Double Entry System of Book-keeping refers to a system of accounting under which both  the aspects (i.e. 3) To ascertain the financial position of the business by the means of financial statement i.e. 4) Where the alternative accounting practice is available, an enterprise is free to adopt. 4) It is not free from personal bias and personal judgment of the people dealing with it. Disclosure of all material facts is compulsory but it does not imply that even those figures which are irrelevant are to be included in the financial statements. 4) To help Auditors: Accounting standards provide uniformity in accounting practices, so  it helps auditors to audit the books of accounts. 2) Profit or Loss . the income statement and the balance sheet indicate the way in which the activities of the business have been conducted during a given period of time. please add some more mcq’s on Depreciation, BRS and Financial statements. becomes the basis of all subsequent accounting transactions for the asset. Here we discuss the objectives and fundamentals of financial accounting including debit-credit, journals, ledgers and four financial statements (income statement, balance sheet, cash flow, and shareholders equity statement). made or received. Taking the journal entry from above, we can create a T-format for ledger entry. Accounting period is usually a period of one year, which may be a financial year or a calendar year. Whether an item is material or not depends on its nature. b) Intangible Assets: Intangible Assets are those assets which have no physical  existence and can be felt by operation. According to this principle, business is treated as an, entity, which is separate and distinct from its owner. Accounting period is defined as the interval of time, at the end of which the profit and loss account and, the balance sheet are prepared, so that the performance is measured at regular intervals and decisions. Financial accounting refers to the processes used to generate interim and annual financial statements. Any accounting practice may be changed if the law or Accounting standard requires so,  to make the financial information more meaningful and transparent. ➢ Accounting Principles  Accounting principles are the rules of action or conduct adopted by accountants  universally while recording accounting transactions. This concept is instrumental for the company in: 3. providing depreciation charged on fixed assets and appearance in the Balance Sheet at. This  discount is not recorded in the accounting books as it is deducted in the invoice/cash  memo. The three key financial statements are the income statement, balance sheet, and statement of cash flows, and they serve two broad purposes: to report on the current financial position of the company, and to show how well the company performs over a period of time. In other words, for every debit there is a credit of equal amount in one or more accounts and, vice-versa. in the financial statements along with its effect on income statement and Balance Sheet. 2) To improve reliability of the financial statements: Statements prepared by using  accounting standards are reliable for various users, because these standards create a sense  of confidence among the users. 1) Accounting standards are guidelines which provide the framework credible financial  statement can be produced. It excludes the amount collected. We take all accounting transactions (including non-cash ones) and do a “revenue – expense” analysis to find out the profit for the year. The excess of revenues over its related expenses during an accounting year is profit. It is not relevant when the payment was. debit or credit) of every transaction are recorded in the accounts  involved. This concept applies equally to revenues and expenses. For      example, different people have different opinions regarding life of asset for calculating   depreciation, provision for doubtful debts etc. Introduction: Both financial accounting and managerial accounting provide important information about the business process. If the knowledge about any information is likely to affect the user’s decision, it is termed as material, According to this principle, prospective profit should not be recorded but all prospective losses should, immediately be recorded. Login details for this Free course will be emailed to you, This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. 3) Classifying: Once the financial transactions are recorded in journal or subsidiary books,  all the financial transactions are classified by grouping the transactions of one nature at  one place in a separate room. the act of. On the other hand, financial accounting helps us understand how profitable a company is through financial statements.For example, if a company has sold $100,000 worth of products in a year and expended $65,000 for making the sales (cost of goods sold plus other operating expenses), then the profit of the company for the year is $35,000.Cost Accounting vs Financial Accounting Infographics 4) It helps in keeping systematic and complete records of business transactions in the books      of accounts according to specified principles and rules, which is accepted by the Courts as evidence. 2) Recording: A transaction will be recorded in the books of accounts only it is considered  as an economic event and can be measured in terms of money. As per Accrual assumption, all revenues and costs are recognized when they are earned or incurred. For Example: Furniture, Machinery etc. qualitative elements such... 3) … This concept assumes that an enterprise has an indefinite life or existence. A Bill of Exchange is Bill  Receivable for seller at time of credit sale. 7,000 of  January 2010 paid in February 2010 it would be recorded in the books of accounts only in, Under this however, revenues and costs are recognized in the period in which they occur  rather when they are paid. System”. Introduction to financial accounting. Financial accounting is a specialized branch of accounting that keeps track of a company's financial transactions. These are liabilities for the business. Financial accounting is the branch that processes historical information about an entity's transactions and summarizes them into reports called general-purpose financial statements. This concept holds that accounting should be free from personal bias. Financial Statements reflect an entity’s past performance and current position based on a set of standards and guidelines known as GAAP (Generally Accepted Accounting Principles). In case  of trading concerns it is purchase of final goods and in manufacturing concern it is  purchase of raw materials. Consistency assumption does not mean that particular practices, once adopted, cannot be changed. 4) It is done by junior staff called bookkeepers. It involves  observing all business activities and selecting those events or transactions which can be  considered as financial transactions. on behalf of third parties such as certain taxes. 2) It helps owners to compare one year’s results with those of other years to locate the  factors which leads to changes. Sales are total revenues from goods sold or services provided to customers. 5) It helps a firm in the assessment of its correct tax Liabilities such as income tax, sales tax, VAT, excise duty etc. (B) … consumed are matched against the cost of goods sold for the accounting period. It increases cash in assets side  and capital in liabilities- side by Rs. According to this principle, business is treated as an entity, which is separate and distinct from its owner. side and the right side of an account is called credit side. The cash flow statement is a combination of three statements – cash flow from operating activities (which can be calculated using a direct and indirect method of cash flow), cash flow from financing activities, and cash flow from investing activities. Understanding debit and credit is easy. When sold goods are returned from customer due to any reason is known as sales return. It means it record the effect of transaction is taken into book in  the when they are earned rather than in the period in which cash is actually received or  paid by the enterprise. INTRODUCTION TO FINANCIAL ACCOUNTING AND ITS TERMS 1) It is historical in nature; it does not reflect the current worth of a business. They are the basic assumptions within which accounting  operates. The items that are purchased for the purpose  of resale and not for use in the business are called goods. This concept should be followed to have a true and fair view of the financial position of the company. An Economic activity that affects financial position of the business and can be measured  in terms of money e.g., expenses etc. depreciation, provision for doubtful debts etc. As financial accounting is solely prepared for the right disclosure of financial information of a company, the statements, and reports company produce should be valid and credible. Accounting is the art of recording, classifying and summarising the economic information 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. 2) Capital Receipts: Capital Receipts are those receipts which are occurred by other than  business operations like money received by sale of fixed assets. Offered by University of Pennsylvania. 3) It provides information about the financial position of the business by means of balance  sheet which shows assets on one side and Capital & Liabilities on the other side. Debtors are persons and/or other entities to whom business has sold goods and services  on credit and amount has not received yet. It is immaterial, whether the cash is received or paid at the time of transaction or on a later date. 2) Cash Discount: The objective of providing cash discount is to encourage the debtors to  pay the dues promptly. 1) It is the summarizing phase of an accounting system. To control the cost of production and distribution is the main field of: (A) Financial Accounting. Balance Sheet is based on the equation – “Assets = Liabilities + Shareholders’ Equity”. Balance Sheet. 2) It is a primary stage and basis for  accounting. So  accounting standards are flexible. 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