Financial accounting by Amit kumar Arora

B. Com, M. Com, I.C.W.A, M.B.A.(Finance), M.A.(Economics) Author of the books Financial Management & Management of Working Capital for M.B.A.

Basic accounting terms

Capital Owner/Proprietor/Businessman Assets Fixed Assets Current Assets Tangible Assets Intangible Assets Wasting Assets Debtors Stock or Inventory Bills Receivables (B/R) Goodwill

Liabilities Short Term Liability Long Term Liabilities Creditors Bills Payable Purchase Purchase Return/Return Outward Sales Sales Return/Return Inward Voucher Discount Trade Discount Cash Discount

Drawings Transaction Book Keeping Accounting : Accounting is the art of recording, classifying and summarizing in a significant manner in terms of money, transaction and events which are in part at least of a financial character and interpreting the result thereof. Difference between B.K. and Acc. Account Debit Credit Depreciation Solvent Insolvent

Objectives of Accounting
To Know Profit or Loss

To Know Financial Position

To Facilitate Management for Control Provides Accounting Information to Users Maintenance of Businss Records

User of Accounting Information

1)Internal Users Owner Management Employees or Workers 2)External Users Investors Creditors Government Banks and Financial Institutions Foreigners

Advantages of Accounting
Replace Memory Helps in Comparison Evidence in Court Facilitates Sale of Business Helps in Management Provides Financial Information

Limitations of Accounting
Accounting is not fully Exact Accounting does not Indicate the Realisable Values Accounting Ignores the Qualitative Elements Accounting Ignores the Effect of Price Level Accounting may Lead to Window Dressing

Branches of Accounting
Financial Accounting Cost Accounting Management Accounting

ACCOUNTING PRINCIPLES
Accounting Principles may be defined as those rules of action which are adopted by accountants universally while recording transactions. "Principles of Accounting are general laws or rules adopted or proposed as a guide to action, a settled ground or basis of conduct or practice." The American Institute of Certified Public Accountants

ACCOUNTING CONCEPTS : The term 'Concepts' includes those basic assumptions or conditions upon which the accounting is based.
The Business Entity Concept The Money Measurement Concept The Going Concern Concept Accounting Period Concept The Cost Concept

The Dual Aspect Concept

The Revenue Recognition Concept The Matching Concept The Accrual Concept The Verifiable Objective Concept

ACCOUNTING CONVENTIONS
Convention of Full Disclosure Convention of Consistency Convention of Prudence or Conservatism Materality Convention

Journal

A primary book of accounts in which transactions are originally recorded in a chronological order. The process of recording a transaction in a journal is known as journalizing.

Rules of Entries
Personal Account : Debit the receiver & credit the giver

Ex. : Ram sold goods to Mohan. Mohan Receiver Dr Ram Giver Cr

Real A/c :
Debit what comes in & Credit what goes out. Ex. : Machine purchase for cash. Machine is Coming Dr Cash is Going Cr

Nominal A/c :
Dr all the losses and exps. and Cr all the gain and incomes. Ex. : Rent Paid ExpenseDr. (Rent) Rent Received Income Cr. (Rent) Rule for Assets : Debit increas in value of assets and credit decreas in value of assets. Rules for Liability : Debit decrease in value of liability and credit

Steps of Journalising
1. Identify the things between which transaction taken place. 2. Classifying these things (Personal, Real, Nominal) 3. Apply the rules of entry. 4. Prepare Entry : First show debit and than credit in second line using the word 'To'.

ACCOUNTING EQUATION
An Accounting Equation is based on the dual aspect concept. In the dual aspect concept, we discussed that every business transaction has a twosided effect, that is, on the assets and also claims on assets. The total claims (those of outsiders and of the proprietors) will always equal the total assets of the firm. Assets = Liabilities + Capital

Transactions Affecting Two Items

Transactions affecting opposite side are : Increase in Asset, Increase in Liability Decrease in Liability, Decrease in Asset Increase in Asset, Increase in Owner's Equity Decrease in Owner's Capital, Decrease in Asset