B. V.

Patel Institute of Management

(FY BBA)

Chapter 1:
Introduction to
Financial
Accounting
By Ms. Riddhi Mistry
 Definition of
Needs of Accounting
Accounting
• Communicate the result of business
“Accounting is the process and for that keep a record of
of identifying, recording, money received and spent. Ex:
classifying, summarizing, Household keeps ‘Household Diary’
analyzing and interpreting Useful for get to know about:
the financial transactions ✓What it owns and owes?
✓Whether its earning profit or loss?
and communicating the
✓The financial position of the
result thereof to the business.
persons interested in such ✓Give result of bankrupt or good
information.” future.
 Functions of End users of Accounting
Accounting Information

➢ Recording (Journal)
➢ Classifying (Ledger)
1.Proprietors / promotors
➢ Summarizing (Trading A/c,
2.Managers
P&L A/c, Balance Sheet)
3.Creditors
➢ Dealing with only financial
4.Prospective Investors
transactions
5.Government
➢ Analyzing and interpreting
6.Employee
➢ Communicating (Graphs,
7.Citizen
ratios, diagrams)
 Bookkeeping Accounting

➢Annual Work
➢ Routine work ➢Design the system for recording,
➢ Record financial data in classifying & summarize the data
orderly manner ➢The person work as an
➢ The person work as a accountant
clerk ➢Need knowledge, clear concept,
analytical skills
 Types of Accountants

Public Practice Employment

➢ Professional accountant
➢ Offer services for a Fee Ex: ICAI,
ICWA ➢Employed in non-business
They must be; entities
➢ Trained in prescribed manner ➢NO-PROFIT object
➢ Pass the examination ➢Provide information for
➢ Observe principle tax, return, budgeting
➢ Code of Ethics
➢ Subject to disciplinary proceeding
 Role/Services of
Accountant

Maintain books of account: Auditing Financial

✓ Helps Management Taxation
*Statutory Services
✓ Replacement of Memory *Internal
✓ Comparative Study
✓ Acceptance by Tax
authorities
✓ Evidence to the court
✓ Sale of business
 Branches of Accounting

Financial Management

➢ For discharging its functions

only for business
➢ Preparation of financial ➢ Provide Information in a
statements outsiders like professional way to assist
Shareholders management in the formation
➢ P&L statement, Balance of policy planning, about
sheet Funds, cost, Profit, Budgeting
control, Inventory control,
Auditing
 Difference Between Financial & Management
Accounting

Points Financial Accounting Management Accounting

Objective Supply information in the Information provided for

form of P&L, Balance sheet the internal use by
to outsiders management
Analysis of Overall performance of the Directs attention to the
Performance business various divisions,
departments through
detailed analytical data
Data used Use past data Accounting for future
Monetary Record So that supply both data
present and future duly
 Points Financial Accounting Management Accounting
Monetary Monetary events Non-monetary events
Measurement
Periodicity of Much longer period Quick and comparatively
reporting because statements short interval
prepared on the basis of
yearly or half-yearly
Precision More depends on precision Less emphasis because of
internal consumption
Nature Objective Subjective

Legal Need to prepare Free not to install this

Compulsion accounting
 Objectives of Accounting

➢ To keep systematic records

➢ To protect business properties
➢ To ascertain the operation profit & loss
➢ To ascertain the financial position of business
➢ To facilitate rational decision making
 Accounting Principles Or
Gaap (generally accepted accounting principle)

Accounting Concepts Accounting

Conventions
❖ Separate Entity Concept
❖ Going Concern Concept
❖ Money Measurement Concept ❖ Conservatism
❖ Cost Concept ❖ Full Disclosure
❖ Dual Aspect Concept ❖ Consistency
❖ Accounting Period Concept ❖ Materiality
❖ Periodic Matching of Cost & Revenue
Concept
❖ Realisation Concept
 Accounting concepts

Separate Entity Concept Going Concern Concept

▪ Business is expected to
continue operation for future
▪ Business & Owner are
and cannot shut it down
separate to their self
suddenly
▪ Transactions recorded only
▪ No intention of liquidation
for a business not for the
▪ Assets are recorded at
owner personally
purchased price not at
liquidation value
 Money Measurement Cost Concept
Concept

▪ Record only monetary

transactions ▪ Assets are recorded at their
▪ Non-financial things are not original cost not at current
recorded like skills, market price
reputation, dedication
Example: Record at the cost (at
Example: Non-Monetary Monetary
Cash 100 notes of 100 Rs. 10,000
a time of purchase) i.e. Rs.
Raw Material 600 kg 12,000 50,000 not at a current price
Trucks 2 No. 10,00,000 i.e. Rs. 70,000.
Building 2000 sq. feet 1,00,000
 Dual Aspect Concept Accounting Period
Concept

▪ Two effect is there. i.e. Debit

and Credit ▪ For reporting purpose,
Example: ‘A’ started a business business is divided into
with capital of Rs. 10,000. fixed period (1 year)
So, Capital = 10,000 increases ▪ According to going
Asset = Cash 10,000 decreases concern there is an
Indefinite life of business
Assets = Liabilities + Capital so businessman should
“For each debit, there is an ‘stop’ and ‘see back’ how
equivalent credit” things are going
 Periodic Realisation Concept
Matching of
Costs and
Revenue ▪ Sale is consideration to be made at the point
Concept when the property in goods passes to the
buyer and he becomes legally liable to pay
Example: ‘A’ places an order with ‘B’ for supply of
goods yet to be manufactured on receipt of. an
Revenue should order, ‘B’ purchased Raw material, goods and
be equal to Cost delivered to ‘A’.
So, ‘A’ paid on delivery to ‘B’.
Exceptions: At the time of Hire Purchase &
At the time of contract, after the receipt/payment, sale is
presumed to be sale.
 Accounting conventions

Conservatism Full Disclosure

▪ Policy of ‘Playing Safe’

▪ Inventory is valued ‘at cost
▪ All important information
or market price whichever is
should be disclosed
less’
▪ Help shareholders to make
▪ Provision made for possible
informed decisions
and doubtful debt
▪ Fully and fairly information
▪ Be cautious
▪ Only material information
▪ Record expected losses but
not profit
 Consistency Materiality

▪ Accounting practices should

remain unchanged
Example:
❑ Depreciation if charged ▪ Only attach important
according to diminishing information that affect
balance, it should be same decisions
for every year ▪ Ignore insignificant details
❑ Cost or market price
whichever is low
• So that it is easy to compare
Thank You for Your
ATTENTION !!!