Financial Accounting

Dr. Sanjib Kumar Das

Meaning of Accounting

Accounting is an art of recording, classifying, summering in a significant manner in terms of money transaction and events which in part at least of a financial character and interpreting the result there of.

Accounting refers to systematic recording, classifying and summarizing of financial transactions and interpreting the results thereof. Thus, accounting encompasses financial reporting. Accounting starts with recording and ends with presentation of financial information in a manner that facilitates informed judgments and decisions by users.

In modern days accounting is not merely concern with recording keeping but also with a whole range of activities involving planning, controlling, decision-making, problem solving, performance measurement & evaluating, coordinating & directing, tax designing and planning cost & management accounting.

Nature of Accounting

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Accounting is a book keeping Accounting as an Information System Accounting as a language

Accounting is a book keeping

Book keeping is a process of accounting concern merely with recording transaction and keeping records. Bookkeeping should be small and simple part of accounting. It is a mechanical repetitive while dealing with financial transactions.

Accounting as an Information System

Accounting involves a series of linked activities begins with observing, collecting, recording, analyzing and pass information or communicating information to users. System- it is the sets of elements together in order to attain a goal. It contains (a) Input, (b) Processing of Input and (c) Output.

Accounting as a language
Accounting is called as language of business. It is the communicating information about a business.

Functions of Accounting System

Internal routine reporting to managers for cost planning and cost control of operations, and performance evaluation of people and activities. Internal routine reporting to managers on the profitability of products, brand categories, customers etc.

Internal non-routine reporting to managers for strategic and tactical decisions. External reporting through financial statements to different users.

Users of Accounting

Management and Managers- Promoters, Directors, Officers of company, Managers, Department Heads etc. Users with direct financial interestShareholders, Creditors, Employees, and Suppliers. Users with indirect financial interestCustomers, Taxation Authority, Financial Analysts, Advisors, General Public.

Accounting Trail / Cycle

Identify a transaction and make Voucher Recording Record in Primary Books

Record in Secondary Books Prepare Trial Balance

Reporting

Prepare Financial Statements

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Events and Transactions

An event is a happening of consequence to an entity. An event could be an internal happening or external happening.

External events that involve transfer of value ( in monetary terms) between two entities (within or outside) are called transactions. Thus, a transaction is an external event that affects the financial position of an entity.

Financial Accounting: An introduction

Branches of Accounting

There are three main branches of accounting they are (a) Financial Accounting (b) Cost Accounting (c) Management Accounting (d) Social Responsibility Accounting

Financial Accounting

Its largely concern with financial statements for external use by investors, creditors, financial analysts, government Agencies and other interest groups. It deals with historical data. It involves recording, classifying, and analysis of financial transaction in a subjective manner according to nature of expenditure so as to facilitate preparation of financial statements for showing the performance and position of the business operation as a whole. It is the published financial statement, which are generally the best for the investment decision by the shareholders, lending decision by the banks & FIs and credit decision by the vendors.

Cost Accounting

It is defined as the process of accounting for costs from the point of which expenditure is incurred or committed. It involves classification, allocation, absorption, and control of costs. It also ascertaining or evaluating of total costs and cost per unit of a product, service and operation.

Management Accounting

It means provision or provide of information for management activities such as decision making, planning and controlling. It is a system of accounting which is concern with internal reporting of information to management for (a) planning, controlling, operating (b) Decision making in special matter. (c) Formulating long range planning.

Social responsibility Accounting

It is the process of identifying, measuring and communicating the social effects of business to permit informed judgment and decision by the users of informations. It is accounting for social responsibility aspect of a business management is hold responsible for what is contribution to the social well being and progress accounting for environment and ecology as part of social responsibility

Double Entry Book Keeping

Each business transaction used to record in minimum of two accounts, so that the accounting equation is always in balance. In the double entry system, every transaction must be recorded with equal debits and credits. As a result the total of all debits must equals to total of all credits.

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Recording of Transactions: The Double Entry Principle

Each transaction has two aspects (or side): Debit and Credit. Every debit has an equal and opposite credit. Each transaction should be recorded in such a way that it affects two sides- debit and creditequally. Thus, the first and foremost step in recording a transaction is to identify the debit and credit elements.

Financial Accounting: An introduction

Some Important terms in Accounting

Entity- it is an economic/business Unit that performs the economic/business activities. Events- it is the happening of consequences in the entity. Transaction- it is an exchange in which each participant receives or sacrifices value and also the recording of events. Voucher- it is a document, which is, serves as an evidence of a transaction. Entry- it is the record made in the books of accounts in respect of a transaction or events.

Assets- it refers to the tangible object or intangible right of a company. It is the company of its owns. Liabilities- It is the company of its owes. Capital- it refers to the amount invested in the enterprise by the proprietor or partners or Promoters. It is the assets over the liabilities. Drawings- it refers to the total amount of cash or goods or any other assets withdraw by the proprietor. Purchases- the total amount of goods obtains for resale or production or service render. Sales- The total amount of goods is sold or service render.

Stock or Inventory- It refers to the tangible property held for consumption in the production of products. Trade Debtors- It refers to the person from whom the amounts are due for goods sold or services rendered on credit basis. Trade Creditors- It refers to the person from whom the amounts are due for goods purchased or services rendered on credit basis Receivables- It involves the bills of exchange, trade debtor and bills receivables. Payables- it involves the bills of exchange, trade creditor and bills payables.

Expenditure- these are the cost in acquisition of an asset or service it the terms of outflow or decrease of assets or increase in liabilities. Expenses- it is the decrease in economic benefit during the accounting period in the form of outflow of assets or increase in liabilities. Losses- it is decrease in Equity. Income- it is the increase in economic benefit during the accounting period in the form of inflow of assets or decrease in liabilities. Revenue- it refers to the amount charged for goods sold or services rendered. Gains- it is increase in Equity

Generally Accepted Accounting Principles (GAAP

Generally Accepted Accounting Principles and the Accounting Environment- The set of conversions, rules and procedures are necessary to defined accepted accounting practice at a particular time is referred to as Generally Accepted Accounting Principles (GAAP). GAAP represents the fundamental positions that have been generally agreed for making accounts. GAAP involves Postulates, Concepts and Principles.

Accounting Postulates- These are basic assumptions, which are generally accepted as self-evident truth in accounting. These are basic assumption used in accounting practice. Accounting Concepts- These are self-evident statements of truths. This is use to accept by the people without questioning. It provides conceptual guidelines for application in the financial accounting process. Accounting Principles- These are generally the decisions rules derived from the accounting concept. Principle means a general law or rules adopted or preferred as a guide to action a settled ground or basis of conduct practice. These are characterized as how to apply concepts.

Money Measurement Concepts- a unit of exchange or measurement is necessary to account for the transaction of business enterprise in uniform manner. The common denominator chosen in accounting is the monetary unit. Going Concern Concept- Financial accounting is formulated assuming that the business will continue to operate for an indefinite time. Cost Concept- Assets acquired by a business are generally recorded at their cost or the price paid for acquisition. Conservatism Concept- This concept modifies the cost concept in the case of current assets (It is normally not apply to non current assets the valuation of which is governed by the cost concept). This concept is usually stated as Anticipated no profit by provide for all possible losses. It represents the current assets used to record the marker value or cost which ever is lower.

Dual Aspect Concept- this may be regarded as most distinctive and fundamental concept of accounting. It provides the conceptual basis for accounting mechanics and there is a universal agreement among accountant over this concept. Here Assets = Liabilities Assets = Equities Assets = Capital + Liabilities Capital = Assets - Liabilities Accounting Period Concept- Financial accounting provide information about the economic activities about the business activities of an enterprises for that are shorter than the life of the enterprise. Normally the time periods are of equal length to facilitate comparison.

Realization Concept- According to this revenue, which is derived, to be earned only when it is realized. It realized when goods are shipped or delivered to the customer and not when a sale order is received or a contract signed or goods manufactured. This concept implies that profit should be recognized when there is objective evidence for it. Matching Concept- Once revenue for an accounting period are recognized, expense incurred in generating this revenue are matched against them. These ensure that sales and cost of goods sold in the income statement refer to the same products. It may be noted that expenses are matched to the revenue and not vise versa. Salaries Period cost Raw Material Product cost

Accrual Concept- According to this income is measured by changes in the owners equity arising from the operation of the business.
Materiality Concept- maintaining the accounting records involve time and expenses, the accountant is usually concern with events, which are material. Full Discloser Principle- It require that a business enterprise should provide all relevant information to external users for the purpose of sound economic decision.