SRI MOOGAMBIGAI COLLEGE OF ARTS AND SCIENCE (WOMEN)

PALACODE, DHARMAPURI, TN

B.COM
FINANCIAL ACCOUNTING - I

NAME:
Reg No:

Prepared By
Mr. R.SIVAKUMAR,
M.Com., M.Phil., MBA., D.T.Ed., B.Ed., D.Co-op.,
Assistant Professor,
PG Department of Commerce.

Mr.R.SIVAKUMAR, M.Com.,MBA., M.Phil., Asst. Professor, PG Department of Commerce Page 1

 SRI MOOGAMBIGAI COLLEGE OF ARTS AND SCIENCE (WOMEN)
I-SEMESTER
CORE-I-FINANCIAL ACCOUNTING-I
UNIT-I Fundamental of Financial Accounting.
Financial Accounting Meaning Definition- Objective, Basic Accounting Concepts and Conventions
- Journal, Ledger Accounts Subsidiary Books - Trial Balance - Classification of Errors Error
Rectification of Preparation of Suspense Account - Bank Reconciliation Statement - Need and
preparation

1. What is meant by financial accounting?

Financial accounting is the process of recording, analysing, and summarizing the financial
transactions of an organization for an accounting period. It helps enterprises evaluate their
financial health and stability.

Definition of Financial Accounting

The American Institute of Certified Public Accountants define financial accounting as “the art of
recording, classifying and summarising 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”

Accounting Principles
Accounting Concepts Accounting Conventions
a) Entity concept a) Disclosure
b) Dual aspect concept b Materiality
c) Going concern concept c) Consistency
d) Money measurement concept d) Conservatism
e) Cost concept
f) Cost attach concept
g) Accounting period concept
h) Accrual concept
i) Periodic matching of cost and Revenue concept
j) Realisation concept
k) Verifiable objective evidence concept

ACCOUNTING CONCEPTS
1. Business entity concept: A business and its owner should be treated separately as far as
their financial transactions are concerned.
2. Money measurement concept: Only business transactions that can be expressed in terms
of money are recorded in accounting, though records of other types of transactions may be
kept separately.
3. Dual aspect concept: For every credit, a corresponding debit is made. The recording of a
transaction is complete only with this dual aspect.
4. Going concern concept: In accounting, a business is expected to continue for a fairly long
time and carry out its commitments and obligations. This assumes that the business will
not be forced to stop functioning and liquidate its assets at “fire-sale” prices.
5. Cost concept: The fixed assets of a business are recorded on the basis of their original cost
in the first year of accounting. Subsequently, these assets are recorded minus depreciation.
No rise or fall in market price is taken into account. The concept applies only to fixed assets.
6. Accounting year concept: Each business chooses a specific time period to complete a cycle
of the accounting process—for example, monthly, quarterly, or annually—as per a fiscal or
a calendar year.

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 SRI MOOGAMBIGAI COLLEGE OF ARTS AND SCIENCE (WOMEN)
7. Matching concept: This principle dictates that for every entry of revenue recorded in a
given accounting period, an equal expense entry has to be recorded for correctly calculating
profit or loss in a given period.
8. Realisation concept: According to this concept, profit is recognised only when it is earned.
An advance or fee paid is not considered a profit until the goods or services have been
delivered to the buyer.

ACCOUNTING CONVENTIONS
There are four main conventions in practice in accounting: conservatism; consistency; full
disclosure; and materiality.
Conservatism is the convention by which, when two values of a transaction are available, the
lower-value transaction is recorded. By this convention, profit should never be overestimated, and
there should always be a provision for losses.
Consistency prescribes the use of the same accounting principles from one period of an
accounting cycle to the next, so that the same standards are applied to calculate profit and loss.
Materiality means that all material facts should be recorded in accounting. Accountants should
record important data and leave out insignificant information.
Full disclosure entails the revelation of all information, both favourable and detrimental to a
business enterprise, and which are of material value to creditors and debtors.

What is the Objective of Financial Accounting?

Record Financial Transactions: Financial accounting’s main goal is to record a company’s
money-related activities. It’s like keeping a detailed diary of where the money comes from and
where it goes.
Provide Clear Financial Picture: It aims to create financial statements like balance sheets and
income statements. These documents give a clear snapshot of how much money the company has,
how much it owes, and how much it’s making.
Ensure Accuracy: Financial accounting strives to ensure all the numbers are correct. Imagine
balancing your chequebook to avoid errors – it’s like that but on a larger scale.
Comply with Regulations: Companies must follow rules and laws when reporting their financial
information. Financial accounting ensures that the company plays by the rules, like a referee in a
game.
Help Decision-Making: Financial accounting data is used by company leaders and investors to
make smart decisions. It’s like having a map to choose the best route on a journey.
Attract Investors: Companies use financial statements to show potential investors how well they
do. It’s like a report card that can convince others to invest in the business.
Evaluate Performance: Financial accounting lets you compare the company’s performance over
time. It’s like looking at your grades from last year to see if you’re improving.
Assess Financial Health: It helps determine if the company is financially healthy or in trouble.
It’s like going to the doctor for a check-up to ensure everything’s okay.
Facilitate Accountability: Financial accounting holds everyone in the company accountable for
their financial actions. It’s like tracking who spent what in a shared household budget.
Support Transparency: It encourages companies to be open and honest about their financial
situation, which builds trust with customers, investors, and the public. It’s like having an open
book policy so everyone can see what’s happening.

HERE ARE SOME OF THE CHARACTERISTIC OR FEATURES:

 Monetary recordkeeping: Financial accounts don’t record non-monetary transactions,
regardless of their importance from a business point of view.
 Historical transaction recording: Financial accountants only track transactions that have
already taken place in the past.

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 SRI MOOGAMBIGAI COLLEGE OF ARTS AND SCIENCE (WOMEN)
 Legal requirements: As law mandates, organizations must keep their financial accounts up-
to-date. They should also get financial statements audited to ensure accuracy.
 Made for external use: Financial accounting reports inform customers, investors, suppliers,
and financial institutions about the financial performance of an organization.
 Interim reports: Organizations treat financial account statements covering less than a year
as interim reports. These reports are useful for conveying the financial performance before a
full-year reporting cycle ends.
 Forms the basis of other accounting branches: Financial accounting deals with raw data
from journals and ledgers. Therefore, it is the foundation for other accounting branches, such
as management accounting, cost accounting, and other advanced accounting methods.

What Are the Main Functions of Financial Accounting?

IMPORTANCE OF FINANCIAL ACCOUNTING
Financial accounting is of significant importance in the business world for several reasons:
 Set of standard rules – By outlining a uniform set of regulations for the preparation of
financial statements, a standardised framework in financial accounting ensures coherence
across reporting periods and diverse companies.
 Decreasing the risk – Through enhancing accountability, financial accounting mitigates risk
by bolstering transparency. External stakeholders such as lenders, regulatory bodies, and tax
authorities depend on financial information, and adherence to acceptable methodologies in
report preparation ensures that companies are held responsible for their performance.
 Management insights – While managerial accounting may offer superior insights, financial
accounting can still facilitate strategic thinking if a company thoroughly evaluates its financial
outcomes and makes informed investment choices.
 Trust in financial reporting – By establishing independent governing bodies to regulate
reporting standards, financial accounting fosters confidence in financial reporting. This
ensures that the foundation of reporting remains separate from management, providing a
dependable and trustworthy source of precise information.
 Encourage transparency – Through the establishment of regulations and mandates, financial
accounting compels companies to divulge specific details regarding their operational status
and potential risks. Thus presenting an authentic depiction of financial performance,
irrespective of the company’s success or struggles. This emphasis on transparency ensures a
comprehensive understanding of the company’s financial condition.

ADVANTAGES OF FINANCIAL ACCOUNTING

1)Maintaining Business Records
Accounting helps in recording all financial transactions in the books of accounts in a systematic
manner. Therefore, we do not need to rely on human memory.
2)Preparing the Financial Statement
Accounting helps in determining the profit or loss as well as the financial position of the business
during a particular period. Accounting records and classification provide the relevant information
to the accountant for preparing financial statements.
3)Comparing Results
Accounting involves comparing the profits or loss in a given year with those of previous years. The
comparison helps in gathering important information and planning for the future operations.
4)Helping in Decision Making
It implies that accounting assists the management decision-making by providing significant
information for solving numerous problems, such as deciding the selling price of goods produced,
or deciding whether a part should be manufactured in the industrial unit or procured from outside.
5)Providing Information to Interested Groups

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 SRI MOOGAMBIGAI COLLEGE OF ARTS AND SCIENCE (WOMEN)
It implies that the accounting process provides appropriate information to various interested
parties, such as owners, creditors and management who are concerned about the accounting
information related to various aspects, such as, sales, production and profit.
6)Providing Legal Evidence
This refers to the documentary evidence of the accounting information for legal requirements.
This helps to prevent any misconduct or threats from rival organisations
Limitations of Financial Accounting
 Focuses on Historical Data: Financial accounting mainly deals with past transactions. This
limits its ability to predict future financial performance.
 Lacks Non-Financial Information: It does not include non-financial factors like employee
satisfaction or market competition. This can impact a company's valuation.
 Adheres to Standards Strictly: The strict adherence to accounting standards may not always
reflect the actual economic situation of a business.
 Subject to Manipulation: Financial statements can be manipulated through legal accounting
practices. This can mislead stakeholders.
 Ignores Inflation: Financial accounting does not account for the effects of inflation on
reported financial results.
 Time and Cost Intensive: The process of preparing financial statements according to
regulatory standards can be time-consuming and costly.
 Provides Limited Scope for Analysis: It offers a limited scope for analysis by focusing
primarily on financial aspects, overlooking operational efficiencies.
 Periodic Reporting: Financial accounting reports are generated at fixed intervals, which may
not provide timely information for decision-making.
 Emphasis on Quantitative Data: It emphasizes quantitative data but it does overlook the
qualitative aspects that could affect a company's financial health. which lacks objectivity

What Are the Main Functions of Financial Accounting?

FUNCTIONS OF ACCOUNTING
(1) Recording: The basic function of accounting is recording the monetary aspect of all the
business transaction in an orderly manner for the purpose of memory and reference in a future
period, Recording is done in a book called Journal.
(2) Classifying: The transactions recorded in journal are classified and posted to the main book
of accounts known as Ledger.
(3) Summarizing: The transactions recorded in the ledger will be summarized and the balance in
each account will be ascertained and list of such balance is called Trial Balance will be prepared
at the end of accounting period.
(4) Interpreting: The final stage in the accounting process is analysing and interpreting the
financial data contained in the final account. It will help in planning for the future in a better way.
(5) Communicating: It communicates the results of the business to the various categories of
persons as owners, investors, creditors, employees, management, Government etc

Branches of accounting
Accounting has five main branches
Accounting Branches
1.Financial Accounting
2.Cost Accounting
3.Management Accounting
4.Social Responsibility Accounting
5.Human Resource Accounting

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 SRI MOOGAMBIGAI COLLEGE OF ARTS AND SCIENCE (WOMEN)
(1) Financial Accounting: Financial accounting is concerned with recording and processing all
transactions with outsiders and events affecting the financial position of the firm.
(2) Cost Accounting: Cost accounting seeks to ascertain the cost of each product or each job by
the firm. Cost accounting data is useful to the management.
(3) Management Accounting: Management accounting has the objective of collecting
systematically and regularly all such information as will help management in discharging its
functions of planning, control decision making.
(4) Social Responsibility Accounting: Social responsibility accounting describes the impact of
corporate decisions on environmental pollutions, the consumption of non-renewable resources
and ecological and groups on the maintenance of public services, on public safety, on health, and
education and many other such social concerns.
(5) Human Resource Accounting: Human resource accounting is a process to identify, qualify
and report investments made in human resources as employees are the assets of company, they
must be duly recognized

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