Session 1_Introduction to Financial Accounting

8/22/2019 Session 1_Introduction to Financial Accounting

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Background and Meaning

Business

is all about

money


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Branches of Accounting Process of

communicating social

and environmentalimpacts of business

actions

Post mortem of

Businesstransactions

Cost estimation,

Cost controlAccounting

for

Management

FINANCIAL

ACCOUNTING

SOCIAL

ACCOUNTING

ACCOUNTINGCOST

ACCOUNTING

MANAGEMENT

ACCOUNTING


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Financial Accounting Basic

Principles

PRINCIPLES

CONCEPTS CONVENTIONS


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Concepts

It means basic rules and regulations.

Different Concepts

- Business Entity

- Going Concern

- Dual Aspect

Business and owners are separate

Business = artificial legal entity

Business has a long indefinite life

Every thing of business has two equal

sides/ two equal fold impact


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- Accounting Period

- Matching

- Money Measurement

Standard period of 12 months at the

end of which evaluation will be done

Expenses are recognized in the same

accounting period when the related

revenue is recognized.

Accounts only deal with items to

which a monetary value can be

attributed.


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- Cost

- Accrual

- Revenue Recognition

An asset is entered into the accounting

records at the price paid to acquire it.

The idea that income and expense

items must be included in financial

statements as they are earned orincurred

Revenue recognized only when itis realizable or earned or realized


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Conventions

It means basic assumptions.- Disclosure

- Consistency

- Conservatism

- Materiality

To inform both current and potential

investors of the accounting strategies and

methods used when developing periodic

corporate

Be consistent = no change in method

unless forced

Play safe

Relating to the importance/ significance

of an amount, transaction or

discrepancy.


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MCQs

The immediate recognition of loss is supported

by the underlying principle of:

- Matching

- Consistency

- Judgment

- Conservatism


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The determination of the expenses for an

accounting period is based largely on the

application in which principle?

- Cost

- Consistency

- Matching

- Time period


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Assigning revenues to the accounting period in

which the goods were delivered or the services

performed and expenses to the accountingperiod in which they were used to produce

revenues is known as the:

- Accounting period

- Continuity assumption

- Matching rule

- Revenue recognition


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Generally accepted accounting principles:

- Define accounting practice at a point in time- Are similar in nature to the principles of chemistry

or physics

- Are rarely changed

- Are not affected by changes in the way business

operate


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Account

Personal - Accounts of individuals andartificial persons. E.g. Mr. A , B , C , ABC Ltd.

Z Ltd. etc.

Impersonal - Accounts of Others i.e. those

who are not individuals and artificial persons.

Further classified into two types.

- Real- Nominal


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Real and Nominal Account

Real Nominal

Tangible Real Account:

Account of assets that can be

seen, touched i.e. which are

real.Eg: Cash, Furniture, Car,

Mobile, Machinery etc.

Intangible Real Account:

Account of assets that

cannot be seen and touched.

Eg: Trade Mark, Goodwill

etc.

Accounts of things that can

only be felt, imagined but

cannot be seen or touched.

Eg: Wages, Salary,Electricity charges,

Telephone charges etc.


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Question Classify the following into Personal, Real and Nominal

Account:

- Stationery Account

- Cash Account

- Goodwill Account

- Capital Account- Freight Account

- Rent Account

- Interest Account

- Account of Govind, a customer

- Bank Loan Account

- Depreciation

Th G ld R l f D bit


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Three Golden Rules for Debit

and Credit

PERSONAL

DebitThe Receiver

CreditThe Giver


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Example

Received cash Rs.500 from Mr. A- Mr. A, a Personal account

- A is the giver of the money

- So As account will be credited.


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REAL

DebitWhat comes in

CreditWhat goes out


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Contd: the same example Received cash Rs.500 from Mr. A

- Cash is coming into the business

- Cash will be debited applying the rule.


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NOMINAL

Debit

All Expenses

and Losses

CreditAll Incomes and

Gains


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Example

Received cash from Mr. A as Commission

- Here commission is a nominal account

- In the given transaction Commission is

Income

- Applying the rule commission will be

credited.


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Business transactions

In order to record the business transactions we

follow certain steps:

- Identify the nature of transaction i.e. Cash or

Credit

- If it is a Cash transaction, then one accountgetting affected is Cash or Bank (Cheque)

- Next question WHY?

- If no answer to the previous question then

next question WHOM?


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- In case of Credit Transaction, one account

getting affected is Personal account.

- Next question WHY

- Example

Purchased Furniture from Furniturewala and Sons

Rs.20000- Credit Transaction as no money is coming in or

going out

- So Furniturewala and Sons Account gettingaffected

- WHY = Purchase of Furniture

- Second account getting affected is Furniture


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Question

Point out the accounts which will be debitedand credited for each one of the following

transactions.

1. Cash received from X

2. Cash paid to Y

3. Credit sale to Z

4. Salary paid to clerk by means of cheque.5. Payment of cash to Landlord for Rent.

Session 1_Introduction to Financial Accounting

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