School of Engineering

Financial Accounting and Management

(CSE-2) Subject Code: MR20-1BS0162
 UNIT-1

I. INTRODUCTION:

The main objective of any business is ‘earning profit’. For this purpose, a businessman
conducts various economic activities. In business, there are various transactions like
cash and credit, sale and purchase, expenditure and revenue transactions and exchange
of money. It is difficult to remember all these transactions and it is also not easy to find
out the profit or loss and financial status of a business at the end of the year by
recollecting all those transactions of that year. Hence, these should be recorded in the
books of accounts systematically. Then, it is possible to present the ‘Accounting
Information’ to the management, partners in the business, creditors, government,
workers and others.

Definition of Accountancy
As per the American Institute of Certified Public Accountants “ Accountancy is the art
of classifying, analyzing, recording and summarizing the available financial information
for the purpose of passing on the results of these exercises to the business managers and
to the management.

Nature of accounting

Accounting is a process, as it performs a step by step task of collecting, processing and

communicating the information.

Accounting is an art as it needs special skills and expertise in performing accounting.

Accounting is a science as it is based on pre-defined principles and rules.

Accounting is a store house of valuable information, therefore also is an information

system.

Accounting is a way to attain certain specific objective of making the management and
investors independent enough take their own decisions, by supplying useful financial
information. It is not an end but a way to reach that end.
 1. Records Financial Transactions: Financial accounting record each and every
financial transaction taking place in the business organisation. It maintains a clear and
systematic record of all information in the form of journals and various subsidiary
books. It avoids any confusion or loss because if any problem arises these records can
be easily checked. All transaction cannot be just memorized by humans without
recording them and that makes the financial accounting important part of every
business.
2. Summarize information’s: Information collected and recorded by financial
accounting is properly categorized according to their nature. Financial accounting
involves classifying and summarizing all financial information recorded at the initial
step. All transactions of similar nature are grouped together under one head by
making accounts like Sales, Purchase, Rent, Salaries, and Interest etc. Grouping of
same nature transactions together adds convenience in understanding of information
collected
3. Prepares Financial Statements
Financial accounting prepares financial statements like cash flow statement, income
statement, balance sheet etc. These financial statements depict the true financial position of
business. Financial statements are the result of various information collected and analysed in
overall process of financial accounting. All financial strength and weakness of business are
determined by preparation of financial statements.
4. Interprets Financial Information

Financial accounting interprets information from several analysis conducted and financial
statements prepared. It understands and explains the results of several relationships
establishes by analysis to different users for easy understanding and decision making. It
simplifies the accounting information so that it is well understood by persons having limited
or no knowledge of accounting subject.

5. Communicates All Outcomes

Financial accounting serves the needs of all external stakeholders by delivering them true and
accurate picture of the company’s financial affairs. It communicates them all financial
information by providing them with financial reports routinely. All interested parties to
business are fully aware of all business financial matters and this helps them in making
conclusions. It helps them in knowing profitability and future growth aspects through these
reports.

6. Determines and Maintains Financial Position: Financial accounting determines fair and
actual image of financial position of business. Finance is termed as lifeline of business
activities and its management is quite important for every organisation. Mismanagement of
financial resources may have adverse effects on the company’s performance. Financial
accounting records and analyse each financial aspect of business

Branches of Accounting

Is a bookkeeping system in which separate accounts are maintained for each branch or
operating location of an organization However, branch accounting usually refers to branches keeping
their own books and later sending them into the head office to be combined with those of other units .

Financial accounting

Cost accounting

Management accounting

Financial accounting:

Financial accounting is a specific branch of accounting involving a process of recording,

summarizing, and reporting the myriad of transactions resulting from business operations over a
period of time. ... Work opportunities for a financial accountant can be found in both the public and
private sectors

Cost accounting:

Is a method of managerial accounting which aims to capture the total production cost of a
business by measuring the variable costs of each production phase as well as fixed costs, such as a
lease expense is

Defined as "a systematic set of procedures for recording and reporting measurements of
the cost of manufacturing goods and performing services in the aggregate and in detail. It includes
methods for recognizing, classifying, allocating, aggregating and reporting such costs and comparing
them with standard costs."

Often considered a subset of managerial accounting, its end goal is to advise the
management on how to optimize business practices and processes based on cost efficiency and
capability. Cost accounting provides the detailed cost information that management needs to control
current operations and plan for the future
Cost accounting involves determining fixed and variable costs. Fixed costs are expenses that recur
each month regardless of the level of production. Examples include rent, depreciation, interest on
loans and lease expenses

Management Accounting

Is the process of preparing reports about business operations that help managers make
short-term and long-term decisions? It helps a business pursue its goals by identifying, measuring,
analyzing, interpreting and communicating information to managers.

"Management accounting is a profession that involves partnering in management decision

making, devising planning and performance management systems, and providing expertise in
financial reporting and control to assist management in the formulation and implementation of an
organization's strategy".

ACCONTING CONCEPTS

Business Entity Concept: While recording the business transactions in the books, it should
be noted that the business and owners are separate entities. The activities of the concern and
personal transactions of the owners should not be mixed. The final accounts are prepared to
reflect the profit/loss of the business concern only

Dual aspect concept

 States that every business transaction requires recordation in two different
accounts. This concept is the basis of double entry accounting, which is required by all accounting
frameworks in order to produce reliable financial statements.

Money measurement concept

Also called monetary measurement concept) underlines the fact that

in accounting and economics generally, every recorded event or transaction is measured in
terms of money, the local currency monetary unit of measure. Using this principle, a fact or a
happening or event which cannot be expressed in terms of money is not recorded in the
accounting books. Thus, it is not acceptable to record such non-quantifiable items as
employee skill levels or the quality of great customer service.

Cash concept

Is legal tender currency or coins that can be used to exchange goods, debt,
or services. Sometimes it also includes the value of assets that can be easily converted into
cash immediately, as reported by a company

Going concern Concept

Is an accounting term for a company that is financially stable

enough to meet its obligations and continue its business for the foreseeable future? Certain
expenses and assets may be deferred in financial reports if a company is assumed to be a
going concern.

Accounting Period Concept an Accounting year is a period of twelve months, used by
government, business, and other organizations in order to calculate their budgets, profits,
and losses. Financial year is often used in business to compare with the calendar year.

Matching concept

Is an accounting practice whereby firms recognize revenues and their

related expenses in the same accounting period? Firms report "revenues," that is, along
with the "expenses" that brought them. The purpose of the matching concept is to avoid
misstating earnings for a period

Objective Evidence Concept

The objectivity principle states that accounting information and financial reporting should
be independent and supported with unbiased evidence. This means that accounting
information must be based on research and facts, not merely a preparer's opinion.

2. ACCOUNTING CONVENTIONS
Full Disclosure Convention: states that all information should be included in an entity's
financial statements that would affect a reader's understanding of those statements. The
interpretation of this principle is highly judgmental, since the amount of information that
can be provided is potentially massive

Consistency convention: is a principle that the same accounting principles should be used
for preparing financial statements over a number of time periods. This enables the
management to draw important conclusions regarding the working of the concern over a
longer period. It allows a comparison in the performance of different periods. If different
accounting procedures and processes are used for preparing financial statements of
different years then the results will not be comparable because these will be based on
different postulates.

Conservatism: In accounting, the convention of conservatism, also known as the doctrine of

prudence, is a policy of anticipating possible future losses but not future gains. ... In
accounting, it states that when choosing between two solutions, the one that will be least
likely to overstate assets and income should be selected

Accounting Cycle

Financial Transaction

Is an agreement, or communication, carried out between a buyer and a

seller to exchange an asset for payment? It involves a change in the status of the finances of
two or more businesses or individuals. ... It is still a transaction if the goods are exchanged at
one time, and the money at another

Journal Book
 Is the book that entity firstly records all of the daily financial transactions in it.
It is also called a book of original entries because all of the transactions are records in this
book before moving to other books. Sometimes, the general journal is called the book of
original entries

General Ledger

Is the foundation of a company's double-entry accounting system? General

ledger accounts encompass all the transaction data needed to produce the income
statement, balance sheet, and other financial reports.

Trial Balance

Is a bookkeeping worksheet in which the balance of all ledgers is compiled into

debit and credit account column totals that are equal The general purpose of producing a
trial balance is to ensure the entries in a company's bookkeeping system are mathematically
correct.

FINANCIAL STATEMENT

Financial statements (or financial reports) are formal records of the financial
activities and position of a business, person, or other entity. ... A balance sheet or statement
of financial position, reports on a company's assets, liabilities, and owners’ equity at a given
point in time.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

Generally accepted accounting principles (GAAP) refer to a common set of accounting

principles, standards, and procedures issued by the Financial Accounting Standards Board
(FASB)

1. GAAP is the set of accounting principles set forth by the FASB that U.S. companies must
follow when putting together financial statements

2. GAAP aims to improve the clarity, consistency, and comparability of the communication
of financial information

3. The ultimate goal of GAAP is to ensure a company's financial statements are complete,
consistent, and comparable.

Principles of GAAP
1. Principle of Regularity

The accountant has adhered to GAAP rules and regulations as a standard.

2. Principle of Consistency

Accountants commit to applying the same standards throughout the reporting process,
from one period to the next, to ensure financial comparability between periods.

3. Principle of Sincerity

The accountant strives to provide an accurate and impartial depiction of a company’s

financial situation.

4.Principle of Permanence of Methods

The procedures used in financial reporting should be consistent, allowing a comparison of

the company's financial information.

5.Principle of Continuity

While valuing assets, it should be assumed the business will continue to operate.

6.Principle of Periodicity

Entries should be distributed across the appropriate periods of time. For example, revenue
should be reported in its relevant accounting period.

7.Principle of Materiality

Accountants must strive to fully disclose all financial data and accounting information in
financial reports.

What is meant by IFRS?

International Financial Reporting Standards (IFRS) are a set of accounting rules for the
financial statements of public companies that are intended to make them consistent,
transparent, and easily comparable around the world.

Transparency

It encourages transparency and accountability of financial statements prepared by

companies, small firms, and government agencies. As a result, it minimizes the margin of
error and manipulation of any holdings and irregularities of funds, transactions, and
balances. Besides, it also motivates consistency and clarity of work
Uniformity and Comprehensive

The International Financial Reporting Standards are developed to set uniformity in the

presentation and understand ability of statements. When everyone follows and recognizes
the standards, it becomes easy for companies and agencies to follow a common law that
helps world economies compare their growth comprehensively. Also, it is easy to read for
everyone

Security and Flow

It helps track the flow of transactions, records funds information, and works towards
attaining a security level for direct and indirect foreign investments across nations. This
accounting standard is essential when we are dealing with significant assets or getting into
heavy transaction

Accountability

It strengthens accountability by bridging the gap of incompetent financial reporting. If not

complied with it, the companies may face penalties

International Accounting Standards Board (IASB)

The international accounting standards are a set of practices established by the

International Accounting Standards Board (IASB). These practices are designed to make it
simpler for businesses around the world to compare financial reporting and data

Maintaining transactional data

Defining types of transactions

Financial reporting

Proper record-keeping

Assessing financial impacts

OBJECTIVES

1.Providing information to the management of an organization which is used for the

purpose of planning, analysis, benchmarking and decision making.
2.Providing information to investors, promoters, debt provider and creditors which is used
to enable them to male rational and prudent decisions regarding investment, credit etc.

5.Providing information as to how an organization is procuring & using various resources.

6.Providing information to various stakeholders regarding performance management of an

organization their duties & responsibilities.

7.It facilitates statutory audit. The Statutory auditors are required to audit the financial
statements of an organization to express their opinion.

UNIT-II

PREPARATION OF ACCOUNTING RECORDS

Double Entry System of Accounting and Importance

Definition: Double Entry System is one of the accounting method in which every transaction
has a dual effect, i.e., every debit transaction will have an equivalent credit transaction. This
system is followed by institutions for passing journal entries of their day to day business
transactions.

EX:-Mr. A makes some payment to Mr. B. In this transaction, Mr. B is a receiver and Mr. A is
a giver; therefore, Mr. B’s account will be debited and Mr. A’s account will be credited

ADVANTAGES

1.Entire Transactions Report: All the transactions of the business, as well as personal
operations of the proprietor or firm, are recorded in this system.

2.Find Exact Profit or Loss: Preparing a profit and loss account, which shows the precise
position of profit or loss earned by the business during the financial year, becomes more
accessible with the double-entry system.

3.Arithmetical Accuracy Checks: Every transaction has double entries and therefore
arithmetical accuracy of transactions gets maintained, which can be double-checked later by
preparing a trial balance.

4.Control Over Frauds: Double entry system restricts fraudulent activities as it is a scientific
system of accounting.

5.Finds the Accurate and Fair Position of Financial Statement: Double entry system helps in
preparing the balance sheet any time during the year to see the actual financial position of
the company as and when required.
6.Feasibility of Business Management: In this system, the administration has control over
the business exercises as complete information is available to monitor.

7.Relative Study Approach: In this system of accounting, it is feasible to do a comparative

study of the statements of previous years with the current year which helps in taking
necessary actions to achieve the desired results.

8.Decisive Information: However, the data collected under this system is based on a
scientific and systematic approach; it acts as crucial information for business actions.

Disadvantages of Double Entry System

1.Double-entry system of accounting is convenient for large business enterprises.

2.This system is quite expensive than the single-entry system.

3.For maintaining this system of accounting, complete knowledge of accounting is essential.

4.In the Double-entry system, if any transaction gets omitted, it becomes difficult to trace
such a transaction

Personal Accounts:

accounts opened in the names of individuals and institutions are called ‘Personal
accounts’. For example: Raju’s Account, M/s. Ramesh & Co account.

Real Accounts:
 All the accounts, which record transactions related to Assets is known as Real Account.
A separate account will be opened for every asset in the business concern. Ex. Machinery, furniture,
stock, cash etc.,

Nominal Account:

Account that gives information related to expenditure and income is known as

Nominal account. Separate accounts will be opened to record expenditure, losses, income and profit
of a business. These are also known as ‘Fictitious Accounts’. Ex. Salaries, Rent, Depreciation etc.,
Date Particulars Ledger Debit Rs Credit Rs
folio

2002 Cash A/c…………………. Dr. 40,000

April 1
To Capital A/c 40,000

(Being the business commenced with

investment)

2002 Purchases A/c …………… Dr

20000
April 3
To Cash A/c
20000
(Being the goods purchased for cash)

Salaries A/c ……………… Dr

2002 10000
April 5 To Cash A/c
10000
(Being the salaries paid)

2002 Ravi A/c ……………… Dr

35,000
April 13
To Sales A/c
35,000
( Being the salaries paid)
 2002 April Cash A/c ……………… Dr 1000
20
To commission A/c 1000

(Being the commission received)

Discount A/c ……………… Dr 2000

2002 April
22 To Cash A/c 2000

(Being the discount allowed)

2002 April Purchases A/c ……………… Dr 50000

28
To Venkat A/c 50000

(Being goods purchased from Venkat on

credit)

LEDGER

A Ledger account may be defined as a summary statement of all the transactions

Relating to a person, asset, expense or income, which have taken place during a given
period of time and show their net effect? So every entry recorded in the journal must be
posted into the Ledger. It is a register having a number of pages, which are serially
numbered. One account is usually assigned one page in the Ledger. It is the principal book of
accounts.

LEDGER POSTINGS: ILLUSTRATION

Journalise the following transactions, post them into Ledger and balance the accounts:.
2003 May 1 Raj commenced business with a capital of Rs. 50,000
“ 2 Purchased goods from Jagan Rs. 5,000
4 Sold goods to Gopal Rs.10,000
5 Cash purchases Rs. 10,000
7 Paid salaries Rs. 3,000
8 Cash sales Rs. 10,000
9 Bought machinery and paid through bank Rs.2,000
14 Cash paid to Jagan in full settlement Rs. 4,800
17 Cash received from Gopal and Rs. 9,500
discount allowed Rs. 500
18 Deposited with bank Rs. 5,000
24 Sold old machinery Rs. 1,500
 26 Interest received through Cheque Rs. 500
31 Raj’s personal use Rs. 1,000

Solution:

JOURNAL ENTRIES

Date Particulars Ledger Debit Credit

Folio Rs. Rs.

2003 Cash A/c… Dr. 50,000

May1 To Capital A/c 50,000

(Being the business commenced with investment)

“2 Purchases A/c Dr 5,000

To Jagan A/c 5,000

(Being the goods purchased on credit)

4 Gopal A/c Dr 10,000

To Sales A/c 10,000

Being the goods sold on credit paid)

5 Purchases A/c Dr 10,000

To Cash A/c 10,000

Being the goods purchased for cash)

7 Salaries A/c Dr 3,000

To Cash A/c 3,000

(Being the Salaries paid received)

8 Cash A/c Dr 10,000

To Sales A/c 10,000

Being the goods sold for cash)

9 Machinery A/cDr 2,000

To Bank A/c 2,000

(Being machinery bought and paid through cheque)

14 Jagan A/c Dr 5,000

To Cash A/c 4,800

To Discount A/c 200

(Being Jagan,s account settled )

17 Cash A/c Dr 9,500

Discount allowed A/c Dr 500

To Gopal’s A/c 10,000

(Being Cash received with discount)

18 Bank A/c Dr 5,000

To Cash A/c 5,000

(Being the Being cash deposited with bank)

24 Cash A/c Dr 1,500

To Machinery A/c 1,500

(Being the sale of old machinery)

26 Bank A/c Dr 500

To Interest A/c 500

(Being the interest received through cheque)

31 Drawings A/c Dr 1,000

To Cash A/c 1,000

(Being the owner used cash for personal use)

 LEDGERS

Cash Ledger A/C

Date Particulars J. F Amount Date Particulars J. F Amount
No Rs. No Rs.
2003 2003
May1 To capital A/c 50,000 May5 By Purchases A/c 10,000
8 To Sales A/c 10,000 7 By Salaries A/c 3,000
17 To Gopal A/c 9,500 14 By Jagan A/c 4,800
24 To Machinery A/c 1,500 18 By Bank A/c 5,000
31 By Drawings 1,000
31 By Balance c/d 47,200
71,000 71,000
======
1/6/03 To Balance C/d 47200

Date Particulars J. F Amount Date Particulars J. F Amount

No Rs. No Rs.
2003 2003
May1 To Balance c/d 50,000 May1 By cash A/c 50,000

50,000 50,000
=====
1/6/03 By Balance B/d 50,000

TRIAL BALANCE

It is a must for the businessman to prepare ‘final accounts’ with a specific object
to find out the profitability of the transactions made and the true and fair financial position
of the firm. These final accounts are prepared from the balances of Ledger accounts which
are available in a common list called ‘Trial Balance’.

Characteristics of Trial Balance:

• It is a statement or a list

• It contains all the debit and credit balances

• The total of debit balances and credit balances must be equal.

• It is the only base for preparation of final accounts

• It can be prepared at any time

Carriage 350 Discount 70

Inward 1,500 Received 240
Returns 17,000 Carriage 380
Inward 29,960 outward 1,370
Wages & 1,000 Returns 500
Salaries 22,760 outward 1,690
Advances Sundry 3,000
paid expenses
Bank Taxes
charge Commission
Creditors received
Drawings
 Elements of Financial statement

These Financial Statements contain five main elements of the entity’s financial information,
and these five elements of financial statements are:

Assets,

Liabilities,

Equities,

Revenues, and

Expenses
Capital Expenditure: The transactions of capital expenditure give benefits for more than one
accounting period, such as acquisition and improvement of assets, acquisition of special
rights, increasing of earning capacity, and restoration of operating efficiency. It is non-
recurring in nature. Therefore, they are shown on the assets side of the Balance Sheet.

Revenue Expenditure: It is incurred for generating revenue in the current accounting period
and its benefit expires with such period. It helps to maintain the normal working condition
of a business. It is charged as expenses in Trading / Profit & Loss Account on debit side. Ex:
Purchases, carriage expenses, wages, fuel, salaries, postage, telephone rent, rates, taxes
salaries, advertisements, traveling charges, interest and depreciation.

Capital receipts: are defined as “non-recurring receipts’ from the owner of the business or
lender of money creating a liability to either of them”. Which include proceeds out of sale of
assets: capital, bank loan, issue of debentures, loan, and sale of assets? They are to be
shown on liabilities side of the balance sheet or deducted from the asset value on assets
side of the balance sheet.

Revenue receipts: Revenue receipts are defined as “a recurring receipt against sale of goods
in the normal course of business. It may be a non-trading income of regular or recurring
nature. Ex. Interest, discount, dividend received etc., these items should be credited to
Trading account, Profit and Loss account