FINANCIAL ACCOUNTING :

CONCEPTS, IMPORTANCE, SCOPE

AND GAAP.
Dr. Anupam
Mitra
M.Com, Ph.D, ACMA,
(CFM)
Assistant Professor
(Finance)
SIBM,
Bangalore
Session
1

Recall the Flows of funds and decisions
important to the financial manager
Financial
Manager
Financial
Markets
Real Assets
Financing
Decision
Investment
Decision
Returns from Investment Returns to Security Holders
Reinvestment Refinancing
Capital Budgeting is used to make the Investment Decision
Different Business Activity
ACCOUNTING GUIDELINES
Accounting
Guidelines
Basic
Assumptions
& Customs
Guide the
Accountants
Preparing
Accounting
Statements
Universally
Accepted
Accounting
Guidelines
Have
Evolved
Over Time
Respected
Bodies &
Industries
GAAP
Will also help you to evaluate the correct financial health of a company
To understand the accounting statement due to their uniformity
Meets the needs of
External Users Internal Users
Generally Accepted Accounting Principles
GAAP
Internal Users
Manageme
nt
Owners Employees
External Users
Banks Suppliers Govt.
custome
rs
Standard Setting Organizations
India US UK Canada International
ICAI FASB Accounting Accounting International
ASB(1977) AICPA Standard
Committee
Standards
Committee
Accounting
Standards
Committee
Dept. of
Corporate
Affairs
SEC Financial
Service
Authority (FSA)
(IASC)
SEBI, IRDA AAA International
ICWAI, ICSI

Accounting
Standards
RBI, CAG Board(IASB)
The Institute of Cost Accountants of India
(ICAI) [previously known as the Institute of Cost &
Works Accountants of India (ICWAI)] is a
premierprofessional accountancy body established on
28 May 1959 under the Cost and Works Accountants
Act, 1959 (Act No.23rd of 1959)
[1]
enacted by
the Parliament of India to regulate the profession of
Cost & Management Accountancy in India. It is the only
licensing cum regulating body of the Cost
Audit and Cost & Management Accountancy profession
in India. It recommends the Cost Accounting Standards
to be followed by companies in India to which
statutory maintenance of cost records applicable
Use of Accounting Standards
India
(ICAI, MCA)
US
(FASB)
International (IASB)
Indian GAAP
(32 Accounting
Standards)
US GAAP IFRS (International Financial
Reporting Standards) (37 IFRSs & IASs
as on 1.1.08)
Examples of Indian Companies that provide US GAAP or IFRS
Infyosys, Wipro, Bharti Airtel,
TCS, Tata Motors, Dr. Reddys Laboratories



Necessity
Fair Presentation of a Company's financial
performance across the world

Comparability of Financial Statements

Reporting Standards ensure that the
information is useful to a wide range of users.
Challenges Facing Financial
Accounting

Non-financial measurements need to be
developed and reported.
More information needs to be provided
regarding soft assets (intangibles).
Forward-looking information,(in addition
to historical information), must be
provided.

Barrier to Convergence
1. Different Standard setting bodies and
Regulating Authority
2. Disagree on the best treatment of any item
or issue
3. Political Pressure
4. Pressure from business groups as change in
reporting standard affect them
Observations
The SEC requires foreign firms that issue
securities in the US to reconcile their financial
statements to US GAAP
Even when a unified framework emerges,
special reporting standards that apply to
particular industries like insurance, banking
will continue to exist due to different
operational activity.



Thank You
JOURNAL TO BALANCE SHEET
Dr. Anupam
Mitra
M.Com, Ph.D, ACMA,
(CFM)
Assistant Professor
(Finance)
SIBM,
Bangalore
Session
2-4

NEED FOR INFORMATION
INFORMATION
QUANTITATIVE
INFORMATION
MANAGEMENT
ACCOUNTING
NON QUANTITATIVE
INFORMATION
ACCOUNTING
INFORMATION
NON ACCOUNTING
INFORMATION
FINANCIAL
ACCOUNTING
COST
ACCOUNTING
DEFINITION OF ACCOUNTING
THE process of identifying, measuring and
communicating economic information to
permit informed judgments and decisions by
users of the information.

-American Accounting Association Committee
ACCOUNTING HISTORICAL ANTECEDENTS
When humans began keeping accounting records in their head ?
Symbols recording transactions
3200BC Sumerian civilisation in Mesopotamia kept records in clay
tablets.
1400BC In Greece slaves used as scribes and auditors, it was assumed
that statements from slaves who could be tortured would be more reliable
that those from freemen
990BC Scribes in Babylonia and Egypt received formal accounting
training in school.
521-486BC Persia under Darius had government scribes who performed
surprise audits of accounts of the province
4AD In Byzantine empire, Constantine founded a public administration
school in which accounting was taught.
642-814AD - Roman empire under Charlemagne continued examples of
government accountants and auditors.
In the 15
th
century, branches of the Medici Bank were required to submit
annual balance sheets to the main office in Florence.
ACCOUNTING A LANGUAGE
ACCOUNTING LANGUAGE OF BUSINESS.

COMPLICATION SIMILAR TO TASK OF LEARNING NEW LANGUAGE.

WORDS USED IN A DIFFERENT SENSE IN ACCOUNTING THAN IN THEIR
COLLOQUIAL MEANING (EG: NET WORTH).

SOME ACCOUTING RULES ARE DEFINITE OTHERS ARE NOT.

ACCOUNTING NOT STATIC RULES SUBJECT TO CHANGE


BASIC CONCEPTS
1. Money measurement.
Record is made only of information that can be expressed in monetary terms.

2. Entity.
Accounts kept for entities, as distinguished from the persons who are
associated with these entities.

3. Going concern.
Entity will continue to operate for an indefinitely long period in the future.

4. Cost concept.
The economic resources of an entity is ordinarily entered in the accounting
records at the price paid to acquire it.

5. Dual aspect.
Since all of the assets of a business are claimed by someone and since the
total of these claims cannot exceed the amount of assets to be claimed it
follows that ASSETS = LIABILITIES & EQUITIES
BASIC CONCEPTS
6. Accounting period.
Accounting measures activities for a specified interval of time called
accounting period. (Pacioli, first author of an accounting text, wrote in 1494:
Books should be closed each year, especially in a partnership, because frequent
accounting makes for long partnership.)

7. Conservatism.
Recognition of revenues requires better evidence than does recognition of
expenses.

8. Consistency.
All the policies adopted for preparing financial statements should be consistently
Followed by the entity.

9. Materiality.
Insignificant events may be disregarded, but there must be full disclosure of all
important information.
ACCOUNTING PROCESS
ACCOUNTING PROCESS
IDENTIFICATION OF THE ECONOMIC EVENTS
CLASSIFYING THE BUSINESS TRANSACTIONS
MEASUREMENT IN RUPEES
RECORDING THE BUSINESS TRANSACTIONS
ANALYSING AND INTERPRETING THE BUSINESS TRANSACTIONS
ACCOUNTING CYCLE
TRANSACTIONS
PREPARATION OF JOURNAL AND SUBSIDIARY BOOKS
LEDGER POSTINGS
EXTRACTING TRIAL BALANCE
PREPARING FINANCIAL STATEMENTS, TRADING AND PROFIT AND
LOSS ACCOUNTS AND BALANCE SHEET
ACCOUNTING EQUATION
OWNERS CAPITAL + LIABILITIES
=
ASSETS
FORMAL ACCOUNTING - DOUBLE ENTRY SYSTEM OF BOOK KEEPING
METHOD OF RECORDING TWO-FOLD EFFECTS OF EVERY
TRANSACTION.

BOTH DEBIT AND CREDIT ASPECT OF A TRANSACTION IS
RECORDED.

FORMAL ACCOUNTING USES A SET OF BOOKS AND
LEDGERS TO RECORD TRANSACTIONS.

LEDGER ( T-ACCOUNTS) ARE PREPARED FROM WHICH
TRIAL BALANCES AND FINANCIAL STATEMENTS ARE
DRAWN.
ENGLISH SYSTEM OF ACCOUNTING
CLASSIFICATION OF ACCOUNTS
1) PERSONAL ACCOUNTS

2) REAL ACCOUNTS

3) NOMINAL ACCOUNTS
PERSONAL ACCOUNTS
ACCOUNTS OF PHYSICAL PERSONS
EG., NAVEENS ACCOUNT

ACCOUNTS OF LEGAL PERSONS
EG., CANARA BANKS ACCOUNT

REPRESENTATIVE PERSONAL ACCOUNTS
EG., OUTSTANDING EXPENSES
REAL & NOMINAL ACCOUNTS
REAL ACCOUNTS REPRESENT THE PROPERTY OF THE
BUSINESS.

NOMINAL ACCOUNTS REPRESENT LOSSES OR EXPENSES
OR INCOMES OR GAINS OF A BUSINESS.
MATCH THE FOLLOWING
A B
A RAMESH 1 REAL
B DENA BANK 2 PERSONAL
C RENT 3 NOMINAL
D COMPUTER 4 REAL
E LAND 5 NOMINAL
F DISCOUNT 6 PERSONAL
CONCEPT OF DEBIT AND CREDIT
PERSONAL
ACCOUNTS
DEBIT THE RECEIVER
CREDIT THE GIVER
REAL ACCOUNTS DEBIT WHAT COMES IN
CREDIT WHAT GOES OUT
NOMINAL
ACCOUNTS
DEBIT ALL EXPENSES AND LOSSES
CREDIT ALL INCOMES AND GAINS
FINANCIAL STATEMENTS
STAGES IN ACCOUNTING

1)Journal
2)Ledger
3)Trial Balance to verify the accuracy of ledger
account balance
4)Preparation of financial statements

JOURNAL
WORD JOURNAL HAS BEEN DERIVED FROM THE FRENCH WORD
JOUR WHICH MEANS A DAY. THEREFORE JOURNAL MEANS DAILY
RECORD.

JOURNAL IS A BOOK IN WHICH DAY TO DAY TRANSACTIONS ARE
RECORDED.

IN JOURNAL EACH TRANSACTION IS CLASSIFIED INTO DEBIT AND
CREDIT ASPECT AND BOTH THE ASPECT ARE RECORDED
TOGETHER WITH EXPLANATION FOR EACH ENTRY.

THE PROCESS OR ACT OF RECORDING A TRANSACTION IN THE
JOURNAL IS CALLED JOURNALISING. THE RECORD OF A
TRANSACTION IN THE JOURNAL IS CALLED JOURNAL ENTRY.
JOURNAL FORMAT
DATE PARTICULARS L.F DEBIT (RS.) CREDIT (RS.)
Trial Balance
Profit / Loss Account Balance Sheet
Ledger or T Account
Journal Entries
(DIES latin word means days)
Accounting Equation
(Double Entry System by Luca Pacioli
(1494)
Capital Liabilities Assets
Accounting Equation
Capital
Owners
Investment
Retained
Earnings
Revenue Expenses
Accounting Equation
Assets (A) = Liabilities (L) + Capital (C)
A = L + Owners Investment(OI) +
Retained Earnings (RE)
A = L + OI + Revenue (R) Expenses (E)
A + E = L + OI + R
Components
Components of Balance Sheet
Assets (A) Owners Investment (OI)
Liabilities (L)
Components of Income Statement
Expenses (E) Revenue (R)
Assets : which give economic benefit for more
than one year or liquidated to cash within 1 year
or consumed within one accounting year
Expenses : charges incurred on goods & services
whose benefit is utilised fully during the current
financial year
Owners Investment : Amount contributed by the
person who shares the profit or loss of the
business
Liabilities : obligations of the business payable to
outsiders
Revenue : income earned from normal or other
than normal business activity.

Definitions
Journal : Debit (Debitum) & Credit (Credere)Rules
Left Hand Side Right Hand Side
Assets
Owners Investment

Debit
Credit
Debit Credit

Liabilities

Expenses

Debit Credit
Revenue

Debit Credit Debit Credit
Basic Rule of Dr and Cr
Debit (Dr) = Credit (Cr)
Rules:
Left hand side Debit = Left hand Side Credit
Right hand Side Debit = Right hand Side Credit
Left hand side Debit = Right hand Side Credit
Left hand Side Credit = Right hand Side Debit
Proceed to journal Entries
Date Particulars LF Amount
(Dr)
Amount
(Cr)
1/08/
12
Cash A/C ............................Dr
To Sales A/C
(Being sold goods for cash)
10,000
10.000
4/08/
12
Salary A/C ...........................Dr
To Cash A/C
(Being salary paid by cash)
5,000
5,000
T-Account
For Each Account open one T-Account. Transfer the
Journal Entries to respective T-Accounts. Balance
the T-Accounts.
Dr Cash Account Cr
To Sales (1)10,000 By Salary(2) 5,000
5,000

Dr Sales Account Cr

By Cash (1) 10,000
10,000

Dr Salary Account Cr
To Cash (2) 5,000
5,000

Trial Balance
Particulars Amount
(Debit)
Amount
(Credit)
Cash 5,000
Sales 10,000
Salary 5,000
Total 10,000 10,000
Profit & Loss Account
(Income Statement)
Dr Profit and Loss (P/L) Account Cr

(Expenses & Losses) (Revenues & Gains)
To Salary 5,000 By Sales 10,000

To Net Profit 5,000
Balance Sheet
(Position Statement)
Liabilities Amount Assets Amount
Capital Fixed Assets
Retained Earnings Investment
----Net Profit 5,000 Current Assets
Other Liabilities ---Cash 5,000
5,000 5,000
Balance Sheet (Schedule VI)
Liabilities Amount Assets Amount
Share Capital Fixed Assets
---Equity & 7% Pref Share
Reserve & Surplus Investments
--Net Profit
---Securities Premium
Secured Loan Current Assets, Loans & Advances
---Mortgage Loan
----8% Debenture
----Closing Stock
Unsecured Loan ----Debtor
----Bills Receivable
Current Liability & Provisions Misc. Expenditures
--Bank Overdraft ---Preliminary Expense
---Creditors, Suppliers ---Discount on Issue of Share
---Provision for Tax


Case Study
The Garden Place


1. Pass Journal Entries (13 Transactions)
2. Prepare T-Accounts
3. Prepare Trial Balance
4. Prepare P/L Account and Balance Sheet

Case Study


Forest City Tennis Club
(Pass Journal Entries
and
Prepare Balance Sheet)
P/L Account
To Opening Stock 00 By Sales 1,20,000
To Purchases 1,50,000 By Closing Stock 1,22,500
To Wages 52,500
To Interest 4,000
To Depreciation 6,000
To Income Tax 9,000
To Dividend 15,000
To Net Profit 6,000
2,42,500 2,42,500
Income Statement
Sales (Operating Income) 1,20,000
Less : Cost of Goods Sold (CGS/ COGS)
Opening Stock + Purchases
+ Wages + Carriage
Closing Stock
00 + 1,50,000 + 52,500 + 00 1,22,500 80,000
Gross Profit 40,000
Less : Depreciation (Operating Expenses) 6,000
EBIT (Earnings before Interest & Taxes)/ Operating Profit 34,000
Less : Interest (Non Operating Expenses) 4,000
Add : Non Operating Income (interest, Profit on sale of Assets) nil
EBT (Earnings before Tax) 30,000
Less : Income Tax 9,000
EAT (Earnings after Tax) 21,000
Less : Dividend 15,000
Net Profit/ Retained Earnings 6,000
Revised Schedule VI
Equity & Liabilities Rs Assets Rs
Shareholders Fund Non Current Assets
---Share Capital ----Fixed Assets
Tangible
Intangible
---Reserve & Surplus ---Non Current Investments
Non Current Liabilities
--Debentures Current Assets
---Loan ---Stock
Current Liabilities ---Debtors
--Creditors
--Provision for Tax
---Bills Receivable
---Cash & Bank
--Bills Payable
---Outstanding Wages
--Prepaid Expenses
RULES OF DEBIT AND CREDIT
T - ACCOUNT
DEBIT SIDE CREDIT SIDE
ASSET



INCREASE OR ADDITIONS
ON THE DEBIT SIDE

" + " ON LEFT HAND SIDE




DECREASE OR DEDUCTION
ON THE CREDIT SIDE

- " ON RIGHT HAND SIDE

RULES OF DEBIT AND CREDIT
T - ACCOUNT
DEBIT SIDE CREDIT SIDE
LIABILITY (EXTERNAL) & CAPITAL(INTERNAL)



DECREASE OR DEDUCTION
ON THE DEBIT SIDE

- " ON LEFT HAND SIDE





INCREASE OR ADDITIONS
ON THE CREDIT SIDE

" + " ON RIGHT HAND SIDE


RULES OF DEBIT AND CREDIT
T - ACCOUNT
DEBIT SIDE CREDIT SIDE
EXPENSES / LOSSES



INCREASE OR ADDITIONS
ON THE DEBIT SIDE

" + " ON LEFT HAND SIDE




DECREASE OR DEDUCTION
ON THE CREDIT SIDE

- " ON RIGHT HAND SIDE

RULES OF DEBIT AND CREDIT
T - ACCOUNT
DEBIT SIDE CREDIT SIDE
REVENUES / GAINS



DECREASE OR DEDUCTION
ON THE DEBIT SIDE

- " ON LEFT HAND SIDE





INCREASE OR ADDITIONS
ON THE CREDIT SIDE

" + " ON RIGHT HAND SIDE


TYPES OF BUSINESS ESTABLISHMENTS
TYPES
1) TRADING CONCERNS
2) MANUFACTURING CONCERNS

Trading concerns purchase finished goods from market and sell it at a profit. Such
firm prepare
1) Trading account
2) Profit and loss account
3) Balance sheet

Manufacturing concerns are those which purchase raw material and effect certain
productive activities on it and convert the same into marketable goods and then
sell it. Such concern while preparing final accounts prepare
1) Manufacturing account
2) Trading account
3) Profit and loss account
4) Balance sheet
TRADING & MANUFACTURING ACCOUNT
Particulars Amount Particulars Amount
To Opening stock By Sales Less Returns
To Purchases Less Returns By Closing stock
To Direct expenses By Gross Loss c/d to profit and
loss account
To Gross profit c/d to profit
and loss account
TOTAL XXX TOTAL XXX
PROFIT AND LOSS ACCOUNT FORMAT
Particulars Amount Particulars Amount
To Gross loss c/d from Trading
account
By Gross profit c/d from trading
account
To Indirect expenses By Interest income
To Interest expenses By Miscellaneous income
To Depreciation By Net loss transferred to capital
account
To Net profit transferred to
capital account
TOTAL XXX TOTAL XXX
BALANCE SHEET
LIABILITIES Amount ASSET Amount
CAPITAL FIXED ASSETS
LIABILITIES CURRENT ASSETS
TOTAL XXX TOTAL XXX
DIFFERNCE TRADING AND P&L ACCOUNT
TRADING ACCOUNT PROFIT AND LOSS ACCOUNT
FIRST STAGE OF FINAL ACCOUNT SECOND STAGE OF FINAL ACCOUNT
IT RECORDS SALES AND DIRECT
COSTS
THIS ACCOUNT RECORDS GROSS
PROFIT, INCOMES, INDIRECT COSTS
AND LOSSES
IT DISCLOSES GROSS PROFIT OR
GROSS LOSS
IT DISCLOSES NET PROFIT OR NET
LOSS
DIFFERNCE BETWEEN GP AND NP
GROSS PROFIT NET PROFIT
It is the difference between sales and direct
costs
It is the difference between gross profit and
indirect expenses
Gross profit is transferred to profit and loss
account
Net profit is transferred to capital account
Drawing of a owner does not depend on the
gross profit
Drawings of the owner depends on the net
profit



Thank You