B.COM.

(HONOURS)
SEMESTER-I
Course Code: UG BCOM-H-CC-T-01
Course Title: FINANCIAL ACCOUNTING - 1
Core Course; Credit-6; Full Marks-75
Unit 1: Introduction to Accounting
1. Meaning and objectives of Financial Accounting, Meaning of different types of accounting.
2. Users of accounting information and their information needs.
3. Accounting Concepts and Conventions: Entity, Money Measurement, Cost, Realisation,
Periodicity, Going Concern, Accrual, Consistency, Conservatism, Materiality, Matching and
Full Disclosures.
4. Meaning of Accounting Theory, Relation of Accounting Theory with Practice, Generally
Accepted Accounting Principles (GAAP).
5. Accounting Standards: Concept, Need, Google Classroom Code: akmzzwu
Benefits and Limitations of Accounting
Standards, Types (Accounting Standards & Indian Accounting Standards) and names of
Accounting Standards in India, Provision relating to mandatory application of Accounting
Standards under Companies Act, 2013.
6. Basic concept of IFRS.

Contents
Introduction ..................................................................................................................................................................................................... 2
Classification ................................................................................................................................................................................................... 2
Transaction ....................................................................................................................................................................................................... 3
Organization/Proprietorship [based on ownership]............................................................................................................... 4
Accounting is the Language of Business ...................................................................................................................................... 4
Financial information ................................................................................................................................................................................. 5
Annual Report of Hindustan Unilever Ltd [Extract] ........................................................................................................... 6
Objective of Accounting ......................................................................................................................................................................... 8
The Accounting Process........................................................................................................................................................................... 8
EVOLUTION OF ACCOUNTING....................................................................................................................................................... 9
GAAP ..................................................................................................................................................................................................................... 9
GAAP Diagram ............................................................................................................................................................................................. 11
ASSUMPTIONS ABOUT THE WORLD................................................................................................................................... 11
OPERATING CONVENTIONS ...................................................................................................................................................... 12
QUALITY CONSIDERATIONS (QC) ....................................................................................................................................... 13
EVENT AND TRANSACTION............................................................................................................................................................ 14
VOUCHER IN ACCOUNTING........................................................................................................................................................... 15

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Introduction
1. “Accounting is the language of business and ….. Getting comfortable in a foreign
language takes a little experience, a little study, early on but it pays off big later on.”
–Warren Buffet
[Source: https://www.cnbc.com/2014/07/31/warren-buffett-surprises-teen-cancer-
patient-on-cnbc.html]
2. Accounting is the process of identifying, measuring, and communicating financial
information about an entity to permit informed judgments and decisions by users of
the information.
[American Accounting Association]

3. In 1970, the Accounting Principles Board of AICPA also emphasized that the function
of accounting is to provide quantitative information, primarily financial in nature,
about economic entities, that is intended to be useful in making economic decisions.
The field of accounting is generally sub-divided into:
(a) Book-keeping
(b) Financial Accounting
(c) Cost Accounting and
(d) Management Accounting

Classification

And

ACCOUNTANCY

ACCOUNTING

BOOK KEEPING

a. Bookkeeping –
i. Recording [Systematically]
ii. Financial statements are not part of it
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 iii. Managerial Decisions cannot be taken based on this
iv. Crude form

b. Accounting –
i. Summarizing of recorded transaction
ii. Language of business
iii. Financial statements are prepared on the basis of bookkeeping records
iv. Decision Making is based on reports prepared.
v. Three fields – Financial, Cost and Management accounting.
c. Accountancy – the academic discipline of Accounting

Transaction
 Transaction is exchange of values carried out between two or more entities.
 Accounting deals with recording and compiling the financial transactions in a
significant manner and interpreting the results.
 In an accounting sense, an event can be understood as the outcome of a business
activity, that can affect the account balances of the company if it is financial in
nature.

BASIS FOR
TRANSACTION EVENT
COMPARISON

What is it? Cause Effect

Accounting record Transactions are recorded as Only those events are recorded
they arise. which are financial in nature.

Change in financial Results in change in the financial May or may not result in change
state position of the company. in financial position of the
company.

⇒ All transactions are events, but all events are not transactions because to become a
transaction, an event must be of financial nature.

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 Organization/Proprietorship [based on ownership]

ORGANISATION

profit seeking non profit seeking

organisation organisation

Joint Stock
Company
Sole Limited
Propietorship Partnership Liability
Partnership
Public Limited
Compnay

Private Limited
Company [Small
Company]
One Person
Company

Accounting is the Language of Business

1. “The process of identifying, measuring and communicating economic information to
permit informed judgments and decisions by the users of accounting”.
2. “Accounting is the 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 result thereof”.
3. Accounting is the process of identifying, measuring and communicating financial
information about an entity to permit informed judgments and decisions by users of
the information.

What Financial Information

1. How is financial information identified?
2. How is financial information measured?
3. How is financial information communicated?
4. What is an entity?
5. Who are the users of financial information about an entity?
6. What types of judgments and decisions do these users make?

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Financial information

Let us understand “financial information” disseminated by a Company for the

“Users” of financial information

Users of accounting information and their information Needs.

1. Investors: They provide risk capital to the business.
2. Employees: Growth of the employees is related to the growth of the organisation
3. Lenders: They are interested to know whether their loan-principal and interest
will be paid when due.
4. Suppliers and Creditors: They are also interested to know the ability of the
enterprise to pay their dues.
5. Customers: Customers are also concerned with the stability and profitability of
the enterprise.
6. Government and their agencies: public good and taxes
7. Public: Successful business makes substantial contribution to the local economy in
8. Management: Management as whole is also interested in the accounts for various
managerial decisions.

Hindustan Unilever Ltd

Hindustan Unilever (HUL) is India's largest fast-moving consumer goods (FMCG)
company, with leadership in Home & Personal Care Products and Foods & Beverages. In
1931, Unilever set up its first Indian subsidiary, Hindustan Vanaspati Manufacturing
Company, followed by Lever Brothers India Limited (1933) and United Traders Limited
(1935). These three companies merged to form HUL in November 1956

Some Known Products

Lux, Lifebuoy, Surf Excel, Rin, Wheel, Glow & Lovely, Pond's, Vaseline, Lakmé, Dove,
Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality
Wall's and Pureit.

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Annual Report of Hindustan Unilever Ltd [Extract]

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Objective of Accounting

The Accounting Process

THE
ACCOUNTING
PROCESS

ACCOUNTING
ECONOMIC 'LINKS' DECISION
MAKERS WITH COMMUNICATIN
ACTIVITIES
ECONOMIC G INFORMATION
ACTIVITIES AND
THE RESULT -
DECSION

DECSION MAKERS
(INTERNAL AND EXTERNAL
USERS]

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EVOLUTION OF ACCOUNTING
The early development of accounting system is traceable to the most ancient
cities, in Mesopotamia, a home of number between 450 and 500 BC. (Keistar,
1965): Greece and Rome were cities where coinage was invented in about 630
BC (Chatfield, 1977) and China is where accounting systems were concerned
with the recoding of merchants, temples, and estates (FU 1971).
[https://arxiv.org/ftp/arxiv/papers/1411/1411.4633.pdf]

GROWTH OF ACCCOUNTING KNOWLEDGE

1775 -1850 1. Small Business Units
2. Emphasis on Proprietary ‘Interest’ or Net Worth or
Wealth
3. More emphasis on the Capital (Asset –Liabilities)
1850 -1900 1. Growth of Corporations and Large Scale Business
2. Emphasis on ‘Income Statements’
3. Separate Entity Postulate
4. Going Concern and Periodicity
1900 -1950 1. Stewardship Accounting
2. Cost and Management Accounting
3. Emphasis on rational Decision Making
1950 -2000 1. Development as a Science
2. Accounting Standard Setting Board
3. Need for harmonization
Post 2000 1. Accounting as a Profession [accelerates].
2. More technology driven
3. Harmonization [globalization of accounting thought]
4. Increasing role of regulations to curb unethical practices

GAAP
Generally Accepted Accounting Principles (GAAP) refers to a widely accepted
set of rules, standards, conventions, and procedures for reporting financial
info. In USA this set of rules has been established by the Financial Accounting
Standards Board (FASB). GAAP is an amalgamation of authoritative standards
and the usually accepted methods of recording and reporting info on accounting.

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As explained by Investopedia, GAAP are enforced on the companies so as to
provide the investors with least possible level of reliability in the financial
statements used while analyzing companies for investment purposes. The things
covered by GAAP include revenue recognition, measuring outstanding share, and
classification of items on balance sheet.

Beyond the 10 principles, GAAP compliance is built on three rules that

eliminate misleading accounting and financial reporting practices. These rules
create consistent accounting and reporting standards, which provide
prospective and existing investors with reliable methods of evaluating an
organization's financial standing. Without these rules, accountants could use
misleading methods to paint a deceptive picture of a company or organization's
financial standing.
U.S. law requires businesses that release financial statements to the public and
companies that are publicly traded on stock exchanges and indices to follow
GAAP guidelines, which incorporate 10 key concepts:

1. Principle of regularity: GAAP-compliant accountants strictly adhere to

established rules and regulations.
2. Principle of consistency: Consistent standards are applied throughout the
financial reporting process.
3. Principle of sincerity: GAAP-compliant accountants are committed to
accuracy and impartiality.
4. Principle of permanence of methods: Consistent procedures are used in
the preparation of all financial reports.
5. Principle of non-compensation: All aspects of an organization's
performance, whether positive or negative, are fully reported with no
prospect of debt compensation.
6. Principle of prudence: Speculation does not influence the reporting of
financial data.
7. Principle of continuity: Asset valuations assume the organization's
operations will continue.
8. Principle of periodicity: Reporting of revenues is divided by standard
accounting time periods, such as fiscal quarters or fiscal years.
9. Principle of materiality: Financial reports fully disclose the organization's
monetary situation.

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 10. Principle of utmost good faith: All involved parties are assumed to
be acting honestly.

GAAP compliance makes the financial reporting process transparent and

standardizes assumptions, terminology, definitions, and methods. External
parties can easily compare financial statements issued by GAAP-compliant
entities and safely assume consistency, which allows for quick and accurate
cross-company comparisons.

GAAP Diagram

ASSUMPTIONS ABOUT THE WORLD

1. Business Entity Assumptions (BEA): Business should be separated from its
owners and the environment in which it operates is necessary in order to
set a boundary to the accounts. Only the transactions directly affecting
the entity are recorded in financial statement. Separate legal personality is
assumed as business has a right to acquire assets and incurs liabilities as
distinct from its owners. The business has right to sue and be sued like any
other person.
2. Going Concern Assumption (GCA) means that in drawing up financial
statements; the entity will continue to exist in its present form into the
indefinite future (perpetuity). It is further stresses by that organization
will continue to exist for life as far as the firm can meet its immediate and
long term financial obligations.
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3. Accounting Period or Periodicity Assumption (PA) believes that the
continuum of time can be subdivided into a number of discrete time periods
(accounting periods)
4. Stable Monetary Unit Assumption (SMUA): states that the value of the
monetary unit used in drawing up the financial statements is constant over
time.

OPERATING CONVENTIONS:
1. Historical cost Convention (HCC): Forms the basis of valuation used in the
preparation of published financial statements. That is, all assets are shown in
the accounts at the cost of acquisition. The word 'cost', said Horngren and
George, (1990), is intricate, complex and confusing. This is because cost may
mean different things to different people at different time, place and event.
They assert that cost is intricate when referred to as expired or futuristic,
production cost or period cost, direct or indirect cost. It is complex when
referred to as variable cost, fixed cost, semi variable cost, semi fixed cost,
marginal cost, absorption cost, sunk cost, conversion cost and opportunity
cost. Confusion may arise when certain cost attributes are not or are to be
capitalized for purpose of assets valuation.
2. Realization Convention (RC): It suggests that it is when contractual
relationship between the buyer and the seller was completed that the
amount of revenue is recognized and recorded in the books of accounts but
not necessarily when cash is collected. Turpin and Stein, (1986) assert that
accounting period imposes serious problem to realization principle as the
entity needs to have recognized the transactions during the accounting
period but not when contractual relationship was completed.
3. Matching Convention (MC): Leads to the matching of entity's revenue
generated with the expenses incurred. The matching process also deals with
the allocation of capital costs between periods. The combination of the
matching principles with that of realization gives rise to the accruals system
of accounting
4. Duality Convention (DC): This is associated with the system of Double Entry
Book-keeping invented by Luca Pacioli in 1494. It requires that every

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 accountant enters both aspects of every transaction in the books of account
because every action has an equal and opposite reaction.
5. Money Measurement Convention (MMC): Says that all items included in the
accounts must be measurable or quantifiable in terms of monetary unit. This
assumption suggests that it would be insufficient to include non-quantifiable
items in traditional accounts merely using an ordinal ranking for them.
The important concepts have been listed as below:
1. Business entity: business has a distinct and separate entity from its owners.
2. Money measurement: transactions which can be expressed in terms of money are to be recorded in the book
of accounts.
3. Going concern: a business firm would continue to carry out its operations indefinitely
4. Accounting period: the span of time at the end of which the financial statements of an enterprise are
prepared
5. Cost: all assets are recorded in the book of accounts at their cost price, which includes cost of acquisition,
transportation, installation and making the asset ready for the use.
6. Dual aspect (or Duality): every transaction has a dual or two-fold effect
Assets = Liabilities + Capital
7. Revenue recognition (Realization): the revenue for a business transaction should be considered
realized when a legal right to receive it arises
8. Matching: expenses incurred in an accounting period should be matched with revenues during that period
9. Full disclosure: all material and relevant facts concerning financial performance of an enterprise must be
fully and completely disclosed in the financial statements and their accompanying footnotes.
10. Consistency: policies and practices followed by enterprises are uniform and are consistent over the period of
time.
11. Conservatism (Prudence): concept of playing safe
12. Materiality: accounting should focus on material facts
13. Objectivity: free from the bias of accountants and others

QUALITY CONSIDERATIONS (QC)

Objectivity states that entries made in the ledger shows that accounts must
be capable of verification by an independent party. This would ensure that
financial statements are free from bias and minimizes the possibility of
subjective judgment by accountant.

Prudence or conservatism (C) Connotes that where an accountant could deal

with an item in more than one way, his choice between the alternatives should
give precedence to which provides the most conservatism result, the principle is
applied in valuation of Stock (AS 2)

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Consistency consideration (CC) States that where a transaction or economic
event is repeated in different time periods, then the accounting representation
should be the same in all time periods. The consideration however does not
preclude mistakes being rectified.

Materiality. It states that the way an item is treated in the accounts should
depend upon its magnitude. To classify an item as material depends upon the
influence the item will have on the interpretation of the amounts.

EVENT AND TRANSACTION

In accounting, only financial transactions are recorded. A financial transaction
is an event which can be expressed in terms of money and which brings change
in the financial position of a business enterprise. An event is an incident or a
happening which may or may not bring any change in the financial position of a
business enterprise. Therefore, all transactions are events but all events are
not transactions. A transaction is a complete action, to an expected or possible
future action. In every transaction, there is movement of value from one source
to another. For example, when goods are purchased for cash, there is a
movement of goods from the seller to the buyer and a movement of cash from
buyer to the seller. Transactions may be external (between a business entity
and a second party, e.g., goods sold on credit to Hari or internal (do not involve
second party, e.g., depreciation charged on the machinery).

Illustration 1
State with reasons whether the following events are transactions or not to Mr. Nikhil,
Proprietor, Delhi Computers
1. Mr. Nikhil started business with capital (brought in cash) Rs. 40,000.
2. Paid salaries to staff Rs. 5,000.
3. Purchased machinery for Rs. 20,000 in cash.
4. Placed an order with Sen & Co. for goods for Rs. 5,000.
5. Opened a Bank account by depositing Rs. 4,000.
6. Received passbook from bank.
7. Appointed Sohan as Manager on a salary of Rs. 4,000 per month.
8. Received interest from bank Rs. 500.
9. Received a price list from Lalit.

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VOUCHER IN ACCOUNTING
Voucher means a written statement that serves to confirm or witness for some
facts like a Transaction. Primarily, it is a document that shows goods purchased
or services rendered, authorizing the payment and indicating in the ledger
account in which these transactions have to be recorded.

Benefits of Voucher
1. Vouchers are useful for maintaining a higher level of control over the
payables process.
2. Several invoices can be paid at once (reducing the number of checks).
3. It can be pre-numbered, which simplifies the audit trail for payables.
4. Invoice approval is separated from invoice payment, it makes easier to
schedule both to maximize efficiency.
5. Payment of the invoices is done by the cashier, who reports to the
treasurer.

Types of Vouchers in Accounting

There are four different types of Vouchers in Accounting. They are:
1. Debit or Payment voucher
2. Credit or Receipt voucher
3. Non-cash or Transfer Voucher
4. Supporting Voucher

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