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FINANCIAL ACCOUNTING AN ICE BREAKERBY:Mohit DhawanAsst. Prof. (Finance) & Asst. Dean (Mgt.)INMANTEC, Ghaziabad.08/17/14Meaning of AccountingAccounting is the art of recording, classifying & summarizing in terms of money transactions & events of Financial nature & interpreting the results thereof.- AICPA08/17/14Attributes of AccountingAccounting is an art as well as science.Accounting records only those events which are of Financial Character.Functions of Accounting: Identification, Recording, Classifying, Summarizing & Interpreting.Service Activity.08/17/14ExerciseExercise 1. Accounting Records events & transactions that have a financial character. Is this a limitation of Accounting? If Yes. Give reasons.

Exercise 2. Resignation by a Marketing Manager is not recorded in the books of account. Why?08/17/14Accounting ProcessFINANCIAL TRANSACTIONS OR EVENTSRECORDINGCASH BOOKPURCHASE BOOKSALES BOOKPURCHASE/SALES RETURN BOOKJOURNAL PROPER

Classifying(Posting Into Ledger)SUMMARIZINGTRIAL BALANCETRADING & PROFIT & LOSS ACCOUNTBALANCE SHEETAnalysis & communicating to the users.08/17/14BRANCHES OF ACCOUNTINGFINANCIAL ACCOUNTINGCOST ACCOUNTINGMANAGEMENT ACCOUNTING08/17/14DIFFERENCE B/W BOOK KEEPING & ACCOUNTING1.Accounting is a wider concept which includes Book Keeping.2. ?

08/17/14USERS OF ACCOUNTING INFORMATIONS.NOPARTIESAREAS OF INTEREST1.Owners or InvestorsProfitability, Financial Position & Future Prospects2.ManagementProfitability in relation to investment, Managerial Decisions & Liquidity of the concern.3. Suppliers/CreditorsProfitability & Financial Positions4. LendersProfitability & Financial Positions5.EmployeesProfitability6.Government Profitability, Financial Position & Tax Liability7.ResearchersBusiness Practices8.Society?08/17/14Exercise 3. Book keeping is not a part of accounting. Do you agree with the statement?08/17/14OBJECTIVES OF ACCOUNTINGMaintenance of Business Records.Ascertaining profit or loss.Ascertaining Financial Position.Facilitating management control.Providing Accounting Information to the users.08/17/14Exercise 4. Recording the transactions & events Correctly & preparing the Financial Statements are the only objectives of Accounting. Do you Agree?08/17/14Accounting InformationReliabilityRelevanceUnderstandabilityComparabilityAccounting information will have limited usefulness if it lacks08/17/14SYSTEMS OF ACCOUNTINGDOUBLE ENTRY SYSTEMSINGLE ENTRY SYSTEM.08/17/14TEST 1.Q1. Book Keeping is mainly concerned with:Recording financial data relating to business operations.Interpreting data for Internal & External Users.Q2. Which of the following is not an Internal user of Financial Statement.a) Directorsb) Lendersc) Managers08/17/14Basic Accounting Terms1. Assets8. Drawings2. Liabilities3. Capital4. Expense5. Debtor6. Creditor7. Stock

08/17/14Practical Application to Done by U:Readymade Garment Business2 Minutes only

08/17/14Readymade Garment BusinessSolution:1. 8,00,0002. Furniture & Computer: 50,000 each.3. 4,00,000 + 2,00,000 = 6,00,0004. Satish = 2,00,0004. Rajesh = 1,50,0005. 15,0006. 20,000

08/17/14TransactionsInternal TransactionsCash TransactionsCredit transactions08/17/14Test 2Q3. A person who owes money to a firm is called a :Debtorb) Creditor

Q4. The amount invested by proprietor in Business is called:a) Capitalb) Cash08/17/14ACCOUNTING MECHANICS:BASIC RECORDS08/17/14Surprise???An Open book EXAMINATION08/17/14Scramble Quiz on Basic Accounting First three Submission will get ????????08/17/14FUNDAMENTAL ACCOUNTING EQUATION.Total Liabilities = Total AssetsorOwners Equity+ Outside Liability=Assets * Where Assets refer to resources which are owned by business enterprises, Liabilities are debts payable to Parties .08/17/14For Example: A business is started with a capital of Rs.10,000 brought in cash. The above event gives rise to a cash balance of Rs.10,000, at the same time business owes Rs.10,000 to the owner.Liabilities (Sources) = Assets (Uses)Owners Equity=Cash10,000=10,00008/17/14For example assume that in above business, land & Buildings worth Rs. 8,000 are bought for cash.

The above event will make the Accounting equation look as:-08/17/14Liabilities=Assets

Owners Equity = Cash + Land & Buildings

10,000=2,000 + 8,000

08/17/14 Another Example: In the same business a vehicle is purchased for Rs.4,000 by taking a loan for the purpose. The Accounting equation for the above will be:

08/17/14Liabilities=AssetsOwners equity + loan = Cash + L&B + Vehicle

10,000 + 4,000 = 2,000 + 8,000 + 4,00014,000=14,000

08/17/14Accounting Equation (Cont..)Ex.4.1) A Proprietor starts business with Rs. 5000.

4.2) The Proprietor Purchases Furniture For Rs. 1000 in cash

4.3) Goods Purchased on Credit for Rs. 2000.

4.4) Goods sold for Rs. 1000/- in cash.

08/17/14Solution4.1) Owners Capital = Assets5000=50004.2) Owners Capital = Furniture + cash5000= 1000 + 40005000=50004.3) Creditors + Capital = Furniture + Cash + Stock2000+5000=1000+ 4000 + 20007000=70004.4) Creditors + Capital = Furniture + Cash + Stock 2000+5000=1000+ 5000 + 1000

08/17/14Do it YourselfThe Balance Sheet2 minutes only08/17/14THE BALANCE SHEETSolution:LiabilitiesAmountAssetsAmountNet worth1,00,000Cash75,000Accounts Payable 25,000Inventory50,0001,25,0001,25,000LiabilitiesAmountAssetsAmountAccounts payable 25,000Cash50,000Long Term LiabilitiesInventory50,000Mortgage75,000Fixed AssetsNet Worth1,00,00Building1,00,0002,00,0002,00,00008/17/14Differentiate the following items into Assets, Liabilities, Revenue & Expenses. Plant & MachineryLoan Rent ReceivedBuildingInterest ReceivedCommission PaidCashElectricity Expenses

08/17/14Vehicle10.Telephone ExpensesInterest paidConveyanceFurnitureDepreciationDiscount PaidInterest on Bank LoanOutstanding salariesInsurance ExpensesRepair & MaintenanceBills Payable.21.Commission Received22.Land08/17/14Solution

1.Fixed Assets2.Liabilities3.Indirect Income4.Fixed Assets5.Indirect Income6. Indirect Expenses7.Current Assets8. Indirect Expenses9.Fixed Assets10.Indirect Expenses11. Indirect Expenses12. Indirect Expenses13. Current Assets14. Indirect Expenses15. Indirect Expenses16. Indirect Expenses17.Current Liabilities18. Indirect Expenses19. Indirect Expenses20. Current Liabilities21. Indirect Income22. Fixed Assets

08/17/14AccountsPersonal Account

Impersonal Account

- Real Account - Nominal Account

08/17/14Personal AccountThese are the accounts of individuals, Corporate and representative personal account with whom a trader deals .These can be classified into three parts:- Natural Person - Artificial Person - Representative

08/17/14Real AccountThere are accounts of property or possessions, i.e. accounts related to assets such as cash, plant and machinery, stock-in-hand etc.

08/17/14Nominal AccountThese are the accounts relating to gains, incomes, or losses, e.g. discount, commission, rent, salary etc.

08/17/14Golden Rules of Accounting:-Personal Account: Dr. the receiver & Cr. the giver.Real Account:Dr. what comes in & Cr. What goes Out.Nominal Account: Dr. all expenses & losses & Cr. All incomes & Gains.

08/17/14JournalIt is a basic book of original entry. All transactions are recorded in the chronological order as and when they takes place. The recording of transactions in the journal is called journalizing.*What is a journal entry in Accounting? Ans. * Journal entry is an entry to the journal. * Journal is a record that keeps accounting transactions in chronological order, i.e. as they occur. *Ledger is a record that keeps accounting transactions by accounts. *Account is a unit to record and summarize accounting transactions. All accounting transactions are recorded through journal entries that show account names, amounts, and whether those accounts are recorded in debit or credit side of accounts.

08/17/14Double Entry System *To record transactions, accounting system uses double-entry accounting.*Double-entry implies that transactions are always recorded using two sides, debit and credit. *Debit refers to the left-hand side and credit refers to the right-hand side of the journal entry or account.* The sum of debit side amounts should equal to the sum of credit side amounts.*A journal entry is called "balanced" when the sum of debit side amounts equals to the sum of credit side amounts.

08/17/14Format of JournalDateParticularL.F.Amount(Dr.)Amount(Dr.)08/17/14Example 1. Journalize the following transactions in the books of Narayan.1.Commenced business with cash Rs.40,000.2.Purchased goods on credit from shyam Rs.30,000.3.Purchased Goods for Cash Rs.1000.4.Paid gopal an advance for goods ordered.08/17/14Solution To Example 1.Cash A/c40,000To Capital A/c40,000Purchases A/c 30,000To Shyam A/c30,000Purchases A/c1,000To Cash A/c1,000Gopal A/c 2,000To Cash A/c2,000

08/17/14Example 2Journalize the following transactions in the books of Ram.1.Paid Wages Rs.500.2.Drew Cash for Personal Use Rs.1000.3. Received Commission In Cash Rs. 600.4.Paid into Bank Rs.500

08/17/14Solution1.Wages A/c 500To Cash A/c5002. Ram Drawings A/c 1000To Cash A/c10003.Cash A/c 600To Commission A/c600Bank A/c 500To Cash A/c50008/17/14Example 3Journalize the following transactions:-On 2nd Jan. Purchased goods on cash. 5,000 4th Jan. Purchased goods from Gopal 3,000 5th Jan. Paid wages 500 8th Jan. Cash paid to Ram 7,000 9th Jan. Cash received from Mohan 8,000 11th Jan. Commission Received 9,000

08/17/14Meaning of Accounting PrinciplesPrinciples of Accounting are the general law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice.These Principles are Classified into two categories:08/17/14Accounting ConceptsAccounting ConventionsAccounting ConceptsBusiness Entity Concept: A firm has identity separate from its owners.Exercise 1. Rahul the Owner of M/s R.K. & Co. purchased an air conditioner & installed it at his residence. The payment was made by issuing a cheque from the account of M/s R.K. & Co. The accountant debited the drawings account with the amount whereas Rahul is of the view that it should be debited to the Fixed Assets. In your opinion who holds the correct view & Why?08/17/14b) Money Measurement Concept: Stipulates recording of only those transactions which can be expressed in monetary terms.Exercise 2. Production at a factory had to stop for a week due to a labour strike. The estimated the loss of production & the likely loss of profit arising out of the situation. He directed the accountant to record the loss in the books of accounts. Is the owner correct in recording the likely loss? Give reasons.08/17/14C) Going Concern Concept: assumes that the business entity would continue to operate indefinitely.Exercise 3: The assets of standard sugar co. were acquired by the government on April 1 2000 & the co. received a compensation of Rs. 10 crores. The co. did not have any other business on the date of acquisition & have also not ventured into any other business after acquisition. The co. placed the amount so received in a fixed deposit with a bank, which is lying deposited till date. It has also filed a case in the court seeking higher compensation. Do you think the co. is a going concern.08/17/14d) Accounting Period Concept: requires notional/artificial pause to prepare financial statements, normally one year period.e) The Cost Concept: Closely related to going concern postulate. It implies assets owned by a firm should be shown at acquisition cost in contrast to their current market value.Exercise 4: Amit purchased 1000 sq. yards land to build a factory & paid Rs. 15 lakhs towards its cost. At the end of the financial year, the value of the land came down to Rs. 13 lakhs. Amit recorded the land at 13 lakhs & booked a loss of Rs. 2 Lakhs. Is he correct in doing that.08/17/143.4 SCS53f) The Dual Aspect Concept: means that every transaction effects two accounts.Exercise 5: Fundamental Accounting Equation.g) The Revenue recognition Concept: Exercise 6: Ajay an Engineer follows the cash system of accounting . He has raised a bill on his client for professional services. The payment was not received by him till the year end. His accountant wants to record the bill as income on the basis that services have been rendered. Will he be correct in doing so? Will your reply be different if Ajay was following the accrual system of accounting ?08/17/14h) The Matching Concept: requires that expenses recognised in an accounting period are matched with the revenue recognized in that period.i) The Accrual Concept: means a transaction is recorded at the time when it takes place & not when the settlement takes place.08/17/14Accounting ConventionsConvention of Full DisclosureConvention of ConsistencyConvention of ConservatismConvention of Materiality08/17/14Convention of Full DisclosureThere should be complete & understandable reporting on the financial statements of all significant information relating to the economic affairs of the entity.Exercise 7: An Infra. Co. had built a road under a scheme whereby it had a right to collect toll for a period of 11 years after which the road shall become the property of the government. The company depreciates the Assets with WDV method which was not disclosed in Balance sheet. Do you think co. is complying with the concept?

08/17/14Materiality Concept: An item should be regarded as material if there is a reason to believe that knowledge of it would influence the decision of an informed investor.08/17/14Practical Application to Done by U:You as a Chief Accountant2 minutes only08/17/14You as a Chief AccountantSolution:1. Money Measurement Concept.2. Going Concern3. Realisation4. Business Entity5. Accrual

08/17/14Puzzle on Basic Accounting Concepts.Solution:1. MATCHING2. CARRYING3. STRAIGHT4. LAND5. SALVAGE6. PRINCIPLES7. ECONOMIC

08/17/148. DISCLOSURE9. DEBITED10. RIGHT11. DOUBLE12. JOURNAL13. EQUITY14. TRIAL

08/17/14Accounting with FunGo to:http://www.dwmbeancounter.com/BCTutorSite/TestLectures/Tests/BCOnlineQuiz.html#introquiz08/17/14THANK YOU!THANK YOU08/17/14