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Why Accounting?
•Record keeping of financial
transactions
•Is it the same as book-keeping?
• No
•Book-keeping = Maintaining all the
records in a proper manner but without
any framework •Accounting = Book-keeping + working
within a given framework
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When does financial
transaction begin?• When the business has already been
established
• Commercial activity may not have started
• Beginning of financial transaction =
Finance
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What is ‘Finance’?
• Any business for a commercial activity
requires money or funds
• The first dose of finance is from the owners of the enterprise
• The next dose can be from lenders like banks
• Thus finance = Financial resources and their management
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Is there no difference between
finance and accounts?• Functionally, there is. We will see this
later.
• For the purpose of financial
accounting, finance = accounts
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What is the purpose of
business?• To carry on a commercial activity with
profit motive unlike co-operatives and non-
profit organizations
• Commercial activity = Trading,
manufacturing or services
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How does one do business?
• By starting a business enterprise
• Different kinds of business enterprise:
– Sole proprietorship firms – single owner,
– Partnership firms – joint owners and
– Limited companies – permanent legalentity with limited liability for owners
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What is the first point for
business?• Capital of the owner/s
• It is called capital in firm categories no. 1
and no. 2
• It is called share capital in firm category no.
3
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Need for accounting
• Need to record financial transactions that
involve transfer of financial benefit
• Need to know how much capital of the
owner has grown over a period of time
• Need to know whether the business is in
profit or loss
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Financial benefits
• Cash
• Goods
• Services
• Assets
• Difference between goods and assets
Rashmi Paranjpye
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Finance and accounting
• Finance brings in funds
• Accounts keeps track of these funds to
ensure proper utilization
• Accounting is the financial language of the
business
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Objective of financial
accounting• Recording, classifying, summarizing, and
interpreting the financial information about
the activities of the concern so thatintelligent decisions can be made.
• The basic objective of accounting is to
provide information, which is useful to persons inside & outside the organisation.
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Funds
• Capital- Funds introduced by the owners &
permanent or long-term funds in the
business.• Debt-Money owed to external agencies like
loans
• a. Short term – Working capital
• B. Long term – For fixed assets
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Definitions
• Liability- Amount owed by the business
enterprise to the outside agencies.
• Asset- The property of the business
enterprise such as land, bldg, plant &
machinery, stock
• Assets split into fixed assets and currentassets.
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Fixed Assets
• Fixed Assets- Long term business
assets like land, building, machinery
which act as catalysts in the activity of
the enterprise but do not form part of
the finished goods of the
manufacturing co. or stocks in trade in
case of a trading co.
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Current Assets
• Current Assets- Working capital assets
which enable an enterprise to achieve sales
revenue by the process of turnover of thecurrent assets.
• Current assets constantly change form from
cash back to cash through the activity of thefirm i.e. trading or manufacturing or
service.
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Users of financial statements
• Owners
• Lenders
• Suppliers
• Customers
• Income-tax authorities• Other statutory authorities like ROC &
• Employees (The list is not exhaustive)
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Points to remember
• Assets are what you own
•Liabilities are what you owe
• Revenue is what you get in i.e. income
• Expense is what you pay out
• Difference between revenues &expenses is ‘Profit’
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Cash Transactions
• Cash Purchase- When goods \
services are bought by paying cashimmediately, it is a cash purchase.
• Cash Sale- When goods \ services
are sold by receiving cashimmediately, it is a cash sale.
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Credit Transactions
• Credit Purchase- When goods\services are bought and payment
is made at a later date , it is a credit purchase.
• Credit Sale- When goods\servicesare sold and payment is received ata later date, it is a credit sale.
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Revenues & Receipts
• Revenues occur when money is
earned.• Receipts occur when cash is
received.