FINANCIAL ACCOUNTING

FUNDAMENTAL

FACULTY NAME – SANDEEP BHATIYA

NAMRATA PRASAD
QUESTION - 1

Accounting conventions and concepts.

The term convention includes those customs or traditions which guide the
accountant
While preparing the statements. The following are the important
accounting conventions.

MATERIALITY
 CONVENTION OF CONSISTENCY

CONVENTION OF PRUDENCE
TIMELINESS
 SUBSTANCE OVER FROM

VARIATION IN ACCOUNTING PRACTICE

ACCOUNTING STANDARDS
 QUESTION - 2

•Basics principals of A/c.

 DUAL ASPECT PRINCIPLE

VERIFIABLE OBJECTIVE EVIDENCE

REVENUE RECOGNITION REALISATION PRINCIPLE

HISTORICAL COST CONCEPT

 MATCHING PRINCIPLE

PRINCIPLE OF FULL DISCLOSURE

ACCRUAL CONCEPT
 QUESTION - 3

•Final A/c and the treatments of adjustment.

 Final accounts

Final accounts refers to the position of a company at the end of its

accounting period. A company can finalize its accounts based on its own
timelines, but it is usually a year. At the end of the accounting period,
the company prepares final accounts and looks at its position and knows
whether it has made a profit or a loss.

the final accounts consist of (1) manufacturing

account, (2) trading account, (3)
profit and loss account, and (4) profit and loss
appropriation account. A trading firm's final accounts
will include all of the above except the manufacturing
account. Together, these accounts generate the
gross profit, net income, and distribution of net income
figures of the firm.
1st Adjustment: Closing stock

1. Show the value of closing stock on credit side of Trading Account

2. Show closing stock on asset side of balance sheet

2nd Adjustment: Depreciation
2nd Adjustment: on on
Depreciation fixed asset.
fixed asset.

1. Calculate depreciation as a percentage of fixed assets & show on the

debit side of profit & Loss Account.

2. Deduct depreciation in balance sheet on asset side from respective fixed

asset.
3rd Adjustment: Any outstanding expense
(expense due but not received)

1. Add outstanding expend to the respective expense on debit side of the

balance sheet on Trading Account.

2. Show outstanding expense on Liabilities of balance sheet.

 4th Adjustment: Any Prepaid expense (An
expense paid in advance).

1. Deduct prepaid expense from the respective expense on debit side of

trading account or of profit & loss account.

2. Show prepaid expense on asset side of balance sheet.

5th Adjustment: Any income received in
advance.

1. Subtracts from respective income on credit side of P/L Account.

2. Show income received on Liability side.

 6th Adjustment: Further Bad Debt.

1. Show Bad Debt on debit side of P/L Account.

2. Subtracts Bad Debt from debtors on asset side of Balance Sheet.

 7th Adjustment: Provision for Bad &
Doubtful Debts.

1. Show Provision on Debit side of P/L Account.

2. Subtracts provision for debtor on asset side of Balance Sheet.

 8th Adjustment: Good withdraw by
proprietor for personal use.

1. Subtract from purchases on debit side of trading account.

2. Subtract from capital on the liabilities side of balance sheet.

9th Adjustment: Any rectification entries. Ex:
wages include wages paid for errection of
new manhine.

1. Subtract from wages on debit side of trading account.

2. Add to plant and machinery on asset side of balance sheet & calculate
depreciation accordingly.
 10th Adjustment: Provide for manager’s
commission after changes such commission:

1. Calculate manager’s commission as follows:

2. Net Profit * Rate of commission

3. 100 + Rate

4. Show the above calculation amount on debit side of P/L Account.

5. Show the the above calculated amount on liability side of balance account.
11th Adjustment: Hidden Adjustment ( either on
interest on loan or on interest on investment).

1. Interest on Loan: shown interest on loan on debit side of P/L account.

2. Show interest on loan on liabilities side.

3. Interest on investment:

4. Add to interest on credit side P/L account.

5. Show accord interest on asset side of balance sheet.

 QUESTION - 4

•Depreciation and method of depreciation.

Depreciation

Depreciation is the charge against the usage of any financial physical assets in an
organization which has the usage life beyond one accounting year. As the usefulness
is spread for many years, so the charges or expenses booked in proportion every
year in the books of accounts.

E.g.: If a Genset having a life of approx 10Years having the purchase value of
25000/-, purchase for the factory, then a sum of Rs. 2500/- shall be accounted as an
expense towards the usage of Genset every year.

Applicable only on Fixed Assets, baring land.

 Causes of depreciation

Fixed assets are those assets bought by the company for the intention to be used
for a long period of time. Fixed assets are said to depreciate over a period of time
due to the following factors:

1) Physical deterioration
i) Wear and tear – When a motor vehicle or machinery or fixtures and fittings are
used, they eventually wear out. Some last many years, others last only a few
year.
ii) Erosion, rust, rot and decay – Land may be eroded or wasted away by the
action of wind, rain, sun and other elements of nature. Similarly, the metals in
motor vehicles or machinery will rust away.
Causes of depreciation

2) Economic factors
 i) Obsolescence
This is the process of becoming out of date. For instance,
replacing a computer with old operating system with a new
computer with XP system.

 ii) Inadequacy
This arises when an asset is no longer used because of the
growth and changes in the size of the firm. For instance, a
small ferryboat that is operated by a firm at a coastal resort will
become entirely inadequate when the resort becomes more
popular, to be more efficient and economical, the firm may
replace it with a large ferryboat.
 Methods of Depreciation

a) Straight-line method (using equation)

Straight-line method of depreciation is based on the cost of an
asset that is then depreciated, by the same amount, over the
estimated useful life of the asset.

Cost – Estimated Disposal Value

Depreciation per annum =
Expected useful life
 Methods of Depreciation

b) Reducing balance method

Advantages of using reducing balance method:

1) Appropriate for assets which lose value quickly in the early year.
2) Appropriate for assets which become outdated/obsolete

Disadvantages:
1) Asset is never completed written off
2) For assets which have a short life, the percentage used to calculate
depreciation is very large.
 Double entry records for depreciation

The ledger accounting entries for depreciation:

Step 1:
Dr Depreciation Expense (Profit and Loss)
Cr Provision for Depreciation (Balance Sheet)

Step 2:
Dr Profit and Loss
Cr Depreciation Expense
MEANING OF BUDGET!

A budget is a detailed plan of operations for some specific future period. It is an estimate
prepared in
advance of the period to which it applies. It acts as a business barometer as it is complete
programmed of
activities of the business for the period covered. The Chartered Institute of Management
Accountants,
London, defines a budget as "a financial and/or quantitative statement, prepared prior to a
defined period of
time, of the policy to be pursued during that period for the purpose of attaining a given
objective." Thus, the
essentials of a budget are:
(a) it is prepared in advance and is based on a future plant of actions;
(b) it relates to r. future period and is based on objective to be attained
 Budgetary Control

LEARNING OBJECTIVES
After studying this chapter you should be able to:
• explain the Meaning of Budget and Budgetary Control;
• state the advantages of budgetary control;
• enumerate the steps involved in installation of budgetary control system in an
organization
• prepare different types of budgets;
• differentiate between fixed and flexible budgeting;
• compute different accounting ratios;
• understand the concept of responsibility accounting;
• appreciate the importance of performance budgeting and zero base budgeting for an
organization; and
• explain the meaning of certain key concepts
The budgetary control has now become an essential tool of the management for
controlling costs and
maximizing profits. Costs can be reduced, wastage can be prevented and proper
relationship between cost
and incomes can be established only when the various factors of production are
combined in the most
profitable way. This requires careful working out plans in advance for all divisions of the
industrial plants,
their implementation and investigating the causes of variance between anticipated and
actual results. The
budget and its administration are one of the principal means of meeting this end.