WELCOME

TO THE PRE-EXAMINATION TRAINING

SESSION

TOPIC: PC-14 (FINANCIAL ACCOUNTING WITH ELEMENTARY

COSTING)
Day-1_Session-1_22.03.2023 (From 10:45 AM to 12 Noon)

Prepared and Presented By:

Sri Ajaya Kumar Sahoo, AAO Commercial), M: 9014934044
 Basic Concepts of Accounting
Definition by the American Institute of Certified Public Accountants (Year
1961): “Accounting is the art of recording, classifying and summarizing 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 result thereof”.
Objectives of Accounting are:
(i) Providing Information to the Users for Rational Decision-making
(ii) Systematic Recording of Transactions
(iii) Ascertainment of Results of above Transactions
(iv) Ascertain the Financial Position of Business
(v) To Know the Solvency Position
Functions of Accounting are:
(a) Measurement
(b) Forecasting
(c) Decision-making
(d) Comparison & Evaluation
(e) Control
(f) Government Regulation and Taxation
There are three types of Accounting i.e.
1. Financial Accounting: Determining the financial results for the period and the state of
affairs on the last day the accounting period. It is a Stewardship Accounting
2. Cost Accounting: Information generation for controlling operations with a view to
maximizing efficiency and profit. It is a Control Accounting
3. Management Accounting: Accounting to assist management in planning and decision
making. It is a Decision Accounting
 Basic Accounting Terms
• Transaction: It means an event or a business activity which involves exchange of money
or money’s worth between parties.
• Goods/Services: There are tangible article or commodity in which a business deals.
These are goods. Services are intangible in nature which are rendered with or without
the object of earning profits.
• Profit: The excess of Revenue Income over expense is called profit. It could be
calculated for each transaction or for business as a whole.
• Loss: The excess of expense over income is called loss. It could be calculated for each
transaction or for business as a whole.
• Asset: Asset is a resource owned by the business with the purpose of using it for
generating future profits. Assets can be Tangible and Intangible. Tangible Assets are the
Capital assets which have some physical existence. The capital assets which have no
physical existence and whose value is limited by the rights and anticipated benefits that
possession confers upon the owner are known as lntangible Assets. Like Trade Mark,
Goodwill, Copy Writes etc.
 Basic Accounting Terms
• Current Assets – An asset shall be classified as Current when it is expected to be realised in, or is intended for
sale or consumption in the Company’s normal Operating Cycle of 12 months.
• Non-Current Assets – All other Assets shall be classified as Non-Current Assets. e.g. Machinery held for long
term etc.
• Liability: It is an obligation of financial nature to be settled at a future date. It represents amount of money that
the business owes to the other parties. E.g. when goods are bought on credit, the firm will create an obligation
to pay to the supplier the price of goods.
• Current Liabilities – A liability shall be classified as Current when it is expected to be settled in the Company’s
normal Operating Cycle of 12 months.
• Non-Current Liabilities – All other Liabilities shall be classified as Non-Current Liabilities. E.g. Loan taken for 5
years, Debentures issued etc.
• Working capital is the excess of current assets over current liabilities. That is the amount of current assets that
remain in a firm if all its current liabilities are paid. Working Capital (Net) = Current Assets – Currents Liabilities.
• Contingent Liability: It represents a potential obligation that could be created depending on the outcome of an
event. Please note that contingent liability is not recorded in books of account, but disclosed by way of a note to
the financial statements.
• Capital: It is amount invested in the business by its owners. It may be in the form of cash, goods, or any other
asset which the proprietor or partners of business invest in the business activity.
• Net worth: It represents excess of total assets over total liabilities of the business. Technically, this amount is
available to be distributed to owners in the event of closure of the business after payment of all liabilities.
 Basic Accounting Terms
• Debtor : The sum total or aggregate of the amounts which the customer owe to the business for
purchasing goods on credit or services rendered or in respect of other contractual obligations, is
known as Sundry Debtors. These debtors may again be classified as under:
• (i) Good debts: The debts which are sure to be realized are called good debts.
• (ii) Doubtful Debts: The debts which may or may not be realized are called doubtful debts.
• (iii) Bad debts: The debts which cannot be realized at all are called bad debts.
• Creditor: A creditor is a person to whom the business owes money or money’s worth. e.g. money
payable to supplier of goods or provider of service. Creditors are generally classified as Current
Liabilities.
• Capital Expenditure: This represents expenditure incurred for the purpose of acquiring a fixed asset
which is intended to be used over long term for earning profits there from. e. g. amount paid to buy
a computer for office use is a capital expenditure.
• Revenue expenditure: This represents expenditure incurred to earn revenue of the current period.
• Balance Sheet: It is the statement of financial position of the business entity on a particular date. It
lists all assets, liabilities and capital. It is important to note that this statement exhibits the state of
affairs of the business as on a particular date only.
• Profit and Loss Account or Income Statement: This account shows the revenue earned by the
business and the expenses incurred by the business to earn that revenue.
 What is Book Keeping?
• Book-keeping is an activity concerned with recording and classifying
financial data related to business operation in order of its occurrence.
Book-keeping is a mechanical task which involves:
• Collection of basic financial information.
• Identification of events and transactions with financial character i.e.,
economic transactions.
• Measurement of economic transactions in terms of money.
• Recording financial effects of economic transactions in order of its
occurrence.
• Classifying effects of economic transactions.
• Preparing organized statement known as trial balance.
• Single-entry bookkeeping or single-entry accounting is a method of bookkeeping
relying on a one sided accounting entry to maintain financial information. It is known
as an incomplete or unscientific method for recording transaction. Most businesses
maintain a record of all transactions using double-entry bookkeeping.
• Double Entry System: It was in 1494 that Luca Pacioli, the Italian mathematician,
first published his comprehensive treatise on the principles of Double Entry System.
The use of principles of double entry system made it possible to record not only cash
but also all sorts of mercantile transactions. It had created a profound impact on
auditing too, because it enhanced the duties of an auditor to a considerable extent.
• Features of Double Entry System
(i) Every transaction has two fold aspects, i.e., one party giving the benefit and the
other receiving the benefit.
(ii) Every transaction is divided into two aspects, Debit and Credit. One account is to
be debited and the other account is to be credited.
(iii) Every debit must have its corresponding and equal credit.
The Golden Rules for Debit and Credit
• These rules are shown below:
• Personal Account: Debit the receiver or who owes to business Credit
the giver or to whom business owes
• Real Account: Debit what comes into business Credit what goes out of
business
• Nominal Account : Debit all expenses or losses Credit all income or
gains
 Book of Original Entry
• Books of original entry is nothing but an accounting book or Journal where all
transactions are initially recorded. All business transactions, their details and
descriptions are first recorded in the book of original entry.
• Various types of books of Original Entry are:
(i) General Journal - To record the transactions not recorded in special journals
(ii) Special Journals - Special journals include further sub-journals; as given below:
• Sales journal - To record sales invoices issued by the firm when selling goods on
credit
• Purchases journal - To record purchases invoices received by the business from
suppliers, when buying goods on credit
• Return inwards journal - To record sales returns from customers
• Return outwards journal - To record purchases returns to suppliers
• Cash book - To record receipts or payments
 Journal
• A journal is often referred to as Book of Prime Entry or the book of original entry. In
this book transactions are recorded in their chronological order. The process of
recording transaction in a journal is called as ‘Journalisation’. The entry made in this
book is called a ‘journal entry’.
• Functions of Journal:
(i) Analytical Function: Each transaction is analysed into the debit aspect and the
credit aspect. This helps to find out how each transaction will financially affect the
business.
(ii) Recording Function: Accountancy is a business language which helps to record the
transactions based on the principles. Each such recording entry is supported by a
narration, which explain, the transaction in simple language. Narration means to
narrate – i.e. to explain. It starts with the word – Being …
(iii) Historical Function: It contains a chronological record of the transactions for
future references.
 Ledgers
• The book which contains accounts is known as the ledger. Since finding information
pertaining to the financial position of a business emerges only from the accounts, the
ledger is also called the Principal Book. As a result, all the necessary information relating to
any account is available from the ledger. This is the most important book of the business
and hence is rightly called the “King of All Books”. Also Known as Book of Final Entry.
• The rules for writing up accounts of various types are as follows :
Assets: Increases on the left hand side or the debit side and decreases on the credit side or
the right hand side.
Liabilities: Increases on the credit side and decreases on the debit side.
Capitals: The same as liabilities.
Expenses: Increases on the debit side and decreases on the credit side.
Incomes or gain: Increases on the credit side and decrease on the debit side
Types of Ledger: There are two types of ledger i.e. Personal Ledger and Impersonal Ledger.
The ledger where the details of all transactions about the persons who are related to the
accounting unit, are recorded, is called the Personal Ledger. The Ledger where details of all
transactions about assets, incomes & expenses etc. are recorded, is called Impersonal Ledger.
 Trial Balance
• Trial balance may be defined as a statement or a list of all ledger account
balances taken from various ledger books on a particular date to check the
arithmetical accuracy. As this is merely a listing of balances, this will always
be as on a particular date. Further it must be understood that Trial Balance
does not form part of books of account, but it is a report prepared by
extracting balances of accounts maintained in the books of accounts.
• Purpose of a Trial Balance: It serves the following purposes:
1. To check the arithmetical accuracy of the recorded transactions.
2. To ascertain the balance of any ledger Account.
3. To serve as an evidence of fact that the double entry has been completed
in respect of every transaction.
4. To facilitate the preparation of final accounts promptly.