Basics of Financial Accounting

- Dr. M. S. Pahwa

Accounting and Financial Reporting



Accounting refers to systematic recording, classifying and summarizing of financial transactions of any business enterprise and interpreting the results thereof. Accounting starts with recording and ends with presentation of financial information in a manner that facilitates informed judgments and decisions by users. The basics of accounting are same for all the organizations but the accounting is done keeping in mind the type and structure of organization.
2

Types of Organisations
  

Sole Proprietorship Partnership Firm Company Perpetual Succession (Geeta Shalok)

What is Company Mangal Pandey?

Accounting Trail
Identify a transaction Recording Record in Primary Books

Record in Secondary Books Prepare Trial Balance

Reporting

Prepare Financial Statements

Recording of Transactions: The Double Entry Principle



Each transaction has two aspects (or side): Debit and Credit. Every debit has an equal and opposite credit. Each transaction should be recorded in such a way that it affects two sides- debit and creditequally. Thus, the first and foremost step in recording a transaction is to identify the debit and credit elements.
6

 

Basic Accounting Concepts



Accounting concepts underlying the recording of transactions: Entity Concept Going Concern Concept Money Measurement Concept Accrual Concept Cost Concept Periodicity Concept Matching Concept Prudence Consistency
7

Accounting Equation


The relationship among three elements of the balance sheet can be expressed through an equation, known as fundamental accounting equation:
Assets (A) = Liabilities (L) + Equity (E)

The unique feature of the above equation is that all transactions will affect the equation in such a way that the equality will always be maintained. This happens due to double entry rule.
8

Journalize the following:

1. 2. 3. 4. 5. 6. 7. 8. 9. Started business with cash Rs. 50, 000, Furniture Rs. 40,000 equipment worth Rs. 50,000. Rented a premise at rent Rs. 10,000 Purchased goods on credit from Ram Rs. 1,75,000. Sold goods on credit to Shyam Rs. 1,50,000 worth Rs. 1,40,000 Cash sales Rs. 20,000 worth Rs. 15,000 Received cash from Shyam Rs. 1,45000 in full settlement of his dues. Paid Rs. 170,000 to Ram and availed discount of Rs. 5,000. Paid rent of Rs. 10,000. Withdrawn money for personal use by the owner Rs.10,000. and

Solution:
S. N. 1. 2. 3. 4. 5. 6. 7. 8. 9. Transaction Started Business Rented Premises Credit Purch (St.) Credit Sales (St.) Cash Sales Cr. Sale Settled Cr. Purch Settled Paid Rent Personal Drawing TOTALS Cash
50,000 +10,000 --+20,000 +1,45,000 -1,70,000 -10,000 -10,000 35,000

Equip.
50,000 --------50,000

Furnitr
40,000 --------40,000

Stock
--+1,75,000 -1,40,000 -15,000

Debtor
---+1,50,000 --1,50,000

Liablity
--+1,75,000 ---

Equities
1,40,000 +10,000 -+10,000 +5,000 - 5,000

-1,75,000 --20,000 -------

+5,000 -10,000 -10,000 1,45,000

10

Thanks

11