Amity Business School

Financial Accounting

Harendra Singh
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Introduction to Accounting

It is a process of identifying, measuring and

communicating the economic information of an
organization to its users who need the information for
decision making.
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Conti…
• Identifying the transactions and events:- Accounting identifies
transactions and events of a specific entity. A transaction is an
exchange in which each participant receives or sacrifices value.

• Measuring the identified transactions and events :- Accounting

measures the transactions and events in terms of a common
measurement unit, that is the ruling currency of a country.

• Recording:-It is concerned with the recording of identified and

measured financial transactions in an orderly manner, soon after their
occurrence in proper books of accounts.

• Classifying:- It is concerned with the classification of the recorded

transactions so as to group the transactions of similar type at one place.
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Conti…
• Summarising :- It is concerned with the summarisation of the
classified transactions in a manner useful to the user.

• Analysing:- It is concerned with the establishment of relationship

between various items or group of items taken from balance sheet.
Its purpose is to identify the financial strengths and weakness of the
enterprise
• Interpretation:- It is concerned with explaining the meaning and
significance of the relationship so established by the analysis.

• Communicating :- It is concerned with the transmission of the

summarized, analyzed and interpreted information to the users to
enable them to make reasoned decision.
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Usefulness of accounting
• Short Term Creditors:- Short term creditors need information to
determine whether the amount owing to them will be paid when due.

• Long Term Creditors:- they need information to determine whether

the principals and the interest thereof will be paid when due and
hether they should extend , maintain or restrict the flow of credit to
an enterprise.
• Present Investors- They need information to judge prospects for
their investments and to determine whether they should buy hold
and sell their shares.

• Potential Investors -They need information to judge prospects of

an enterprise and to determine whether they should buy the shares.
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Conti…
• Management- Management need
information to review the firm’s.
• (a) short term solvency
• (b) long term solvency
• (c) activity
• (d) profitability in relation to turnover
• (e) profitability in relation to investments
and to decide upon the the
course of action to be taken in future.
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Conti….

• Employees:- Employees and their

representative groups are interested in
information about the stability and
profitability of the employers.

• Tax Authorities:- Tax authorities need

information to assess the tax liablities of
an enterprise.
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Branches of Accounting
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Conti…
• Financial Accounting:- It is the process of identifying, measuring,
recording, classifying, summarising, analysing, interpreting and
communicating the financial transactions and events.
• Cost accounting:- It is the process of accounting and controlling
the cost of a product, operation or function. The purpose of this
branch of accounting is to ascertain the cost , to control the cost and
to communicate the information for decision making.
• Management Accounting :- It is the application of accounting
techniques for providing information designed to help all levels of
management in planning and controlling the activities of business
enterprise and in decision making. The purpose of this branch of
accounting is to supply any and all information that management
may need in taking decision and to evaluate the impact of its
decisions and actions.
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Conti….
• Social Responsibility Accounting:- It is the process of
identifying, measuring and communicating the social
effects of business decisions to permit informed
judgment and decisions by the users of information's.
Management is held responsible for what it contributes
to the social well being and progress. Accounting for
environment and ecology is part of social responsibility
accounting.
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Basic Accounting terms
1.Entity 9. Drawings 17. Net Loss

2. Events 10. Trade debtors

3. Transaction 11. Trade Creditors

4. Voucher 12. Receivables

5. Entry 13. Payables
6. Assets 14. Revenue

7. Liabilities 15. Expenses

8. Capital 16. Net Profit
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Assets
Assets refer to tangible objects or intangible rights of an enterprise
which carry probable future benefits.
1. Current Assets: cash in hand, cash at bank, stock of finished goods,
,debtors, stock of raw materials, stock of work in progress
2. Fixed Assets:
a) Tangible fixed assets: Land, building, Plant, Machinery, Furniture
and fixtures.

b) Intangible fixed assets: Goodwill, Patent, Trademarks, copirights

etc.
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liabilities
• Liabilities refer to the financial obligations of an
enterprise other than owner’s fund.
a)Current Liabilities: Bills Payable, Trade
Creditors, Outstanding Expenses, Bank
overdraft.
b)Long term Liabilities: Long term loans,
debentures etc.
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Example
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Accounting Concepts

• Separate Entity Concept

• Money Measurement Concept
• Accounting Period Concept
• Going Concern Concept
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Accounting Principals

• They may be defined as those rules of

action or conduct which are derived from
experience and practice and when they
prove useful, they become accepted as
principles of accounting.
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Principles of Accounting

• Duality principle
• Revenue Recognition
• Historical cost principle
• Matching principle
• Fully disclosure principle
• Objectivity
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Accounting Standards
• An accounting standard is a selected set of accounting
policies or broad guidelines regarding the principles and
methods to be chosen out of other alternatives.
• The main objective of accounting standard is to
harmonize the diverse accounting policies and practices
at present in use in India.
• The adoption and application of accounting standard
ensures uniformity, comparability and qualitative
improvement in the preparation and presentation of
financial statements.
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• At international level in 1972 International Accounting Standards

Committee (IASC) was formed for developing International
Accounting Standards (IASs). The IASC comprises the
professional accountancy bodies of over 75 countries ( Including
The Chartered Accountants of India).
• During these three decades the IASC has issued 40 IASs through a
due process involving the worldwide accountancy profession, the
preparers and users of financial statements and the national
standard-setting bodies. However the IASs are not accepted
worldwide
• In 1978, another professional body, the international federation of
accountants (IFAC) was established.
 Accounting standard board of India Amity Business School

• The institute of chartered accountant of India, recognizing

the need to harmonize the diverse accounting policies and
practices at present in use in India, constituted accounting
standard board (ASB) on 21 april, 1977.
• The main function of ASB is to formulate accounting
standards so that such standards may be established by
the council of the Institutive in India.
• The Institute is one of the members of the IASC and
agreed to support the objectives IASC.
• The council of Institute of Chartered Accountants of India
has so far issued twenty eight accounting standards.
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AS Title Recommendatory or Mandatory from

No. mandatory
AS-1 Disclosure of accounting Mandatory 1.4.1991
Policies
AS-2 Valuation of Inventories Mandatory 1.4.1999
AS-3 Cash Flow Statements Mandatory 1.4.2000
AS-4 Contingencies and Events Mandatory 1.4.1995
Occurring after the Balance
Sheet date
AS-5 Prior Period and Extraordinary Mandatory 1.1.1987
items and changes in
accounting policies
AS-6 Depreciation Accounting Mandatory 1.4.1995
AS-7 Accounting for Construction Mandatory 1.4.1991
Contract
AS-8 Accounting for R&D Mandatory 1.4.1991
AS-9 Revenue Recognition Mandatory 1.4.1991
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AS Title Recommendatory or Mandatory from

No. mandatory
AS-10 Accounting for Fixed Assets Mandatory 1.4.1991
AS-11 Accounting for the effect of Mandatory 1.4.1995
changes in Foreign Exchange
rates
AS-12 Accounting for Govt Grants Mandatory 1.4.1994
AS-13 Accounting for Investments ---------
AS-14 Accounting for Amalgamation Mandatory 1.4.1995
AS-15 Accounting for retirement Mandatory 1.4.1995
benefits in the Financial
Statements of employers
AS-16 Borrowing cost Mandatory 1.4.2000
AS-17 Segment reporting Mandatory 1.4.2001
AS-18 Related parties disclosure Mandatory 1.4.2001
AS-19 Leases Mandatory 1.4.2001
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AS Title Recommendatory or Mandatory from

No. mandatory
AS-20 Earning per share Mandatory 1.4.2001
AS-21 Consolidated Financial Mandatory 1.4.2001
Statement
AS-22 Accounting for taxes on Mandatory 1.4.2001
Income
AS-23 Accounting for investments in Mandatory 1.4.2002
associates in consolidated
financial statement
AS-24 Discontinuing operations Mandatory 1.4.2002
AS-25 Interim financial reporting Mandatory 1.4.2002
AS-26 Intangible assets Mandatory 1.4.2003
AS-27 Financial reporting of interest Mandatory 1.4.2002
in joint venture
AS-28 Impairment of Assets Mandatory 1.4.2004
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Double entry system
• Double entry system of Book-keeping refers to a system
of accounting under which both the aspects( i.e. debit or
credit) of every transaction are recorded in the account
involved.

Ex 1: Mr. X sold goods for cash Rs. 1000 to Mr. Y.

Ex 2: Mr. X sold good for Rs 1000 to Mr. Y on credit.

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Accounting Equations

An accounting equation is a statement of

equality between the resources and the
sources which finance the resources and
is expressed as follows:
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Conti…
• Resources mean the Asset- The assets refer to the tangible
objects ( e.g., Land and Building, Machinery, Furniture etc. )
or intangible rights (e.g., Patents, trademark, Copyright etc.)
owned by the enterprise and carrying future benefits.)
• Sources of finance means Equities- It includes internal
sources ( internal equity) ( i.e., capital) and external Sources
i.e., liablities. Capital refers to an amount invested in an
enterprise by its owners. Liablities are the financial obligations
by the enterprise other than owners fund.
• Thus
Total assets= Total liablities or
Assets= Internal Equity+ External Equity or
Assets= Capital + Liablities
Capital= Assets - Liablities
 Steps Involved in Developing an
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Accounting Equation
• Step-1- Ascertain the variables (i.e., Assets,
Liablities or Capital) of an equation affected
by a transaction.
• Step-2 – Find out the effect ( in terms of
increase or decrease ) of a transaction on the
variables of an equation.
• Step-3- Show the effect on the appropriate
side of an equation and ensure that the total
of the right hand side is equal to the total of
the left hand side.
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1. Started business with Rs. 1,00,000. Analyze the

transaction and give the accounting equation

• Step 1- Variable affected-------Assets & Capital

• Step 2- Effect of transaction----Increase in

on affected variable-- Assets & Capital
• Step 3- Accounting Equation-------
Assets= Liabilities + Capital
1,00,000= 0+ 1,00,000
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2. Borrowed Rs 10,000 From Sun.

3. Purchased furniture for Rs 10,000
4. Purchased goods for cash Rs 20,000
5. Purchased goods from Moon on credit for Rs 30,000.
6. Sold goods costing Rs 10,000 for cash Rs 12,000
7. Sold goods costing Rs 20,000 to star on credit for Rs
25,000.
8. Returned goods costing Rs 5,000 to the supplier of goods
9. Received cash from the customer Rs. 20,000
10. Paid cash to supplier of goods Rs 15,000
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11. Paid salary Rs. 1,000

12. Withdrew cash Rs. 2,000 for personal use.
13. Withdrew goods costing Rs.3,000 For personal use.
14. Furniture costing Rs. 10,000 is valued Rs 9,000
15. Rent due but not paid Rs. 2,000
16. Repaid loan Rs 10,000
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1. Show the accounting equation on the basis of following

transactions
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2
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3.
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4.
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5
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6
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