MB20104 FINANCIAL

REPORTING,
STATEMENT AND
ANALYSIS
 Introduction to Accounting
Book Keeping:
Book-keeping is the process
Book- of recording
financial transactions in the books of
accounts.. It is the primary
accounts stage in the
accounting process
process.. It includes recording the
transactions and classifying the same
under proper heads
heads..
Book Keeping
Keeping:: R.N.Carter
Carter::
Book-keeping is the science and art of
Book-
recording correctly in the books of account all
those business transactions of money or
money’s worth
worth..
Accounting:
Accounting is the systematic process of
identifying, measuring, recording, classifying,
summarising, interpreting and communicating
financial information
information..

Accounting: American Accounting

Association:
Accounting is the process of identifying,
measuring and communicating economic
information to permit informed judgements
and decisions by users of the information
information..
Methods of Accounting:
1. Single Entry System:
It is an incomplete method of book keeping
keeping..
This system of recording transactions is
unscientific..
unscientific
Accuracy of books cannot be ascertained
ascertained..
It can be followed in sole trading concern and
partnership firms but not in company form of
organization..
organization
2. Double Entry System:
According to this system, every transactions has
got a twofold aspect
aspect..
One is benefit giving aspect and other one is
benefit receiving aspect
aspect..
For every transaction one account is to be
debited and another account is to be credited in
order to have a complete record of the
transaction..
transaction
Under this system for every debit there must be
a corresponding and equal credit
credit..
Basis of Accounting:
1. Cash Basis of Accounting:
Under this system all incomes are considered to
be earned only when they are actually received
in cash
cash..
All expenses are considered to be incurred only
when they are actually paid in cash
cash..
Example:: Doctors, Lawyers and Brokers prefer
Example
to follow this method
method..
2. Accrual/Mercantile Basis of
Accounting:
It is a system in which accounting entries are
made on the basis of amount having become
due for payment or receipt
receipt..
Incomes and Gains are credited to the period in
which they are earned whether cash is received
or not
not..
Expenses and Losses are debited to the period
in which they are incurred whether cash is paid
or not
not..
This method is followed by merchants for trade
and industry
industry..
3. Mixed/Hybrid Basis of Accounting:
It is combination of both cash and accrual basis
of accounting
accounting..

This is a system of accounting in which some

items of income/expenses are taken on cash
basis while most of the income/expenses are
shown on accrual basis
basis..
Branches of Accounting:
1. Financial Accounting:
The accounting for revenues, expenses, assets and
liabilities which is commonly carried on in the general
offices of business is known as financial accounting
accounting..
The financial accounting information is expressed in
two main types of financial statements they are
Profit and Loss Account
Account::
It matches the incomes and expenses of the accounting
period to ascertain the profit or loss
loss..
Balance sheet
sheet::
It shows the assets, liabilities and revealing financial
position as on that date
date..
2. Cost Accounting:
It involves the collection, recording,
classification and appropriate allocation of
expenditure for the determination of the costs
of products or services and for the presentation
of data for the purposes of cost control, cost
reduction and managerial decision making
making..
3. Management Accounting:
It is concerned with the presentation of
accounting information in such a way as to
assist management in decision making and in
the day
day--to
to--day operations of an enterprise
enterprise..
The information collected from financial
accounting, cost accounting, etcetc.. are grouped,
modified and presented as per the requirements
of management for discharging their functions
and for decision making
making..
Accounting Principles:
Principles:
Accounting principles are the basic norms and
assumptions developed and established as the basis for
accounting system
system..
It provide the basic framework within which the
accounting records and accounting reports are to be
prepared..
prepared
These principles are adopted by the accountants
universally..
universally
These accounting principles provide uniformity and
consistency in the accounting methods and process
process..
Such accounting principles are known as Generally
Accepted Accounting Principles (GAAP)
(GAAP)..
Accounting principles are classified into two categories
they are
1. Accounting Concepts:
Accounting concepts are the assumptions or postulates
or ideas which are essential to the practice of
accounting and preparation of financial statements.
The important accounting concepts are
1.1 Business entity concept
1.2 Going concern concept
1.3 Money measurement concept
1.4 Dual aspect concept
1.5 Accounting period/Periodicity concept
1.6 Cost concept
1.7 Realisation/Revenue recognition concept
1.8 Revenue matching concept
1.9 Accrual concept
1.10 Objective evidence concept
2. Accounting Conventions:
Accounting conventions are the established
traditions, customs, methods and practices
which usually act as guidelines for preparation
and presentation of accounts
accounts..
The important accounting conventions are
2.1 Convention of full disclosure
2.2 Convention of consistency
2.3 Convention of materiality
2.4 Convention of conservatism or prudence
prudence..
Debit::
Debit
Entry on the left side of a Double entry book
keeping system that represents the addition of
an asset or expense or the reduction to
a liability or revenue
revenue..
Debit Balance
Balance::
Balance remaining after one or a series of book
book--
keeping entries..
entries This amount represents
an asset or an expense of the entity
entity..
Credit::
Credit
Entry on the right side of a double
double--entry
bookkeeping system that represents the
reduction of an asset or expense or the addition
to a liability or revenue
revenue..
Credit Balance
Balance::
Balance remaining after one of a series
of bookkeeping entries
entries.. This amount represents
a liability or income to the entity
entity..
Classification/Types of Accounts:
Under double entry system of book keeping,
for the purpose of recording the various
financial transactions, the accounts are
classified as
1. Personal Accounts
Accounts::
Accounts of persons with whom the business
has dealings
dealings..

1.1 Natural person’s Account

Account::
Natural person means human beings
beings..
Example:: Vinoth account or Malini account
Example account..
1.2 Artificial person’s Account:
Artificial person refers to the persons other than
human beings recognised by law as persons
persons..
They include Business concerns, Limited companies,
Banks and Charitable institutions
institutions..
Example:: ABC Co
Example Co.. account or Indian Bank account
account..
1.3 Representative personal Accounts:
These are the accounts which represent persons
natural or artificial or a group of persons
persons..
Example:: Outstanding expenses, Prepaid expenses,
Example
Accrued income and Prepaid income
income..
Accounting Rules for Personal Account
Account::
Debit the Receiver.
Credit the Giver.
2. Impersonal Accounts:
All accounts which do not affect persons are called
impersonal accounts
accounts.. These are further classified
into
2.1 Real Accounts
Accounts::
All accounts relating to tangible and intangible
properties and possessions of the business are
called real accounts
accounts..
2.1.1 Tangible Real Accounts
Accounts::
These include accounts of properties and
possessions of the business which can be seen, felt
and touched
touched..
These have physical existence or shape
shape..
Example:: Machinery, Building, and Furniture
Example Furniture..
2.1.2 Intangible Real Accounts:
These include accounts of properties and
possessions of the business which cannot be
seen and touched
touched.. These do not have
physical existence or shape
shape..
Example:: Goodwill, Patents, Copy rights
Example
and Trademarks
Trademarks..

Accounting Rules for Real Account

Account::
Debit What Comes In.
Credit What Goes Out.
2.2 Nominal Account:
The accounts relating to expenses, losses,
revenues and gains of the business are
called nominal accounts
accounts..
Example:: Salaries, Electricity charges,
Example
Rental income, Interest income and
Commission received
received..
Accounting Rules for Nominal Account
Account::
Debit All Expenses and Losses.
Credit All Incomes and Gains.
Journal Entries:
Journal is the book of original entry in which
business transactions are recorded in chronological
order..
order
Entries are made in the journal based on source
documents..
documents
As soon as a transaction takes place, its debit and
credit aspects are analysed and recorded in the
journal together with a short description called
narration..
narration
Record of business transactions in the journal is
known as Journal entry
entry..
The process of recording the transactions in journal
is called as journalising
journalising..
 Format of Journal Entries

Journal Entries in the Books of ABC Co. Ltd.

Date Particulars L . F. Debit Credit
No Rs. Rs.
23.09.202 Debit A/C Debit Amount -----
----- Credit
1 Dr. Amount
To Credit
A/C
[Narration]
Nature of transactions:
1. Capital
2. Drawings
3. Cash
4. Bank
5. Purchases
6. Purchase Return
7. Sales
8. Sales Return