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Financial Accounting

Principles, Concepts and Conventions

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What is Accounting?
“The main purpose of accounting is to ascertain profit or loss
during a specified period, to show financial condition of the unit
on a particular date and to have control over the unit‟s property.
Such accounting records are required to be maintained to
measure the income of the unit and communicate the
information so that it may be used by various interest groups”,
hence;
“Accounting is a discipline which records , classifies,
summarizes and interprets financial information about the
activities of a concern so that intelligent decisions may be
taken about the concern and the various interest groups
interested in the concern”

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What is Accounting?
“The financial accounting is an art of recording, classifying and
summarising in a significant manner and in terms of money
transactions and events which are in part, at least of a financial
character and interpreting the results thereof”.
- American Institute of Certified Public Accountants

“Accounting is the process of identifying, measuring and


communicating economic information to permit informed
judgments and decisions by users of information”
- American Accounting Association

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Objectives & Systems of Accounting
Objectives
• Making decisions concerning use of limited resources
• Identification of crucial decision areas and deciding objectives
and goals
• Effective directing and controlling of unit‟s resources
• Maintaining and reporting on the custodianship of resources
• Facilitating social functions and control

Systems
• Cash System
• Mercantile (Accrual) system

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Double Entry Accounting System
• Originated in 1494 by Italian Merchant Fra Luco Pacioli
• „De Computis et Scripturis‟ the first Book on System by
Pacioli
• Every business traction has two aspects
• The method of writing every traction in two accounts is
known as DEAS
• One account is given debit the other account is given
credit with equal amount
• On any date the total of all debits must be equal to all
credits because every debit has a corresponding credit

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Accounts under Double Entry Accounting
System
• Personal Account
Rule: Debit the receiver credit the giver

• Real Account
Rule: Debit what comes in Credit what goes out

• Nominal Account
Rule: Debit all expenses and losses credit all incomes and gains

• Accounting Equation : Assets = Liabilities + Capital

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Generally Agreed Accounting Principles
(GAAP)
Concepts and Conventions of Accounting
Concepts of Accounting: Assumptions
• Business Entity Concept
• Going Concern Concept
• Accrual Concept
• Money Measurement Concept
• Cost Concept
• Dual Aspect Concept
• Accounting Period Concept
• Matching Concept
• Realization Concept
• Objective Evidence Concept

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Conventions (Traditions) of
Accounting
• Convention of Consistency

• Convention of Disclosure

• Convention of Conservatism (Prudence)

• Convention of Materiality

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Accounting Process
• Transaction
• Journal
• Ledger
• Trial Balance
• Profit & Loss Account
• Balance Sheet
Some other additional Statements
• Profit and Loss Appropriation Account
• Fund Flow Statement
• Cash Flow Statement

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Journal (First Book of Accounting)
• Purchase Book
• Sales Book
• Purchase Return Book
• Sales Return Book
• Bills Receivable Book
• Bills Payable Book
• Cash Book
• Journal Proper
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Profit & Loss Account
• Nominal Account

• Expenses decrease Capital and Income Increase Capital

• Income is shown on Credit Side and Expenses are shown on Debit


Side of the Account

• No Opening Balance but certainly Closing Balance as profit or loss

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Trading and Profit & Loss Account of XYZ Ltd. For
the Year Ending on 31.12.2010
Particulars Amt. Particulars Amt. (Cr.)
(Dr.)
To Direct Expenses By Sales
To G/P By Closing Stock
----- -----
To Indirect Expenses By G/P
By Other Incomes
To N/P
-------- -----

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Balance Sheet
• Prepared in Two Ways

• Shows Capital or General Fund

• Special Funds are also Shown

• Beginning Capital is Worked Out if not Given by


preparing Beginning Balance Sheet

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Balance Sheet of XYZ Ltd. as on 31.12.2010
Liabilities & Amt. Assets Amt.
Capital
Share Capital Fixed Assets
Add N/P
Reserves & Surplus

Long Term Liabilities

Current Liabilities Currents Assets

------ -----

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