INTRODUCTION TO ACCOUNTING AND FINANCIAL STATEMENT

Meaning of Accounting

 Accounting as an information system is the process of identifying,

measuring and communicating the economic information of an organization
to its users who need the information for decision making.

 Identifying the transactions and events

 Measuring the identified transactions and events

 Recording

 Classifying

 Summarizing

 Analyzing

 Interpreting

 Communicating

• INPUT: Economic Events measured in financial terms

• PROCESS: Recording, classifying, summarizing, analyzing and

interpreting

• OUTPUT: Communicating information to users

 GAAP: Generally Accepted Accounting Principles (GAAP) are
those rules of action or conduct derived from experience and
practice and when they prove useful, they become accepted
as principles of accounting.

 BASIC ASSUMPTIONS: These are like foundation pillars on

which the structure of accounting is based.

 Accounting Entity Concept

 Money Measurement unit of assumption

  Accounting Period Assumption

 Going concern Assumption

 BASIC PRINCIPLES: These are general decision rules that

govern the development of accounting techniques.

 Revenue Recognition

 Revenue is gross inflow of cash, receivables or other considerations

arising out of normal activities of the business.

 Revenue is recognized in the period in which it is earned.

 Historical Cost Principle

 Assets are recorded at the price paid for acquisition.

 Depreciation is charged to allocate cost of the asset over its useful life

 Matching Principle

 Revenues and Costs pertain to the same period are only matched to
reveal the performance.

 Full Disclosure

 Financial statements should act as means of conveying information

but not concealing.

 Objectivity Principle

 Accounting data should be definite, verifiable, and free from

personal bias.

 MODIFYING PRINCIPLES:

 To make the information useful, the basic assumptions and principles have
to be modified. These modifying Principles are

o Cost-benefit principle
 o Materiality principle (as Opposed to full disclosure?)

o Consistency principle (Ex. FIFO, LIFO, Depn)

o Prudence principle

o Timeliness principle

o Industry Practice

CONCEPT UNDERLYING FINANCIAL STATEMENTS:

 Performance

 Position

ACCOUNTING STANDARDS:

 The International Accounting Committee (IASC), now International

Accounting Standards Board (IASB) was formed on 29th June 1973, by
the recognized professional accounting bodies in Canada, Australia, France,
Japan, Germany, Mexico, Netherlands, United Kingdom and the United
States of America, with its secretariat and head quarters in London.

 National standard setting bodies like Financial Accounting Standards

Boards (FASB) of USA, Accounting Standards Boards (ASB) of UK, and
Indian Accounting Standards (IAS) in India generally frame accounting
standards in the line of IASC after due consideration of the local laws and
conditions.

 In India the Accounting Standards Board (ASB) was constituted by the

Institute of Chartered Accountants of India (ICAI) on 21st April 1977 with
the function of formulating accounting standards.

 Accounting Standards (ASs)

• AS 1 Disclosure of Accounting Policies

• AS 2 Valuation of Inventories

• AS 3 Cash Flow Statements

• AS 4 Contingencies and Events Occurring after the Balance Sheet Date

• AS 5 Net Profit or Loss for the period, Prior Period Items and Changes in
Accounting Policies

• AS 6 Depreciation Accounting

• AS 7 Construction Contracts (revised 2002)

• AS 8 Accounting for Research and Development

• AS 9 Revenue Recognition

• AS 10 Accounting for Fixed Assets

• AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003),

• AS 12 Accounting for Government Grants

• AS 13 Accounting for Investments

• AS 14 Accounting for Amalgamations

• AS 15 (revised 2005) Employee Benefits Limited Revision to Accounting

Standard (AS) 15, Employee Benefits (revised 2005) AS 15 (issued
1995)Accounting for Retirement Benefits in the Financial Statement of
Employers

• AS 16 Borrowing Costs

• AS 17 Segment Reporting

• AS 18, Related Party Disclosures AS 19 Leases

• AS 20 Earnings Per Share

• AS 21 Consolidated Financial Statements

• AS 22 Accounting for Taxes on Income.

• AS 23 Accounting for Investments in Associates in Consolidated

Financial Statements
• AS 24 Discontinuing Operations AS 25 Interim Financial Reporting

• AS 26 Intangible Assets

• AS 27 Financial Reporting of Interests in Joint Ventures

• AS 28 Impairment of Assets

• AS 29 Provisions, Contingent` Liabilities and Contingent Assets

• AS 30 Financial Instruments: Recognition and Measurement and

Limited Revisions to AS 2, AS 11 (revised 2003), AS 21, AS 23, AS 26,
AS 27, AS 28 and AS 29

• AS 31, Financial Instruments: Presentation Accounting Standard

• (AS) 32, Financial Instruments: Disclosures, and limited revision to

Accounting Standard (AS) 19, Leases

INTERNATIONAL ACCOUNTING STANDARDS:

• IAS 1- Presentation of Financial Statements

• IAS 2- Inventories

• IAS 3- Consolidated Financial Statements Originally issued 1976,

effective 1 Jan 1977. Superseded in 1989 by IAS 27 and IAS 28.

• IAS 4 - Depreciation Accounting Withdrawn in 1999, replaced by IAS

16, 22, and 38, all of which were issued or revised in 1998.

• IAS 5 - Information to Be Disclosed in Financial Statements Originally

issued October 1976, effective 1 January 1997. Superseded by IAS 1 in
1997.

• IAS 6- Accounting Responses to Changing Prices Superseded by IAS 15,

which was withdrawn December 2003

• IAS 7 - Statement of Cash Flow

• IAS 8 - Accounting Policies, Changes in Accounting Estimates and

Errors
• IAS 9 - Accounting for Research and Development Activities
Superseded by IAS 38 effective 1.7.99

• IAS 10- Events After the Reporting Period

• IAS 11 - Construction Contracts

• IAS 12- Income Taxes

• IAS 13- Presentation of Current Assets and Current Liabilities

Superseded by IAS 1.

• IAS 14- Segment Reporting

• IAS 15- Information Reflecting the Effects of Changing Prices

Withdrawn December 2003

• IAS 16- Property, Plant and Equipment

• IAS 17- Leases

• IAS 18- Revenue

• IAS 19- Employee Benefits

• IAS 26- Accounting and Reporting by Retirement Benefit Plans

• IAS 27- Consolidated and Separate Financial Statements

• IAS 28- Investments in Associates

• IAS 29- Financial Reporting in Hyperinflationary Economies

• IAS 30- Disclosures in the Financial Statements of Banks and Similar

Financial Institutions Superseded by IFRS 7 effective 2007.

• IAS 31- Interests In Joint Ventures

• IAS 32- Financial Instruments: Presentation Disclosure provisions

superseded by IFRS 7 effective 2007.

• IAS 33- Earnings Per Share

• IAS 34- Interim Financial Reporting

• IAS 35- Discontinuing Operations Superseded by IFRS 5 effective 2005.

• IAS 36- Impairment of Assets

• IAS 37- Provisions, Contingent Liabilities and Contingent Assets

• IAS 38 - Intangible Assets

• IAS 39 - Financial Instruments: Recognition and Measurement

• IAS 40- Investment Property

• IAS 41 - Agriculture
ACCOUNTING MECHANICS
ACCOUNT:
• An account is a ‘T’ shaped statement used to record
financial transactions of a business.
• It is Divided into Two Parts
• Left Hand side is called Debit
• Right hand side is Credit
Debit Credit
Double Entry System of Accounting
Developed by Venetian Merchants
It is a system of Recording financial Transaction
Each Transaction is entered Twice
One Debit
And
One Credit
(Not in the same Account with rare exception)
Accounting Equation
 Forms the basis for double entry system of Book Keeping
Assets = Liabilities + Equity
How Does it Work?

Assets Liabilities Equity

= +
Cash Capital
50000 50,000

Cash Capital
30000 50,000
Goods
20000 Capital
Cash 50,000
42,000 +
Goods 2,000
Y Rs
10,000 20,000 Capital
Cash 52000
Y Rs
42,000 20,000 Capital
Goods 52000
30,000 -
Cash 2000
Mr X Brought Rs
2,000
50,000 Cash into his new business.
Purchased goods worth Rs
20, 000 for Cash
sold goods worth Rs 10,000 for Rs 12,000 on Cash
Purchased goods worth
Rs 20,000 on Credit From Mr. Y
Paid salary to his employee
Rs 2,000
TYPES of ACCOUNTS:
• Liability Accounts: Accounts of Individuals and
Institutions, a business owes
• Capital Account: Owner’s Equity or claims
• Assets: Any Tangible and Intangible Properties
• Expenses : Incurred by the Business
Revenues : Earned by the Business
Rules of Debit and Credit
1. Capital Account:
DEBIT:Decrease (-)
CREDIT: Increase (+)
2. Liability Account:
DEBIT:Decrease
CREDIT: Increase
 3. Asset Account:
DEBIT: Increase
CREDIT: Decrease
4. Revenue Account:
DEBIT: Decrease
CREDIT: Increase
5. Expense Account:
DEBIT: Increase
CREDIT: Decrease
Double Entry System of Accounting
Developed by Venetian Merchants
It is a system of Recording financial Transactions
Each Transaction is entered Twice
One Debit
And
One Credit
(Not in the same Account with, rare exception)
Accounting Equation
Forms the basis for double entry system of Book Keeping
Assets = Liabilities + Equity
Types of Accounts
• Real Account
• Includes all Assets
• Personal Account
• Includes All Individuals and Businesses Accounts
• Nominal Account
• Includes all Revenues and Expenses
Journalize the following transactions, post them in ledger and prepare a trial
balance.

January 1 2009: Ram commenced his business with a capital of Rs 1,00,00 for
which he brought cash Rs 50,000 and furniture worth Rs
50,000. Of Rs 50,000 Cash, he deposited Rs 10,000 in bank.

2 He purchased goods for cash Rs 30,000

4 purchased Stationery For Rs 200.

5 sold goods to Ramesh on Credit Rs 6000

7 Purchased goods on credit from Aroop Rs 12,000

8 Ramesh paid cash Rs 3,000

9 Ram paid cash to Aroop Rs 3,000

11 He sold goods for cash Rs 8,000 and received a cheque for the
same.

13 Sold goods on credit to Harish Rs 4,000

15 Paid to Aroop by cheque Rs 5,000

17 Paid Wages to workers Rs 400

18 Returned goods to Aroop Rs 1,000

20 Received commission Rs 600 in cash

22 Paid rent Rs 2000 by cheque

25 Purchased a system for Rs 4,000 on credit from Suresh.

28 sold goods for cash Rs 12,000

30 Borrowed Rs 10,000 from Abdul and the cheque was deposited
in bank.