INTRODUCTION

TO
FINANCIAL
ACCOUNTING
 HISTORY AND ORIGIN OF
ACCOUNTING

The earliest evidence of this language comes from

mesopotamians civilizations. The mesopotamians kept the
earliest records of goods traded and received, and these
activities are related to early recording-keeping of the
ancient egyptians and Babylonians.
The people of that time relied on primitive accounting
methods to record the growth of crops and herds.

Because there is a natural season to farming and

herding, it is easy to count and determine if a surplus
had been gained after the crops had been harvested
or the young animals weaned.
 EARLY ACCOUNTING IN
INDIA

Accounting was practised in India twenty three centuries

ago as is clear from the book named "Arthashastra“ written
by Kautilya, King Chandragupta's minister. This book not
only relates to politics and economics, but also explain the
art of proper keeping of accounts.
      The modern system of accounting based on the
principles of double entry system owes it origin to Luca
Pacioli who first published the principles of Double Entry
System in 1494 at Venice in Italy.
BRANCHES OF ACCOUNTING

FINANCIAL ACCOUNTING

COST ACCOUNTING

MANAGEMENT ACCOUNTING
 What is Financial
Accounting?

The American Institute of Certified Public Accountants has defined the

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".
 NATURE OF ACCOUNTING
• Accounting as a service activity
• Accounting as a profession
• Accounting as a social force
• Accounting as a language
• Accounting as science or art
• Accounting as an information system
 IS ACCOUNTING A SCIENCE OR AN
ART: ?
Definition of Science

1. a branch of knowledge or study dealing with a body of facts or

truths systematically arranged and showing the operation of
general laws: the mathematical sciences.

2. systematic knowledge of the physical or material world gained

through observation and experimentation.

3. any of the branches of natural or physical science.

4. systematized knowledge in general.

5. knowledge, as of facts or principles; knowledge gained by

systematic study.
Definition of Art:

1. The expression or application of human creative

skill and imagination, typically in a visual form such
as painting or sculpture, producing works to be
appreciated primarily for their beauty or emotional
power.

2. Works produced by such skill and imagination

3. Skill, dexterity, or the power of performing certain

actions, acquired by experience, study, or observation
Accounting is both an art and science.
An art because it can be learnt by practice and not by mere
listening to it like scientific rules. Every accountant is not same.
Many are good and other make mistakes, like every person is
not a great artist.

It is science because it is based on many rules, concepts,

conventions and assumptions. If everything goes accordingly,
your balance sheets match, trial balances match and profits
can be calculated correctly.

But even if a single accounting concept is mishandled and

transaction is entered incorrectly, it brings propagation errors.
We need to go back every step to trace it, which is very
exhausting. So its a science.
 OBJECTIVES OF ACCOUNTING

PROFITABILITY
ASCERTAINMENT

GENERATE FINANCIAL
INFORMATION ACCOUNTING POSITION

FORECASTING
•Profitability Ascertainment: Shows true figures of profits earned my
the business or losses incurred by the business enterprise, as the case may be.

•Financial Position: Shows true financial position of the business, position

of assets and liabilities and helps the administrators to decide for future well
being

•Generates Information: Accounting generates information about the

financiability of the business enterprise. It provide true benchmarks for the
business to survive in the long run by providing with good sources of accurate
data

•Forecasting: Accounting helps the business enterprises to predict the

position of the business in the future and decide about the future in the
present.
FUNCTIONS OF ACCOUNTING

Communication
of results and
compliance of
legal
requirements
USERS OF ACCOUNTING INFORMATION
 SYSTEM OF ACCOUNTING

Single Entry System: Under this system only

personal accounts with or without subsidiary books are
maintained.

This system has no complete record of business

transactions done during a specified period.

Hence neither trial balance nor final accounts can be

prepared.

This system is less costly.

A double-entry system
is a set of rules for recording financial information in a financial accounting
system in which every transaction or event changes at least two different
ledger accounts.

When each financial transaction is closely analyzed, it reveals two aspects. One
aspect will be “receiving aspect” or “incoming aspect” or “expenses/loss
aspect”. This is termed as the “Debit aspect”. The other aspect will be “giving
aspect” or “outgoing aspect” or “income/gain aspect”. This is termed as the
“Credit aspect”

the basic principle of this system is, for every debit, there must be
a corresponding credit of equal amount and for every credit, there
must be a corresponding debit of equal amount.
DIFFERENCE BETWEEN SINGLE ENTRY AND DOU
BLE ENTRY SYSTEM
 BOOK KEEPING

Bookkeeping is the recording of financial

transactions. Transactions include sales,
purchases, income, and payments by an
individual or organization. Bookkeeping
is usually performed by a bookkeeper.
Bookkeeping should not be confused
with accounting.
How is bookkeeping
different from accounting?
 DIFFERENCE ACCOUNTING VIS-À-VIS BOOK KEEPING

BASIS ACCOUNTING BOOK KEEPING

Performed by An accountant A bookkeeper

Purpose Interpret, prepare Record, classify and

Financial statements, summarize
etc. transactions

Results used by Internal Accountants

(management,
employees) and
external users
(owners, creditor,
banks, etc.)

Methods used / GAAP, IFRS, etc. Single-entry

principals applied bookkeeping system,
Double-entry
bookkeeping system
What Does Cash Basis Mean?
A major accounting method that recognizes revenues and
expenses at the time physical cash is actually received or
paid out.

This contrasts to the other major accounting method, accrual

accounting, which requires income to be recognized in a
company's books
at the time the revenue is earned (but not
necessarily received) and records expenses
when liabilities are incurred (but not
necessarily paid for).
 ACCRUAL BASIS OF ACCOUNTING...

Under the accrual basis of accounting (or accrual method of

accounting), revenues are reported on the income statement when
they are earned. When the revenues are earned but cash is not
received, the asset accounts receivable will be recorded. (Under
the cash basis of accounting, revenues are not reported on the
income statement until the cash is received.)

In other words, under the accrual basis of accounting, the receipt of

cash and the payment of cash are not the focus of reporting
revenues and expenses. Rather the focus is:
1) what revenues were earned, and
2) what expenses were incurred.
 Hybrid Basis of
Accounting
Mixture of Cash and Accrual
Basis of Accounting.

•Incomes recorded on cash basis and expense on accrual

basis.
•Used by professionals like Charted Accountants, Lawyers ,
Doctors etc., to reduce net taxable income.
 Generally accepted accounting
principles ( GAAP )
•It may be expressed as those rules , guidelines
and principles which are derived from
experience and practi ce and when they are
useful to accounti ng practi ce they , then
become accepted as accounti ng principle .
•If any principle possess all the
above characteristi cs , and they are accepted
by all ( Professional Accountants , courts ,
government , business executi ves , taxati on
experts ) then they are known as accounti ng
principles .
 Accounting Conventions
Accountancy is based on usage and customs which is
in use since long . Naturally accountants have to adopt
that usage or customs . These are termed as
conventions in accounting . Major conventions are
used in preparation of final accounts also .
1. Conservatism – Every sincere businessman makes
an estimate of future losses and then some provision
for it is made . Businessman mostly ignore the items
of future profit . In Nutshell , conservatism states as
“anticipate no profit , and provide for all possible
losses” .
2. Full Disclosure – While making accounting records
, care should be taken to disclose all material
information and not to conceal information and
facts . Here emphasis is only on material
information and not on immaterial information .
3. Consistency – Continuance of one practice in
number of year indicates consistency .Whatever
accounting practice has been adopted in one
accounting year , same should be continued in other
future years also .
4. Materiality – Accounting record should be made of
all material facts and immaterial items may either be
mixed with material items and then recorded or these
may be ignored. It has a key position in accounting but
forms a base for accounting .
 Accounting Concepts
 Period concept
 Dual Concept/Accounting
Equivalence
 Money measurement concept
 Realization Concept
 Separate Entity Concept
 Cost Concept
 Going Concern Concept
 Verifiable Objective Evidence Concept
 Capital Concept
 Matching Concept
 Accrual Concept
1. Period Concept - Every Businessman wants to
know the result of his investment and efforts after a
certain period . Usually one year period is regarded as
an ideal for this purpose . It may be of 6 months or 3
months also. This period is called accounting period.
2. Dual Concept/Accounting Equivalence–
Accounting concept is that every transaction affects
two ACCOUNTS . This is why double entry system of
book – keeping came into existence . This concept is
the foundation on which the entire system if book-
keeping and accountancy is based.
3. Money Measurement – Only those transactions
are recorded in the books of accounts which can be
expressed in money .Those transactions which cannot
be expressed in money fall beyond the scope of
accounting .
S
4. Realization Concept – According to this concept ,
revenue is considered as being earned on the date at
which it is realized i.e on the date when the property
in goods passes to the buyer and he becomes liable to
pay.
5. Separate Entity Concept – Business is treated
separate from its owners . All the transactions are
recorded in the books of business and not in the
books of proprietor . On the basis of this concept the
proprietor is treated as a creditor to the business. Ex
Salomon Vs Salomon & co ltd
6. Cost Concept – Accounting to this concept , fixed
assets are recorded at the price or which they are
acquired, i.e. cost less depreciation . This value is called
book value .
7.Going Concern – According to this concept , the
business shall continue to exist until it is liquidated and
transactions are recorded from this point of view .
8. Verifiable Objective Evidence – The concept
relates with the verification of accounting record
with the outside evidence . This concept means that
there is some evidence in ascertaining the
correctness of the information reported.
9. Capital Concept – this concept is that record for
capital be made separately . Proprietor may
contribute capital either in cash or in goods or partly
 10.Matching Concept – Every businessman is eager
to make maximum profit at minimum cost . Hence ,
in an accounting period namely one year , he tries to
find out revenue and cost of this year and compares it
with that of another year , and thus he can make an
idea about progress or downfall of business .
11.Accrual Concept – The net loss made during the
year decreases owners equity i.e. capital . Excess of
revenue income over revenue expenses is net profit ,
while excess of revenue expense over revenue income is
loss .
 BASIC ACCOUNTING TERMS

•Debtor: Person who owes money to the business

•Creditor: A person to whom money is payable

•Capital: Owner’s Funds.

•Goods: Articles in which the business deals in.

•Assets: A physical thing or right owned by business.

•Equity: A claim which can be enforced against the assts of a firm.

•Income: Inflows of fund.

•Expenditure: Acquisition cost of asset or expenditure.

•Expense: Expenditure whose benefit is enjoyed immediately.

 Concept of Accounting Standards:

We know that Generally Accepted Accounting Principles

(GAAP) aims at bringing uniformity and comparability in
the financial statements. It can be seen that at many places,
GAAP permits a variety of alternative accounting
treatments for the same item. For example, different
methods for valuation of stock give different results in
financial statements.
Such practices sometimes can misguide intended users in
taking decision relating to their field. Keeping in view the
problems faced by many users of accounting, a need for the
development of common accounting standards was
aroused.
For this purpose, the Institute of Chartered
Accountants of India (ICAI), which is also a member
of International Accounting Standards Committee
(IASC), had constituted Accounting Standard Board
(ASB) in the year 1977. ASB identified the areas in
which uniformity in accounting was required. After
detailed research and discussions, it prepared and
submitted a draft to the ICAI. After proper
examination, ICAI finalized them and notified for its
use in financial statements.
 Definition of Accounting Standard

The term ‘Accounting Standard’ may be defined as

written statements issued from time to time by
institutions of the accounting profession or
institutions in which it has sufficient involvement and
which are established expressly for this purpose.
Such accounting institutions/bodies are currently
found in many countries of the world, e.g., Accounting
Standards Board (India), Financial Accounting
Standards Board (USA), Accounting Standards Board
(UK), Accounting Standards Committee (Canada), etc.
 Importance of Accounting Standard

It helps in dissemination of timely and useful

information to all stakeholders and users.
It helps to provide a set of standard accounting
policies, valuation norms and disclosure
requirement.
Government officials, tax authorities and others find
accounting reports prepared in accordance with AS
are reliable and acceptable.
It helps to reduce or totally eliminate, accounting
alternatives and leads to better comparison of
financial statements both at inter-firm and intra-
firm level.
It reduces scope of creative accounting i.e., twisting
of accounting policies to produce financial statement
favorable to a particular interest group.
 Procedure for Formulation of Accounting Standards

First, the ASB will identify areas where the formulation of accounting standards may be
needed

Then the ASB will constitute study groups and panels to discuss and study the topic at
hand. Such panels will prepare a draft of the standards. The draft normally includes the
definition of important terms, the objective of the standard, its scope, measurement
principles and the representation of said data in the financial statements.

The ASB then carries out deliberations of the said draft of the standard. If necessary
changes and revisions are made.

Then this preliminary draft is circulated to all concerned authorities. This will generally
include the members of the ICAI, and any other concerned authority like the
Department of Company Affairs (DCA), the SEBI, the CBDT, Standing Conference of
Public Enterprises (SCPE), Comptroller and Auditor General of India etc. These
members and departments are invited to give their comments.
Then the ASB arranges meetings with these representatives to discuss their views
and concerns about the draft and its provisions

The exposure draft is then finalized and presented to the public for their review
and comments

The comments by the public on the exposure draft will be reviewed. Then a final
draft will be prepared for the review and consideration of the ICAI

The Council of the ICAI will then review and consider the final draft of the
standard. If necessary they may suggest a few modifications.

Finally, the Accounting Standard is issued. In the case of standard for non-
corporate entities, the ICAI will issue the standard. And if the relevant subject
relates to a corporate entity the Central Government will issue the standard.
 Indian Accounting standards

IND AS 1 : Disclosure of Accounting Policies

IND AS 2 : Valuation of Inventories
IND AS 3 : Cash Flow Statements
IND AS 4 : Contingencies and Events Occurring after the Balance Sheet Date
IND AS 5 : Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies
IND AS 6 : merged with AS 10
IND AS 7 : Construction Contracts
IND AS 8 : (Deleted)
IND AS 9 : Revenue Recognition
IND AS 10 : Property, Plant and Equipment
IND AS 11 : The effects of changes in Foreign Exchange Rates
IND AS 12 : Accounting for Government Grants
IND AS 13 : Accounting for Investments
IND AS 14 : Accounting for Amalgamations
IND AS 15 : Employee benefits
IND AS 16 : Borrowing Costs
IND AS 17 : Segment Reporting
IND AS 18 : Related Party Disclosures
IND AS 19 : Leases
IND AS 20 : Earnings Per Share
IND AS 21 : Consolidated Financial Statements
IND AS 22 : Accounting for Taxes on Income
IND AS 23 : Accounting for Investments in Associates in Consolidated Financial Statements
IND AS 24 : Discontinuing Operations
IND AS 25 : Interim Financial Reporting
IND AS 26 : Intangible Assets
IND AS 27 : Financial Reporting of Interest in Joint Ventures
IND AS 28 : Impairment of Assets
IND AS 29 : Provisions Contingent Liabilities and Contingent Assets
IND AS 30 : Financial Instruments : Recognition and Measurements*
IND AS 31 : Financial Instruments : Presentation*
IND AS 32 : Financial Instruments : Disclosures*
 International Accounting Standard

International accounting standards are a set

of internationally-agreed principles and
procedures relating to the way that companies
present their accounts. ... The investors required
financial statements prepared using international
accounting standards.
International Accounting Standards (IAS) are older accounting
standards issued by the International Accounting Standards
Board (IASB), an independent international standard-setting
body based in London. The IAS were replaced in 2001 by 
International Financial Reporting Standards (IFRS).

Currently, the United States, Japan, and China are the only
major capital markets without an IFRS mandate.

The U.S. accounting standards body has been collaborating with

the Financial Accounting Standards Board since 2002 to improve
and converge American accounting principles (GAAP) and IFRS
 International Financial Reporting Standards (IFRS)

International Financial Reporting Standards (IFRS) set

common rules so that financial statements can be
consistent, transparent, and comparable around the world.
IFRS are issued by the International Accounting Standards
Board (IASB).
They specify how companies must maintain and report their
accounts, defining types of transactions, and other events
with financial impact.
IFRS were established to create a common accounting
language so that businesses and their financial statements
can be consistent and reliable from company to company
and country to country.
 Standard IFRS Requirements

IFRS covers a wide range of accounting activities.

There are certain aspects of business practice for
which IFRS set mandatory rules.
Statement of Financial Position
Statement of Comprehensive Income
Statement of Changes in Equity
Statement of Cash Flow
 Title Effective from

First-time Adoption of International

IFRS 1 January 1, 2004
Financial Reporting Standards

IFRS 2 Share-based Payment January 1, 2005

IFRS 3 Business Combinations April 1, 2004

IFRS 4 Insurance Contracts January 1, 2005

Non-current Assets Held for Sale and

IFRS 5 January 1, 2005
Discontinued Operations

Exploration for and Evaluation of

IFRS 6 January 1, 2006
Mineral Resources

IFRS 7 Financial Instruments: Disclosures January 1, 2007

IFRS 8 Operating Segments January 1, 2009

 2009
IFRS 9 Financial Instru January 1, 2018
ments (updated 2014)
IFRS 10 Consolidated Financ 2011 January 1, 2013
ial Statements
IFRS 11 Joint Arrangements 2011 January 1, 2013
Disclosure of
IFRS 12 Interests in Other 2011 January 1, 2013
Entities
IFRS 13 Fair Value Measure 2011 January 1, 2013
ment
Regulatory Deferral
IFRS 14 2014 January 1, 2016
Accounts
IFRS 15 Revenue from Contr 2014 January 1, 2018
acts with Customers
IFRS 16 Leases 2016 January 1, 2019
IFRS 17 Insurance contracts 2017 January 1, 2021