Financial Accounting

&
Analysis
(FAA)
 Syllabus
UNIT – 1 Introduction to Accounting

Importance , Objectives and Principles, Accounting Concepts

and Conventions and The Generally Accepted Accounting
Principles (GAAP), their implications on accounting system;
Double entry system – recording business transactions –
Classification of accounts – Accounting Cycle.
 Unit - I

Introduction to
Accounting
 Accounting
American Institute of Certified Public Accountants (AICPA) defines
accounting as an art of recording classifying & summarizing in a
significant manner, and in terms of money & events which are, in
part at least of a financial character & interpreting the results
thereof.

USERS OF ACCOUNTING INFORMATION

(1) Owners
(2) Creditors & Financial Institutions
(3) Government ( Tax authorities)
(4) Employees
(5) Managers
 Objectives of Accounting
The following are the main objectives of accounting:

(1)To keep systematic records – Accounting is done to keep a

systematic record of financial transactions. Which helps the
users to understand the day to day transactions in a
systematic manner so as to gain knowledge about overall
business.

(2)To ascertain the operational profit or loss – Accounting

helps in ascertaining the net profit earned or loss suffered on
account of carrying the business. This is done by keeping a
proper record of revenues and expenses of a particular period.

(3)To ascertain the financial position of business – The

Businessman wants to know about his financial position, i.e,
where he stands what he owes and what he owns? This
objective is served by the Balance sheet.
 Objectives of Accounting
(4) To facilitate rational decision making –
Accounting these days has taken upon itself the
task of collection, analysis and reporting of
information at the required points of time to the
required levels of authority in order to facilitate
rational decision making.

(5) To Protect business properties –

Accounting provides protection to business properties from
unjustified and unwarranted use. Information about the above
matters helps the proprietor in assuring that the funds of the
business are not necessarily kept idle or underutilized.
 Importance of Accounting
(1) Keeps a record of business transactions
Accounting is important as it keeps a systematic record of the organization’s
financial information. Up-to-date records help users compare current
financial information to historical data. it enables users to assess the
performance of a company over a period of time.

(2) Facilitates decision-making for management

Any decision regarding the business organization is made depending on the financial statement
of the organization. A financial statement is as a result of accounting. Without proper accounting
in a business organization, the management cant take important decisions.

(3) Meets legal requirements (it helps in filing financial statements)

Businesses are required to file their financial statements with the Registrar of Companies. Listed
entities are required to file them with stock exchanges, as well as for direct and indirect tax filing
purposes. Needless to say, accounting plays a critical role in all these scenarios.

(4) It Helps to Create Budget and Future Projections

Budgeting and future projections are based on historical financial data to keep
your operations profitable. Accounting helps the management in planning the
Budgeting and future projections.
 Importance of Accounting
(5) Taking Loan
In order to get any loan from the financial institution, you need to have proper
accounting system so as to present various books of records such as profits
recorded, assets and liabilities, taxes paid. Financial institutions will scrutinize
them carefully before granting loan.

(6) Communicates results

Financial Statements and accounts helps to communicate
company results to various users. Investors, lenders, and other
creditors .

(7) To ascertain the operational profit or loss –

Accounting helps in ascertaining the net profit earned
or loss suffered on account of carrying the business.
This is done by keeping a proper record of revenues
and expenses of a particular period.
 Importance of Accounting
(8) To ascertain the financial position of
business – The Businessman wants to know
about his financial position, i.e, where he stands
what he owes and what he owns? This objective is
served by the Balance sheet.

Accounting Principles:
Accounting Principles are general decision
rules, derived from objectives and concepts
of accounting which govern the
development of accounting techniques.
 ACCOUNTING CONCEPTS
Accounting Concepts:
Accounting Concepts are basic assumptions or conditions
upon which science of accounting is based.

(1)Business Entity Concept: According to this concept owner

is separate from business. Business have its own identity it
can buy sell the properties in its own name, all personal
information of owner should not be written in the accounts
books.
(2)Going concern Concept: According to this concept
Business is assumed to continue for ever for long period of
time. Members may change but business will continue for
ever.
(3)Money Measurement Concept: According to this concept
in accounts books , only those transactions are recorded
which can be measurable in terms of money.
(4)Cost Concept: According to this concept in accounts the
assets should be recorded at the original cost incurred
only but not at escalated value.
 ACCOUNTING CONCEPTS

(5) Realization Concept: According to this concept,

entries are recorded in the accounts books only when
transaction actually happened and money received
but not based on the future expectations.
(6) Accounting Period Concept: According to this
concept, financial statements are prepared after
completion of one year either by following calender yr
(jan to dec) or financial year ( Apr to March).
(7) Matching Concept: According to this concept
current year expenses should be compared with
current year revenue, then only correct profit or loss
ascertained.
(8) Dual Aspect Concept: According to this concept all
transactions are recorded in the accounts books
based on two aspects that is Debit and Credit .
 ACCOUNTING CONVENTIONS

Accounting Conventions:
Accounting Conventions include those customs and
traditions which are followed up by an accountant while
preparing a financial statement.

(1) Consistency: According this only one accounting method

should be used for preparing the accounts, this will help you in
comparing the financial statements from one period to another.
(2) Full Disclosure: It is essential all transactions that takes place
in business need to be disclosed in full, irrespective of their
volume and nature.
(3) Materiality: This principle states that if an accounting detail is
not very important it can be dropped or ignored. The essence of
materiality principle is to record only such items which have
significant economic effect on the business.
(4) Conservatism: While recording accounts, you should not take
into account of anticipated income and but anticipated all
possible losses are taken into consideration.
ACCOUNTING CONVENTIONS

social-general-accepted-accounting-principles-gaap.webp
 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP)
Definitions:
(1) The rules that govern accounting are called
GAAP “Generally Accepted Accounting Principles”
(or)
(2) GAAP defined as the set of accepted industry
rules, practices and guidelines for financial
accounting.
Includes the standards , conventions and rules
accountant follow in recording and summarizing
transactions, and in the preparation of financial
statements.

The GAAP Principles are divided into two

categories, they are
Accounting Concepts & Accounting Conventions
 ADVANTAGES / SIGNIFICANCE / OF GAAP
The following are the benefits of GAAP
(1)Reliability: Accounting Standards helps in developing the
trust and confidence which the users have on the
fairness of financial statements.

(2)Useful to Investors: Accounting Standards helps the

investors in analyzing the growth of different companies
depending on the financial statements. So that the best
alternative is selected for taking investment decision.

(3)Useful to Auditors : Accounting standards must be

followed while preparing financial statements as it helps
the auditors to verify the accounts as per the provisions
of Companies Act 1956.

(4)Useful to Government: The financial statements which are

prepared by following accounting standards can be easily
combined and used by Government officials and others.
 ADVANTAGES / SIGNIFICANCE / OF GAAP
(5) Comparability: As the accounting principles
are uniform or consistent, the accounting
standards can be used for comparing the
financial statements of various
organizations or same organization.
 ACCOUNTING CYCLE
It refers to a complete sequence of accounting
procedures, which are required to be
repeated in the same order during each
accounting period.

It is complete sequence beginning with the

recording of the transaction and ending with
the preparation of the final accounts.
Accounting Cycle Steps are
(1) Analyze the transactions
(2) Journalize the transactions
(3) Post the transactions to accounts in Ledger
(4) Prepare the Trial Balance
(5) Prepare the Financial Statements.
 ACCOUNTING CYCLE STEPS
The following are the steps in Accounting Cycle.

(1)Analyze the transactions:

The process starts with source documents , which are
the supporting original records of any transaction.
Examples are Invoice, Sales slips,

(2) Journalize the transactions

In the second step, an analysis of the transaction is
placed, in the book of original entry, JOURNAL,
which is a chronological record of all the business
transactions.
Examples are JOURNAL – Dairy of all events
(transactions) in an entity’s life.
 ACCOUNTING CYCLE STEPS
(3) Post the transactions to accounts in Ledger:
In the third step , transactions are entered into the
ledger.
After transactions are entered in the Journal next for
every account posting is done in the ledger book
based on the nature of transactions.
(4) Prepare the Trial Balance
The Fourth step includes the preparation of the Trial
Balance, Which is a simple listing of all accounts
from the ledger with their balances.
It helps in verifying the accuracy and in preparing the
financial statements .
(5) Prepare the Financial Statements.
In the final step, the financial statements are prepared
at the end of the year. The companies may prepare
financial statements at various other intervals to
 Double Entry System of Book Keeping
Double Entry book keeping is a method of recording transactions based on the fact that
for every debit , there is a corresponding credit.
In other words , Double entry system records both debit and credit aspects of the
transaction.

ADVANTAGES:
(1) INFORMATION ABOUT EVERY ACCOUNT:
Under Double entry system, both aspects of a transaction are being recorded in the
books of accounts. Hence information about every account is available in the books
of accounts.

(2) HELPS TO KNOW THE RECEIVABLES AND PAYABLES:

It helps to know how much is owed to the creditors and how much is due from the
debtors. Also it focuses on the Bills Payables and Bills Receivables.
 Double Entry System of Book Keeping
(3) ARITHMETICAL ACCURACY:
The arithmetical accuracy can be ascertained by preparing statement of debits and
credits called Trial Balance.

(4) HELPS TO LOCATE ERRORS:

Trial balance can reveal the errors that creep in accounts while recording the business
information.

(5) HELPS TO ASCERTAIN PROFIT / LOSS:

The Profit and Loss statement can be prepared without much difficulty under double entry
system.
 Double Entry System of Book Keeping
(6) HELPS TO KNOW THE FINANCIAL POSITION:
Double entry system helps to prepare Balance Sheet that reveals the financial position of
the business as on a particular date.

(7) MONITORING AND AUDITING MADE EASIER:

With Double entry system the scope for frauds and misappropriations is less, provided
proper internal audit system is in place.
 Rules for preparing accounts
TYPES OF ACCOUNT & RULES GOVERNING EACH
ACCOUNT
There are 3 types of account. They are Personal account,
Real account & Nominal account.
(A)REAL ACCOUNT: These accounts are opened in the
name of assets (properties) such as Land & Building,
Plant & Machinery, Furniture , Cash etc.
The rule governing Real Account are
Debit Dr. What come in
Credit Cr. What goes out
(B) PERSONAL ACCOUNT: These accounts are opened in
the name of Persons, name of companies and name of
the banks.
the rule governing personal account is
Debit …..Dr. The Receiver
Credit …..Cr. The Giver
 Unit IV Introduction to Financial Accounting & Financial Analysis

TYPES OF ACCOUNT & RULES GOVERNING EACH

ACCOUNT
© NOMINAL ACCOUNT: These accounts are
opened in the name of Expense, Losses, Profits,
Income & Gains. These cannot be physically seen.
They can be felt.
The rule governing Nominal Account are
Debit Dr. All Expenses & Losses
Credit Cr. All Incomes & Gains
 Unit IV Introduction to Financial Accounting & Financial Analysis
TYPES OF ACCOUNT & RULES GOVERNING EACH
ACCOUNT
(ASSETS / PROPERTIES) Dr.
Cash ------------------- Real Account
Furniture---------------- Real Account
Land & Building ---------- Real Account
Plant & Machinery------- Real Account
Motor Vechile (Car)------- Real Account
Goods --------------- Real Account
Computers/ laptops -------- Real Account
(like Dr.Purchases, Cr.Sales, Cr.Purchase returns, Dr.Sales
returns)

The rule governing Real Account are

Debit Dr. What come in
Credit Cr. What goes out
 Unit IV Introduction to Financial Accounting & Financial Analysis

TYPES OF ACCOUNT & RULES GOVERNING EACH

ACCOUNT

Ramu, shamu, Sita , Geeta ------------- Personal Account

SBI, ICICI, CANARA BANK-- ------------Personal Account
TATA ,WIPRO,RELIANCE COMPANY-- ---Personal Account
EXPENSES (Dr.)
Rent paid ----------------------------Nominal Account
Salary paid--------------------------- Nominal Account
Advertisement Expenses---------------- Nominal Account
General Expenses---------------------- Nominal Account
Insurance Expenses-------------------- Nominal Account
Transportation(carriage) Expenses------- Nominal
Account
 Unit IV Introduction to Financial Accounting & Financial Analysis

TYPES OF ACCOUNT & RULES GOVERNING EACH

ACCOUNT

INCOMES (Cr.)
Rent Received----------------------------Nominal Account
Interest Received------------------------- Nominal Account
Commission Received--------------------- Nominal
Account
Discount Received----------------------- Nominal Account
LOSSES
Bad Debts------------------------------ Nominal Account
Discount Allowed----------------------- Nominal Account
Depreciation---------------------------- Nominal Account
 Unit IV Introduction to Financial Accounting & Financial Analysis
TYPES OF ACCOUNT & RULES GOVERNING EACH
ACCOUNT
Cash,Machinery,Building,Furniture
Goods, Motor Vechile ----(Assets)----------------Real Account

Ramu,Shamu,Sita,Geeta
Wipro Co,Infosys,SBI Bank,ICICI Bank----Personal
Account

Rent Received, Interest Received,

Commission Received,Discount received
Salary Paid, Rent Paid, Travelling Expenses etc-- Nominal
Account