Financial accounting notes

ACCOUNTING:-
Accounting can be defined as: “The art of analyzing and recording financial
transaction in a manner that facilitates classifying and summarizing the
information and reporting and interpreting the results”. In other words, “The
process of identifying, measuring and communicating economic information to
permit informed judgments and decisions by users of the information”.
Simply, Accounting is the “language of business”.

OBJECTIVES OF ACCOUNTING:
a) The purpose of accounting to organize the financial details of a business.
b) To identify the financial transactions.
c) To organize the financial data into useful information.
d) To measure the value of these information in terms of money.
e) To analyze, interpret, and communicate the information to persons or groups,
both inside or outside the business.

CONSUMERS OF ACCOUNTING:-
The purpose of accounting is to provide information about the financial
operations and conditions of an enterprise to the interested parties. These parties
normally include the following:
(a) OWNERS (b) MANAGEMENT (c) CREDITORS
(d) EMPLOYEES (e) GOVERNMENT (f) OTHERS

DOUBLE ENTRY SYSTEM:-

As there are always two aspects (accounts) in each and every transaction, so
if we record both the aspects of a transaction it is called “Double Entry System” of
Book-keeping. One record is debited while other is credited. It is better to Record
both the accounts in order to have complete information about the transaction. But if
a business while keeping his business records only one of the accounts and ignores the
other, this method is known as “Single Entry System” of Book keeping. It is an
incomplete, incorrect, faulty, unsystematic and unscientific system of accounting.

ADVANTAGES OF DOUBLE ENTRY SYSTEM:

(a) This system provides complete record of a business, because in it is both the
aspects of all transactions.
(b) The system provides reliable and up-to-date information.
(c) Even after expiry of financial year, if some information is needed, the record
kept provides facility for such details a reference.
(d) Trial Balance can be prepared to prove. The arithmetic accuracy of records.
(e) Net Income or loss may be determined by preparing income statement at the
end of a fiscal year.
(f) Balance sheet is prepared at the end of each year, so the true financial
position can be revealed.

www.asjad.vze.com
 Financial accounting notes

(g) Business results can be composed with that of previous years and therefore,
progress can be judged.
(h) Errors may be located and rectified.
(i) It prevents farads and misappropriation of funds.
(j) This system assists the management for effective control.

Business: -
Business includes all activities, which takes place for the purpose of earning
profit.

ASSETS: -
The things and properties possessed by the business are called “assets”. Any
tangible or intangible that has a monetary value is an asset, e.g. Cash, Machinery,
Building, Account Receivables, Land, and Vehicles etc. Assets are divided into four
major categories:
(a) Current Assets (b) Non-Current Assets (c) Plant Assets (d) Intangibles
CURRENT ASSETS => Cash, Marketable Securities, Receivable (A/R, N/R), Inventories
Non-Current ASSETS => Investments, Loans Granted, Shares, Equipments
INTANGIBLE ASSETS => Copy Rights, Trade Mark, Good Will, Preliminary Expenses
FIXED ASSETS => Furniture, Machinery, Building, Land

EQUITIES:-
The rights possessed by the owners or outsiders against the business (assets of
the business) are called “Equities”.
Equities are of two types: (a) Owner’s Equities & (b) Creditor’s Equities

Owner’s EQUITY:
It is also known as “Capital”. It is the investment/capital of the owner/owners
of the business. It is the residual claim against assets of the business after the total
liabilities are deducted. The equity of owner also includes the net income after
deducting drawings.

Creditor’s EQUITY: -
It is also known as “Liabilities”. The debts owed to outsiders (creditors) are
called liabilities. Simply it is the claim from outsiders against the assets of the
business.

TRANSACTION:-
It is the dealing between at least two parties/organizations regarding financial
matter. It may be purchase of goods/services (products) or it may be sale of
goods/services (products). In other words, “any activity of an enterprise which
involves an exchange of value is called a transaction.” The values are presented in
terms of money.

www.asjad.vze.com
 Financial accounting notes

Conditions:
• Willingness of all the parties involved.
• It must be about some financial matter.
• It must take place between two parties.
• Exchange of products/value should happen.
• Complete independences of all parties involved.

TYPES OF TRANSACTION:
There are three types of transactions, which are discussed below:
Cash Transaction:
When the party selling the product(s) receives the total value of the product at
the time of agreement then such transaction is known as “Cash Transaction”, e.g.
Transaction of book between a buyer and a shopkeeper.

Credit Transaction:
When the party selling the product(s) receives no money at the time of
transaction but will receive it in the future then such transaction is called “Credit
Transaction”, e.g. buying a house from a bank on loan.

Cash & Credit Transaction:

When the party selling the product(s) receives a part of the total value of the
product(s) and will receive the remaining value in future then cash & credit
transaction has said to be taken place, e.g. buying a Car on installments from a
leasing company.

ACCOUNT:-
A summarized record of a business transaction is called an account.
Account is concerned with some goods, services, property, person (individual) or
revenue and expense.

CLASSES OF ACCOUNTS:
Accounts are classified into three categories under English (British) approach,
i.e. real, personal, and nominal. Whereas are divided into five classes under American
approach.
The kinds of Accounts under American Approach are:
1. Assets Accounts
2. Liabilities Accounts
3. Owner Equity Accounts (Capital/Proprietorship)
4. Revenue Accounts (Income Statement Accounts)
5. Expenses Accounts (Losses Accounts)

www.asjad.vze.com
 Financial accounting notes

MERCHANDISE:-
The things or items bought or sold in an enterprise in order to earn profit are
called merchandise or goods.

PURCHASES:-
Goods or services, articles and items, bought for the business are called
“purchases”.

SALES:-
When the merchandise is sold out, they are called “sales”.

DISCOUNT:-
It is a deduction, reduction, grant or an allowance from the price of goods or
any asset purchased/sold or from the account payable/receivable in order to attract
the customers.

NOTES RECEIVABLES:-
They are the claim against debtors evidenced by a written promise to pay a
certain sum in money at a definite time to the order of a specified person or to
bearer.

EXPENSES:-
Expenses are the cost of goods and services used up in the process of
obtaining revenue.

REVENUE:-
It is the price of goods sold and services rendered to costumers, e.g. interest,
commission, cash sales, income from investments, dividend from corporations, and
discount earned.

INCOME:-
The excess of cash receipts over cash payments is regarded as income.
According to the accounts net income is the excess of the price of merchandise sold
and services rendered over the cost of goods sold and services used during a given
time period.

DRAWINGS: -
Cash or Goods taken by the owner/owners for personal or domestic use are
called drawings. Simply drawings can be called so Owner’s Withdrawals. It is always
deducted from owner’s equity while preparing Balance Sheet. Drawings are always
debited.

www.asjad.vze.com
 Financial accounting notes

VOUCHER:-
Any written evidence in support of a business transaction is called a voucher.
Voucher must be backed by support documents. A cash memo, bill, receipt, or
invoices all are vouchers. Whenever a transaction takes place, a voucher is prepared.
The voucher serves double purpose, on one hand it is a written proof of a transaction
and on other hand it serves as the basic of recording transaction in the books of
accounts.
Voucher Name Book Name Quantity
Cash Receipt Voucher (CRV) Cash Book
Two
Cash Payment Voucher (CPV) Cash Book
Bank Receipt Voucher (BRV) Bank Book
Two
Bank Payment Voucher BPV) Bank Book
Purchase Voucher (PV) Purchase Journal One
Debit Note Purchase Return & Allowance Journal One
Invoice Sales Journal One
Credit Notes Sales Return & Allowance Journal One
Journal Voucher (JV) Proper Journal One

Discount Received: -
“It is a deduction, reduction, grant or an allowance from the price of goods
or any other assets purchased from the amount payable in order to attract the
customers”. Discount Received is considered as revenue/income, therefore this
account is always credited in posting a transaction.
Discount may be of two types, i.e. Cash Discount and Trade Discount.
Cash Discount is received at the moment of transaction in the form of deducting
some cash from the price of the goods, simply cash discount occurs in cash
transaction. Cash Discount is not shown while posting a transaction.
Trade Discount is the amount that will be received when a debtor pay all of its dues
(account payable/ notes payable) in the given specified time by the creditor. Trade
Discount is shown while posting a transaction.

Discount Allowed: -
“It is a deduction, reduction, grant or an allowance from the price of goods
or any other assets sold from the amount receivable in order to attract the
customers”. Discount Allowed is considered as expense; therefore this account is
always debited in posting a transaction. Discount may be of two types, i.e. Cash
Discount and Trade Discount.

www.asjad.vze.com
 Financial accounting notes

Cash Discount is given at the moment of transaction in the form of deducting some
cash from the price of the goods, simply cash discount occurs in cash transaction.
Cash Discount is not shown while posting a transaction.
Trade Discount is the amount that will be granted when a debtor pay all of its dues
(account payable/ notes payable) in the given specified time by the creditor. Trade
Discount is shown while posting a transaction.

POSTING: -
The analyzed, classified and summarized information recorded in the form of
debit and credit in journal is transferred there from into ledger accounts. The act of
such transfer is called posting.

www.asjad.vze.com