Fin Acct Mba

Introduction to Accountancy Definition : “ Accounting is an art of recording, classifying and summarising in a significant manner and in terms of money, transactions & events which are of a financial character, and interpreting the results thereof.”

Objectives of Accountancy  To keep systematic record  To ascertain the result of operations  To ascertain the financial position of business To protect business properties To facilitate rational decision making

Accounting Concepts –  Entity concept – Business is  Dual aspect concept  Going concern concept  Money measurement concept  Cost concept  Accounting period concept  Accrual concept  Matching concept

Accounting Concepts – Entity concept 

Business is treated as a separate entity from the proprietor  Thus, if a proprietor invests Rs 1,00,000 in the business, it is deemed that the proprietor has given Rs 1,00,000 to the business & it has to ultimately repay it to the proprietor.

Accounting Concepts – Dual Aspect concept 

There are two aspects to every transaction

 Eg. If X starts business with cash Rs 1,00,000, the business gets asset (cash) & on the other hand business owes Rs 1,00,000 to him as his capital.

Accounting Concepts – Going concern concept 

It is assumed that the business will continue for a fairly long time unless it is liquidated  Thus, the assets are not valued at their sale value

Accounting Concepts – Money measurement concept 

Everything is recorded in terms of money

 Purchase & sale of goods, payment of expenses are accounted for. Death of an executive, resignation of a manager etc. cannot be expressed in terms of money.

Accounting Concepts – Cost concept 

This concept does not recognise the realisable value or the real worth of an asset  An asset is recorded at the price paid to acquire it.

Accounting Concepts – Accounting period concept 

It is the interval of time at the end of which the income statement & financial position statement are prepared to know the results  Normal accounting period is 12 months.  Studying the financial position after a very long period would not help in taking corrective steps

Accounting Concepts – Accrual concept 

Revenues & expenses are identified with specific periods of time  Revenues & expenses of a particular accounting period are recorded whether they are actually received/paid in cash or not

Accounting Concepts – Matching concept 

It is necessary to match revenues of the period with the expenses of that period  A comparison between the two helps in measuring the profit earned by the business or the loss incurred

Accounting Conventions 

Convention of Disclosure- Accounting reports should disclose full & fair information to the proprietors, creditors, investors & others

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Convention of Materiality- Accountant should attach importance to material details & ignore insignificant details

Accounting Conventions 

Convention of Consistency-The company must follow one method of accounting year after year to enable comparison of one accounting period with another

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Convention of Conservatism-All prospective losses are to be taken into consideration but not all prospective profits i.e. Anticipate no profits but provide for all possible losses

Review of concepts 

Asset- It is an economic resource that is expected to give benefit in the future

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Capital- It is the owner’s equity i.e. the amount invested by the proprietor in his business

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Depreciation- It is the reduction in the book value of fixed assets due to their use in business

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Liability- It is an economic obligation payable to the outsiders

Review of concepts

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Owner’s Equity- It is the claim of an owner of a business

Double Entry system Principles 1. Every transaction effects two accounts 2. One account is the receiver of the benefit & the other is the giver of the benefit 3. For each transaction one account is debited & the other account is credited 4. Amount of benefit received by one account is equal to amount given

Classification of Accounts

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Personal A/c Real A/c Nominal A/c Valuation A/c

Classification of Accounts 

Personal A/c- These are accounts of individuals, firms, companies, bankers, associations with whom businessman deals

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Real A/c- These are the accounts of properties, assets or possessions of the businessman

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Nominal A/c- These are accounts of expenses or losses & gains or incomes

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Valuation A/c- These are accounts which are concerned with valuation of assets viz. provision for depreciation, prov for doubtful debts etc.

Introduction to Accountancy Classification of Accounts –  Personal A/c Types of personal A/c

Natural Personal A/c

Artificial Personal A/c

Groups/ Representative Personal A/c

Introduction to Accountancy Classification of Accounts –  Real A/c Types of Real A/c

Tangible Real A/c

Intangible Real A/c

Golden rules of Accounting  Real A/c : Dr what comes in & Cr what goes out  Personal A/c : Dr the receiver & Cr the giver  Nominal A/c : Dr expenses & losses & Cr Incomes & Gains  Valuation A/c : Dr the A/c when it is to be reduced & Cr the A/c when it is to be increased

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Accounting Equation :

Assets = Liabilities + Owners Equity 

The rules of Dr & Cr :

vii) Dr increase in assets, Cr decrease in assets viii) Dr decrease in liabilities, Cr increase in liabilities ix) Dr decrease in Owners equity, Cr increase in Owners equity

Journal 

A journal is a book of primary entry. First all the transactions are recorded in the journal & subsequently they are posted in ledger.

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A ledger is the principal book of accounts. It is a group of accounts; it contains an account for each asset, liability, revenue & expense A/c

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While transferring the transaction from journal to ledger, the transactions are classified. For each person, head of expenditure, income, asset etc. separate accounts are opened in the ledger.

Posting process     

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On debit side : Write the name of the credited a/c in the journal after the word “To”. On the credit side : Write the name of the debited a/c in the journal after the word “By”. All the transactions relating to a particular a/c should be recorded in the a/c already opened. No new a/c of the same name should be opened in the ledger At the end of a certain period, the a/cs are balanced If the debit side is heavier the difference will appear on the credit side as, “By balance c/d” in the particulars column & if the credit side is heavier, the difference will appear on the debit side as , “To balance c/d”

Purpose of balancing ledger a/cs: 

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Personal a/cs are balanced to know whether a person is a debtor or a creditor. A debit balance indicates that the person is our debtor & a credit balance indicates that the person is our creditor . A debit balance of a real a/c means an asset & a credit balance means liability Debit balance of a nominal a/c means expense & a credit balance represents income