between Book-keeping and
Accounting
Book-keeping is a part of accounting and is concerned with
record keeping or maintenance of books of accounting which
is often routine and clerical in nature.
Basis of Book-keeping Accounting
distinction:
1. Scope Book-keeping involves: Accounting in addition to
(i) Identifying the transactions. Book-keeping involves –
(ii) Measuring the identified summarizing the classified
transactions transactions, analysis and
(iii)Recording the measured interpretation of accounting
transactions information.
(iv) Classifying the recorded
transactions

2. Stage (i) Book-keeping is primary Accounting is the secondary

stage stage. It starts where book-
keeping ends.
Basis of Book-keeping Accounting
distinction:

Basic objective The basic objective of book- The basic objective of

keeping is to maintain systematic accounting is to ascertain
records of financial transactions. net results of operations and
financial position and to
communicate information to
the interested parties.

Who performs Book –keeping is performed by Accounting work is

and skills junior staff and they are not performed by senior staff
required required to possess analytical and they need to possess
skills and higher levels of higher levels of knowledge
knowledge and analytical abilities.

Nature of job Routine and clerical Analytical in nature

Designing of It does not cover designing of It covers designing of
accounting accounts system accounting system.
system
Basis of Book-keeping Accounting
distinction:
Supervision The book-keeper does An accountant
and checking not supervise and check supervises and
the work of an checks the work of
accountant a book-keeper.
 End users of accounting information
Proprietors
Managers
Creditors
Prospective investors
Government
Employees
Citizen Organization is the
communicator of
accounting information
 OBJECTIVES OF ACCOUNTING
1. To keep systematic records- replacement of human
memory.
2. To protect business properties.
a) the amount of owner’s funds invested in the
business
b) the amount of total assets - fixed as well as
current
3. To ascertain the operational profit or loss for a
period of time.
4. To ascertain the financial position of business.
5. To facilitate rational decision making
 NEED OF ACCOUNTING
1. Facilitates to replace memory
2. Maintain its own records of business
3. Facilitates to comply with legal requirements
4. Facilitates to ascertain Net result of operations
5. Facilitates to ascertain financial position
6. Facilitates the user to take decisions
7. Monitor the business activities
8. Facilitates a comparative study
9. Assists the management
10.Facilitates control over assets
11.Facilitates the settlement of tax liability
12.Facilitates the ascertainment of value of business
13.Facilitates raising of loans
14. Acts as legal evidence
15.Communicate the information to the interested parties