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Financial Accounting

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Financial Accounting (Mgt-101)
VU
Lesson-2
Learning Objective
The evolution of accounting started in the previous lecture continues with a slight emphasis on how
actual record keeping started. In addition, some basic concepts like capital, profit, and budget are
introduced.
Different Types of Business Entities
Commercial Organizations (Profit Oriented)
o  Sole proprietor
o  Partnership
o  Limited companies
Non-Commercial Organizations (Non-Profit Oriented)
o  NGO's (Non-government Organizations)
o  Trusts
o  Societies
The Basic Concept of Record Keeping
We can maintain a diary of transactions and note the daily transactions like sale, purchase etc. in it.
Problems Faced in Maintaining Diary of Transactions
How will we come to know the income and expenses from various sources?
We only have a sheet / page on which daily transactions are listed.
We do not know which product is selling better and which is not.
Available Alternate
One can go through all the transactions at the end of the month and note the different types of
transactions on different pages.
So that every page gives total for a different type of transaction like sales of different products and
expenses of different types
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Financial Accounting (Mgt-101)
VU
Diary of Transactions
Transactions of Jan 20--
P a r t i c u l a r s
Rs.
Sold 5 nos. of Item A
1,000
Purchased 10 nos. of Item B
( 15,000 )
Sold 1 no. of Item C
2,000
Electricity bill paid
( 1,500 )
Sold 1 no. of Item A
500
Sold 2 nos. of Item B
4,000
Sold 5 nos. of Item A
1,000
Purchased 10 nos. of Item B
( 15,000 )
Sold 1 no. of Item C
2,000
Telephone bill paid
( 1,000 )
Salary paid
( 1,500 )
Now try to go through these transactions and separate, transactions of different types.
But what if the number of transactions is large?
Is it really possible to go through hundreds or thousands of transactions at the month end and
analyse them to obtain required results.
Cash and Credit Transactions
Sales and purchase are not always for cash. Some times the payment / receipt is delayed to a future
date (Sale/purchase for "UDHAR")
The diary that we have discussed above, records cash transactions only.
The "UDHAR" (credit) transactions may be noted in separate diary.
Now we have two diaries. One for cash and one for credit.
We need to know total sales and purchases (both cash and credit) and other information like the
amount that is payable and receivable.
How will we get our required results now?
Do we need another diary to combine information from both these diaries?
But when we receive or pay cash for the credit transactions will we again record the transactions on
the day, when cash is received or paid? If so, where?
So the problems keep on increasing with the size or volume of business. But one thing is becoming
certain and that is that an accurate reflection of business transacted can only be obtained if both
cash and credit transactions are recorded in such a manner that there is no duplication and yet the
transactions are completely recorded. This is possible only under Commercial Accounting.
Commercial Accounting
 Commercial Accounting is done through a system that is known as Double entry book keeping.
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Financial Accounting (Mgt-101)
VU
Single Entry and Double Entry Accounting
Single entry accounting/Cash accounting.
This system records only cash movement of transactions and that too up to the extent of
o
recording one aspect of the transactions.
This means that only receipt or payment of cash is recorded and no separate record is
o
maintained (about the source of receipt and payment) as to from whom the cash was
received or to whom it was paid.
Double entry book keeping/Commercial accounting.
Double entry or commercial accounting system records both aspects of transaction i.e.
o
receipt or payment and source of receipt or payment.
It also records credit transactions. Example of Electricity Bill
o
.
This concept will be explained in detail in the next lectures but for the time being it should be noted
that in cash accounting date of receipt / payment of actual cash is important while in commercial
accounting the date on which the expense is caused, whether paid or not, as well as the spreading of
the cost of certain items over their useful life becomes important.
Capital
No business can run without money or resources being invested therein.
Whatever money or resources from ones' own pocket are put in a business is referred to as
CAPITAL.
This capital or investment must earn a return or profit on its use even if it is coming out of ones'
pocket.
This return is also known as PROFIT. So no capital should be without a profit or a return.
Also, no Capital even if coming from the business owner can be without cost. Why? Because if the
same sum that was used in a business was put in the bank or used to buy Defence Savings or
National Savings Certificates, a certain amount of profit would have been earned. By putting this
money in business, a return must be expected.
Money Value of Time
Another important concept to remember in all businesses is that of MONEY VALUE OF TIME.
Time spend by the owner also has value; he should be remunerated for it.(The time of the
proprietor or business persons spent on the business is also a business cost and must be paid for by
the business in addition to the profit)
 Why? Because if the business person had employed somebody else in his place, the person would be
paid a salary.
 Therefore, a business person's time and money both have costs attached to them. Nothing is free
nor should be expected to be free of cost.
Goodwill
Then there is something called GOODWILL.
This is simply the value attached to the good reputation earned through good, clean conduct of
business over a number of years.
This good reputation also has a value and becomes part of investment in business
Is Cash in Hand Our Profit?
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Financial Accounting (Mgt-101)
VU
Not unless we have deducted from
it the total amount of expenses that are accrued or are on
credit and added to it the sale made on credit for which cash is to be received at a later date. The
simple equation for calculation of profit would thus be:
Cash Sale-Cash Payment + (Credit Sale-Credit Expense)
Also remember that certain items have a long life and will be used during that time to earn more
money for business. The cost of such items will as be spread over their life and also accounted for
accordingly in the above equation.
More on this in later lectures.
Budget
Budgeting is another important aspect of business planning.
The budget is made to ensure that there is at least a balance between Income earned and the
expenses incurred on earning this income in the first instance, and to provide a reasonable return on
the capital used in the business.
However, if there is a shortfall between of Income as against expense, it means that more is being
spent and less earned.
Decisions will be required to bring the situation to balance or if it cannot be so then to arrange for
loans or more capital to ensure business continues.
But business cannot be run on loans and these must be repaid.
Budget Is an Organization's Plan of a Future Period Expressed in Money Terms.
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Table of Contents:
  1. Introduction to Financial Accounting
  2. Basic Concepts of Business: capital, profit, budget
  3. Cash Accounting and Accrual Accounting
  4. Business entity, Single and double entry book-keeping, Debit and Credit
  5. Rules of Debit and Credit for Assets, Liabilities, Income and Expenses
  6. flow of transactions, books of accounts, General Ledger balance
  7. Cash book and bank book, Accounting Period, Trial Balance and its limitations
  8. Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account
  9. Assets and Liabilities, Balance Sheet from trial balance
  10. Sample Transactions of a Company
  11. Sample Accounts of a Company
  12. THE ACCOUNTING EQUATION
  13. types of vouchers, Carrying forward the balance of an account
  14. ILLUSTRATIONS: Ccarrying Forward of Balances
  15. Opening Stock, Closing Stock
  16. COST OF GOODS SOLD STATEMENT
  17. DEPRECIATION
  18. GROUPINGS OF FIXED ASSETS
  19. CAPITAL WORK IN PROGRESS 1
  20. CAPITAL WORK IN PROGRESS 2
  21. REVALUATION OF FIXED ASSETS
  22. Banking transactions, Bank reconciliation statements
  23. RECAP
  24. Accounting Examples with Solutions
  25. RECORDING OF PROVISION FOR BAD DEBTS
  26. SUBSIDIARY BOOKS
  27. A PERSON IS BOTH DEBTOR AND CREDITOR
  28. RECTIFICATION OF ERROR
  29. STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
  30. STANDARD FORMAT OF BALANCE SHEET
  31. DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations
  32. SOLE PROPRIETORSHIP
  33. Financial Statements Of Manufacturing Concern
  34. Financial Statements of Partnership firms
  35. INTEREST ON CAPITAL AND DRAWINGS
  36. DISADVANTAGES OF A PARTNERSHIP FIRM
  37. SHARE CAPITAL
  38. STATEMENT OF CHANGES IN EQUITY
  39. Financial Statements of Limited Companies
  40. Financial Statements of Limited Companies
  41. CASH FLOW STATEMENT 1
  42. CASH FLOW STATEMENT 2
  43. FINANCIAL STATEMENTS OF LISTED, QUOTED COMPANIES
  44. FINANCIAL STATEMENTS OF LISTED COMPANIES
  45. FINANCIAL STATEMENTS OF LISTED COMPANIES