UNIT-4

FINANCIAL ACCOUNTING
INTRODUCTION TO FINANCIAL STATEMENT ANALYSIS

• According to “ American Institute of certified public Accountants” (AICPA) the art of recording,
classifying and summarizing in a significant manner and in terms of many transactions and events,
which are in part at least, of a financial character and interpreting the results there of.

• According to Professor G.A. Lee the accounting system has two stages.

• THE FIRST STAGE IS BOOK KEEPING, SECOND STAGE IS ACCOUNTING.

 Book Keeping: It involves the chronological records of financial transactions in a set of books in a
systematic manner.

 Accounting: It is concerned with the maintenance of accounts giving stress to the design of the
system of records, the preparation of reports based on the recorded data and the interpretation of the
reports.
Thus, the terms, book-keeping and accounting are very closely related, through there is a subtle
difference as mentioned below.

1. Object: The object of book-keeping is to prepare original books of Accounts. It is restricted to journal,
subsidiary book and ledge accounts only. On the other hand, the main object of accounting is to record
analyse and interpret the business transactions.

2. Level of Work: Book-keeping is restricted to level of work. Clerical work is mainly involved in it.
Accountancy on the other hand, is concerned with all level of management.

3. Principles of Accountancy: In Book-keeping Accounting concepts and conventions will be followed by

all without any difference. On the other hand, various firms follow various methods of reporting and
interpretation in accounting.

4. Final Result: In Book-Keeping it is not possible to know the final result of business every year,
Classification of accounting principles: Accounting principles can be broadly classified in to two categories:
1. Accounting Concepts. 2. Accounting Conventions
CLASSIFICATION OF BUSINESS TRANSACTIONS or ACCOUNTS
All business transactions are broadly classified into three categories:

These three classes of accounts are maintained for recording all business transactions. They are

1. Personal Accounts (A/c)

2. Real Accounts (A/c)

3. Nominal Accounts (A/c)

Accounting terminology
• Accounts Payable
• Accounts payable are short-term obligations to be paid by an organization. It
arises from trading activities and other business-related expenses during the
business, including parties from whom we have purchased goods or services
and costs incurred for which money is yet to be paid, generally in the same
financial year.
• #2 – Accounts Receivable
• Accounts Receivable form part of current assets and refer to amounts due
from parties to whom we have sold goods or services or incurred expenses on
their behalf for which money is yet to be realized. It may include debtors, bills
receivable, etc., which can be converted into cash in the short term to ensure
the organization’s liquidity.
Double -entry book keeping