MGT101 Handouts Lectures 1-45

MGT101 - FINANCIAL ACCOUNTING – I

Lesson No.

TOPICS

Page No.

Single and Double Entry Record Keeping …………………………….. Classification of Account ……………………………………………... Flow of Transactions ………………………………………………..... Basic Books of Accounts …………………………………………….. Introduction to Financial Statements ………………………………….. Introduction to Financial Statements (Continued) …………………….. Exercises: Recording of Transactions …………………………………. Exercises: Recording of Transactions (Continued) ……………………. Accounting Equation …………………………………………………. Vouchers and Posting to Ledger Accounts ……………………………. Posting to Ledgers & Recording of Stock ……………………………... Recording of Stock (Continued) ………………………………………. Cost of goods Sold Statement & Valuation of Stock …………………... Fixed Assets and Depreciation ………………………………………... Methods of Charging Depreciation …………………………………… Methods for Charging Depreciation (Continued) ……………………... Depreciation on Purchase and Disposal of Fixed Assets ……………… Revaluation of Fixed Assets …………………………………………... Bank Reconciliation Statement ……………………………………….. Bank Reconciliation Statement (Contd.)………………………………. Debtors, Creditors, Accruals and Provision for Bad Debts …………… Provision for Bad Debts and Control Accounts ……………………… Control Accounts (Contd.) …………………………………………… Control Accounts (Contd.) …………………………………………… Rectification of Errors ………………………………………………… Presentation of Financial Statements ………………………………….. Presentation of Financial Statements (Continued) …………………….. Types of Business Entities …………………………………………….. Financial Statements of Sole Proprietorship ………………………….... Financial Statements of Manufacturing Concern ……………………… Financial Statements of Partnership ………………………………….... Mark Up on Capital and Drawings ……………………………………. Introduction to Companies …………………………………………… Components of Financial Statements …………………………………. Financial Statements of Limited Companies ………………………….. Financial Statements of Limited Companies (Contd.)………………….. Financial Statements of Limited Companies (Contd.)………………….. Cash Flow Statement ………………………………………………...... Cash Flow Statement (Contd.) ………………………………………… Financial Statements of Listed/Quoted Companies …………………... Financial Statements of Listed Companies (Contd.) …………………... Financial Statements of Listed Companies (Contd.) & Financial Ratios...

Lesson-1

The objective of this lecture is to introduce the subject of “Financial Accounting” to the students and give them an idea as to how did accounting develop?

What is Financial Accounting?

It is the maintenance of daily record of All financial transactions in such a manner that it would help in the preparation of suitable information regarding the financial affairs of a business or an individual.

Why is Financial Accounting needed?

The need for recording financial transactions arises because the individual or business wants to know the performance of the business and to assist the person in making decisions related to the business.

What are Transactions?

In accounting or business terms, any dealing between two persons involving money or a valuable thing is called transaction.

Human beings are social animals and are bound to adopt a community living style. Living in a community, essentially means that people interact with other people and are dependant on each other to fulfil their needs. Every person cannot fulfil all his needs like food, clothing, housing etc. on his own. He, therefore, depends on other people for his needs, in return to this providing others with some of theirs. It means that one will fulfil his needs from others and will provide others the things of their need in return. Every instance where one ‘gives something’ to ‘get something’ is called a transaction.

How did it develop?

Nearly all developments happen because of human being’s need for the same. Accountancy is no different. There was times when goods were bartered or exchanged. But when the concept of money was introduced, it became a little more difficult.

What is a Budget?

Budget is a plan of income, expenses & other financial operation for a future period.

Concept of Costing

A person making or producing any thing must not only know how much it costs to make but also to help in determining the selling price. It is necessary that the person not only knows the cost of what is being produced but also the cost of each component which has gone into production. The control of the costs being incurred is also necessary otherwise the same can exceed the estimates. All this is only possible if the costs and data relating to production is properly recorded and analysed. It is an exercise that only carries out by the Accountant.

Impact of IT on Accounting

The old “Munshi,” who kept record of the financial dealings was the original accountant. But he is now of no use, as he lacks the capability for analysing the information recorded and forecasting financial information. In fact, there is no need for any expert in writing of books. Information Technology has taken over. But some one has to tell the Software developer how books are written? The need for an Accountant who is well versed in the art of writing up books still remains. The role has changed. Information Technology software can now produce the reports and analysis but need the expert to interpret all of this remains. The need for the professional to describe this has not yet been overtaken by Information Technology.

Barter Trading and Barter Transactions

Trading one commodity or service for another commodity or service is called ‘Barter trading’. OR Every transaction where goods are exchanged for goods is called a ‘Barter Transaction’.

Since every person cannot produce every thing that he needs. Therefore, he needs to give / sell what he produces in order to get / buy what he wants?

In early days when ‘money’ was not introduced, people used to exchange goods for goods. This kind of trade, where goods are exchanged for goods, is called barter trade.

In fact, in barter trade, value of one commodity is quoted in terms of other commodity, for example the price of 10 kg of wheat may be equal to 2 meters of cloth or 5 litres of milk. Although, there is no involvement of money but still every commodity has a value, which means that you have to give a specific quantity of one commodity to buy a specific quantity of another commodity.

Money Measurement Concept

With the passage of time, the trading volumes and types of commodities available in the market are increased and it became difficult to exchange commodity with other commodity. That is why the concept of cash / money is introduced and people started valuing all goods / services in terms of a common commodity called money. Now the price of 10 kg wheat would be Rupees 60 instead of 2 meters of cloth. Similarly, the price of 2 meters of cloth and 5 litres of milk would also be Rupees 60. In accounting, every transaction that is worth recording is recorded in terms of money. In other words any event or item that cannot be translated in terms of money is not recorded in books of accounts.

Translating every transaction in terms of money does not always mean that the money changes hands, the same time at which the transaction takes place. It may be paid before or after the goods are exchanged.

When the money value of an item being purchased is paid, at the same time when the item is exchanged. The transaction is said to be a cash transaction or in other words, if the value of transaction is met in cash at the time of the transaction such kind of transaction is said to be cash transaction.

On the other hand, if the payment is delayed to a future date, the transaction is termed as a credit transaction.

Different Types of Business Organizations

1. Sole Proprietorship

According to D.W.T. Stafford, “It is the simplest form of business organization, which is owned and controlled by one man”