1. Unit 4 INTRODUCTION TO FINANCIAL ACCOUNTING

2. 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.

3. Observe the following transactions of small trader
Purchase of raw materials from Sri Ram 5000.
Goods sold for cash 6000
Sold gods to Sham on credit 3000
Advertising expenses 100
Stationary expenses 150
Withdrawal for personal use 200
Rent paid through cheque 500
Salaries paid 200
Received cash from Sham 3000

4. 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.

5. DEFINITION OF ACCOUNTANCY
“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

6. 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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8. 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.

9. 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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13. 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.

14. 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

15. 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

16. 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,

17. 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.

18. 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.

19. 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.

20. 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.

21. 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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23. 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”

24. 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”.

25. 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)

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

27. Journalize the following transactions
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

28. 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

29. 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

30. 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”

31. 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.

32. 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”

33. 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

34. 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

35. 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

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

37. 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

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

39. Trading account proforma
Particulars
amount
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
By sales xxxx
Less: returns xxx
By closing stock
By goods destroyed by fire
By gross loss

40. 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

41. 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.

42. PROFIT AND LOSS A/C OF …………………….FOR THE YEAR ENDED…………
Particulars
amt
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
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
Xxx
xxxxxx

43. 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

44. “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.

45. BALANCE SHEET OF ………………………… AS ON …………………………………….
Liabilities
amt
Assets
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
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

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

47. INTRODUCTION TO FINANCIAL ACCOUNTING

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

49. 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.

50. 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”.

51. 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 /- to Bharati by cash.

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

53. Types of Accounting Financial Accounting Management Accounting
Cost Accounting

54. 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

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

56. Principles of Double Entry system
Personal Accounts
Real Accounts
Nominal Accounts
Debit
Credit
Debit
Credit
Debit
Credit
Receiver
Giver
What comes in
What goes out
Exp and Loss
Income & Gain

57. 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”.

58. 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

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

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

61. 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

62. Types of cash transactions
Cash Receipts
Cash Payments

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

64. 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”.

65. 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

66. 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.

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

68. 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

69. 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

70. 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”.

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