FINANCIAL ACCOUNTING

Definition:- American Institute of Certified Public Accountants defines “ The Art of recoding,
classifying and summarizing in a significant manner and of in Money, transactions, and
events, which are in a part at least of a financial character and interpreting the results
thereof” .

FUNCTIONS:- 1) RECORDING 2) CLASSIFICATION, 3) SUMMERISING 4) INTERPRETATION

1) Recording:- All financial transactions must be put in writing as soon as it is incurred in

the Books of Accounts.
2) Classification:- All financial transactions should be recorded after systematic analysis
under appropriate Head of Accounts.
3) Summerising:- The classified financial data must be presented before the
Management and End users. The financial statement includes preparation of final
Accounts I,e Trading and Profit & Loss account, Balance-sheet etc.
4) Interpretation:- After studying the financial statements a meaningful judgment can be
drawn about the financial condition and profitability of the enterprises. Management
can take a future decision of the Company.

ACCOUNTING PRINCIPALS:-

1) ACCOUNTING CONCEPTS
2) ACCOUNTING CONVENTIONS

ACCOUNTING PERIOD

ACCOUNTING CONCEPTS:-

1) BUSINESS ENTITY CONCEPTS:-An Organisation is treated as a separate legal entity

specially A Company registered under the Indian Companies Act-1956. Share capital is a
liability of the company to those who have invested.
2) GOING CONCERN CONCEPTS:- The organization shall continue to operate as a going
concern year after year and have perpetual succession. Future decision is possible only
when the Company operates year after year.
3) Revenue recognition concept:-Revenue is recognized only when it is earned and
expenditure is booked only when it is incurred. In other words it must be legally
receivable and payable.
4) Money measurement concept:- All transactions recoded in the Books of Accounts must
be expressed in moneytory terms. Currency is the common denomination for
measurement.
 5) MONEY MEASUREMENT CONCEPTS
6) COST CONCEPT
7) DUAL ASPECT CONCEPT
8) PERIODICITY CONCEPTS
9) ACCRUAL CONCEPTS
10) MATCHING CONCEPTS

DUAL ASPECT CONCEPT :-

ASSETS = LIABILITIES + CAPITAL OR CAPITAL = ASSETS – LIABILITIES

ACCOUNTING CONVENTION:-

1) CONVENTION OF MATERIALITY
2) CONVENTION OF CONSERVATION
3) CONVENTION OF CONSISTENCY
4) CONVENTION OF DISCLOSURE

LIMITATIONS:-
1) HISTORICAL IN NATURE
2) NOT DEPARTMENTWISE
3) NO MEASUREMENT OF INEFFICIENCIES AND WASTAGE
4) COMPARISION OF STANDARDS
5) NO IMPACT OF INFLATION
6) NO QUALITITATIVE INFORMATION
7) NO STRATEGIC INFORMATION
8) NO ACOOUNTING OF TECHNOLOGICAL CHANGES

PARTIES INTERESTED
1) MANAGEMENT
2) SHAREHOLDERS
3) CREDITORS
4) BANKS AND FINANCIAL INSTITUTIONS
5) GOVERNMENT
6) PUBLIC AT LARGE
7) POLICY MAKERS
BOOKS TO BE MAINTAINED
1) CASH BOOK
2) PETTY CASH BOOK
3) PURCHASE DAY BOOK
4) SALES DAY BOOK
5) PURCHASE RETURN BOOK
6) SALES DAY BOOK
7) BILLS RECEIVABLES BOOK
8) BILLS PAYABLE BOOK
9) JOURNAL
10) LEDGER
FINANCIAL STATEMENTS
1) INCOME AND EXPENDITURE ACCOUNT
2) RECEIPTS AND PAYMENTS ACCOUNT
3) TRIAL BALANCE
4) PROFIT & LOSS ACCOUNT FOR THE YEAR
5) BALANCE-SHEET AS ON DATE
6) DIRECTORS’ REPORT TO THE SHAREHOLDERS
7) AUDITORS REPORT
8) MICRO & MACRO ECONOMIC INFLUENCE

REVENUE AND CAPITAL EXPENDITURE

 PROFIT AND LOSS STATEMENT AND BALANCE-SHEET

Profit & Loss Account for a financial year is prepared to determine the profit earned or
loss incurred during the accounting year I,e from 1 st April to 31st March. All revenue
expenditure and income are taken in the profit and Loss Account for the year. The revenue
expenditure are shown in the left hand side (DR.-side ) including opening stock or Works in
progress and revenue income is shown on the right hand side (CR-side) including closing
stock and works in progress. If the revenue expenditure is more than the revenue income,
for the year there is a loss during the year. In the revenue income is more than the revenue
expenditure during the year there is a profit for the year.
A sample is given below.