You are on page 1of 7

Basic Concepts in Financial Accounting

BY Naveen. Rohatgi

CA.CS.ICWA.MBA
INTRODUCTION

In any type and size of business enterprise there are numerous


transactions taking place every day. Every businessman is
interested in knowing the result of the business after certain
equal intervals. These intervals are generally accounting years
(financial years) having twelve months span starting on
1stApril of the year and ending on 31st March of the next year.
Thus, in order to ascertain the business result, there is a need
of maintaining appropriate record of all the business
transactions and at the end of an accounting year, finalizing
the recorded information. This process of regularly recording
the business transactions and finalizing the results at the end
of an accounting year is considered to be the core scope of
financial accounting. This scope is further extended to
understand the financial position and profitability of the
business through further analysis of financial statements with
the help of accounting tools such as ratio, fund flow and cash
flow.
NEED FOR FINANCIAL ACCOUNTING :
Financial accounting is needed for understanding profitability
of the business.
Financial accounting records reveal the financial position of
the business.
It helps understand overall efficiency of the business.
It provides appropriate numerical information to the creditors
of the business for decision making regarding the period and
amount of credits to be sanctioned.
It is required to be submitted to various government
departments for payments of taxes such as income tax, sales
tax, excise duty etc.
Procurement of loans from banks and financial institutions.
It helps management of the business for taking appropriate
decision at right time.
USERS OF FINANCIAL ACCOUNTING INFORMATION

Management
Shareholders
Prospective investors
Lenders
Suppliers (Creditors)
Customers
Employees
Government
Researchers
Accounting Principles:
Consistency
Materiality
Disclosure
Going concern
Cost concept
Money measurement concept
Accrual concept
Periodicity concept
Matching Concept
Realization concept
Verified evidence concept

STEP S IN ACCOUNTING CYCLE
Accounting cycle is a process which involves following steps.
Step1 Journalizing. Under this step the transactions are
identified and recorded journal book by providing two effects
as per double entry book keeping system. Journal" is the book
of prime entry.
Step 2- Posting: It is the second step in accounting cycle.
Under this step the transactions recorded in journal are posted
to respective ledger accounts opened specifically for the
purpose.
Step 3- Balancing: Under this step separately prepared ledger
accounts are totaled and balanced for understanding the
position of individual ledger account. A ledger account may not
have any balance or may either have debit balance or credit
balance
Step 4- Trial Balance: After balancing all ledger accounts a
trial balance is prepared which is generally defined as list of
debit and credit balances of ledger accounts. Trial balance
should always tally.
Step 5- Preparation of financial statements: This is the
final step in the accounting cycle. Under this step profit and
loss account is prepared to understand the profitability
whereas balance sheet is prepared to know the financial
position of the business.

You might also like