B.Com 1st Year Subject- Financial Accounting
SYLLABUS
Class – B.Com. I Year
Subject – FINANCIAL ACCOUNTING
UNIT – I Concept of Double Entry System, Accounting Concepts and
Conventions Preparation of Journals, Sub division of Journal,
Preparation of Ledger and Trial Balance. Final Accounts with
Adjustments.
UNIT – II Introduction to Indian Accounting Standards. Detail study of
accounting standard - 6 and 10, Branch Accounts,
Departmental Account.
UNIT – III Royalty Accounts, Accounting of Non-Profit making
Organization.
UNIT – IV Joint Venture Accounts, Consignment and Investment Account.
UNIT – V Partnership Accounts – Dissolution with Insolvency of Partner,
Amalgamation of Partnership Firms, Conversion of
Partnership Firm into Joint Stock Company.
45, Anurag Nagar, Behind Press Complex, Indore (M.P.) Ph.: 4262100, www.rccmindore.com
1
,B.Com 1st Year Subject- Financial Accounting
UNIT-I
FUNDAMENTAL PRINCIPLES OF FINANCIAL ACCOUNTING
According to American Institution of Certified Public Accountant Committee:-
“Accounting as 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
results thereof”.
From the above definition, it can be said that “Accounting is science of recording and classifying trading
transaction of financial nature and is an art in which financial results are summarized and interpreted.”
Characteristics of Accounting
1) Accounting is science as well as an art.
2) The transaction and events relating to financial nature are recorded in it.
3) All transaction and events are recorded in monetary terms.
4) It maintain complete, accurate, permanent and legible records of all transaction in a systematic
manner.
5) It analyses the results of all the transaction in detail.
Objectives of Accounting
1. To Maintain a Systematic Record
Accounting is done to maintain a systematic record of the monetary transactions of the firm which is
the initial step leading to the creation of the financial statements. Once the recording is complete, the
records are classified and summarized to depict the financial performance of the enterprise.
2. To Ascertain the Performance of the Business
The income statement also known as the profit and loss account is prepared to reflect the profits
earned or losses incurred. All the expenses incurred in the course of conducting the business are
aggregated and deducted from the total revenues to arrive at the profit earned or loss suffered during
the relevant period.
3. To Protect the properties of the Business
The information about the assets and liabilities with the help of accountancy, provides control over
the resources of the firm, because accounting gives information about how much the business has to
pay to others ? And how much the business has to recover from others?
4. To Facilitate Financial Reporting
Accounting is the precursor to finance reporting. The vital liquidity/solvency position is
comprehended through the Cash and Funds Flow Statement elucidating the capital transactions.
5. To Facilitate Decision making
Accounting facilitates in decision making. The American Accounting Association has explained this
while defining the term accounting, it says accounting is, the process of identifying measuring and
communicating economic information to permit informed judgments and decisions by users of the
information.
Accounting As Science and Art
Accounting is both a science and an art. Science as well we know is the systematical body of knowledge
establishing relationship between causes and their effects. In other words, science has its own
concepts, assumptions and principles which are universal and verifiable. Accounting as discipline has
also its own assumptions, concepts and principles, which have got universal application. Accounts have
systematically and scientifically developed accounting equation and rules of debit and credit. It makes
accounting, Science.
Art is the practical application of the knowledge. Accounting as discipline is used in the maintenance of
books of accounts practically in the real life situations and day-to day affairs of the business, so it is an
art also. It can now be safely concluded that Accounting is both science and an art.
45, Anurag Nagar, Behind Press Complex, Indore (M.P.) Ph.: 4262100, www.rccmindore.com
2
,B.Com 1st Year Subject- Financial Accounting
BOOK-KEEPING
Book-Keeping is the proper and systematic keeping or maintenance of the books of accounts. Book-
Keeping starts from the identification of business transactions. These transactions must be supported
by the documents and they must be financial in nature. For example, selling goods for cash in an
accounting transaction, because cash is received and goods are going outside the business. The
transaction will increase cash and reduce goods.
Book-Keeping involves the following process:
1. Identifying accounting transactions
2. Initial record of accounting transactions
3. Preparation of ledger accounts
4. Balance Ledger accounts
5. Preparation of trial balance
DIFFERENCE BETWEEN BOOK-KEEPING AND ACCOUNTING
S.No Basis of Difference Book-Keeping Accounting
1 Transaction Trading transactions are recorded in Entries written in primary books
primary books. are checked and verified.
2 Posting Entries are posted in ledger from Posting are checked whether
journal and subsidiary books correctly posted or not.
3 Total and Balance It includes totaling of journal and On the basis of balances of ledger
finding of balances of ledger. final accounts are prepared
4 Objects The object of Book-keeping is to The object of accounting is to
write all trading transactions in a analyse the transactions written
reasonable manner. in the books.
5 Adjustments and In Book-keeping entries of
Rectification of adjustments and rectification of Accounting includes entries of
errors errors are not included. adjustments and rectification of
6 Scope of Book keeping is narrow. errors.
Scope Scope of Accounting is wide.
7 Final Account is not prepared in Final account preparation is
Final Accounts Book-Keeping. must.
Accounting Concepts
Meaning and Significance: - Accounting concepts are those basic assumptions or conditions upon
which the accounting system is based. Some of the important accounting concepts are as follows :
1) Business Entity Concept : As per this concept, business is treated as a separate entity or unit
distinct from that of the proprietor. The significance of this concept is that without such a distinction
the affairs of the business will be mixed up with the private affairs of the proprietor and the true
picture of the business will not be available. The transactions between the proprietor and the business
will be recorded in the business books separately and shown separately under the heading capital
account. For example, if when the proprietor invests Rs. 50000 in this business, it will be assumed that
the owner has given that much money to the business and will be shown as a liability for the business.
When he withdraws, say Rs. 10000 from the business it will be charged to his capital account and the
net amount due to him will be only Rs. 40000.
2) Going Concern Concept : As per this concept it is assumed that a business unit has a perpetual
succession or continued existence and transactions are recorded from this point of view. Hence, while
valuing the business assets, the accountant does not take into account the realizable or market values of
the assets. Assets are valued at cost at which they were originally purchased less depreciations till date,
which is calculated on the basis of the original cost only.
The concept presumes that the business will continue in operation long enough to charge the cost of
fixed assets over their useful life against the business income. It is only on the basis of this concept that
45, Anurag Nagar, Behind Press Complex, Indore (M.P.) Ph.: 4262100, www.rccmindore.com
3
, B.Com 1st Year Subject- Financial Accounting
a distinction is made between capital expenditure and revenue expenditure. If it is expected that the
business will exist only for a limited period, the accounting records will be kept accordingly.
3) Dual Aspect Concept : Each business transaction has two aspects, i.e., the receiving of a benefit
[debit] and giving of a benefit [credit]. For example, if a business purchases furniture, it must have
given up cash or have incureed an obligation to pay for it in future. Technically speaking, for every
debit, there is a credit this concept is the core of accountancy and upon this the whole superstructure of
Double entry system of book keeping has been raised. As each transaction has giving account and
receiving account equally, the total assets of a business firm will always be equal to its total equities [i.e.
liabilities]. That is
External liabilities + Capital = Total Assets
Total Liabilities = Total Assets
This is called the Accounting or Balance Sheet equation.
4) Historical Cost Concept : This concept is based on the going concern concept According to this
concept, assets purchased are normally entered in the accounting books at the cost at which they are
purchased and this cost is the basis for all subsequent accounting for asset. The market value is
immaterial for accounting purpose since the business is not going to be liquidated but is to be
continued for a long time to come. This concept also prevents arbitrary values being used for recording
purposes, mainly those resulting in the acquisition of assets.
5) Money Measurement Concept : According to this concept, accounting records only those
transactions, which can be expressed in terms of money. Events or transactions, which cannot be
expressed in terms of money cannot find place in the books, however important they may be.
Qualitative or non monetary transactions are either omitted or recorded separately. For example a
strained relationship between production manager and sales manager, which may affect directly the
operating results of the business, does not find place in accounting records.
6) Realization Concept : According to this concept, the revenue is recognized only when the sale is
made. But the sale is a gradual process, which starts with the purchase of raw materials for production
and ends with the sale. If no sale is effected, no revenue is recognized. This is important to stop
business firms from inflating their profits. However, there are certain exceptions to this concept like
hire purchase sale, or contract etc.
7) Accrual Concept : This concept is based on the economic that all transactions are settled in cash
but even if cash settlement has not yet taken place, it is proper to bring the transaction or event
concerned into the books. Expenditure incurred during the year but not paid and Income earned but
not received is called as accrued items. According to this concept these items will be taken into
consideration while arriving at profit or loss. This concept enables to define income and expense.
8) Matching Concept : The matching concept provides the guidelines as to how the expense be
matched with revenues. In other words, costs are reported as expenses in the period in which the
associated revenue is reported. Note that costs are matched with, revenues, not the other way round.
The expense shown in an income statement must refer to the same accounting period, production units,
division or department of business unit to which revenue refers.
9) Accounting Period concept: - It is also known as periodicity concepts or time period assumption.
According to this assumption, the economic life of an enterprise is artificially split into periodic
intervals which are known as accounting periods, at the end of which financial position. The use of this
assumption further requires the allocation of expenses between capital and revenue. That portion of
capital expenditure which is consumed during the current period is charged as an expense to income
statement and t he unconsumed during the current period is charged as an expense to income
statement and the unconsumed portion is shown in the balance sheet as an asset for future
consumption. Truly speaking, measuring since, actual income can be determined only on the
liquidation of the enterprise. It may be noted that the custom of using twelve month period applied
only for external reporting. For internal reporting, accounts can be prepared even for shorter periods,
say monthly, quarterly or half yearly.
10) Verifiable Objective Concept:- according to this principle, the accounting data should be definite,
verifiable and free from personal bias of the accountant. in other words, this principle requires that
45, Anurag Nagar, Behind Press Complex, Indore (M.P.) Ph.: 4262100, www.rccmindore.com
4
SYLLABUS
Class – B.Com. I Year
Subject – FINANCIAL ACCOUNTING
UNIT – I Concept of Double Entry System, Accounting Concepts and
Conventions Preparation of Journals, Sub division of Journal,
Preparation of Ledger and Trial Balance. Final Accounts with
Adjustments.
UNIT – II Introduction to Indian Accounting Standards. Detail study of
accounting standard - 6 and 10, Branch Accounts,
Departmental Account.
UNIT – III Royalty Accounts, Accounting of Non-Profit making
Organization.
UNIT – IV Joint Venture Accounts, Consignment and Investment Account.
UNIT – V Partnership Accounts – Dissolution with Insolvency of Partner,
Amalgamation of Partnership Firms, Conversion of
Partnership Firm into Joint Stock Company.
45, Anurag Nagar, Behind Press Complex, Indore (M.P.) Ph.: 4262100, www.rccmindore.com
1
,B.Com 1st Year Subject- Financial Accounting
UNIT-I
FUNDAMENTAL PRINCIPLES OF FINANCIAL ACCOUNTING
According to American Institution of Certified Public Accountant Committee:-
“Accounting as 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
results thereof”.
From the above definition, it can be said that “Accounting is science of recording and classifying trading
transaction of financial nature and is an art in which financial results are summarized and interpreted.”
Characteristics of Accounting
1) Accounting is science as well as an art.
2) The transaction and events relating to financial nature are recorded in it.
3) All transaction and events are recorded in monetary terms.
4) It maintain complete, accurate, permanent and legible records of all transaction in a systematic
manner.
5) It analyses the results of all the transaction in detail.
Objectives of Accounting
1. To Maintain a Systematic Record
Accounting is done to maintain a systematic record of the monetary transactions of the firm which is
the initial step leading to the creation of the financial statements. Once the recording is complete, the
records are classified and summarized to depict the financial performance of the enterprise.
2. To Ascertain the Performance of the Business
The income statement also known as the profit and loss account is prepared to reflect the profits
earned or losses incurred. All the expenses incurred in the course of conducting the business are
aggregated and deducted from the total revenues to arrive at the profit earned or loss suffered during
the relevant period.
3. To Protect the properties of the Business
The information about the assets and liabilities with the help of accountancy, provides control over
the resources of the firm, because accounting gives information about how much the business has to
pay to others ? And how much the business has to recover from others?
4. To Facilitate Financial Reporting
Accounting is the precursor to finance reporting. The vital liquidity/solvency position is
comprehended through the Cash and Funds Flow Statement elucidating the capital transactions.
5. To Facilitate Decision making
Accounting facilitates in decision making. The American Accounting Association has explained this
while defining the term accounting, it says accounting is, the process of identifying measuring and
communicating economic information to permit informed judgments and decisions by users of the
information.
Accounting As Science and Art
Accounting is both a science and an art. Science as well we know is the systematical body of knowledge
establishing relationship between causes and their effects. In other words, science has its own
concepts, assumptions and principles which are universal and verifiable. Accounting as discipline has
also its own assumptions, concepts and principles, which have got universal application. Accounts have
systematically and scientifically developed accounting equation and rules of debit and credit. It makes
accounting, Science.
Art is the practical application of the knowledge. Accounting as discipline is used in the maintenance of
books of accounts practically in the real life situations and day-to day affairs of the business, so it is an
art also. It can now be safely concluded that Accounting is both science and an art.
45, Anurag Nagar, Behind Press Complex, Indore (M.P.) Ph.: 4262100, www.rccmindore.com
2
,B.Com 1st Year Subject- Financial Accounting
BOOK-KEEPING
Book-Keeping is the proper and systematic keeping or maintenance of the books of accounts. Book-
Keeping starts from the identification of business transactions. These transactions must be supported
by the documents and they must be financial in nature. For example, selling goods for cash in an
accounting transaction, because cash is received and goods are going outside the business. The
transaction will increase cash and reduce goods.
Book-Keeping involves the following process:
1. Identifying accounting transactions
2. Initial record of accounting transactions
3. Preparation of ledger accounts
4. Balance Ledger accounts
5. Preparation of trial balance
DIFFERENCE BETWEEN BOOK-KEEPING AND ACCOUNTING
S.No Basis of Difference Book-Keeping Accounting
1 Transaction Trading transactions are recorded in Entries written in primary books
primary books. are checked and verified.
2 Posting Entries are posted in ledger from Posting are checked whether
journal and subsidiary books correctly posted or not.
3 Total and Balance It includes totaling of journal and On the basis of balances of ledger
finding of balances of ledger. final accounts are prepared
4 Objects The object of Book-keeping is to The object of accounting is to
write all trading transactions in a analyse the transactions written
reasonable manner. in the books.
5 Adjustments and In Book-keeping entries of
Rectification of adjustments and rectification of Accounting includes entries of
errors errors are not included. adjustments and rectification of
6 Scope of Book keeping is narrow. errors.
Scope Scope of Accounting is wide.
7 Final Account is not prepared in Final account preparation is
Final Accounts Book-Keeping. must.
Accounting Concepts
Meaning and Significance: - Accounting concepts are those basic assumptions or conditions upon
which the accounting system is based. Some of the important accounting concepts are as follows :
1) Business Entity Concept : As per this concept, business is treated as a separate entity or unit
distinct from that of the proprietor. The significance of this concept is that without such a distinction
the affairs of the business will be mixed up with the private affairs of the proprietor and the true
picture of the business will not be available. The transactions between the proprietor and the business
will be recorded in the business books separately and shown separately under the heading capital
account. For example, if when the proprietor invests Rs. 50000 in this business, it will be assumed that
the owner has given that much money to the business and will be shown as a liability for the business.
When he withdraws, say Rs. 10000 from the business it will be charged to his capital account and the
net amount due to him will be only Rs. 40000.
2) Going Concern Concept : As per this concept it is assumed that a business unit has a perpetual
succession or continued existence and transactions are recorded from this point of view. Hence, while
valuing the business assets, the accountant does not take into account the realizable or market values of
the assets. Assets are valued at cost at which they were originally purchased less depreciations till date,
which is calculated on the basis of the original cost only.
The concept presumes that the business will continue in operation long enough to charge the cost of
fixed assets over their useful life against the business income. It is only on the basis of this concept that
45, Anurag Nagar, Behind Press Complex, Indore (M.P.) Ph.: 4262100, www.rccmindore.com
3
, B.Com 1st Year Subject- Financial Accounting
a distinction is made between capital expenditure and revenue expenditure. If it is expected that the
business will exist only for a limited period, the accounting records will be kept accordingly.
3) Dual Aspect Concept : Each business transaction has two aspects, i.e., the receiving of a benefit
[debit] and giving of a benefit [credit]. For example, if a business purchases furniture, it must have
given up cash or have incureed an obligation to pay for it in future. Technically speaking, for every
debit, there is a credit this concept is the core of accountancy and upon this the whole superstructure of
Double entry system of book keeping has been raised. As each transaction has giving account and
receiving account equally, the total assets of a business firm will always be equal to its total equities [i.e.
liabilities]. That is
External liabilities + Capital = Total Assets
Total Liabilities = Total Assets
This is called the Accounting or Balance Sheet equation.
4) Historical Cost Concept : This concept is based on the going concern concept According to this
concept, assets purchased are normally entered in the accounting books at the cost at which they are
purchased and this cost is the basis for all subsequent accounting for asset. The market value is
immaterial for accounting purpose since the business is not going to be liquidated but is to be
continued for a long time to come. This concept also prevents arbitrary values being used for recording
purposes, mainly those resulting in the acquisition of assets.
5) Money Measurement Concept : According to this concept, accounting records only those
transactions, which can be expressed in terms of money. Events or transactions, which cannot be
expressed in terms of money cannot find place in the books, however important they may be.
Qualitative or non monetary transactions are either omitted or recorded separately. For example a
strained relationship between production manager and sales manager, which may affect directly the
operating results of the business, does not find place in accounting records.
6) Realization Concept : According to this concept, the revenue is recognized only when the sale is
made. But the sale is a gradual process, which starts with the purchase of raw materials for production
and ends with the sale. If no sale is effected, no revenue is recognized. This is important to stop
business firms from inflating their profits. However, there are certain exceptions to this concept like
hire purchase sale, or contract etc.
7) Accrual Concept : This concept is based on the economic that all transactions are settled in cash
but even if cash settlement has not yet taken place, it is proper to bring the transaction or event
concerned into the books. Expenditure incurred during the year but not paid and Income earned but
not received is called as accrued items. According to this concept these items will be taken into
consideration while arriving at profit or loss. This concept enables to define income and expense.
8) Matching Concept : The matching concept provides the guidelines as to how the expense be
matched with revenues. In other words, costs are reported as expenses in the period in which the
associated revenue is reported. Note that costs are matched with, revenues, not the other way round.
The expense shown in an income statement must refer to the same accounting period, production units,
division or department of business unit to which revenue refers.
9) Accounting Period concept: - It is also known as periodicity concepts or time period assumption.
According to this assumption, the economic life of an enterprise is artificially split into periodic
intervals which are known as accounting periods, at the end of which financial position. The use of this
assumption further requires the allocation of expenses between capital and revenue. That portion of
capital expenditure which is consumed during the current period is charged as an expense to income
statement and t he unconsumed during the current period is charged as an expense to income
statement and the unconsumed portion is shown in the balance sheet as an asset for future
consumption. Truly speaking, measuring since, actual income can be determined only on the
liquidation of the enterprise. It may be noted that the custom of using twelve month period applied
only for external reporting. For internal reporting, accounts can be prepared even for shorter periods,
say monthly, quarterly or half yearly.
10) Verifiable Objective Concept:- according to this principle, the accounting data should be definite,
verifiable and free from personal bias of the accountant. in other words, this principle requires that
45, Anurag Nagar, Behind Press Complex, Indore (M.P.) Ph.: 4262100, www.rccmindore.com
4
