Introduction To Financial Accounting

Self-Learning Material
Program: OPGDM
aditya4chouhan@gmail.com
Semester: 1
TVGRD0HOI6
Course Name: Financial Accounting & Decision Making

Unit Name: Introduction to Financial Accounting
This file is meant for personal use by aditya4chouhan@gmail.com only.

Sharing or publishing the contents in part or full is liable for legal action.
Course Objectives:
In this Unit you will learn –
1. Develop cognizance of the importance of accounting in preparation of Financial statements
2. Analyze Financial transactions
3. Interpret and communicate the accounting data
4. Evaluate the various accounting standards and understand their applicability.
Course Learning Outcomes:

At the end of this Unit, you would -
✔ Understand the meaning and significance of Accounting.
✔ Nature and Objective of Accounting
✔ Identify the Users of Accounting
✔ Discuss the limitations of Accounting.
✔ Understand Generally Accepted Accounting Principle
✔ IND-Accounting Standard, US-GAAP and IFRS
✔ Applicability of Accounting Equation
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Table of Topics
1.1 Conceptual Framework of Accounting and Accounting Concepts

1.1.1 What is Accounting?
1.1.2 Accounting as a language of business
1.1.3 What is the concept of Bookkeeping in Accounts?
1.1.4 Accounting as an Information system
1.1.5 Objectives of Accounting
1.1.6 What are the different types of Accounting?
1.2 Users of Accounting Statement
1.2.1 Internal users
1.2.2 External Users
1.2.3 Limitations of Accounting
1.3 Terminology, Assumption and Conventions
1.3.1 Specimen of an Account
1.3.2 Balance of an Account
1.3.3 Chart of Account
1.3.4 Classification of Accounts
1.3.5 Debit and Credit
1.3.6 Rules of Debit and Credit
1.4 Terminology, Assumption and Conventions
1.4.1 What are accounting systems?
1.4.2 What are source documents?
TVGRD0HOI6 1.4.3 What is the role and importance of source document?
1.4.4 Kinds of Source Documents
1.4.5 Vouchers
1.5 Generally Accepted Accounting Principles
1.5.1 Accounting Concepts
1.5.2 Accounting Conventions
1.5.3 Accounting Standard Understanding
1.5.4 Accounting Standard IND AS
1.5.5 Accounting Standard GAAP
1.5.6 International Financial Reporting Standards
1.6 Accounting Equation
1.6.1 What is the Accounting Equation?
1.6.2 What are the accounting principles and concepts behind Accounting Equation?
1.6.3 What makes accounting equation to be true always?
1.6.4 Understanding the basic accounting terminologies
1.6.5 How Accounting Equation is affected by changes in Income , Expenses and
Dividend

1. Introduction to Financial Accounting
1.1. Conceptual framework of Financial Accounting and Accounting

Concepts
1.1.1. What is Accounting?

The term Accounting as defined by the American Institute of Certified Public Accountants is “the
art of recording, classifying, and summarizing in as significant manner and in terms of money
transactions and events which in part, at least of a financial character, and interpreting the results
thereof"”. As per the definition accounting is a process of recognizing a transaction of financial
nature and then recording it. The role of accounting is imperative in functioning of any business
or service organization to grow and achieve the desired outcome. It is true that business cannot run
in isolation. It is undisputable that business must constantly interact with the internal and external
stakeholders. The art of accounting helps in gathering and interpreting the transactional
information as per the need and requirement of every stakeholder involved.
1.1.2. Accounting as a Language of Business

The sole purpose of accounting is to record, summarize and report the financial transactions to the
intended user. The communication of financial outcomes to the involved stakeholders is crucial in
decision-making. Accounting is aptly referred to as Language of Business, as it expresses and
measures the financial performance and profitability of the business . The progress of the firm can
easily be compared and seen with the help of various accounting data.
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1.1.3. What is the concept of Bookkeeping in Accounts?
Book-keeping is a subset of Accounting. It is methodical procedure of recording business
transaction in a set of books, whereas accounting performs other functions as well that is the
measurement and communication, besides recording. The scope of book-keeping is limited in
comparison to accounting and hence managerial decisions cannot be entirely based on these set of
record, as they require further interpretation and summarizing, that is the substantial role of an
accountant. The set of books created under the book-keeping function are referred to as primary
records. In today’s scenario these records are maintained by using various computer software that
suit the needs and requirements of the business or service organization.
Accountancy
Book-keeping

1.1.4. Accounting as an Information System
The utmost objective of Accounting is to provide information to all the stakeholders involved in
a business organization. The accounting information enables the decision makers to evaluate the
financial consequences of a variety of alternatives.
1.1.5. Objective of Accounting
Aids in maintenance of Systematic records: The crux of accounting lies in systematically recording
the financial aspects of business transactions. The transactions are appropriately classified and
later summarized in a logical manner for preparation of financial statements and thus aids in
interpreting financial results of a specific period.
Ascertain the Financial Position of the Firm: Accounting guidelines help in preparation of various
Financial statements that mainly comprise of the Balance Sheet and the Income statement. The
Balance sheet helps in ascertaining the financial position of the company by providing a
comprehensive view of assets and liabilities on a certain date.
Maintaining Records to comply with the laws of the state: It is quite essential for business firms to
maintain records and duly submit them as per the rules laid down by the state. The thumb rule of
maintaining such books of accounts is seven years for tax audits, lawsuits, and potential claims.
Furnish information to the stakeholders for rational decision making: The detailed overview of
TVGRD0HOI6financial statements guides the stakeholders in making a rational decision. Accounting serves a
language of business that communicates the solvency of the firm.
1.1.6. What are the Different types of Accounting?
● Financial Accounting: Financial Accounting is the process of preparing and interpreting

financial statements and communicating to all the related stakeholders. It records all the
transactions in a systematic manner as per the generally accepted accounting principles and
later summarizes them to prepare Balance Sheet and Income Statement. The Financial
statements aid in ascertaining the net result for an accounting period and financial position
as on a given date. The user of the reports in case of Financial Accounting are shareholders,
creditors, and regulators.
● Management Accounting: Management accounting intends to provide relevant and

pertinent information at frequent interval to the management ,to take sound decisions and
effectively carry out internal controls. Unlike Financial Accounting which generates
reports for external stakeholders, Management Accounting reports are referred by internal
stakeholders such as the top-level executives and departmental heads. This accounting
helps management in formulation of strategies, optimal use of resources and safeguarding
its assets.

● Cost Accounting: According to the Chartered Institute of Management Accountants
(CIMA), Cost Accountancy is defined as “application of costing and cost accounting
principles, methods and techniques to the science, art and practice of cost control and the
ascertainment of profitability as well as the presentation of information for the purpose of
managerial decision-making”. The definition lays focus on classification, recording and
analyzing cost and cost behaviors. The understanding of cost behavior aids in ascertaining
the profitability component of a product or service.
1.2. Users of Accounting Statements
Employees
Internal Records and Top-level

Internal Users Statements Management
Owners
Investors
Users of Accounting
Suppliers and
Creditors
Statements
External Users Financial Statements Lenders
Research Students
TVGRD0HOI6 Customers
SEBI
Governmnent Financial Statements Ministry of Corporate

Authorities and Tax Reporst Affairs
Income Tax
Department
The users of Accounting statement can be classified into two categories that is the internal and the
external users. The internal users are concerned with all the aspects relating to recording,
summarizing, and analyzing of financial transaction, whereas the external users are interested in
the outcome which is reflected in financial statements, that is the Balance Sheet and Income
Statement.
1.2.1. Internal users

Employees: Employees have a direct vested interest in the financial performance of a firm. The
payment of bonus, retirement benefits and other employment opportunities depend on the
continuity and stability of the business organization.
Top-level management: The top-level management is responsible for formulating strategies,

setting budgets, resource allocation etc. Accounting provides a backbone to the top-level
management in setting up goals, planning and controlling.

Owners: The funds in order to establish a business and carry out its operations are provided by
owners ; they need a detailed view of financial statements to understand the resources are allocated
efficiently and the business would reap returns.
1.2.2. External Users.

Investors: Investors aid the company in raising capital. They need to overview financial statements
to assess whether they should buy, hold, or sell their investment. They have a vested interest in the
financial performance of the company as the payment of dividend is dependent on the earnings of
that specific period.
Government Agencies: Companies need to comply with the Income tax and rules laid down by the
government. These agencies regulate the functioning of the enterprise by carrying out timely audits
and overviewing their financial statements. The government agencies that mandate maintenance
of accounting statements are as follows
▪ Securities Exchange Board of India (SEBI): In terms of Rules 14 and 15 of Securities

Contracts (Regulation) Rules, 1957 (hereinafter referred to as SCRR, 1957), every
recognized stock exchange and its members are required to maintain and preserve the
specified books of account and documents for a period ranging from two years to five
years.
▪ Ministry of Corporate Affairs: At present, Section 209 (4A) of the Act

requires companies to preserve the books of accounts, together with the vouchers relevant
to any entry in such books of account, in good order, relating to a period of not less than 8
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years immediately preceding the current year.
▪ Income Tax Department: As per 44AA and Rule 6F books are required to be maintained
for the purpose of Income Tax.
Suppliers and Creditors: The credit policy, interest rates to be levied are ascertained by evaluating
the financial statements of a company. The suppliers are sometimes also interested in the long-
term continuation of the enterprise if their existence is solely dependent on the survival of that
business. In order to evaluate the liquidity of a firm, these users need detailed information
pertaining to current assets, quick assets, and current liabilities, which can be obtained from the
financial statements.
Lenders: The lenders are interested in knowing the financial position of the company to ascertain
solvency, so that their loan-principal and interest will be paid in due time.
Research Students: To study the trends of market and to compare the performance of a company
over the years, accounting information proves to be of immense value to research students.
Customers: The customers need to have accounting information pertaining to a company as they
are vertically integrated with the product or services that a company provides.

1.2.3. Limitations of Accounting
Influence by Personal judgments: It is quite noteworthy that certain events in accounting are
recorded on an estimate basis, for which judgements must be made. These personal judgments can
differ from one person to another and hence the result is not necessarily accurate. The objectivity
and integrity do suffer in these situations.
Non-monetary information is disregarded while preparing Financial Statements: The transactional

value gets recording while preparing accounting statements, it does not take into consideration
non-monetary factors such as loyalty and skills of its personnel, technical innovations possessed
by the business.
Conflicting Accounting Principles: There are situations in accounting where there is applicability
of more than one accounting principle to a specific item. The application of different principle
results in different outcome, as the assumptions made are distinct, hence the results are un-
comparable.
Unable to disclose the Present value of Business.

The Financial statement provide results as on a particular date. The assumption of longevity of
business as per going concern concept enables the valuing of assets accordingly. The present value
or the realized value of each asset if sold currently cannot be determined by studying the balance
sheet.
TVGRD0HOI6 1.3.Terminology, Assumption and Convention
1.3.1. Specimen of an Account

Specimen of an account is the structure of account generally referred to as T format account. As
per double entry system one account will get posted with a debit entry and the other account will
subsequently get credited to record any transaction that occurs. Specimen of Accounts is as follows
DEBIT NAME OF THE ACCOUNT CREDIT

Date Particulars Folio Amount Date Particulars Folio No Amount
No (Rs) (Rs)
1.3.2. Balance of an Account

The left side of every account records debit entries , whereas the credit entries are recorded on the
right side. Due to this one side of an account will increase and the other will relatively decrease.
The ending balances are computed by taking into effect the difference between debit and credit of
each account

Debit Balance: Debit balance is an amount which states that the total amount of debit entries in
an account is more than the total amount of the credit entries.
DEBIT CASH ACCOUNT CREDIT
Date Particulars Fo Amount Date Particul Folio No Amount
lio (Rs) ars (Rs)
No
6th Mar 20 To Sales 7,000 10th Mar 20 By Repairs 1,000
8th Mar 20 To Dividend Income 3,000 12th Mar 20 By Rent 6,000
By Balance 3,000
c/d
Total 10,000 Total 10,000
Credit Balance: Credit Balance refers to the excess of credit side of an account over the debit
side.
DEBIT CREDITORS ACCOUNT CREDIT
Date Particulars Folio Amount Date Particulars Folio Amount
No (Rs) No (Rs)
4thMar 20 To Cash 10,000 1stMar 20 By Purchases 25,000
9th Mar 20 To Goods Return 4,000
31st Mar 20 To Balance c/f 11,000
25,000 25,000
1.3.3. Chart of Account

TVGRD0HOI6A chart of account is a concise listing of every account in the general ledger of a company. It
proves to be a very effective tool as the accounts are sub-categorized.
Current Assets Current Liabilities Common Stock Operating Revenue

Cash Accrued liabilities. Preferred Stocks Operating Expenses
Savings Accounts Accounts Payables Debentures Non-operating Revenue
Accounts Receivable Pre-received Incomes Retained Earnings Miscellaneous Expenses
Bank Accounts Notes Payables
Inventory
Fixed Assets

1.3.4. Classification of Accounts
Natural
Personal Accounts Artificial
Accounts Representative
Real
Impersonal
Accounts
Nominal
Personal Accounts
Natural: These transactions are carried out by real persons. Accounts of Individual or natural
person such as Soham’s A/c, Shilpa’s A/c etc.
Artificial: Business entities are treated as a separate person that exists independently with rights
and liabilities. Accounts of firms, companies, institutions such as Cornerstone Pvt ltd, Bheema Co-
operative society.
Representative: The representative accounts cannot be associated to a specific person, instead

they refer to accounts that represent a group. This mainly consist of outstanding accounts, prepaid
TVGRD0HOI6accounts, and accrued accounts.
Impersonal Accounts
Real Accounts: Real accounts are the account that pertain to assets both tangible and intangible.
The tangible or physical asset comprise of building, plant & machinery, cash, furniture etc.
Intangible real asset are the untouchable assets such as goodwill, trademarks, copyrights, and
patents etc.
Nominal Accounts: Accounts that relate to expenses, losses, gains, revenue are referred to as
nominal accounts. Nominal accounts are also called temporary accounts because they temporarily
contain revenue, expense, and dividend information that is transferred to retained earnings account
to ascertain profit and loss for the accounting period.
1.3.5. Debit and Credit

The format of account is in such a format that us denoted by the letter ‘T’. The left-hand side
referred to as the Debit side and the right as the Credit side. The connotations for Debit is Dr and
for credit is Cr. It is methodical procedure. There is always an impact on the either sides of the
account, One side of each account will increase, and relatively the other side will decrease.
The ending account balance is found by calculating the difference between debits and credits for
each account.
The convention is to write the Dr and Cr labels on both sides as shown below.

Accounts Title
Debit Credit
1.3.6. Rules of Debit and Credit

The three Golden Rules of Accounting based on double entry system are as follows:
Personal account is governed by the following two rules:
Debit the receiver.
Credit the giver.
Real account is governed by the following two rules:

Debit what comes in
Credit what goes out
Nominal account is governed by the following two rules:

Debit all expenses and losses.
Credit all incomes and gains.
1.4. Source Document in Accounting
1.4.1. What are accounting Systems?

Accounting systems are used to manage the income expenses, and other financial activities of a
TVGRD0HOI6business. In the past calculations were carried out manually and were complex in nature. Today
computerized accounting systems like QuickBooks, which is designed for small organizations,
and SAP, which is designed for large and/or multinational organizations have massively improved
the efficiency in recording of transactions.
1.4.2. What are Source Documents?

The word source is self-descriptive as it indicates the origin of an event that has been recorded.
Source documents is an accounting term to describe the original records that contain the details
that substantiate the financial transactions that are entered into the internal accounting system of a
business.
1.4.3. What is the Role and Importance of source Document?

Source documents help in establishing the audit trail, which is a trail of evidence documenting the
history of a specific transaction starting from its inception/source document and showing all the
steps it went through until its final disposition. The trail of source documents and other records
(the audit trail) makes it easier to investigate errors or questions by customers, vendors, employees,
and others. The flow of transaction from the source documents to the Financial statements is shown
in the diagram below.

Book of
Source Ledger Trial Financial
Original
Documents Entry Accounts Balance Statements
1.4.4. Kinds of Source Documents

▪ Quotations: It is an offer sent to the customer stating the fixed price of a product or service
▪ Purchase Order: A purchase order (PO) is an official document that buyers send to sellers
to document the sale of products and services to be delivered at a late date. A purchase
order specifies: Purchase order specifies the quantity of the product, model number of the
product, price per unit, delivery details and payment terms.
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▪ Sales Order: A sales order specifies the details about products and/or services ordered by
a specific customer along with the price, quantity and terms and conditions. Businesses use
it as a confirmation document that is sent to the customers before delivery of goods or
service.
▪ Sales Invoice: Sales Invoice is the document generated after the goods are delivered to the
customer. It contains details of product sold.
▪ Credit Note: A credit note is a document which conveys that the business enterprise has
given the credit to the party to whom this document is sent, this document is generally sent
when excess payment has been made by customer or some event that causes customer to
pay less.
▪ Debit Note: This document is sent from customer to seller to request a credit note to an
overpayment or return of goods.
1.4.5. Voucher:
Voucher is a written instrument that affirms (vouch) for an event or transaction occurred. In
accounting it acts as a document that shows goods have bought or services have been rendered,
authorizes payment, and indicates the ledger account in which these transactions must be recorded.
The types of vouchers used are as follows:

● Receipt Voucher
● Payment Voucher
● Non-Cash Voucher
● Supporting Vouchers
1.5.Generally Accepted Accounting Principles

Generally Accepted Accounting Principles (GAAP) are set of rules, conventions, standards, and
procedures for reporting financial information, as established by the Financial Accounting
Standards Board. These principles prove to be the backbone of accounting system as they lay down
ground rules, which define the parameters and constraints based on which accounting reports are
generated. Companies must strictly adhere to these principles to maintain consistency and facilitate
comparison.
1.5.1. Accounting Concepts
Going Concern Concept: This concept states that a business is assumed to exist for an indefinite
period and is not established with the intent of closing in the near future. The concept assumes that
an enterprise has no intention of liquidating or cut down its scale of operations. It enables an
accountant to carry forward the values of assets and liabilities from one accounting period to the
other, without questioning the usefulness and worth of the assets and recoverability of the
receivables.
TVGRD0HOI6Business Entity Concept: This concept states that business is treated as distinct and separate
legal entity from the individuals who own or manage it. The concept requires that all transactions
be viewed, interpreted, and recorded from business entity perspective. The owner’s capital is the
obligation of business and it must be paid back to the owner in the event of business closure.
This concept aids in keeping business matters and concern free from the influence of owner’s
personal matters.
Money measurement Concept: As per this concept a transaction would be recorded only if it has
a monetary value attached to it. The major drawback of this concept is that transactions that do not
have monetary value do not get recorded in books of account. While transactions are recorded in
terms of money, we make an implicit assumption by recording the absolute value of money. The
real value of the money may fluctuate from time to time due to inflation, exchange rate changes,
etc.
Accrual Concept: As per the Accrual concept, transaction is recognized and recorded
immediately on occurrence and not when cash or cash equivalent is received/paid. Financial
statements prepared based on accrual concept give accounting users a clear view of past events
involving the payment and receipt of cash but also of obligations to pay cash in the future and of
resources that represent cash to be received in the future.
Periodicity Concept: According to the periodicity concept or assumption, the life of a business
entity can be appropriately subdivided into specific time period in order to record and report all
the transactions in a systemized manner. The concept focuses on preparation of accounts after

every period and not at the end of life of entity. The period is generally a calendar year, in India
the period is from 1st Apr of a year to 31st March of the immediately following year. Periodicity
concept facilitates comparison of two different periods, it also helps matching periodic revenues
with expenses to derive accurate financial outcome.
Matching Concept: The matching concept is correlated to the periodicity concept as it states the
expenses incurred during a period must be recorded in the same period in which related revenues
are earned. One cannot recognize only the revenue effect thereby inflating the profit or only the
expense effect which will deflate the profit. Both the effects must be recognized in the same
accounting period.
Cost Concepts: This concept states that the value of the asset recorded is its acquisition cost also
referred to as historical cost. The benefit of using cost concept is no arbitrary value gets attached
while recording the asset value. The major drawback of cost concept is that the Balance Sheet does
not consider the market value of the asset owned by the company and subsequently owner’s equity
would not reflect the real value. Financial statements show assets at their historical cost as reduced
by depreciation.
Revenue Recognition Concept: The revenue recognition principle directs a company to

recognize revenue in the period in which it is earned; revenue is not considered earned until a
product is sold or services has been rendered. The concept considers the conservatism principles
and ensures that any income unearned or unrealized will not be considered as revenue and the
firms will not be able to inflate profits.
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Dual Aspect Concept: This aspect is the backbone of double entry book-keeping as all
transactions require two aspects to be recorded. According to this system the total amount debited
always equals the total amount credited. The accounting equation is based on the dual aspect,
which is explained in detail in the later part of the unit.
1.5.2. Accounting Conventions
Convention of Materiality: Materiality is a modifying convention that allows accountants to deal

with immaterial (unimportant) items in a convenient but theoretically incorrect manner. In this
case an accountant is required to apply his own discretion whether the item is substantive or not.
It proposes that while accounting for various transactions, only those which may have material
effect on profitability or financial status of the business should have special consideration for
reporting.
Convention of Conservatism: The Conservatism convention states that while recording a

transaction one must be cautious and prudent and ensure the assets and net income are not
overstated. Such overstatements can mislead potential investors in the company and creditors
making loans to the company. The concept also takes revenue recognition principle in account and
recognizes gains only when they are realized. Further, provision must be made for all known
liabilities, expenses, and losses, if there is a probability of loss or any occurrence of contingencies
it should be accounted for.

Convention of Consistency: This concept advocates that a company should use same accounting
principles and reporting practices through time, i.e., the same principles should be consistently
applied year after year unless there is a valid reason for change. However, consistency does not
prohibit a change in accounting principles if the information needs of financial statement users are
better served by the change. When a company makes a change in accounting principles, it must
make the following disclosures in the financial statements: (1) nature of the change; (2) reasons
for the change; (3) effect of the change on current net income, if significant; and (4) cumulative
effect of the change on past income.
1.5.3. Accounting Standard Understanding:

Accounting Standards are guidelines, or an approach established and issued by recognized expert
accountancy body. The primary objective of formulating accounting standard is to systematize the
diverse accounting policies with views eliminating to the extent possible the incomparability of
information provided in financial statements within or across the organization.
1.5.4. Accounting Standard IND AS:

Indian Accounting Standard were issued by the Accounting Standard Board (ASB) of the Institute
of Chartered Accountants of India. The objective of the Indian Accounting Standard is to ensure
that the Financial statements contain information that is transparent for users and comparable over
the years presented, can be generated at cost that does not exceed the benefits.
1.5.5. Accounting Standard US GAAP:

TVGRD0HOI6Generally Accepted Accounting Principles are a collection of commonly followed accounting
principles and standards formulated by the Financial Accounting Standard Board (FASB) of
United States of America. The purpose of GAAP is to ensure that financial reporting is transparent
and consistent from one organization to another.
1.5.6. International Financial Reporting Standards:

IFRS Standards are formulated by the International Accounting Standards Board (IASB) and
are applied primarily by public limited companies, that are listed on a stock exchange and by
financial institutions, such as banks. These set of rules were established to create a common
accounting language so that Financial Statements of every business would be reliable and
consistent regardless of any company or country.
1.6.Accounting Equation
1.6.1. What is the Accounting Equation?
As per the foundation of Double entry system, the balance sheet displays that company's total
assets are equal to the sum of the company's liabilities and shareholders' equity.
Assets =Liabilities + Capital (Owner’s Equity)
Illustration as follows:

Rudolf Creek Ltd cloth manufacturing unit has following assets and liabilities (shown in exhibit1).
The company has now purchased additional machinery for Rs 30000 and has raised loan from the
bank for purchase of Machinery.
Exhibit 1
Capital 180,000 Machinery 170,000

Bank loan 30 ,000 Cash 40,000
Total 210,000 Total 210,000
Increase in Asset =Existing Machinery New Machinery Purchased=170,000+30000= Rs200,000
The loan taken would also get reflected on the liability side.
Increase in Liability= 30000+30000=Rs 60,000
Balance Sheet after Machinery Purchased
Capital 180,000 Machinery 200,000

Bank loan 60,000 Cash 40,000
Total
aditya4chouhan@gmail.com 240,000 Total 240,000
TVGRD0HOI6
1.6.2. What are the Accounting Principles and Concepts behind accounting equation?
The dual concept emphasizes on having two-sided effect for every transaction that is carried out.
The concept of for every debit there has to be a corresponding credit helps in deriving the
accounting equation that states at any given time the assets must be equal (In context of monetary
value) to the owners’ equity and outside liabilities. Accounting equation can thus be looked from
a “origin and claims “perspective, that is the assets owned by the organization were obtained by
incurring liabilities or were bought in by owners.
1.6.3. What is the role of Accounting Equation in accounting?

Accounting Equation is crucial in accounting as it captures the relationship between the three
components of a balance sheet: assets, liabilities, and equity. The adherence to the double-entry
accounting system makes the maintaining of accounts and tallying processes much easier,
standardized. The accounting equation corroborates that all entries in the books and records are
vetted, and a verifiable relationship exists between each liability (or expense) and its corresponding
source; or between each item of income (or asset) and its source.
1.6.4. What makes accounting equation to be true always?

The accounting equation remains intact under all circumstances is because the foundation of the
equation is based on dual aspect concept. Two aspects of each transactions must be recorded under
this concept. In-short, any transaction that increases or decreases the assets of the business will
change the amount of funds available to business by the same amount.

1.6.5. Understanding the Basic Accounting Terminologies:
Income/ Revenue: It is the money or money equivalent that a business receives on selling of
products or rendering service to the consumers, in the normal course of business. It has a credit
balance as all income and gains are credited.
Expenses: An expense can be described as the cost of operations a company incurs to generate
revenue.
Net Income: Net Income is the Income after deducting all operating and non-operating expenses.
Net income (NI) is known as the "bottom line" as it appears as the last line on the income statement
once all expenses, interest, and taxes have been subtracted from revenues.
Dividend: A dividend is the distribution of earnings to the shareholders. The dividends are paid
using cash or in the form of stock distribution to the existing shareholders. In either of these
situation, it will decrease the retained earnings. Dividend account has a contra impact on equity.
1.6.6. How Accounting Equation is affected by changes in Income , Expenses and Dividend
The basic accounting equation is:
Assets =Liabilities + Capital (Owner’s Equity)
We could also look at the breakdown of the

TVGRD0HOI6Assets= Liabilities + Share Capital+ Retained Earnings
Retained Earnings is Computed as follows:

Retained earnings at the beginning of the Year + Revenue of the Current Year- Expenses -
Dividend
Assets=Liabilities+ Contributed Capital + Beginning Retained Earnings +Revenue -

Expenses-Dividend
The expanded accounting equation helps analysts to look at the company’s breakdown of share
holders equity. The revenue and expenses show the change in the net income from one period to
another period. Shareholders transaction cab be seen through contributed capital and dividends.


Introduction To Financial Accounting

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1.1 Conceptual Framework of Accounting and Accounting Concepts

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1.1. Conceptual framework of Financial Accounting and Accounting

1.1.1. What is Accounting?

1.1.2. Accounting as a Language of Business

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1.1.5. Objective of Accounting

1.1.6. What are the Different types of Accounting?

● Financial Accounting: Financial Accounting is the process of preparing and interpreting

● Management Accounting: Management accounting intends to provide relevant and

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1.2. Users of Accounting Statements

Internal Records and Top-level

External Users Financial Statements Lenders

Governmnent Financial Statements Ministry of Corporate

1.2.1. Internal users

Top-level management: The top-level management is responsible for formulating strategies,

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1.2.2. External Users.

▪ Securities Exchange Board of India (SEBI): In terms of Rules 14 and 15 of Securities

▪ Ministry of Corporate Affairs: At present, Section 209 (4A) of the Act

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Non-monetary information is disregarded while preparing Financial Statements: The transactional

Unable to disclose the Present value of Business.

1.3.1. Specimen of an Account

DEBIT NAME OF THE ACCOUNT CREDIT

1.3.2. Balance of an Account

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1.3.3. Chart of Account

Current Assets Current Liabilities Common Stock Operating Revenue

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Personal Accounts Artificial

Representative: The representative accounts cannot be associated to a specific person, instead

1.3.5. Debit and Credit

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1.3.6. Rules of Debit and Credit

Real account is governed by the following two rules:

Nominal account is governed by the following two rules:

1.4. Source Document in Accounting

1.4.1. What are accounting Systems?

1.4.2. What are Source Documents?

1.4.3. What is the Role and Importance of source Document?

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1.4.4. Kinds of Source Documents

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1.5.Generally Accepted Accounting Principles

1.5.1. Accounting Concepts

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Revenue Recognition Concept: The revenue recognition principle directs a company to

1.5.2. Accounting Conventions

Convention of Materiality: Materiality is a modifying convention that allows accountants to deal

Convention of Conservatism: The Conservatism convention states that while recording a

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1.5.3. Accounting Standard Understanding:

1.5.4. Accounting Standard IND AS:

1.5.5. Accounting Standard US GAAP:

1.5.6. International Financial Reporting Standards: