1. INTRODUCTION TO FINANCIAL ACCOUNTING

2. Introduction to Final Final Accounts Finance means Cash, Money, Price, Value and Cost Its relating to Monetary benefit Basically 3 Concepts

3. Introduction to Final Final Accounts Account – It’s a summarized statement of Debit and Credit Accounting – it’s a process of all types of accounts such as PA, RA & NA Accountancy – its law of accounts.

4. Introduction to Accounting Accounting is a old concept. It was introduced by Edward Jones in 1795 in the books of “Modern Accounting System”. Accounting is “Method of Identifying, Classifying, Summarizing in a significant manner in terms of Money”.

5. Principles of Accounting Recording Identifying Classifying Summarizing Balancing Eg. 1. Mr. Ramu Purchased a book of Rs. 150/- from kiran at Koti. 2. Mrs. Aishwarya Sold a Machinery of Rs. 10000/- to Bharati by cash.

6. Types of Financial Accounting Personal Accounts Real Accounts Nominal Accounts

7. Types of Accounting Financial Accounting Management Accounting Cost Accounting

8. Concepts of Accounting Money Measurement concept Business Entity concept Going concern concept Cost concept Dual aspect concept Accounting period concept Matching concept Reliasation concept Objective concept Other concepts

9. Conventions of Accounting Convention of Disclose Convention of Consistency Convention of Conservatism Convention of Materiality

10. Principles of Double Entry system Principles Personal Accounts Real AccountsNominal Accounts DebitCredit DebitCreditDebitCredit ReceiverGiver What comes in What goes out Exp and Loss Income & Gain

11. Journal When the size of the business firm is big. All the business transections are first recorded in a Rough Book, before entering them in “JOURNAL”. After words these transactions are recorded in a chronological order. After analyzing, classifying these benefits according to the principles of debit & Credit is called “Journal”.

12. Advantages of Accounting Replacing money Assisting the performance of the business Assessing the financial status of the business Documentary evidence Assisting in realisation of debts. Facilitating & detecting frauds Preventing & detecting frauds Help full to Management

13. Classification of Ledger Debtors ledger Creditors ledger General ledger Self ledger

14. Types of Subsidiary books Purchase book Sales book Purchase returns book Sales returns book Cash book Bill receivable book Bills payable book Journal proper

15. Characteristics of Cash book It can also be treated as a subsidiary book Like ledger, there are the debit and credit columns in cash book Only cash transactions are recorded It always shows debit balance but it never shows the credit balance The balance of cas can be known at any point of time

16. Types of cash transactions Cash Receipts Cash Payments

17. Types of Cash books Simple cash book Double column cash book Triple column cash book Petty cash book

18. Trial Balance M.S gosav defined the Trail Balance as “The Trail balance is a statement containing the balances of all ledger accounts., as at any given date, arranged in the form of debit and credit columns placed side by side and prepared with the object of checking the arithmetical accuracy of the ledger postings”.

19. Characteristics of Trial Balance Basically Trial Balance is a statement or list It contains all the Debit and Credit balances It total debit balances must be equal in aggregate to the total of the credit balances when accounts are balanced at any given time. Trial Balance is the only base for the preparation of final accounts

20. Advantages of Trial balance Preparation of final accounts will become easy with the preparation of Trail balance When the total balance of debit is equal to the total balance of credit in a trial balance one can confidently rely on the results derived out of such trail balance.

21. Final Accounts Relating to Trading Concern Trading Account Profit & Loss Account Balance sheet Relating to Manufacturing Firm Manufacturing Account Trading Account Profit & Loss Account Balance Sheet

22. Importance of Trading Account We can ascertain Gross Profit / Gross Loss We can observe the changes in direct expenses. We can calculate the cost of production We can establish the relation b/w the costs and revenues We can analyze the trend in sales We can decide the earning capacity of the firm

23. Importance of Profit & Loss Account The main purpose of preparing the Profit & Loss account is to ascertain Net profit / Net Loss of the firm It is also useful to establish a relationship b/w the sales and the total indirect expenses through percentages. Its relating to the expenses and Incomes of the firm

24. Balance Sheet “Balance Sheet is a statement prepared on a particular date of reflect the financial position of the firm with all assets and liabilities of the firm”.

25. Types of Balance Sheet Rigidity preference order Liquidity preference order

27. Unit 4 INTRODUCTION TO FINANCIAL ACCOUNTING

28.  Need for ACCOUNTING As you are aware, every trader generally starts business for purpose of earning profit. While establishing business, he brings own capital, Then he purchases machinery, furniture, raw materials and other assets. He starts buying and selling of goods, paying for salaries, rent and other expenses, depositing and withdrawing cash from bank. Like this he undertakes innumerable transactions in business.

29. The number of transactions in an organization depends upon the size of the organization In small organizations, the transactions generally will be in thousands and in big organizations they may be in lakhs. It is humanly impossible to remember all these transactions. Further, it may not be possible to find out the final result of the business without recording and analyzing these transactions. Accounting came into practice as an aid to human memory by maintaining a systematic record of business transactions.

30.  DEFINITION OF ACCOUNTANCY o “Accountancy is the science of RECORDING and CLASSIFYING business transactions and events, primarily of financial character and the art of making significant SUMMARIES, ANALYSIS & INTERPRETATIONS of those transactions and events, & COMMUNICATING the results to persons who make decisions or form judgments” Smith & Ashburne

31. American Institute of Certified Public Accountants (AICPA): “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 results thereof.” Thus, accounting is an art of identifying, recording, summarizing and interpreting business transactions of financial nature. Hence accounting is the Language of Business.

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33. Objectives of Accountancy To keep permanent, accurate and complete record of business transactions To maintain records of incomes and expenses and losses in such a way that, the Net profit/Loss for any specified period is ascertained To maintain records of Assets and Liabilities and in such a way that, the Financial position of the business at any point is ascertained To provide information for legal & tax purposes.

34. Accounting Principles Accounting principles are general rules adopted in accounting These principles enables standardization in recording & reporting of financial information Accounting principles may be defined as those rules of conduct or procedures which are adopted by the accountants universally while recording the accounting transactions.

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38. Double entry system of Accounting According to this system of Accounting every transaction has two fold aspect. i.e., One party receiving benefit & Other party giving benefit Every transaction is divided in to two aspects Debit & Credit. The basic principle of Double entry system is FOR EVERY DEBIT THERE IS CORRESPONDING CREDIT OF EQUAL VALUE.

39. Basic Books of Accounts An account is a summary of the record of all the transactions relating to particular Person, Asset, expense or gain. An account has two sides left side of the account is called Debit side right side of the account is called Credit side

40. CLASSIFICATION OF BUSINESS TRANSACTIONS  All business transactions are classified into three categories: 1.Those relating to persons 2.Those relating to property Assets) 3.Those relating to income & expenses  Thus, three classes of accounts are maintained for recording all business transactions. They are: 1.Personal accounts 2.Real accounts 3.Nominal accounts

41. 1.Personal Accounts :Accounts relating to persons & artificial persons are called “Personal Accounts”. A separate account is kept on the name of each person for recording the benefits received from,or given to the person in the course of dealings with him. E.g.: Krishna’s A/C, Gopal’s A/C, Nagarjuna Finances Ltd.A/C,

42. 2.Real Accounts: The accounts relating to properties or assets are known as “Real Accounts”. Every business needs assets such as machinery, furniture etc, for running its activities.A separate account is maintained for each asset owned by the business. E.g.: Cash A/C Furniture A/C Building A/C Machinery A/C etc.

43. 3.NominalAccounts:Accounts relating to expenses, losses, incomes and gains are known as “Nominal Accounts”. A separate account is maintained for each item of expenses, losses, income or gain. E.g.: Salaries A/C, Stationery A/C, Wages A/C, Postage A/C, Commission A/C, Interest A/C, Purchases A/C, Rent A/C, Discount A/C, Commission received A/C, Interest received A/C,Rent received A/C, Discount received A/C.

44. Basic Accounting rules Before recording a transaction, it is necessary to find out which of the accounts is to be debited and which is to be credited. The following three different rules have been laid down for the three classes of accounts…. 1.Personal Accounts: The account of the person receiving benefit (receiver) is to be debited and the account of the person giving the benefit (given) is to be credited.

45. 2.Real Accounts: When an asset is coming into the business, account of that asset is to be debited.When an asset is going out of the business, the account of that asset is to be credited. 3. Nominal Accounts: When an expense is incurred or loss encountered, the account representing the expense or loss is to be debited. When any income is earned or gain made, the account representing the income of gain is to be credited.

46. Summary of Accounting rules Personal account Rule: “Debit----The Receiver Credit---The Giver” Real account Rule: “Debit----What comes in Credit---What goes out” Nominal account Rule: “Debit----All expenses and losses Credit---All incomes and gains”

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48. Journal The book in which the business transactions are recorded in a chronological order, after analyzing them and classifying the benefits according to the principles of debit & credit is called JOURNAL. As all the day to day transactions are recorded in journal, this book is also called as “Day book” or Daily record”

49. All the transactions related to business like Purchases, Purchase returns, sales, sales returns, cash receipts, cash payments, loans & advances taken (given), assets acquired, salaries paid are first recorded in the book of JOURNAL. Hence Journal is called as “BOOK OF PRIME ENTRY”.

50. JOURNAL ENTRY The process of recording the business transactions in a chronological order in the journal after analyzing, classifying & identifying them as Dr and Cr is called entry. All the transactions are recorded in the book of Journal are in the form of Entry. For easy identification of the transaction a brief description is given under each entry with in brackets. (Narration)

51. Journalize the following transactions 1. Ram commenced business with Rs 50,000 2. Purchase furniture for cash Rs 3,000 3. Purchase machinery from Manoj on credit Rs 40,000 4. Received cash from pavan Rs 8,000 on account 5. Paid rent to land lord Rs 5,000

52. Jan 1 Raja commenced business with Rs 50,000 Jan 2 Deposited in bank Rs 40,000 Jan 5 Purchased goods from Krishna on credit Rs 10000 Jan 7 Sold goods to ram on credit 8,000 Jan 9 Purchased goods from Mahesh for cash 5000 Jan 12 Sold goods for cash to sailesh 8500 Journalize the following transactions

53. Jan 15 purchased machinery from ajay engineering company, payment made by cheque 20,000 Jan 18 Issued cheque to Krishna 7500 Jan 20 Received interest from raja 700 Jan 22 Cash withdrawn from bank for office use 2000 Jan 24 Amount with drawn from bank for personal use 800 Jan 27 Loan taken from rajiv varma 15000

54. Jan 29 Cash with drawn from office for personal use 1000 Jan 30 Goods withdrawn for personal use 2000 Jan 31 Paid rent to landlord by cheque 600

55. Ledger Introduction Journal cannot give net results of various transactions related to any account, at a given date the full information is not made available, with regard to value of assets, incomes & expenses. This limitation can be overcome by opening a LEDGER, which shows the net results of different accounts on given date. LEDGER is also called the “Book of final entry”

56. From the LEDGER it is not possible to know the total purchases, sales, rent, salaries paid etc, this limitation can be over come by LEDGER.

57. LEDGER : It is a book, where the various accounts pertaining to particular person, asset, expense are grouped together in one place in the form of an account. The process of transferring the transactions from JOURNAL to LEDGER is called “POSTING” LEDGER is the principal book of business & hence called “king of books of accounts”

58. 1. Journalize the following transactions, post them into ledger and balance the accounts. Jan 1kittu commenced business 1,00,000 Jan 2 purchase goods from Ravi 10,000 Jan 4 sold goods to gopi 20,000 Jan 5 cash purchases 20,000 Jan 7 paid salaries 5,000 Jan 8 sold for cash 15,000 Jan 9 purchased furniture paid by cheque 2,000

59. Jan 9 brought goods from Sobhan 10,000 Jan 14 cash paid to ravi 9800, discount received 200 Jan 17 received cash from gopi 19,500, discount allowed 500 Jan 18 deposited with bank 10,000 Jan 20 Paid for advertisement by cheque 700 Jan 22 Stationary expenses 800 Jan 24 Sold old furniture 1,700 Jan 28 Paid cash to shoban 4,000 Jan 26 Received interest through cheque (sent to bank on the same day) 500 Jan 31 Proprietors personal use 1,000

60. Trial Balance INTRODUCTION  The Trial Balance contains the debit and credit balances of all LEDGER accounts, it is very much useful in preparation of FINAL ACCOUNTS.  It is a connecting link between the LEDGER & FINAL ACCOUNTS.  Trial Balance can be prepared at any time & not necessarily at the end of a calendar or accounting year.  It is the only base for preparation of FINAL ACCOUNTS

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64. Your are requested to prepare the Trial Balance from the Ledger account balances. capital 65,500 bills payable 4,500 Creditors 18,200 reserve for bad debts 3,250 Debtors 21,350 tax outstanding 1,110 Cash 6,750 interest on investment 2,150 Sales 1,20,000 drawings 1510 Purchases 69,100 fixed deposits 45,000 Cash at bank 7,800 Rent 9,50 Machinery 35,000 Insurance prepaid 4,200 Discount allowed 5,000 Wages 3,150 Discount received 3,200 Salaries outstanding 7,200 Furniture 4,000 bills receivables 21,300.

65. Trading Account Trading account is prepared at the end of each accounting period to assess the GROSS PROFIT/LOSS. GROSS PROFIT = Net sales – COGS GROSS LOSS = COGS – Net sales Net sales = sales – sales returns COGS or cost of production or cost of goods sold = opening stock + purchases + direct expenses – closing stock

66. Direct expense: the following are direct expenses carriage inward wages cartage or freight import duty excise duty coal, fuel, power factory expense, manufacturing expenses.

67. Particularsamount Particularsamount To opening stock To purchases xxxx Less: returns xx To carriage inwards To wages To freight/cartage To customs duty To gas, fuel, coal To factory expenses To other man. Expenses To productive expenses To gross profit c/d (Transferred to P&L account) Xxxx xxxx Xxxx By sales xxxx Less: returns xxx By closing stock By goods destroyed by fire By gross loss (Transferred to P&L account) xxxx Xxxx xxxx Trading account proforma

68. Profit & Loss account It is prepared to ascertain the Net profit/loss of the firm for the accounting period. Net profit can be arrived by deducting the administrative expenses from the Gross profit. By nature Profit & Loss account is a Nominal account and should not have opening & closing balances

69. If the total of credit column exceeds the total of debit column the difference is called net profit, which is transferred to the capital account or added to the existing share capital while preparing the balance sheet. Net profit will increase the capital and net loss will decrease the capital.

70. ParticularsamtParticularsamt TO office salaries TO rent, rates, taxes TO Printing and stationery TO Legal charges To Audit fee TO Insurance TO General expenses TO Advertisements TO Bad debts TO Carriage outwards TO Repairs TO Depreciation TO interest paid TO Interest on capital TO Interest on loans TO Discount allowed TO Commission TO Net profit-------  (transferred to capital a/c) XxxxxxXx xxxXxxxx XxxxXxxx XxxxXxxx xXxxxXxx xXxxxXxx xxXxxxxX xxxxXxxx XxxxxXxx xxXxxxxx xxxxxxxx x Xxxx Xxxxx Xxxx Xxxxx By gross profit b/d By Interest received By Discount received By Commission received By Income from investments By Dividend on shares By Rent received Xxxxxxx x Xxxx Xxx Xxxx xxxxxx PROFIT AND LOSS A/C OF …………………….FOR THE YEAR ENDED…………

71. Balance sheet The preparation of Balance sheet is the last and third stage of Final accounts. The balance sheet has to be prepared only after the preparation of Trading & Profit & Loss account. Trading & Profit & Loss account are prepared for a period of time where as the Balance sheet is prepared on a particular point of time

72. “Balance sheet is a Statement prepared on particular date to reflect the financial position of the firm with all the assets and liabilities of the firm” Balance sheet is not an account but it is a final statement of the financial position of a business on a closing date. Assets are shown on the right side, liabilities including Capital is shown on the left side of the Balance sheet.

73. LiabilitiesamtAssetsamt Creditors Bills payable Bank overdraft Loans Mortgage Reserve fund Capital xxxx + Additional capital xx + Interest on capital x + Net profit xxx Less Drawings xxx Interest on drawings xx Net loss xxx Xxx Xxxx Xxxxx Xxxx Xxxxx Cash in hand Cash at bank Bills receivable Debtors Closing stock Investments Furniture and fittings Plats&machinery Land & buildings Goodwill Prepaid expenses Outstanding incomes xXxx Xxx xxx BALANCE SHEET OF ………………………… AS ON …………………………………….

74. Final accounts problems please bring your own text books & calculators