FINANCIAL

ACCOUNTING

Dr. A.K.Panigrahi
 Luca Pacioli

The Father of
Accounting

c. 1495, Attrib to Jacopo de Barbari

What is Accounting?
Accounting is the recording of all
business transactions to provide a
financial picture of an organization

Say
Cheese
!
 Accounts Record . . .

What we own
What we owe

What weve paid

What we are owed

What we have been paid

 ACCOUNTING
Accounting is the language of business.
The affairs and the results of the
business are communicated to others
through accounting information, which
has to be systematically recorded and
presented.
 Accounting - Definition

Accounting can be defined as the process of

identifying, measuring, recording and
communicating the economic events of an
organization to the interested users of the
information.
 Characteristics of Accounting

Economic events
Identification, measuring, recording
and communication
Organization
Interested users of information
 Economic Events

An economic event has been defined as a

happening of consequence to a business
entity. Economic events are classified into

External types

Internal types.
 Economic Events Continue

An external event which involves the

transfer or exchange of something of value
between two or more entities.
 Economic Events Continue

Sale of goods to customers.

Payment of monthly rent to the landlord.
Purchase of raw materials by an
enterprise from some other business
enterprise.
Rendering of services to customers, etc.
 Economic Events Continue

An internal event is an economic event that

occurs entirely within one enterprise.

Eg : Supply of raw materials or equipment

by the stores department to the
manufacturing department.
 Identification

It means determining what to record, i.e. to

identify recordable events. It involves
observing activities and selecting those
events that are considered to be evidence of
economic activity.
 Identification continue

The value of human resources, changes in

managerial policies or changes in personnel
are important but none of these items is
recorded in financial accounts. However,
when a company makes a cash sale or
purchase, even if the item is small, it is
recorded in the books of account.
 Measurement

It means quantification, including estimates

of business transactions into financial terms,
i.e. rupees and paise. If an event cannot be
quantified in monetary terms, it is not
considered for recording in financial
accounts.
 Recording

Once the economic events are identified

and measured in financial terms, they are
recorded, i.e. a chronological diary of these
measured events is kept in an orderly and
systematic manner.
 Communication

The economic events are identified,

measured and recorded is communicated in
some form to management and others for
internal and external uses. The information
is communicated through the preparation
and distribution of accounting reports. The
most common reports are in the form of
financial statements (Balance Sheet and
Profit and Loss Statement).
 Organization

It can be a business entity or a non-

business entity, depending upon the profit
or non-profit motive.
Users of Accounting Information

Different categories of users need different

kinds of information for making decisions.
These users can be divided into :

Internal Users; and

External Users.
 Internal Users

These are the persons who manage the

business, i.e. management at the top,
middle, and lower levels. Their requirements
of information are different because they
make different types of decisions.
 Internal Users continue

The top level is more concerned with

planning; the middle level is concerned
equally with planning and control; and the
lower level is concerned more with
controlling operations. Information is
supplied on different aspects, e.g. cash
resources, sales estimates, results of
operations, financial position, etc.
 External Users

All persons other than internal users come

in the group of external users. External
users can be divided into two groups:
those having direct interest; and
those having indirect interest
in a business organization.
 External Users continue

The main sources of information for external

users are annual reports of business
organizations, which state the financial
position and performance and give the
auditors report, directors report and other
information.
 External Users continue

Investors and creditors are the external

users having direct interest. Tax authorities,
regulatory agencies, customers, labour
unions, trade associations, stock exchanges,
investors, etc are indirectly interested in the
companys financial strength, its ability to
meet short-term and long-term obligations,
its future earning power, etc for making
various decisions.
 ASSETS

These are economic resources of an

enterprise that can be usefully expressed in
monetary terms. Assets are things of value
used by the business in its operations.
Fixed Assets
Current Assets
 ASSETS continue

Fixed Assets are assets held on a long-

term basis.
e.g. Land, Building, Machinery, Plant,
Furniture and Fixtures, etc.
 ASSETS continue

Current Assets are assets held on a

short-term basis.
e.g. Debtors, Bills receivable,
Stock(Inventory), Cash and Bank
balances, etc.
 LIABILITIES

These are obligations or debts that the

enterprise must pay in money or services at
some time in the future.

Long-term liabilities

Short-term liabilities
 LIABILITIES continue..

Long-term liabilities are those that are

usually payable after a period of one year.

e.g. A term loan from a financial institution,

debentures (bonds) issued by a company.
 LIABILITIES continue..

Short-term liabilities are obligations that

are payable within a period of one year.

e.g. Creditors, bills payable, overdraft from

a bank for a short period.
 CAPITAL

Investment by the owner for use in the firm

is known as capital. Owners equity is the
ownership claim on total assets. It is equal
to total assets minus total liabilities.
 REVENUES

These are the amounts the business earns

by selling its products or providing services
to customers. Other titles and sources of
revenue common to many businesses are:
sales, fees, commission, interest, dividends,
royalties, rent received, etc.
 EXPENSES

These are costs incurred by a business in

the process of earning revenue. Generally,
expenses are measured by the cost of
assets consumed or services used during an
accounting period. The usual titles of
expenses are: depreciation, rent, wages,
salaries, interest, costs of heat, light and
water, telephone, etc.
 PURCHASES
Purchases are total amount of goods
procured by a business on credit and for
cash, for use or sale. In a trading concern,
purchases are made of merchandise for
resale with or without processing.
In a manufacturing concern, raw materials
are purchased, processed further into
finished goods and then sold. Purchases
may be cash purchase or credit purchase.
 SALES

Sales are total revenues from goods or

services sold or provided to customers.
Sales may be cash sales or credit sales.
 STOCK

Stock (Inventory) is a measure of

something on hand goods, spares and
other items in a business.

It is called stock on hand.

 STOCK: continue

In a trading concern, the stock on hand is

the amount of goods which have not been
sold on the date on which the balance sheet
is prepared. This is also called closing
stock.
 STOCK continue

In a manufacturing concern, closing stock

comprises raw materials, semi-finished
goods and finished goods on hand on the
closing date.

Similarly, opening stock is the amount of

stock at the beginning of the accounting
year.
 DEBTORS

Debtors are persons and/or other entities who

owe to an enterprise an amount for receiving
goods and services on credit.

The total amount standing against such persons

and/or entities on the closing date, is shown in the
Balance Sheet as Sundry Debtors on the asset
side.
 CREDITORS

Creditors are persons and/or other entities who

have to be paid by an enterprise an amount for
providing the enterprise goods and services on
credit.

The total amount standing to the favour of such

persons and/or entities on the closing date, is
shown in the Balance Sheet as Sundry Creditors
on the liability side.
End