Notes

1. FINANCIAL ACCOUNTING

2. MEANING OF ACCOUNTING
• According to AICPA "Accounting is 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."

3. • According to American Accounting
Association "Accounting is the process of
identifying, measuring and communicating
economic information to permit informed
judgments and decisions by users of the
information.“
• In simple words, accounting is the process of
collecting, recording, summarizing &
communicating financial information.
Accounting is an information system that
provides accounting information to users for
correct decision-making.

4. Functions of Accounting
 Identification: Economic events are identified and
measured in terms of money.
 Recording: Accounting is an art of recording business
transactions in the books of accounts. Recording is the
process of entering business transactions financial
character in the book of original entry, i.e., in Journal.
 Classifying: Classification is the process of grouping
transactions or entries of one nature at one place. The
transactions recorded in the 'Journal' or the subsidiary
books are classified and posted to the main book of
account known as the 'Ledger'. This book contains the
preparation of the following statements: (i) Trial Balance,
(ii) trading and individual account heads under which all
financial transactions of a similar nature are collected.

5. Summarizing: This involves presenting the
classified data in a manner, which is understandable
and useful to internal as well as external end-users
of accounting statements. This process leads to
Profit and Loss Account, and (iii) Balance Sheet.
Interpreting: The final stage in the accounting
process is analyzing and interpreting the financial
data contained in the final accounts so that parties
concerned with the business can make a meaningful
judgment about the profitability and financial
business can make a meaningful judgment about the
profitability and financial position of the business
unit. This helps in planning for the future in a better
way.

6. OBJECTIVES OF ACCOUNTING
• 1. Maintain of Business Records: Accounting is the
language in which most of the business transactions
(financial) and events are expressed. Its objective is to
keep a systematic record of these financial transactions. It
embraces proper recording of transactions, classified under
appropriate accounts and summarized into financial
statements- Income Statement and the Position Statement.
• 2. Ascertaining Profit or Loss: Another objective of
accounting is to ascertain the net result of day-to-day
transaction for a period. In other words, to ascertain
whether during the period, the firm earned a profit or
suffered a loss. For this purpose, a statement called an
Income Statement or the Trading, Profit and Loss Account
is prepared.

7. • 3. Ascertaining Financial Position: For a businessman,
it is not adequate to only ascertain the profit or loss; it is also
necessary to know the financial health of the firm. For this
purpose, a statement listing assets, liabilities and the owner's
capital is prepared. Such a statement is called a Balance
Sheet.
• 4. Providing accounting Information to Users: Another
objective of accounting is to provide accounting information
to users who analyse them as per their individual needs. The
American Accounting Association while defining
accounting has also identified this objective of accounting.
• 5. Facilitating Management Control: The management
often requires financial information for decision making,
effective control, budgeting and forecasting. Accounting
provides financial information to assist the management in
discharging this function.
•

8. ADVANTAGES OF ACCOUNTING
•
• 1. Financial Information about Business: Accounting
makes available financial information, i.e., the profit earned
or loss suffered and also what are the assets and liabilities of
the enterprise.
• 2. Assistance to Management: The management is
responsible for the functioning of the business and has to
therefore plan, make decisions and exercise effective control
on the affairs of the business. The management performs
these functions on the basis of accounting information.
• 3. Replaces Memory: No businessman can remember
everything about his business since human memory has
limitations. It is necessary to record transactions in the books
of accounts promptly. This will obviate the necessity of
remembering various transactions, since on need; the records
will furnish the necessary information.

9. • 4. Facilitates Comparative Study: a systematic record
will enable a businessman to compare one year's results with
those of other years and locate significant factors leading to
the change, if any.
• 5. Facilitates Settlement of Tax Liabilities: A
systematic accounting record immensely helps settlement of
income tax, sales tax, VAT and excise duty liabilities since it
is a good evidence of the correctness of transactions.
• 6. Facilitates Loans: the banks and financial institution of
basis of growth potential, which is supported by the
performance, grant Loan.
• 7. Evidence in Court: the Courts often treat Systematic
record of transactions as good evidence.
• 8. Facilitates sale of Business: If someone desires to sell
his business, the accounts maintained by him will enable the
ascertainment of the proper price.

10. • 9. Assistance in the Event of Insolvency:
Insolvency proceedings involve explaining many
transactions that have taken place in the past.
Systematic accounting records assist a great deal
in such a situation.
• 10. Helpful in Partnership Accounts: At the
time of admission of a partner, retirement or death
of a partner and dissolution of the firm, accounting
record is of vital importance and use. It is so
because it provides the basis to reach a settlement.

11. ACCOUNTING PROCESS
• Based on the main attributes of accounting, we
may list the steps of Accounting Process as
follows:
• (i) Financial Transactions,
• (ii) Recording
• (iii) Classifying
• (iv) Summarizing
• (v) Analysis and Interpretation

12. MEANING AND NATURE OF ACCOUNTING PRINCIPLES
• According to the AICPA "Principles of
Accounting are the general law or rule
adopted or proposed as a guide to action, a
settled ground or basis of conduct or
practice.“These principles are classified into
two categories:
• (i) Accounting Concepts;
• (ii) Accounting Conventions

13. Accounting Concepts
• Accounting Concepts are the basic assumptions or
fundamental propositions concerning the economic,
political and social environment within which
accounting operates. They are generally accepted
set of accounting rules based on which transactions
are recorded and financial statements prepared. It
is important to follow these rules because it will
enable the user to understand the financial
statements of the enterprise better, which otherwise
would become difficult if not impossible.

14. •
• 1. The Business Entity Concept: The Business Entity
Concept holds the business to be separate and distinct from
its owners.
• 2. The Money Measurement Concept: The Money
Measurement Concept holds that transactions and events
that can be measured in money terms are recorded in the
books of accounts of the enterprise. In other words,
money is common denominator in recording and reporting
all transactions.
• 3. Going Concern Concept: The Going Concern
Concept holds that a business shall continue for an
indefinite period and there is no intention to close the
business or scale down the operations significantly.
• 4. The Accounting Period Concept: The Accounting
Period Concept holds that the life of an enterprise be
broken into smaller periods so that its performance is
measured at regular intervals.

15. • 5. The Cost Concept: The Cost Concept holds that an
asset is recorded in the books of account at the price paid to
ac1quire it and the cost is the basis for all subsequent
accounting of the asset. Asset is recorded at the cost at the
time of its purchase but is systematically reduced in value
by charging depreciation. The market value of an asset may
change with the passage of time, but for accounting
purposes it continues to be shown in the books of accounts
at its book value (i.e., cost at which it was purchased minus
depreciation provided up-to-date).
• 6. The Dual Aspect Concept: This is the basic concept
of accounting. According to this concept, every transaction
entered into by an enterprise has two aspects. If a
transaction has taken place or an event has occurred, it is
bound to have a two sided effect.

16. • 7. The Revenue Recognition Concept: The Revenue
Recognition Concept holds that revenue is considered to
have been realized when a transaction has been entered into
and the obligation to receive the amount has been
established. It is to be noted that recognizing revenue and
receipt of an amount are two separate aspects.
• 8. The Matching Concept: The Matching Concept is
based on the accrual concept of accounting and related to the
revenue concept. It holds that the cost incurred to earn the
revenue should be set out against the revenue in the period
during which it is recognized as earned. For matching
expenses with revenue, first revenue is recognized and then
costs associated with those revenue are recognized.

17. • 6. The Dual Aspect Concept: This is the basic concept of
accounting. According to this concept, every transaction entered into
by an enterprise has two aspects. If a transaction has taken place or an
event has occurred, it is bound to have a two sided effect.
• 7. The Revenue Recognition Concept: The Revenue Recognition
Concept holds that revenue is considered to have been realized when a
transaction has been entered into and the obligation to receive the
amount has been established. It is to be noted that recognizing revenue
and receipt of an amount are two separate aspects.
• 8. The Matching Concept: The Matching Concept is based on the
accrual concept of accounting and related to the revenue concept. It
holds that the cost incurred to earn the revenue should be set out
against the revenue in the period during which it is recognized as
earned. For matching expenses with revenue, first revenue is
recognized and then costs associated with those revenue are
recognized.

18. LIMITATIONS OF ACCOUNTING
• 1. Accounting is Not fully Exact: Although most of the
transactions are recorded on the basis of evidence such as sale or
purchase or receipt of cash, yet some estimates are also made for
ascertaining profit or loss.
• 2. Accounting Does not indicate the Realisable Value: The
Balance Sheet does not show the amount of cash which the firm may
realize by the sale of all the assets. This is because many assets are not
meant to be sole; they are meant for use and are shown at cost less
depreciation that may have been written off.
• 3. Accounting Ignores the Qualitative Elements: Since
accounting is confined to monetary matters only, qualitative elements
like quality of management and labour force, industrial relations and
public relations are ignored.
•
•

19. • 4. Accounting Ignores the effect of Price Level
Changes: Accounting statements are prepared at historical
cost. Money, as a measurement unit, changes in value. It
does not remain stable. Unless price level changes are
considered while preparing financial statement, accounting
information will not show true financial results.
• 5. Accounting May Lead to Window Dressing: The
term window dressing means manipulation of accounts in a
way so as to conceal vital facts and present the financial
statements in a way to show better position than what it is
actually. In this situation, income statement (i.e., Profit and
loss Account) fails to provide a true and fair view of the
result of operations and the Balance Sheet fails to provide a
true and fair view of the financial position of the enterprise.

20. THANK YOU