1. introduction - fa

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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