UNIT-IV

FINANCIAL ACCOUNTING

 Accounting concepts and Conventions

 Accounting Equation, Double-Entry system of Accounting
 Rules for maintaining Books of Accounts
 Journal
 Posting to Ledger
 Preparation of Trial Balance
 Elements of Financial Statements
 Preparation of Final Accounts
 Review
 Review
 FINANCIAL ACCOUNTING
The main object of any business is to make profits. It is may be a business engaged in the
purchase and sales of goods or it may be engaged in the production of goods or provision of
services whatever be it‟s nature, the main object is to earn profits.
A businessman enters into business in order to earn profits. in the businessman wishes
to find out how much profit he has made during a given period, he must be able to remember all
the transactions that have taken place in his business. But it is not possible for any businessman
to remember all the transactions that have takes place in his business. So he has to record them
in his books of accounts.
Book-keeping is the art of recording all business transactions in the books of account
maintained by businessman for that purpose.
Keeping a separate book to recording all the business transaction by using principle of
accounting is also called Book-keeping.
Accounting is an art as well as sciences of identifying, analyzing, recording, classifying
and summarizing of business transactions which are of a financial character and are expressed in
terms of money. It also includes interpretation aspect of the recorded information and the result
of accounts can be submit to the require persons in the business (Accountants)
Objectives of Book keeping & Accountancy:-
 To ascertainment of financial position of the business organization. To determine the
profit and loss of organization
 To knowing the information about capital employed in the business.
 To know the value of asset of the organization
 Calculation of amounts due to and due by others.
 To know how much tax to pay to the government
 To comparison between the current year and the previous years records.
 To plan the organization
 To make the financial decisions of the business
DOUBLE ACCOUNTING SYSTEM
Double entry system of Book-keeping is simple and universal in its application. It has the
test of four hundred years continuous use. It may be claimed that it is the only system worthy of
adoption by the practical businessman. To understand the system of double entry system of
book-keeping all that we need to remember is the fundamental rule:
“Debit the account which receives the benefit.”
“Credit the account which gives the benefit”

Types of account
1) Personal Account
2) Real Account
3) Nominal Account
 RULES FOR DEBIT & CREDIT.
1) Personal Account: - This account deals with the individuals of the organization these
includes accounts of natural persons in varied capacities likes suppliers and buyers of goods,
lenders and borrowers of loans etc. “Debit the receiver”
“Credit the giver”
2) Real Account: - This account deals with the group of individuals of the organization these
include combinations of the properties or assets are known as real account.
“Debit what comes in”
“Credit what goes out”
3) Nominal Account: - Nominal accounts relate to such items which exist in name only.
These items pertain to expenses and gains like interest, rent, commission, discount, salary etc,
“Debit all expenses and losses”
“Credit all incomes and gains”

JOURNAL
In the early evaluation of book-keeping traders used to record the business transactions
in a simple manner in the Waste book or Rough book. The waste book is a book in which a
businessman briefly notes down each transaction as soon as it takes place. Transaction is writing
in this very first so it is also called Book of Prime or First Entry Book.
Journal format

Date Particulars Dr Amount Cr Amount

LEDGER
Ledger is the secondary book of accounts all business transactions are recorded in the
first instance in the journal, but they must find their place ultimately in the accounts in the ledger
in a duly classified form. This ledger are also called final entry book. OR Transferring of all
journals in to accounts by using accounting principles is called ledger.
DR ledger format CR

Date Particulars L F.N Amount Date Particulars LFN Amount

 CASH BOOK
Every businessman receives cash and pays cash practically every day. All the receipts and
payments of cash are recorded in a separate book called the “Cash book” in modern times cash
includes not only legal tender money like notes and coins but also other forms of money like
cheque bank, drafts. Etc.
KINDS OF CASH BOOKS
The following are the most common ones
 Simple or single column cash book

 Two or Double column cash book

 Three or Triple column cash book

Single Column Cash Book: The single column cash book are also called simple cash book it
has only one amount column representing cash with the office. This cash book is ruled just like
on ordinary ledger account. The following is the format of simple cash Book.
DR Cash Book CR

Date Particulars Amount Date Particulars Amount

Double Column cash Book:

This book contains one extra column for discount on either side of the cash book in
addition to the usual columns of a simple cash book. Since cash received and discount allowed
on the debit side of the cash book. Similarly as discount received and cash paid on the credit side
of the cash book. As there will be two amount column now one for the discount and the other
for cash, the cash book of this type is referred to as two column or double column cash book.
The format is given below. .
DR Double Column cash Book CR
A R
Date Particular Dis Amount Date Particulars Dis Amount
Triple Column Cash Book: In case the business man maintains an account with the bank the
above mentioned two kinds of cash book do not suit his need or requirements cash book should
keep a full record not only of cash and discount but also of bank transactions for this purpose a
„Bank” column is added to either side of the cash book just after cash column. As this cash and
Bank column it is called three columns “Cash Book”. The format of a three column cash book is
given below.

DR Triple Column Cash Book CR

Date Particular Dis C B Date Particulars Dis C B

** C: CASH B: BAN
CONTRA ENTRIES
Contra, in Latin, means the other side. If the double entry of a transaction is complete in
the cash book itself such entry is called „Contra Entry‟ contra entry arises only when cash
account and bank account are simultaneously involved in a transactions.
It happens only when either cash is deposited in the bank or cash is withdrawn from it
for office use. In both cases entries have to be made in „cash‟ as well as „Bank‟ columns.
TRIAL BALANCE
Trail balance is a statement containing closing balances of the ledger accounts. It is
prepared to verify the arithmetical accuracy whether the totals of the debit column and the credit
column are equal or not.
When all the ledger accounts are balanced the account which is showing debit balance
will be entered on debit side of trial balance and the account which is showing credit side will be
entered on the credit side of trial balance. The totals of debit side must be equal to the total of
credit side. However, even if the two sides are equal it does not show the conclusive proof of the
correctness of books.
Characteristic of a Trial Balance:
1. It is a statement prepared in tabular form.
2. Trial balance is a statement of closing balance but it is not an account. It is prepared to
verify the arithmetical accuracy.
3. Preparation of trial balance will leads to preparation of final accounts. General format of
Trial Balance

Particulars Debit Particulars Credit

Opening stock Sales
Purchases Commission receive
Carriage inwards wages bad debts reserve
All factory & manufacturing interest received
exp (factory rent factory commission receiv
Insurance factory lighting.) interest on drawing
Oil, water. Gas. discount on creditors
Coal. Fuel, power Capital
excise duty.octroi Bank loan
trade expenses Bank overdraft
Salaries Income received in
Rent rates & taxes advance
Advertising Creditors
Audit fees, legal charges Bills payable
Insurance All other loans
Bad debts
Repairs
Discount allowed
Printing& stationary
Postage& telegrams
Commission paid (dr)
Interest on capital
Interest on loan
Carriage outwards
All depreciations
All management exp
All office exp
General exp
Discount on debtors
Selling exp
Cash in hand
Cash at bank
Debtors
Furniture
Buildings
Good will patents
Copy rights.
Bills receivable
Machinery
Motor car
Freehold premises
All fixed variable assets
Closing stock

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ELEMENTS OF FINANCIAL STATEMENTS

ASSETS
Assets are probable future economic benefits obtained or controlled by a particular entity as a
result of past transactions or events.

LIABILITIES
Liabilities are probable future sacrifices of economic benefits arising from present obligations
of a particular entity to transfer assets or provide services to other entities in the future as a
result of past transactions or events.

EQUITY
Equity or net assets is the residual interest in the assets of an entity that remains after
deducting its liabilities.

COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It includes all
changes in equity during a period except those resulting from investments by owners and
distributions to owner.

REVENUES
Revenues are inflows or other enhancements of assets of an entity or settlements of its
liabilities (or a combination of both) from delivering or producing goods, rendering services,
or other activities that constitute the entity’s ongoing major or central operations.

EXPENSES
Expenses are outflows or other using up of assets or incurrences of liabilities (or a
combination of both) from delivering or producing goods, rendering services, or carrying out
other activities that constitute the entity’s ongoing major or central operations.

GAINS
Gains are increases in equity (net assets) from peripheral or incidental transactions of an
entity and from all other transactions and other events and circumstances affecting the entity
except those that result from revenues or investments by owners.

LOSSES
Losses are decreases in equity (net assets) from peripheral or incidental transactions of an
entity and from all other transactions and other events and circumstances affecting the entity
except those that result from expenses or distributions to owners.

FINAL ACCOUNTS

One of the main objects of maintaining accounts is to find out the profit or loss made by
the business during a period and to ascertain the financial position of the business as a given
date. In order to know the profit or loss made by the business, Trading and profit and loss
Account is prepared. The position of the business on the last date of the financial year will be
revealed by the Balance sheet. The trading and profit and loss account and balance sheet
prepared by the businessman at the end of the trading period are called Final accounts.
 In order to ascertain its income and also to assess the position of assets and liabilities
statements are prepared are know as financial statement. These statements are also called with
their traditional name as Final Accounts
Final statements are divided in two parts. i.e., income statements and position
statements. The term income statement is traditionally known as Trading and Profit and Loss
account and position statements are known as Balance sheet.

Preparation of Final Accounts:

There are three following stages of preparing final accounts of a trading concern.
 Trading Account
 Profit and Loss Account
 Balance Sheet
Trading Account:-
Trading account is prepared mainly to know the “Profitability” of the goods
brought and sold by the businessman. It show the result of trading i.e. buying and selling of
goods called “Gross Profit or Gross Loss”
“The difference between the sales and cost of goods sold is Gross Profit or Gross Loss”
Trading account is prepared in “T”form just like any other accounts expect the date and journal
folio column are not provided.
Profit and Loss Account:-
The profit and loss account is an account, which shows the net Profit or net loss of a
business for a particular period. All indirect expenses such as Administrative or Management
expenses, selling and Distribution Expenses. Financial expenses and other items such as
depreciation, etc are taken debit side. Gross profit and all other income items are taken credit
side. Such as interest received, discount received, ect. The difference between two sides is either
Net profit or Net Loss, which is transferred to Capital Account.
Balance Sheet: -
Balance sheet is prepared to know the financial position of a business on a particular
date. It is a statement, which shows the assets and liabilities of a business as on a particular date.
It shows” what a business owns and what it owes” Balance sheet is a statement and not an
account it does not have Debit and Credit sides. It is divided in to two sides left side and right
side. The left side is called the liabilities side and the right side is called the assets side.
ADJUSTMENTS
An adjustment is a transaction which has not been taken into consideration while
preparing the trial balance. But now considered for the purpose of preparing final accounts
If any item of adjustment appears outside the trial balance. it will e shown at two
places in the final accounts. The treatment of such item has been shown as follows.
Treating of Adjustments
The treatment of such main items is as follows
1) CLOSING STOCK
IN THE TRADING ACCOUNT CR SIDE
IN THE BALANCE SHEET ASSET SIDE
2) OUTSTANDING WAGES
IN THE TRADING ACCOUNT ADD TO WAGES
IN THE BALANCE SHEET LIABILITIES
 3) OUTSTANDING SALARIES
IN THE TRADING ACCOUNT ADD TO SALARIES
IN THE BALANCE SHEET LIABILITIES SIDE
4) PREPAID INSURANCE
IN THE P & L A/C LESS FROM INSURANCE
IN THE BALANCE SHEET ASSETS SIDE
5) INTEREST ON CAPITAL
IN THE P & L A/C DR SIDE
IN THE BALANCE SHEET ADD TO CAPITAL

PROFORMA OF FINAL ACCOUNTS

Dr Trading and Profit & Loss Account Cr
Particulars Amount Particulars Amount
To opening stock By sales
To purchases Less: sales returns
Less: pur. Returns By stolen goods
To carriage inwards By closing stock
To wages By Gross loss (transfer
Add. Out standings to p &l a/c
To all factory & manufacturing
exp (factory rent factory
insurance factory lighting.)
To oil, water. Gas.
To coal. Fuel, power
To excise duty.octroi
To trade expenses
To Gross profit (transfer to p
&la/c)

To Gross profit
To salaries By Gross loss
Add outstanding By commission received
To rent rates & taxes By bad debts reserve
To Advertising By interest received
To Audit fees, legal charges By commission received
To Insurance By interest on drawings
Less prepaid insurance By discount on creditors
To bad debts
To repairs
To discount allowed
To printing& stationary
To postage& telegrams
To commission paid (dr)
To interest on capital
To interest on loan
To carriage outwards
To all depreciations
To all management exp
To all office exp
To general exp
To discount on debtors
To selling exp
To Net profit (transfer to capital a/c)
By Net loss (transfer to capital a/c)

BALANCE SHEET
Liabilities Amouts Assets Amounts
Capital Cash in hand
Add :Int on cap Cash at bank
Add :Net profit Debtors
or Less Bad debts
Less: Net loss Furniture
Less depreciation
Less: drawings Buildings
Less: Int on drawings Less depreciation
Bank loan Good will patents
Bank overdraft Copy rights.
Income received in advance Bills receivable
Creditors Machinery
Less Discount on creditors Less Depreciation
Bills payable Motor car
All other loans Less depreciation
Outstanding wages, salaries Prepaid expenses(insurance)
Freehold premises
All fixed variable assets
Closing stock