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Financial Accounting Accounting - Introduction -Let us understand the basics www.swamyspfa.in
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Financial Accounting
Accounting - Introduction
-Let us understand the basics
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Introduction - Preface
• Why people do business?• What is the meaning of the term “Profits”?• How can you remember?
• Can you understand the relevance of Accounting?
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Accounting - Introduction
Contents
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Contents• Accounting - Meaning• Features of Accounting• Groups Interested• Branches of Accounting• Business Organizations• GAAP• Accounting concepts• Accounting conventions
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Contents• Types of Business Entities• Accounting Equation• Account – Meaning,
Format and Classification• Other Miscellaneous
items
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Accounting - Definition
Accounting is an art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part, at least, of a financial character and interpreting the results there of.
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Features of accounting
Identifying Recording Classifying
Summarizing Interpreting
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Features of accounting
Identifying Recording Classifying
Summarizing Interpreting
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Identifying the financial transactions and the
accounts involved in it.
Features of accounting
Identifying Recording Classifying
Summarizing Interpreting
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Recording the identified financial transactions in the books of accounts as per the
said rules
Features of accounting
Identifying Recording Classifying
Summarizing Interpreting
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Classifying the transactions under
various heads
Features of accounting
Identifying Recording Classifying
Summarizing Interpreting
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At the end of the period, summarizing
all the accounts
Features of accounting
Identifying Recording Classifying
Summarizing Interpreting
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Grouping all the incomes and expenses to know whether the
business has made profits or losses
Groups interested in accounting information
• Owners• Managers• Security Analysts• Lenders• Creditors• Employees• Government• Customers• Competitors• Research Groups
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Groups interested in accounting information
• Owners• Managers• Security Analysts• Lenders• Creditors• Employees• Government• Customers• Competitors• Research Groups
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As owners have invested money, they need to know
the performance
Groups interested in accounting information
• Owners• Managers• Security Analysts• Lenders• Creditors• Employees• Government• Customers• Competitors• Research Groups
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As managers drive the organization, they need to know the performance so
as to improve further
Groups interested in accounting information
• Owners• Managers• Security Analysts• Lenders• Creditors• Employees• Government• Customers• Competitors• Research Groups
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Analysts need to suggest investments
to their clients
Groups interested in accounting information
• Owners• Managers• Security Analysts• Lenders• Creditors• Employees• Government• Customers• Competitors• Research Groups
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As they lend money to the business, need to be interested whether they will get the principal and
interest back on time
Groups interested in accounting information
• Owners• Managers• Security Analysts• Lenders• Creditors• Employees• Government• Customers• Competitors• Research Groups
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The need for creditors to know is more or less similar to lenders, but for a shorter time frame
Groups interested in accounting information
• Owners• Managers• Security Analysts• Lenders• Creditors• Employees• Government• Customers• Competitors• Research Groups
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Employees need to know the accounting data, so that they can know what to expect from the organization
Groups interested in accounting information
• Owners• Managers• Security Analysts• Lenders• Creditors• Employees• Government• Customers• Competitors• Research Groups
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Government need to know so that they can regulate the business and also collect taxes for the profits made
Groups interested in accounting information
• Owners• Managers• Security Analysts• Lenders• Creditors• Employees• Government• Customers• Competitors• Research Groups
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Customers need to know, so that they can decide on the
long term association
Groups interested in accounting information
• Owners• Managers• Security Analysts• Lenders• Creditors• Employees• Government• Customers• Competitors• Research Groups
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Competitors need to know the accounting
data so as to understand their market position
Groups interested in accounting information
• Owners• Managers• Security Analysts• Lenders• Creditors• Employees• Government• Customers• Competitors• Research Groups
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The primary purpose of research groups is to
understand the fundamental issues and
develop detailed knowledge
Accounting – branches
Cost Accounting
Management Accounting
Financial Accounting
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Accounting – branches• Financial accounting– To know the profit or loss and the financial
position of an organization.
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Accounting – branches• Financial accounting– To know the profit or loss and the financial
position of an organization.• Cost accounting– To ascertain the cost
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Accounting – branches• Financial accounting– To know the profit or loss and the
financial position of an organization.• Cost accounting– To ascertain the cost
• Management accounting– To provide the management with
information taken from financial and cost accounting, so as to facilitate decision making
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Check our Understanding• Shall we have a “Pause” here to check our
learning so far…..• Accounting - Meaning• Features of Accounting• Groups Interested• Branches of Accounting
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Business Organization
Merchandising Organization
Service Organization
Manufacturing Organization
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Business Organizations can be • Business organisations bring
together materials, technology, people and money in order to satisfy the customers’ needs and make profit out of it.
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Business Organisations can be • Business organisations bring
together materials, technology, people and money in order to satisfy the customers’ needs and make profit out of it.
• Manufacturing Organisations – they convert inputs into outputs by applying processes. Product has form and substance and the goods are physically delivered.
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Business Organisations can be • Business organisations bring together
materials, technology, people and money in order to satisfy the customers’ needs and make profit out of it.
• Manufacturing Organisations – they convert inputs into outputs by applying processes. Product has form and substance and the goods are physically delivered.
• Merchandising (Trading) Organisations – the organisation just buys and sells the products without adding any significant value
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Business Organisations can be • Business organisations bring together materials,
technology, people and money in order to satisfy the customers’ needs and make profit out of it.
• Manufacturing Organisations – they convert inputs into outputs by applying processes. Product has form and substance and the goods are physically delivered.
• Merchandising (Trading) Organisations – the organisation just buys and sells the products without adding any significant value
• Service Organisations – the organisation gives services, which is not tangible, to the clients. The recipient can enjoy the service but not transfer the same to another person.
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GAAP• Generally Accepted Accounting
Principles – It is a set of conventions, rules and procedures, which define accepted accounting practice
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GAAP• Generally Accepted Accounting
Principles – It is a set of conventions, rules and procedures, which define accepted accounting practice
• Why general acceptance is required?
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GAAP• Generally Accepted Accounting
Principles – It is a set of conventions, rules and procedures, which define accepted accounting practice
• Why general acceptance is required?• So that, meaningful comparisons
between the firm’s past financial history and financial information of other enterprises can be done
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GAAP• Generally Accepted Accounting
Principles – It is a set of conventions, rules and procedures, which define accepted accounting practice
• Why general acceptance is required?• So that, meaningful comparisons
between the firm’s past financial history and financial information of other enterprises can be done
• So let us learn the concepts and conventions now.
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Accounting concepts - assumptions• Entity concept• Dual aspect concept• Going concern concept• Accounting period concept• Objectivity concept• Money measurement concept• Cost concept• Matching concept• Revenue recognition concept• Accrual concept
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Accounting conventions - practices
• Convention of materiality• Convention of consistency• Convention of conservatism• Convention of disclosure
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Accounting concepts - assumptions• Entity concept• Dual aspect concept• Going concern concept• Accounting period concept• Objectivity concept• Money measurement concept• Cost concept• Matching concept• Revenue recognition concept• Accrual concept
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Owner is different from business. They are two
different entities
Accounting concepts - assumptions• Entity concept• Dual aspect concept• Going concern concept• Accounting period concept• Objectivity concept• Money measurement concept• Cost concept• Matching concept• Revenue recognition concept• Accrual concept
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There are two aspects in every transaction. For every give, there
is a take
Accounting concepts - assumptions• Entity concept• Dual aspect concept• Going concern concept• Accounting period concept• Objectivity concept• Money measurement concept• Cost concept• Matching concept• Revenue recognition concept• Accrual concept
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We assume that the business will be going
on for ever
Accounting concepts - assumptions• Entity concept• Dual aspect concept• Going concern concept• Accounting period concept• Objectivity concept• Money measurement concept• Cost concept• Matching concept• Revenue recognition concept• Accrual concept
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There is a time period over which we need
to do the assessment or performance
evaluation
Accounting concepts - assumptions• Entity concept• Dual aspect concept• Going concern concept• Accounting period concept• Objectivity concept• Money measurement concept• Cost concept• Matching concept• Revenue recognition concept• Accrual concept
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Every transaction should have a true
and fair proof
Accounting concepts - assumptions• Entity concept• Dual aspect concept• Going concern concept• Accounting period concept• Objectivity concept• Money measurement concept• Cost concept• Matching concept• Revenue recognition concept• Accrual concept
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Only those transactions that can
be measured by money will be
recorded in accounting
Accounting concepts - assumptions• Entity concept• Dual aspect concept• Going concern concept• Accounting period concept• Objectivity concept• Money measurement concept• Cost concept• Matching concept• Revenue recognition concept• Accrual concept
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The transactions are recorded at the original
cost at which it was incurred and it remains the same in the data,
even when the market value differs
Accounting concepts - assumptions• Entity concept• Dual aspect concept• Going concern concept• Accounting period concept• Objectivity concept• Money measurement concept• Cost concept• Matching concept• Revenue recognition concept• Accrual concept
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The income and expenses of the business should be matched or compared for the same time period, so as to calculate the profits.
Accounting concepts - assumptions• Entity concept• Dual aspect concept• Going concern concept• Accounting period concept• Objectivity concept• Money measurement concept• Cost concept• Matching concept• Revenue recognition concept• Accrual concept
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The revenue should be recognised when
the ownership passes on. Ownership is
assumed to pass on when the physical
delivery takes place
Accounting concepts - assumptions• Entity concept• Dual aspect concept• Going concern concept• Accounting period concept• Objectivity concept• Money measurement concept• Cost concept• Matching concept• Revenue recognition concept• Accrual concept
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In accrual system of accounting, we don’t wait for the cash to
come in or go out. If business is eligible to receive or responsible to pay, it is recorded in the accounting books
Accounting conventions - practices
• Convention of materiality• Convention of
consistency• Convention of
conservatism• Convention of disclosure
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Accounting conventions - practices
• Convention of materiality• Convention of
consistency• Convention of
conservatism• Convention of disclosure
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Data is recorded separately if it is material enough, otherwise it can be clubbed or combined
and recorded as a common data
Accounting conventions - practices
• Convention of materiality• Convention of
consistency• Convention of
conservatism• Convention of disclosure
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In accounting, there are areas where multiple ways of calculations are available. If we choose one method, it
should be consistently followed period after period
Accounting conventions - practices
• Convention of materiality• Convention of
consistency• Convention of
conservatism• Convention of disclosure
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It says, “provide for all possible losses, but
not for possible gains”
Accounting conventions - practices
• Convention of materiality• Convention of
consistency• Convention of
conservatism• Convention of disclosure
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Disclose all the transactions, never
hide any.
Check our Understanding• Shall we have a “Pause” here to check our
learning so far…..• Business Organizations• GAAP• Accounting concepts• Accounting conventions
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Types of business entities
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• Sole Proprietor ship• Partnership • Company - Private
Limited • Company – Public
Limited• Limited Liability
Partnership
Types of business entities – Sole Proprietor Ship
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• Members – Only one – Sole Proprietor• Management Control - Capital and Profits /
Losses fully taken by one owner• Liability is unlimited• Legal Registration – No provision• Flexibility - Maximum
Types of business entities - Partnership
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• Members – Minimum – Two and Maximum – Hundred (does not apply to professional practices)
• Management Control - Capital and Profits / Losses equally shared by all partners, unless otherwise agreed upon
• Liability is Joint and Several• Legal Registration – Under Indian Partnership
Act• Flexibility – Depends on the partners
Types of business entities – Private Limited company
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• Members – Minimum – Two and Maximum – Two Hundred
• Management Control – Capital is contributed as an agreed amount by the share holders which may not be same
• Liability is limited to the extent of unpaid part of the capital by share holders.
• Legal Registration – Under Indian Companies Act• Flexibility – Comparatively less• Ownership cannot be traded outside
Types of business entities – Public Limited Company
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• Members – Minimum – Seven and Maximum – Unlimited
• Management Control – Capital is contributed as an agreed amount by the share holders which may not be same
• Liability is limited to the extent of unpaid part of the capital by share holders.
• Legal Registration – Under Indian Companies Act• Flexibility – Comparatively less• Ownership can be traded outside
Types of business entities – Limited Liability Partnership
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• Members – Minimum – Two and Maximum – Unlimited
• Management Control – Capital and Profits / Losses equally shared by all partners, unless otherwise agreed upon. Partners can be individuals or Corporates
• Liability is limited to the extent of unpaid part of the capital by partners, except in case of fraud
• Legal Registration – Under Limited Liability Partnership Act
• Flexibility – Depends upon the partners
Check our Understanding• Shall we have a “Pause” here to check our
learning so far…..• Types of Business Entities - Sole Proprietor
ship, Partnership, Private Limited company, Public Limited company & Limited Liability Partnership
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Accounting equation
• Assets = Liabilities + Owner’s equity
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Accounting equation
• Assets = Liabilities + Owner’s equity
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What the business “owns”
Accounting equation
• Assets = Liabilities + Owner’s equity
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What the business
“Owes” to others
Accounting equation
• Assets = Liabilities + Owner’s equity
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What the business
“Owes” to owners
Rs 100 cr Rs 40 cr Rs 60 cr
Accounting equation
• Assets = Liabilities + Owner’s equity• Assets = Liabilities + Capital – Drawings
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Accounting equation
• Assets = Liabilities + Owner’s equity• Assets = Liabilities + Capital – Drawings
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The amount drawn by the owners out of the
capital invested by them
Accounting equation
• Assets = Liabilities + Owner’s equity• Assets = Liabilities + Capital – Drawings• Assets = Liabilities + Capital – Drawings + Profit
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Accounting equation
• Assets = Liabilities + Owner’s equity• Assets = Liabilities + Capital – Drawings• Assets = Liabilities + Capital – Drawings + Profit
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Excess of Income over expenses. It
belongs to owners
Accounting equation
• Assets = Liabilities + Owner’s equity• Assets = Liabilities + Capital – Drawings• Assets = Liabilities + Capital – Drawings + Profit• Assets = Liabilities + Capital – Drawings +
Income - Expenses
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Accounting equation
• Assets = Liabilities + Owner’s equity• Assets = Liabilities + Capital – Drawings• Assets = Liabilities + Capital – Drawings + Profit• Assets = Liabilities + Capital – Drawings +
Income - Expenses• Assets = Liabilities + Capital – Drawings +
Income – Expenses - Dividends
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Accounting equation
• Assets = Liabilities + Owner’s equity• Assets = Liabilities + Capital – Drawings• Assets = Liabilities + Capital – Drawings + Profit• Assets = Liabilities + Capital – Drawings +
Income - Expenses• Assets = Liabilities + Capital – Drawings +
Income – Expenses - Dividends
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The amount given to owners as a
share in the profits
Format of an Account
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Debit side Credit side
Account Name
Traditional classification of Accounts
RealNominal
Personal
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Traditional classification of Accounts
RealNominal
Personal
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Accounts representing all real things in life which we can really see, feel, touch, etc.
Traditional classification of Accounts
RealNominal
Personal
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All accounts representing
expenses, losses, incomes and gains
Traditional classification of Accounts
RealNominal
Personal
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Accounts representing persons – natural persons like us or
artificial persons like businesses.
Alternatively, modern classification of accounts
Assets Liabilities
Owner’s Equity
Revenues
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Owner’s account can be
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Drawings
Dividends
Capital
Owner’s account can be
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Drawings
Dividends
Capital
The amount invested by the owners
Owner’s account can be
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Drawings
Dividends
Capital
The amount drawn by the
owners
Owner’s account can be
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Drawings
Dividends
Capital
The amount taken by the
owners from the profits of the
business
Goods a/c can be
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Purchases
Sales
Purchases Returns
Sales Returns
Goods
Goods a/c can be
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Purchases
Sales
Purchases Returns
Sales Returns
Goods
Goods a/c can be
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Purchases
Sales
Purchases Returns
Sales Returns
Goods
Goods a/c can be
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Purchases
Sales
Purchases Returns
Sales Returns
Goods
Goods a/c can be
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Purchases
Sales
Purchases Returns
Sales Returns
Goods
Money can be spent for
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Goods (Resale)
Assets (Usage)
Expenses (Consumption)
Drawings
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Owner draws money
Owner takes goods / services
Owner’s personal expenses paid by business
Check our Understanding• Shall we have a “Pause” here to check our
learning so far…..• Can you recollect our discussions…
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Accounting - Introduction
Conclusion
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