Learning outcome and Programme Learning objectives (PLOs)

CO1 : Describe the purpose of financial reporting and identify the primary financial statements.
CO2: Identify and explain the steps in book keeping in accrual basis using journal entries, ledgers and trial balance
and to learn how the accounting cycle is completed using adjusting entries, financial statements and closing entries.
CO3 : Prepare income statement, balance sheet and statement of stockholders’ equity.
CO4: Outline the structure of cash flow statement with detailed reporting of the three main categories of the
cash flow statement: operating, investing, and financing (PLO 1a).
CO5: Understand - classification, valuation and accounting for inventory. valuation and presentation of
receivables, fixed assets and depreciation
CO6: Learn how financial statement analysis is done using ratio, time series and common size analysis.
PLO 1a : Our graduates will be able to identify the business problem in a given situation.
 Grading structure

Evaluation tool Marks PLOs Assessed

Individual Assignment 15  
Mid-term examination 20  
Quiz 15  
Project 15  
Attendance 5  
End term examination 30 PLO 1a
 
Total [Link]
Financial Accounting
Module-1: Financial Accounting Basic Principles and Double Entry Book Keeping
Differences between Financial Accounting, Cost Accounting and Managerial Accounting -
Definitions of Accounting - Business Entity Concept - Money Measurement Concept -
Fundamental Accounting Equation - Dual Aspect – Going Concern – Cost Concept - Rules of
Debit And Credit - Double Entry Book Keeping – Preparation of Journal - Posting to Ledger -
Preparation of Trial Balance – Introduction to GAAP - Indian and International Accounting
Standards
 Accounting
AN INFORMATION SYSTEM
COMMUNICATES FINANCIAL INFORMATION TO THE USERS
THROUGH:

• IDENTIFYING
• RECORDING –CLASSIFYING ,SUMMARIZING, ANALYZING
AND INTERPRETING
• COMMUNICATING
 Major Differences Between
Financial and Managerial Accounting

Managerial Accounting Financial Accounting

Purpose Decision making Communicate financial position to

outsiders
Primary Users Internal managers External users

Focus/Emphasis Future-oriented Past-oriented

Do not have to follow GAAP; cost vs. GAAP compliant;
Rules
benefit CPA audited
Time Span Ultra current to very long Historical monthly, quarterly reports
time horizons
Behavioral Issues Designed to influence employee behavior Indirect effects on
employee behavior
 Book keeping &
Accounting
Book keeping
Recording of economic events only
Accounting
Entire process of Identifying, Recording and
Communicating
 Users of accounting
Information
Internal Users
Marketing manager, production supervisor, company officers,
Director (Finance)
External Users
Creditors(suppliers, banks), investors, Govt&tax authorities,
regulators(RBI, SEBI..), Customers, Trade Unions
 Financial Accounting

Branch of accounting that provides financial information to

external users
 Accounting Assumptions
Basic assumptions providing the foundation for the accounting process

Separate/Economic Entity concept

Going concern concept
Money measurement concept
Cost concept
Dual aspect concept
Accounting period concept
Realisation concept
Accrual Concept
 Accounting Conventions

Customs or traditions which guide the accountant while

preparing the accounting statements

Convention of Conservatism
Convention of Full Disclosure
Convention of Consistency
Convention of Materiality
 Forms of Business

Sole proprietorship – owned by one person (Eg. Beauty

salons, auto repair shop, shops etc.)
Partnership – owned by two or more persons, based on the
agreement(lawyers, doctors, architects, etc.)
Corporation (Company) – organized a s a separate legal entity
under law, ownership divided into transferable shares
 Accounting Equation

Assets = Liabilities + Owners Equity

Assets : Resources owned by the business
Liabilities : Debts and obligations of the business
Owners Equity : Ownership claim/ amount owed
to the owner
Accounting Equation
Revenue
Anything that increases owners equity, resulting from
business activities (sale of goods/service, rent from property,
interest …), actual/expected CIFs (receipts)
Expense
Anything that decreases owners equity, resulting from
business activities (rent paid, repairs, electricity…),
actual/expected COFs(payments)
 DO IT! Owner's Equity Effects

Classify the following items as investment by owner, owner’s

drawings, revenue, or expenses. Then indicate whether each item
increases or decreases owner’s equity.

Classification Effect on Equity

1. Rent Expense Expense Decrease

2. Service Revenue Revenue Increase

3. Drawings Drawings Decrease

4. Salaries and Wages
Expense Expense Decrease

LO 3
Stage 1 : Identifying Process
Transaction analysis using accounting equation

Assets
Assets = Liabilities
Liabilities + Owner's
Owner's Equity
Equity
Transaction Analysis

Illustration: Are the following events recorded in the accounting

records?
Illustration 1-7
Discuss product
Purchase
Event design with Pay rent
computer
potential customer

Criterion Is the financial position (assets, liabilities, or

owner’s equity) of the company changed?

Record/
Don’t Record

LO 4
 Systems of Accounting

Two systems of accounting

Cash system
Accounting entries are made only when cash is paid or received, no entry
when cash payment or receipt is due
Mercantile/accrual system
Accounting entries are made when cash payment or receipt is due
 Transaction Analysis

TRANSACTION 1. INVESTMENT BY OWNER Ray Neal decides to start

a smartphone app development company which he names Softbyte. On
September 1, 2017, he invests $15,000 cash in the business. This
transaction results in an equal increase in assets and owner’s equity.

Assets = Liabilities + Owner's Equity

Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000

Illustration 1-8
Tabular summary of
Softbyte transactions

LO 4
Recording Process
Journal
Ledger
Trial balance
 Debit and Credit
Indicates the side of the account where an item is recorded –
direction signal only
An account has two sides
When an amount is entered on the left-hand side of an account,
it means debit, and the account is said to be debited
When an amount is entered on the right-hand side of an
account, it means credit, and the account is said to be credited
 Rules of Debit and Credit
Modern Approach

Increase in assets and decrease in liabilities/Equity - Debit

Decrease in assets and increase in liabilities/Equity - Credit

Decrease in revenue and increase in Expenses - Debit

Increase in revenue and decrease in Expenses - Credit

 Journalising

Process of recording all daily transactions of business

in chronological order

Journal is a book in which transactions are recorded

for the first time
Journal is a book of original entry
 Format of Journal

Date Account Titles and Explanation LF (Ref) Debit Credit

Journal entries
Simple entry – one debit , one credit
Compound entry – more than one debit or credit
 TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte
Inc. purchases computer equipment for $7,000 cash.
Illustration 1-8

Assets = Liabilities + Owner's Equity

Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
 TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte Inc.
purchases for $1,600 headsets and other accessories expected to last
several months. The supplier allows Softbyte to pay this bill in October.
Illustration 1-8 Assets = Liabilities + Owner's Equity
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
 TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte Inc.
receives $1,200 cash from customers for app development services it has
performed. Illustration 1-8

Assets = Liabilities + Owner's Equity

Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
 TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT Softbyte
Inc. receives a bill for $250 from the Daily News for advertising on its
online website but postpones payment until a later date. Illustration 1-8

Assets = Liabilities + Owner's Equity

Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
 TRANSACTION 6. SERVICES PERFORMED FOR CASH AND CREDIT.
Softbyte performs $3,500 of services. The company receives cash of
$1,500 from customers, and it bills the balance of $2,000 on account.
Illustration 1-8 Assets = Liabilities + Owner's Equity
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
 TRANSACTION 7. PAYMENT OF EXPENSES Softbyte Inc. pays the
following expenses in cash for September: office rent $600, salaries and
wages of employees $900, and utilities $200. Illustration 1-8

Assets = Liabilities + Owner's Equity

Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
 TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte Inc.
pays its $250 Daily News bill in cash. The company previously (in
Transaction 5) recorded the bill as an increase in Accounts Payable.
Illustration 1-8 Assets = Liabilities + Owner's Equity
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
 TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte Inc.
receives $600 in cash from customers who had been billed for services
(in Transaction 6). Illustration 1-8

Assets = Liabilities + Owner's Equity

Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
 TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal
withdraws $1,300 in cash in cash from the business for his personal use.
Illustration 1-8
Assets = Liabilities + Owner's Equity
Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies +Equipment = + + + Rev. - Exp.
action Receivable Payable Capital Drawings

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $1,300 - $4,700 - $1,950

$18,050 $18,050 LO 4
Recording Process
Journal
Ledger
Trial balance
 Ledger

A book containing various accounts

A set of accounts

Process of transferring debit and credit items of the

journal to their respective accounts in the ledger is
called posting
 Account

Individual accounting record, of increases/decreases in a

specific asset, liability or stockholder’s equity item
Example cash account, accounts payable, accounts
receivables, sales salaries
The Account

 Record of increases and decreases

Account in a specific asset, liability, equity,
revenue, or expense item.
 Debit = “Left”
 Credit = “Right”

An account can be Account Name

illustrated in a T- Debit / Dr. Credit / Cr.
account form.

LO 1 Explain what an account is and how it helps in the recording process.

 Debits/Credits Rules

Balance Sheet Income Statement

Asset = Liability + Equity Revenue - Expense

Debit

Credit

LO 2 Define debits and credits and explain their use

in recording business transactions.
Preparation of Ledger
The Ledger

Illustration 2-16
Three-column form
of account

LO 3
 Ledger

POSTING
Transferring
journal entries
to the ledger
accounts.

Illustration 2-17
Posting a journal
entry

LO 3
Posting

Question
Posting:
a. normally occurs before journalizing.
b. transfers ledger transaction data to the journal.
c. is an optional step in the recording process.
d. transfers journal entries to ledger accounts.

LO 3
 Trial Balance
Statement containing various ledger balances on a particular date

Objects of preparing Trial Balance

Checking the arithmetical accuracy of the accounting entries

Forms the basis for preparing financial statements

Gives the summary of ledgers

Format of Trial Balance

Particulars Debit Credit

Amount amount
Preparation of Trial
Balance

Assets ,Expenses and Losses – Debit Side

Liabilities, incomes and gains – Credit side
Goods Account:
Opening stock, purchase, Sales return – debit side
Sales, Purchase return – Credit side
 Accounting Standards

Written policy documents issued by expert accounting body or

Government or other regulatory body covering the aspects of
recognition, measurement, treatment, presentation and
disclosure of accounting transactions in the financial statements
Accounting Standards
Generally Accepted Accounting Principles (GAAP)
Standards that are generally accepted and universally practiced in accounting profession
Indicates how to report economic events

IASB ( International Accounting Standard Board)

An independent, private-sector body that develops and approves International Accounting Standards.
The IASB operates under the oversight of the International Accounting Standards Committee
Foundation (IASCF). The IASB was formed in 2001
Standards and Interpretations issued by IASB- International Financial Reporting Standards (IFRS)
ICAI (Institute of Charted Accountants of India)
Develops and approves Indian Accounting standards through ASB(Accounting Standard Board)
Function of Accounting Standards

Standardise diverse accounting policies with a view to eliminate, to the maximum possible
extent:
◦ The non-comparability of financial statements and thereby improving the reliability of finaanial
statements
◦ To provide a set of standard accounting policies, valuation norms, and disclosure requirements

.
REVIEW
Steps in the Recording Process

The Journal
 Book of original entry.
 Transactions recorded in chronological order.
 Contributions to the recording process:
1. Discloses the complete effects of a transaction.

2. Provides a chronological record of transactions.

3. Helps to prevent or locate errors because the debit

and credit amounts can be easily compared.

LO 2
 Steps in the Recording Process
JOURNALIZING - Entering transaction data in the
journal.
Illustration: On September 1, Ray Neal invested $15,000 cash in
the business, and Softbyte purchased computer equipment for
$7,000 cash.
Illustration 2-13

GENERAL JOURNAL
Date Account Title Ref. Debit Credit
Sept. 1 Cash 15,000
Owner’s Capital 15,000

Equipment 7,000
Cash 7,000

LO 2
Steps in the Recording Process

SIMPLE AND COMPOUND ENTRIES

Illustration: On July 1, Butler Company purchases a delivery truck
costing $14,000. It pays $8,000 cash now and agrees to pay the
remaining $6,000 on account. Illustration 2-14
Compound journal entry

GENERAL JOURNAL
Date Account Title Ref. Debit Credit
July 1 Equipment 14,000
Cash 8,000
Accounts payable 6,000

LO 2
Ledger
The entire group of accounts maintained by a company is
the leader.

The ledger provides the balance in each of the accounts as

well as track of changes in these balance
LEARNING Explain how a ledger and posting help in the
3
OBJECTIVE recording process.

The Ledger
 General Ledger contains all the asset, liability, and owner’s
equity accounts.
Illustration 2-15

LO 3
 Ledger

POSTING
Transferring
journal entries
to the ledger
accounts.

Illustration 2-17
Posting a journal
entry

LO 3
Posting

Question
Posting:
a. normally occurs before journalizing.
b. transfers ledger transaction data to the journal.
c. is an optional step in the recording process.
d. transfers journal entries to ledger accounts.

LO 3
Charts of accounts
The list of accounts and the account numbers that identify
their location in the ledger.
Chart of Accounts
Illustration 2-18

LO 3
Trial balance
The trial balance proves the mathematical equality of debits and credits after
posting
Trial Balance

Limitations of a Trial Balance

Trial balance may balance even when:
1. A transaction is not journalized.
2. A correct journal entry is not posted.
3. A journal entry is posted twice.
4. Incorrect accounts are used in journalizing or posting.
5. Offsetting errors are made in recording the amount of a
transaction.

LO 4
Dollar Signs and Underlining

Dollar Signs
 Do not appear in journals or ledgers.
 Typically used only in the trial balance and the financial
statements.
 Shown only for the first item in the column and for the total
of that column.

Underlining
 A single line is placed under the column of figures to be
added or subtracted.
 Totals are double-underlined.
LO 4
DO IT! 4 Trial Balance

LO 4
DO IT! 4 Trial Balance

LO 4