Study Material

Academic Year: 2026-27

Department: Commerce

Semester & Programme: I [Link] F&A

Course: Financial Accounting

Faculty In-Charge: Ms. [Link]

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 Contents

[Link] Name of the Module Page No.

1 Introduction to accounting – meaning and 4-8
Definition
2 Accounting Concepts and Conventions 9-10
3 Accounting Process- Journal, Ledger, 11
Trail Balance
4 Accounting Standards and Ind AS 12-13

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 Syllabus
Module:1 - THEORETICAL FRAMEWORK OF FINANCIAL ACCOUNTING 12 Hrs
Accounting: Introduction, Meaning & Definition – Book-Keeping & Accounting – Accounting
Principles: Concepts and Conventions – Accounting Process: Journal, Ledger, Trial Balance, Final
Accounts (Theoretical aspects only) – Preparation of Final Accounts of a Sole Trading Concerns –
Introduction to Accounting Standards and Indian Accounting Standards (AS & Ind AS- Theory
only)

Module:2 – FIRE INSURANCE CLAIMS 10 Hrs

Insurance Claims: Introduction & Need – Loss of Stock – Steps for ascertaining Fire Insurance
Claim – Treatment of Salvage – Average Clause – Treatment of Abnormal Items – Computation of
Fire Insurance Claims

Module: 3 - DEPARTMENTAL ACCOUNTS 10 Hrs

Departmental Accounts: Meaning, Definition, Objectives – Basis of Apportionment of Common

Expenses among different Departments – Preparation of Trading and Profit and Loss Account in
Columnar Form – Preparation of Balance Sheet in Horizontal Format of Sole Trading Concerns &
Partnership Firms (Including Inter Departmental Transfers at Cost Price only)

Module: 4 - BRANCH ACCOUNTS 10 Hrs

Branch Accounts: Introduction, Meaning, Definition, Objectives – Types of Branches – Dependent

Branches: Features & Characteristics – Supply of Goods at Cost Price & Invoice Price – Branch
Account in the books of Head Office (Debtors System Only)

Module: 5 - ACCOUNTING FOR NOT-FOR-PROFIT ORGANISATIONS 14 Hrs

Not for Profit Organizations: Meaning, Features – Capital & Revenue: Receipts, Expenditure and
Losses, Deferred Revenue Expenditure – Preparation of Receipts and Payments A/c, Income and
Expenditure A/c and Closing Balance Sheet (when Opening Balance Sheet is given)

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 INTRODUCTION

A businessman invests capital with objective of making profit and thereby increasing his resources.
He incurs various expenses like salaries, rent and stationery to operate his business. He receives
income from different sources like Commission, interest and discount. He deals with several persons
in the course of buying and selling of goods, purchasing and selling of assets and borrowing money
for financing for financing the business. He acquires various properties and assets like machinery,
furniture, building to generate revenue.
Businessmen also require accounting records to submit in courts to prove their claims or to defend in
courts against made by outsiders. They are required to produce business records to tax authorities
whenever demanded. Similarly, financiers require accounting records of businessmen to decide about
sanctioning of loans. Thus, transactions relating to business have become so important that their
recording has become a necessity.
ACCOUNTING – DEFINITION:
According to the American Institute of Certified Public Accountant defined Accounting as
“Accounting is the art of recording, classifying and summarizing in a significant manner and in
term of Money, transactions and events which are, in part at least, of a financial character and
interpreting the results thereof.”
American Accounting Association defined accounting as “the process of identifying, measuring
and communicating economic information to permit informed judgment and decisions by users of
the information”.
This definition highlights in a logical sequence the different steps in the accounting process and
some important attributes of accounting.
ATTRIBUTES AND STEPS OF ACCOUNTING
Recording: Systematic recording of business transactions is the first step in the accounting process. Each and
every transaction is recorded as and when it occurs, in chronological order. Every entry recorded has to be
supported by reliable documentary evidence. Recording of business transactions is usually done in journal or
in subsidiary books which are ‘books of original entry’.
Classification: It is the process of grouping transactions or entries on a predetermined basis. The classification
takes the form of ‘accounts’ in a separate book known as Ledger. Separate accounts are opened for each
expense, income, property, liability and persons with whom the business has dealings. Classification facilitates
segregation of numerous business transactions into identifiable groups.
Summarising: The classified data in the ledger is presented periodically in a manner which is understandable
and useful to the owners and other interested parties. Summarising takes place in the form of trial balance,
trading account, profit and loss account and balance sheet. The trial balance ensures the arithmetical accuracy
of the recording and classification process. The trading account reveals the gross profit of the business. Profit
and loss account shows net profit or loss for the accounting period. The balance sheet portrays the financial
position of the business.
Significant manner: The accounting process of recording, classifying and summarizing must be carried on
in a significant manner. Each business has its own peculiarities, special problems and particular requirements.
The management of the business needs specific types of information for controlling and decision-making
purposes. Sales and purchases may have to be shown for each product, division, department, and branch
separately. Profit or loss may be required independently for each product or service.
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In terms of money: All business transactions have to be recorded in terms of money. It is the medium through
which all the business transactions are expressed. Land and buildings in square feet, furniture and fixtures in
number, stock in units are all recorded as per their monetary values. ‘Money measurement ‘is the basis for
accounting.
Transactions and events of financial character: All those business transactions and events which are
financial in character are recorded in accounts. All the events, dealings and happenings which have to no
financial effect are completely ignored in the accounting process. For example, working conditions, skilled
work force, sales policies, employees, morale etc., are all important for a business. But they have no ‘financial
character’ and are omitted from accounting process
Interpreting the results: Interpretation of the results is needed for various purposes. The trends observed in
sales, purchases, expenses etc., are useful for future planning of operations. Data about customers and
suppliers have to be interpreted to decide about credit policies. The owners are interested in the amount and
growth of profit. The creditors are interested in the liquidity and stability of the business
Functions of Accounting
The functions of accounting include the systemic tracking, storing, recording, analysing,
summarizing and reporting of a company's financial transactions. Through the functions of the
accounting department, the company can maintain a fiscal history that they can make accessible for
audits. They can also use it to prepare reports, create budgets, reduce costs, increase profits, avail
growth opportunities, assess future expenditure requirements and make financial predictions.

Keeping financial records: Accounting helps businesses maintain an accurate and up-to-date record
of the day-to-day financial transactions of the company, such as supply purchases, product sales, receipts
and payments.

Monitoring financial transactions: Accountants may track multiple financial transactions related to
payments due to the company to ensure it receives the revenue and remains profitable. Making Bill
payments: Accounting involves checking invoices to ensure the legitimacy of the charges, setting
payment dates and paying the bills that the company owes to various vendors and suppliers.

Keeping digital records: Accounting may involve creating, maintaining and updating digital
accounting systems to store and calculate the company's financial data.

Writing financial reports: Accounting involves repairing detailed quarterly and annual financial
reports about the company's assets, profits and losses for internal and external stakeholders.

Maintaining fiscal history: Accountants assist with creating, documenting and storing the fiscal
history of the company's transactions and making it available for audits and assessments.

Achieving business goals: An accountant can analyse financial data to formulate and implement
comprehensive financial policies and strategies to advance the company's business goals.

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 Preparing Budgets: The accounts department may reference the company's financial data to
prepare the overall company budget, the department budgets and the project budgets.
Making financial projections: Accounting involves analysing the company's available
financial resources, expected revenues and business goals and using this information to predict
future business expansion and growth.
BOOK KEEPING – MEANING AND DEFINITION
Book keeping is an art and science of recording business transactions in terms of money, in the books
of accounts with a view to arriving at the final state of the business at any date. Few definitions of
book-keeping are stated below:
I.C. Cropper defines Book-keeping as follows: “Book-keeping may be described as the science of
recording transactions in money or money‟s worth in such a manner that, at any subsequent date,
their nature and effect may be clearly understood, and that when required, a combined statement of
their result may be prepared”.
Book-keeping is said to be a statistical procedure for the collection, classification and summarization
of financial information.
Methods of Accounting
Basically all methods of accounting are classified under two headings:-
1. Single entry system
2. Double entry system

Single entry system

The term single entry is vaguely used to define the method of maintaining accounts which do not
conform to strict principles of double entry. It is wrong to define it as system. The term ‘single entry’
does not mean that there is only one entry for each transaction. It simply signifies that principles of
double entry book-keeping have not been observes in all cases. Under this system, only the personal
accounts of the debtors and creditors and cash book of the trader are maintained.

Double entry system

This system was invented by an Italian named Juco Pacioli in 1494 A.D. and it has spread all over the
world, becoming as popular as Arabic numerals. According to this system, every transaction has two
aspects. One is benefit receiving aspect or incoming aspect and the other one is benefit giving aspect
or outgoing aspect. The benefit receiving aspect is said to be a ‘debit’ and the benefit giving aspect
is said to be a ‘credit ‘. For every transaction, one account is to be debited and another account is to
be credited in order to have a complete record of the transaction. Therefore, every transaction affects
two accounts in opposite direction.

ACCOUNTING CONCEPTS
The term accounting concepts refer to the basic assumption and conditions upon which the science of
Accounting is based. There is no authoritative list of these concepts. In other words, concept means
such ideas which are compiled with different accounting procedures.
E.g. Appropriation and charge, reserve and provisions, depletion and amortization etc.

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 The following are some of the important accounting concepts.
1. Separate Entity Concept
2. Dual Aspect Concept
3. Going Concern Concept
4. Money Measurement Concept
5. Cost Concept
6. Accounting Period Concept
7. Realization Concept
8. Matching Concept
9. Accrual Concept
10. Objective Concept
11.
1. Separate Entity Concept
For accounting purposes, a business is considered to be different from the persons who own it. The
accounting system deals only with the accounts of the firm and not that of the owners. Otherwise, the
affairs of the business would get mixed up with the affairs of the owners. The balance sheet of a
sole trader does not disclose the private assets of its owner, even though such assets might be claimed
by the creditors in case of loss in the business

1. Dual Aspect Concept

Modern accounting is based on the dual aspect concept. For every debit, there should be a
corresponding credit. Hence, the total of the debits will always be equal to the total of the credits.
Further, assets of a firm are purchased by the funds provided by the owners and the creditors.
Therefore, the total of the assets should always be equal to the total of the liabilities or equities.
Equities are the claims of the owners and outsiders on the assets of the firms. Hence, the equation,
Assets = Liabilities + Capital (or) Assets –Liabilities = Capital

2. Going Concern Concept

The general assumption is that a business will exist for a long time to come and will not be liquidated
in the near future. People will not like to deal with a business that is to be closed down. Suppliers may
not provide goods, workers may not provide their services and financial institutions may not provide
credit facilities. If a business is to be closed down, its assets should be valued at current realizable
values.

3. Money Measurement Concept

All the transactions of a business are recorded only in terms of money. Because, money is the medium of
exchange and a common measure of value. This serves as a measuring rod with which different kinds of
resources are measured. For instance, a business may own 2000 square meter of building space, cash
Rs.1,00,000, raw materials of 5,000 tons, motor trucks 5 numbers, motor cars 3 numbers and 100 sets of
table and chair. All these items cannot be added together to give a meaningful information.

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4. Cost Concept
The meaning of this concept is that an asset will be recorded at its cost, that is price paid or to be paid for
acquiring it. Any change in the market value of the asset is not recorded. The market value may fluctuate
from time to time and create confusion if the change in value is recorded. The change is unrealized, hence
they need to be recorded.
When the value of an asset is reduced due to its constant use, due to wear and becoming obsolescence, then
they are shown as depreciation and reduced from the original cost of the asset.
5. Matching Concept
The meaning of expenses against revenues for ascertaining the net profit or loss of a business is known as
the matching concept. The matching concept required that costs should be recognized as expenses in the
period in which the associated revenue is recognized. For example, when a radio is sold in the current year,
all the costs associated with the production and sale of that radio should be recognized as expenses of the
year, even though some of these expenses have not been paid.

ACCOUNTING CONVENTIONS
Accounting conventions refer to the traditions, customs and practices followed by accountants as a guide in
the preparation of financial statements. That is, it is an accounting procedure followed by the accounting
community on the basis of long- standing customers.

Convention of Disclosure
It implies that accounts must be honestly prepared and all material information must be disclosed therein. The
contents of balance sheet and profit and loss account are prescribed by the Indian Companies Act. These
are designed to make disclosure which means that there is to be a sufficient disclosure of information which
is of material interest to proprietors, potential creditors and investors.
Convention of Materiality
This convention deals with the relative importance of the accounting information. Information which is
unimportant need not be disclosed in the financial statements. It is left to the discretion of the accountant
to decide what material is and what is immaterial. Generally information is said to be material if it would
influence the judgement of an investor or creditor. Sometimes, an accountant may not go into minute details
because the work involved may not justify the usefulness of the result.
For instance, in a large concern the entire value of stationery items issued for use in the office may be written
off as expenses of the period.
Convention of Consistency
In any organization, accounting practice should be followed consistently year after year. For example,
if depreciation for a particular asset is provided on the basis of diminishing balance method, then the
same method should continue in the subsequent years also. If there is no consistency in the accounting
method, then comparison of accounting figures and the trading results of different years would become
meaningless.

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Convention of Conservation
This is the Policy of “Playing Safe”. A business man is always conservative in estimating his profits. He
never takes into account expected profits but takes into account all expected losses. This is rather a
pessimistic attitude and is reflected in the preparation of accounting statements also. Stock is always
valued at cost or market price whichever is lower. Provision for doubtful debts and discount on debtors
is created. This convention is against the convention of full disclosure and is attracting a lot of criticism

JOURNAL
Books used for recording transactions are called Books of Account. Every business must
invariably maintain two books of accounts. They are: i) Journal and ii) Ledger.
The journal is the “day-by-day” book of the business where in both aspects of all transactions are
recorded in chronological order (i.e.) date-wise. The very first record of a business transaction is made
in order of date in the journal. The journal is thus, a “Book of Prime Entry”. It is otherwise known as
“Book of Original Entry”. It is then posted from the journal into the ledger. As such, the ledger is known
as the principal book or main book. The ledger is otherwise known as Book of Final Entry

Specimen
Journal Entry

Date Particulars L.F. Debit Credit

Rs. P. Rs. P.

LEDGER
Ledger is a main book of accounts. It contains accounts representing persons, properties and nominal
items like expenses and gains.
All the transactions are recorded in the journal separately and date-wise. As such, the transactions of
a similar nature or those relating to a person or property or expenses/gain are recorded in different
places as they occur on different dates. Moreover, the journal simply dissects the given transactions
as to which account is to be debited and which one to be credited without much bothering as to what
is the “final result”
To get the picture as a whole, journals are further processed. All similar transactions
relating to particular account (eg.) cash a/c or Raman‟s a/c or salary a/c for a given
period are brought together. In other words, they are recorded at one place in ledger.

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 Ledger

Dr. Cr
Date Particulars JF Amt Date Particulars JF Amt

Trial Balance
Definition of Trial Balance

“A trial balance is a statement, prepared with the debit and credit balances of the ledger
accounts to test the arithmetical accuracy of the books”.
– J.R. Batlibo

Objectives of preparing trial balance

(i) Test of arithmetical accuracy
(ii) Basis for preparing final accounts
(iii) Location of errors
(iv) Summarised information of ledger accounts

Limitations of trial balance

The following are the limitations of trial balance:
(a) It is possible to prepare trial balance of an organisation, only if the double entry
system is followed.
Even if some transactions are omitted, the trial balance will tall

Difference Between Trail balance and Balance sheet

No. Basis Trial balance Balance sheet

Distinction
1.11 Objective To know the arithmetical To know the true and fair financial position
accuracy of the accounting of the
Work Business
2.22 Format The columns are debit The two sides are assets and
balances and credit balances Liabilities
3.33 Content It is summary of all the ledger It is statement showing closing balances
balances – personal, of personal &
real and nominal account real accounts
4.44 Stage It is the middle stage in the It is the last stage in the
preparation of accounts preparation of accounts

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5.55 Period It can be prepared periodically say It is generally prepared at the end of the
at the end of the month, quarterly accounting period
or
half yearly etc.,
6.56 Preparation It is prepared before the It is prepared after the preparation of trading,
preparation of trading, profit profit
and loss account. and loss account.

Accounting Standards

Accounting standards is a common set of principles, standards and procedures which specify how an
organization transactions and events are to be recorded, recognised, measured and disclosed in
financial statements.

• Accounting standards are authoritative standards (means binding to all the companies) for financial
reporting and are the primary source of generally accepted accounting principles (GAAP).

• The objective of the accounting standards is to ensure that the financial statements of the company
are easily understandable to all stakeholders (like creditors, debtors, shareholders, government etc).
Because all companies follows same set of accounting rules which ensures information about the
company is relevant and accurate.

• Accounting standards improve the transparency of financial reporting in all countries. As accounting
standards followed by companies across the world are almost similar.
NEED FOR ACCOUNTING STANDARDS

•Accounting is an information system and its main aim is to provide financial information to a
number of parties such as investors, management, creditors, government etc.

• Such information is provided through a set of financial statements such as profit and loss account,
balance sheet, and cash flow statement etc.
• The set of financial statements of a company should depict a true and fair view of its operating
results and financial position.
• There is need to harmonise and standardise the different accounting policies so that financial
statements become consistent and comparable.

• Certain standard must be followed for preparing the financial statements, so that there is minimum
ambiguity and uncertainty about the figures contained in financial statement.

INDIAN ACCOUNTING STANDARDS BOARD

• The Institute of Chartered Accountants of India (ICAI) being the premier accounting body in the
country had set up the Accounting Standards Board (ASB) on 21st April, 1977, with key objective of
formulating Accounting Standards to harmonise varied accounting policies.
ASB is a committee which consists of representatives from government department, academicians,
other professional bodies viz. ICAI, representatives from ASSOCHAM, CII, FICCI, etc.
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 • The function of the board is to review the Accounting Standards on the regular basis from the
point of view of changed conditions, practical challenges and implementation experience, if any, and
revises the same appropriately.

• It takes adequate steps to enhance knowledge of the members and other stakeholders for proper
implementation of Accounting Standards by conducting workshops and seminars.

• It collaborate and develop mutually beneficial partnerships with other national standard setters and
various consultative/advisory forums of IFRS Foundation such as Asian-Oceanian Standard-Setters
Group(AOSSG), Emerging Economies Group (EEG), International Forum of Accounting Standard-
setters (IFASS), Accounting Standards Advisory Forum (ASAF), IFRS Advisory Council, Financial
Accounting Standards Board of US (FASB), European Financial Reporting Advisory Group
(EFRAG) etc.

• It provide time to time interpretations and guidance to support implementation of Accounting

Standards, including publishing education material, guidance notes, technical guides,
implementation guide, e-learning tools, etc

ACCOUNTING STANDARDS IN INDIA

Now India will have two sets of accounting standards 1. Existing accounting standards under
Companies (Accounting Standard) (AS) Rules,

2. International Financial Reporting Standards (IFRS) converged Indian Accounting Standards (Ind
AS).  Convergence means to achieve harmony or co-ordination with IFRS and not complete
adoption. There are modifications in IFRS where necessary.

Before the introduction of Ind AS, financial statements were prepared on the basis of Accounting
Standards (AS) which were not in line with the standards and principles applicable globally (IFRS).
Due to this investors were not able to assess and compare the financial position of Indian companies
with other global companies.

In make financial statements uniform, Ind AS were introduced which are converged form of IFRS
(global standards).  Moreover, introduction of Ind AS will bring consistency in the accounting
practices and principles followed by companies in India and other companies across world, leading
to enhanced accessibility and acceptability of financial statements by global investors.

International Financial Standards Reporting

Meaning of IFRS: “It is set of accounting standards developed by the International accounting
standard board(IASB) which helps in becoming the global standard for the preparation of public
company financial statements.” The Goal of IFRS is to provide a global framework for how public
companies prepare and disclose their financial statements.

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In other words International financial reporting standards (IFRS) are a set of Accounting
standard

developed by the international accounting standard board (IASB) which helps in becoming the
global

standard for the preparation of public company financial statements.

Historical background of IFRS

❖ In 1973, An organization known as the International Accounting Standard

Committee(IASC)was

formed to address the need for standards that could be used by smaller nations in creating their own

accounting standards.

❖ This group was succeeded by the International Accounting Standard Board(IASB) in 2001.

❖ In march 2001 the IASC foundation was formed as a not-for-profit corporation incorporated in the
ISA.

❖ The IASC foundation is the parent entity of the IASB. In July 2010 it changed its name to the
IFRS

foundation .

❖ From April 2001 the IASB assumed accounting standard setting responsibilities from its
predecessor

body, the International Accounting Standards Committee(IASC). IASB consists of 14 members from

nine countries and have a variety of backgrounds .

❖ IFRS is prepared by a expert professional bodies with admixtures of various auditors from
international and highly specialised professionals.
Meaning of convergence with IFRS: Convergence means to achieve or harmony with IFRS. It can be

considered to design and maintain national accounting standards in a way that financial
statements prepared in accordance with national draw unreserved statement of compliance with
IFRS i.e., National

Accounting Statements (NAS) comply with all the requirements of IFRS. Convergence doesn’t
mean that IFRS should be adopted word by word

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