Financial accounting in Masters of Management Studies by Prof. Subhash Dalvi

M.M.S. - SEM I
FINANCIAL ACCOUNTING

• 1.2. Financial Accounting 100 marks
• COURSE CONTENTS
1. Introduction to Accounting : Concept and necessity of
Accounting An Overview of Income Statement and Balance
Sheet.
2. Introduction and Meaning of GAAP; Concepts of Accounting:
Impact of Accounting Concepts on Income Statement and
Balance Sheet.
3. Accounting Mechanics: Process leading to preparation of Trial
Balance arid Financial Statements; Preparation of Financial
Statements with Adjustment Entries
4. Revenue Recognition and Measurement: Capital and Revenue
Items: Treatment of Income & Expenses. Preproduction Cost,
Deferred Revenue Expenditure etc.

5. Fixed Assets and Depreciation Accounting.
6. Evaluation and Accounting or inventory
7. Preparation and Complete Understanding
of Corporate Financial Statements : ‘T
’Form and Vertical Form of Financial
Statements
8. Important Accounting Standard
9. Corporate Financial Reporting — Analysis
of Interpretation thereof with reference Ratio
Analysis. Fund Flow, Cash Flow.
10. Inflation Accounting
11. Ethics Issues in Accounting

Reference text:
1 Financial Accounting. Text & Case.
Daardon & Bhattacharya
2 Financial Accounting for Managers — T P
Ghosh
3 Financial Accounting - R Narayanaswamy
4 Full Text of Indian Accounting standard — Taxman
Publication
5 Book Keeping & Accountancy – Choudhary Chopade

FATHER OF ACCOUNTING
• Luca Pacioli (1445-1517)
• Italian Mathematician
• Seminal Contributor to the
field of Accounting
• Text book used in the
schools of northern Italy
“Summa de arithmetica,
geometria….”includes the
first published description of
the method of book keeping
that Venetian Merchants
used known as “double
entry accounting system”

MEANING & DEFINITIONS
of BOOK KEEPING
• Book Keeping means keeping a
written record of business
transactions in a set of books.
• Book Keeping is the art of
recording business dealings in a
set of books ----- J R Batliboi
• Book Keeping is the science and
art of correctly recording in the
books of accounts all those
business transactions that result
in the transfer of money or
money’s worth ----- R N Carter

NEED OF BOOK KEEPING
• To have permanent record of
all the business transactions
• To know names of customers
& suppliers
• To know net profit & net loss,
assets & liabilities of the
business
• To have important
information for legal & tax
matters

ACCOUNTING
• AICPA (American
Association of Certified
Public Accountants)
Accounting is the art of
Recording, Classifying
and Summarizing, in
terms of money,
financial transactions
and events and
interpreting the results
thereof
• AAA (American
Association of Accounting)
Accounting is the
process of Identifying,
Measuring and
Communicating
economic information to
permit informed
judgements and
decisions by users of the
information

OBJECTIVES OF BOOK KEEPING
• To have date-wise record
• To have account-wise record
• To calculate & know yearly
profit or loss
• To know year-end financial
position
• To analyse, interpret &
communicate the accounting
information

PERSONS INTERESTED IN
ACCOUNTING
• OWNER
• EMPLOYEES
• LENDERS
• CUSTOMERS
• SUPPLIERS
• GOVERNMENT
• SOCIETY
• SHAREHOLDERS
• RESEARCHERS
• PROSPECTIVE INVESTORS

• Financial Accounting is the
process of summarising financial
data, which is taken from an
organisation’s accounting records
and publishing it in the form of
annual or quarterly reports, for the
benefit of people outside the
organisation
• It is also concerned with activities
involving strategic planning,
control, decision making, problem
solving, performance
measurement & evaluation, co-ordinating,
directing, auditing, tax
planning, cost & management
accounting, MIS & so on.

Role of Financial Accounting
• Generates key documents like
Manufacturing A/c, Trading A/c,
Profit & Loss A/c & Balance Sheet
• Records financial transactions
showing both inflow & outflow of
money from sale, purchase, payments
& receipts etc
• Empowers the managers & aids them
in managing more efficiently by
preparing standard information which
includes monthly MIS reports tracing
the costs and profits against budgets,
sales & investigations of the cost.

Benefits of Financial Accounting
• Keeping proper &
chronological record of
transactions & events
• Helps to comply with various
legal requirements under tax
laws, company law etc.
• Protecting and safeguarding
the business assets by serving
as evidence & preventing
unwarranted & unjustified use
• Facilitates rational decision
making
• Communicating & Reporting
to the end users

Limitations of Financial Accounting
• No clear idea of operating
efficiency. (Profit)
• Weakness not spotted. Does not
disclose the exact cause of
inefficiency (Thermometer)
• Not helpful in price fixation
(non availability of costs)
• Provides only historical
information
• Inadequate information for
reports & decision making
• No Analysis of losses

TERMINOLOGY
• TRANSACTION – Exchange
between two parties. It involves
“Give & Take”
• CASH TRANSACTION –
Goods or services are exchanged
for cash
• CREDIT TRANSACTION –
Goods or services are exchanged
for cash receivable or payable at
future

• GOODS – things, articles or commodities exchanged
in a business transaction
• SERVICES – Service means the work done for
money. They do not involve any article or commodity
• PROFIT – Excess of Income over expenditure
• LOSS – Excess of Expenses over Income
• INCOME – Amount earned by sale of goods &
services

• EXPENSES – Amount paid for goods & services used in the
business
• ASSETS – Properties owned by the business like Building,
Plant, Machinery, Computers, Motor Cars, Furniture & Fixtures
etc.
• LIABILITIES – Loans borrowed from banks, relatives, friends
etc. which must be paid back in future are called liabilities
• CONTINGENT LIABILITY – Future liability. It may or may
not become an actual liability. It is not recorded in the books,
but is shown by way of a note in the balance sheet

• CAPITAL – Money put in the business by the owner.
It also includes goods or assets brought in the
business by the owner
• DRAWINGS – If the owner withdraws any money,
goods or assets from the business for his own use,
such withdrawals are called as drawings. Such
drawings reduce the amount of capital of the owner
• NET WORTH – Difference between total assets and
total outside liabilities. Net Worth = Assets -
Liabilities

• DEBTOR – A debtor buys goods & services from us
and promises to pay the price to us on an agreed date
in future. Debtor is a person who owes money to
business.
• CREDITOR – A creditor sells goods & services to
us and agrees to receive the price in future. Creditor is
a person to whom we owe money.
• EXPENDITURE – Payment made by a business to
obtain some benefit i.e. assets, goods or services

• CAPITAL EXPENDITURE – Expenditure
for obtaining an asset is known as capital
expenditure. It is an expenditure having future
benefits. It is an expenditure with long term
use (more than 1 year)
• REVENUE EXPENDITURE – Expenditure
on obtaining goods and services is known as
revenue expenditure. It is an expenditure for
running the business. It is an expenditure with
short term use (1 year or less than 1 year)

• DEFERRED REVENUE EXPENDITURE – To defer
means to postpone. It is that expenditure which is
carried forward as it will be of benefit over
subsequent period e.g. heavy advertisement
expenditure to launch a new product. The
proportionate cost related to current year is taken as
expense. The balance cost is carried forward and
written off in next year.
• ACCOUNTING YEAR – Period of 12 months
normally starting in April & ending in March of next
year. Normally profit is found out for an accounting
year.

• Account – An account is a summarized record of transaction
relating to certain person, kind, income or expenditure. It is
separately prepared record of the certain transactions
• Asset – Assets are the properties of every type (movable or
immovable) owned by a person or an organization
• Casting – Casting means totalling of books of accounts.
• Bad Debt – Bad debts are those debts which are not
recoverable and written off from the debtors account. It is a
loss for the organization
• Discount – It is a concession or allowance given by the
receiver of benefit to giver of the benefit. It is generally given
by seller to buyer
• Entry – The entry refers to the recording of business
transaction in the books of account
• Narration – It is a brief explanation of a journal entry written
exactly after every journal entry starting with the word “being”

• Posting – Transactions recorded in journal are further
transferred to ledger accounts. The process of recording the
transactions from journal to ledger is called as posting
• Purchases – Goods brought for direct resale or further
manufacturing and resale is called as purchase. Thus buying,
the commodities for trading or business purpose are termed as
purchases.
• Revenue – Revenue refers to the amount generated by the
organisation from its business activities. Generally it is the
amount collected through making sales efforts
• Sales – When an organisation makes sale of goods (which it
purchased for resale) then it directly termed as sale.
• Solvent – A person or an organisation is said to be solvent
when its assets are equal to or more than its liabilities
• Stock – Stock refers to the amount of (value of ) unsold goods
lying with the businessman on any particular date

TYPES OF ACCOUNTS
• PERSONAL ACCOUNTS – Accounts of
all persons like Dena Bank a/c, Garware
Institute A/c, Mumbai University A/c,
Sachin Tendulkar A/c etc.
• REAL ACCOUNTS – Accounts of all
properties & assets like CASH Account,
Plant & Machinery A/c, Building A/C etc.
• NOMINAL ACCOUNTS – Accounts of
all expenses & losses and Incomes & gains
like Telephone charges a/c, Interest Recd
A/C, Electricity charges a/c, Salary account
etc.

GOLDEN RULES
PERSONAL ACCOUNT
DEBIT - THE RECEIVER
CREDIT – THE GIVER
REAL ACCOUNT
DEBIT – WHAT COMES IN
CREDIT – WHAT GOES OUT
NOMINAL ACCOUNT
DEBIT – ALL EXPENSES & LOSSES
CREDIT – ALL INCOMES & GAINS

DOUBLE ENTRY ACCOUNTING
• Recording of transactions & events follows a
definite rule.
• Each transaction or event has two aspects
DEBIT (Dr.) & CREDIT (Cr.)
• Every Debit has an equal & opposite Credit
• Every transaction should be recorded in such a
way that it affects two sides – DEBIT &
CREDIT

ACCOUNTING CYCLE
1. SELECTION OF TRANSACTION – Select
only those transactions which are
- Financial in nature and
- Which arise in the course of the business

2. ANALYSIS OF TRANSACTION – Analyse
the transaction to find out
a. Whether the business has received any
benefit such as goods, services or assets and
in return , any amount is paid in cash or is
payable
b. Whether any such benefit has gone out of
business and in return any amount is received
in cash or is receivable

3. CLASSIFICATION OF ACCOUNTS – Find
out which items or persons are involved in the
transaction and classify them in to 3 main
types such as
a. Personal A/c
b. Real A/c
c. Nominal A/c

4. APPLYING RULES OF DEBIT OR CREDIT
Depending upon the nature of a transaction
a. DEBIT – The A/c receiving the benefit or
amount
b. CREDIT – The A/c giving the benefit or
amount

• 5. RECORDING IN JOURNAL OR
SUBSIDIARY BOOKS – Transactions are
recorded as and when they occur, in a daily
book called Journal including subsidiary books
like Cash Book, Bank Book, Purchase
Register, Sales Register etc.
• 6. POSTING AND TOTALLING OF
LEDGER ACCOUNTS – From the journal,
the amounts debited or credited are transferred
(posted) to the debit and credit of the
concerned accounts in a book called Ledger

• 7. TRIAL BALANCE – At the end of the year trial
balance is prepared which shows the closing balances
of all accounts in the ledger
• 8. PROFIT & LOSS A/C – The balances of Income
and Expenses accounts at the end of the year are
summarised in the P/L A/c. The difference between
the income & expenses shows the profit or loss for
the year
• 9. BALANCE SHEET – The balances of assets,
liabilities and capital accounts at the end of the year
are summarised in the Balance Sheet.

BRANCHES OF ACCOUNTING
• FINANCIAL ACCOUNTING
• COST ACCOUNTING
• MANAGEMENT/MANAGERIAL ACCOUNTING
• AUDITING
• TAXATION

• Original Form of Accounting
• Confined to Preparation of
Financial Statements
• Objective is to Calculate
Profit / Loss made during the
year & to exhibit Financial
Position of the Business

COST ACCOUNTING
• Function of cost
accounting is to
ascertain the cost of the
product and to help the
management in the
control of cost
• Costing is a technique
of ascertaining cost of a
particular product or
service

MANAGEMENT ACCOUNTING
• It is an accounting for
management
• Provides information to
the management
• It is reproduction of
financial accounts in such
a way as will enable the
management to take
decisions & control
various activities

AUDITING
• Examination of books,
accounts, vouchers and other
records by a practicing
Chartered Accountant appointed
for the purpose
• Reporting to the members /
management whether the B/S &
P/L A/c as on particular date
shows true & fair view of the
state of affairs of the business

TAXATION
• Computation of
Taxable Income &
Tax Payable thereon
• Reconciliation
between accounting
profit & taxable
profit
• Statutory compliance

Accounting Conventions
• Consistency
• Materiality
• Disclosure
• Conservatism

Consistency
• Means following the
same accounting policies
consistently without
initiating frequent
changes
• Comparison of business
results of one period with
the other is possible only
when accounting policies
are followed consistently.
• E.g. Depreciation

Materiality
• An item should be
regarded as material, if
there is a reason to
believe that knowledge of
it would influence the
decision of the informed
investor
• Significant & important
information should be
properly reported

Disclosure
• Full disclosure of all
the material facts with
the true and fair view
• It does not mean
disclosure of each
and everything
• It simply means
providing information
of significance to the
relevant users

Conservatism
• It refers to policy of
playing safe
• All the probable losses
are taken in to
consideration but not the
probable gains
• E.g. making provision for
doubtful debts, discount
on debtors, valuation of
stock at cost or market
price whichever is less
etc.

ACCOUNTING CONCEPTS
Elephant, Monkey, Cat, Goat, Parrot & Ant Playing Match for Victory
Cost
Going
Concern
Periodicity
Matching
Prudence
Accrual
Entity
Money
Measurement
Verifiable
Evidence

ACCOUNTING CONCEPTS
EXPLAINED
• The Entity Concept – A business is an
artificial entity distinct & separate from its
owner. For accounting purposes a
business & its owner are two separate
persons
• Money Measurement Concept – For
accounting purposes each transaction &
event must be expressible in monetary
terms.

• The Cost Concept - Assets such as Land,
Buildings, Plant & Machinery etc. and
obligations such as Loans, Public Deposits
etc. should be recorded at historical cost
(acquisition)
• The Going Concern Concept – It is
assumed that the business organization
would continue its operations for a long
time

• Periodicity Concept – The results of
operations of entity are measured
periodically i.e. in each accounting period.
Calendar Year – January to December
Fiscal Year – April to March
As per Income Tax Act, Accounting Period
should always be starting from April -
March

• Accrual Concept – Incomes & Expenses
should be recognized as and when they
are earned and incurred, irrespective of
whether the money is received or paid in
connection thereof. E.g. Rent paid for 15
months in advance on January 2009. In
this case Rent for 3 months should be
recognized in FY 08-09 & Rent for 12
months should be recognized in FY 09-10

• Concept of Prudence – It states that
anticipate no profits but provide for all
possible losses. Prudence is the inclusion
of a degree of caution in the judgment of
estimates. Expected losses should be
accounted for but not anticipated gains

• Matching Concept – Revenue earned in an
accounting year is matched with all the
expenses incurred during the same period to
generate that revenue. Matching concept
suggest that to find out the profitability, the
expenses incurred to generate revenue are to
be matched against that revenue
• Verifiable Evidence – All accounting transactions
should be evidenced and supported by the
documents. Such supporting documents provide
the basis for making accounting entries and for
making verification by the auditor later on.

ACCOUNTING SEQUENCE
Transaction
/ Event
Preparation
Of Vouchers
Recording in
Primary Books
JOURNAL
Postings in
Secondary
Books
LEDGER
Preparation
Of Financial
Statements
Trading A/C,
Profit & Loss A/C,
Balance Sheet etc.
Preparation
Of
Trial Balance

VOUCHER PREPARATION
• After the event is happened, physical
vouchers based on certain documents like
Bill, Delivery Challan, Receipt, Reports,
Purchase Order, Quotations etc. are
prepared & the same are filed for future
reference

Voucher with Supporting Documents

RECORDING IN PRIMARY BOOK
• All the events are recorded in primary book called “JOURNAL”
in a double entry system of book keeping.
• Format of JOURNAL is as follows
Sr.No. Date Particulars
Dr. /
Cr.
Vr.
No. L/F
Dr.
Amt
Cr.
Amt.
1 24.04.2009 Plant & Machinery A/C Dr. 1 12 500
To Cash Cr. 1 14 500
(Being Purchase of
Machinery for cash from Mr.
Sam)

SECONDARY BOOKS - LEDGER
DR. Plant & Machinery Account CR.
Date Particulars JF Amount Date Particulars JF Amount
24.04.09 To Cash 500 30.04.09 By Balance 500
500 500
DR. Cash Account CR.
Date Particulars JF Amount Date Particulars JF Amount
30.04.09 To Balance 500 24.04.09 By P&M 500
500 500

TRIAL BALANCE
• It is a list of various accounts showing their
balances (either DR. or CR.) as on particular
date. Based on such TB financial statements
are prepared.
Trial Balance as on 31.03.2009
Sr.No. Name of the Account Dr. Bal. Cr.Bal.
1 Plant & Machinery 500
2 Cash 500
Total 500 500

Trading Account
TRADING A/C for the year ended 31.03.2009
Dr. Cr.
Particulars (Trad Exp) Amount Particulars (Trad Income) Amount
To Opening Stock xx By Sales xx
To Purchases xx By Closing Stock xx
To Wages xx
To Gross Profit c/d xx
xxx xxx

Profit & Loss Account
PROFIT & LOSS A/C for the year ended 31.03.2009
Dr. Cr.
Particulars (Expenses) Amount Particulars (Incomes) Amount
To Salary xx By Gross Profit b/d xx
To Printing & Station xx By Commission Recd xx
To Telephone xx By Discount Recd xx
To Advertisement xx By Interest Recd xx
To Electricity xx By Remuneration Recd xx
To Postage xx By Profit on Sale of Asset xx
To Fax Exp xx
To Net Profit c/d xx
xxx xxx

JOURNAL
• Journal means a daily book
• Journal means a book to record daily
transactions
• As soon as any financial transaction takes
place, it is recorded in the Journal. Hence
it is called the book of First, Original or
Prime entry
• Journal entry is passed according to the
rules of Debit & Credit.

LEDGER
• JOURNAL – Date wise record
• LEDGER – Account wise record
• Ledger A/c is a statement showing the
summary of transactions and the final balance
in respect of a person or an item. Each A/c is
kept on a separate page or folio. All the
pages/folios are bound together in a book
called LEDGER

FORMAT OF LEDGER A/C
DR. ……………. A/c (Name of the Ledger A/c) CR.
DATE PARTICULARS J/F AMT DATE PARTICULARS J/F AMT
xx To …….. A/c - xxx xx By …….. A/c - xxx
xxxx xxxx

TRIAL BALANCE
• TRIAL BALANCE is a statement containing
the list of the balances of all Ledger Accounts
on a particular day
• It is a concise summary of ledger balances
• It gives an idea of balances of various accounts
of persons, assets, income and expenses at a
glance
• It is a link between ledger and the final
accounts

FORMAT OF TRIAL BALANCE
TRIAL BALANCE OF …………. AS ON …………
Sr.No
. Particulars / Name of the Ledger A/c L/F
Debit
Amt
Credit
Amt
1 Purchases A/c xx
2 Sales A/c xx
3 Purchase Returns A/c xx
4 Sales Returns A/c xx
5 Cash A/c xx
6 Bank A/c xx
7 Capital A/c xx
8 Salaries A/c xx
9 Furniture A/c xx
10 Sundry Debtors A/c xx
11 Sundry Creditors A/c xx
Total xxxx xxxx

STEPS IN EXTRACTING TRIAL
BALANCE
• RECORDING - the transactions in Journal
• POSTING - the transactions in Ledger
• BALANCING - the Ledger Accounts
• TRIAL BALANCE – writing the balances of
the Ledger Accounts

Ledger Accounts
Normally Having Dr. & Cr. Balances
• DR. BALANCES
1. Drawings
2. Sundry Debtors
3. Bills Receivable
4. Bank
5. Loans Given
6. Deposits Given
7. Advances Given
8. Cash A/c
9. Assets A/c
10. Purchases
11. Return Inwards
12. Opening Stock
13. Expenses & Losses
• CR. BALANCES
1. Capital A/c
2. Sundry Creditors
3. Bills Payable
4. Bank Overdraft
5. Loans Taken from
6. Deposits Taken from
7. Advances Taken from
8. Sales
9. Return Outwards
10. Income & Gains

INDIVIDUAL PROJECT/ASSIGNMENT
• TOPIC
ACCOUNTING
STANDARDS ISSUED
TILL DATE
- Meaning, Who sets,
Factors considered,
Points Covered,
Objective, Benefits etc.
- List along with AS-No.
- Explanation in full
details for any 4
accounting standards
• Submission Date
15th October, 2013
• Neatly typed
/printed/handwritten &
spiral bounded
• Specify the name, roll
no. division, subject etc.
• Total Marks 40

Thank You
• For More:
– Visit
– www.guide2startup.blogspot.com

Financial accounting in Masters of Management Studies by Prof. Subhash Dalvi

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Financial accounting in Masters of Management Studies by Prof. Subhash Dalvi