SHREE SWAMINARAYAN COLLEGE OF COMMERCE & MANAGEMENT

BBA SEM 1
SUBJECT: 102 FUNDAMENTALS OF ACCOUNTING
UNIT: 1 (1) INTRODUCTION TO FINANCIAL ACCOUNTING (Only Theory)
 Introduction to Financial Accounting-
 Definition and Scope
 Objectives of Financial Accounting
 Accounting v/s Book Keeping
 Advantages and Limitations of Financial Accounting
 Role of Accountant

Q: 1 GIVES THE MEANING OF FINANCIAL ACCOUNTING AND ALSO GIVES

THE CHARACTERISTICS OF IT.
INTRODUCTION
Now trade and business has expanded to such a scale that the owner of the business is not able to remember
all transactions. Hence, all transactions and events taking place in business must be systematically recorded
in books of account Accounting has become an integral part of business, as the business activities in modern
life has expanded to a great height. Hence Accounting has become the life blood of business.
In actual life, it is hot possible for anybody to remember everything that he should remember in his business
or profession. A doctor prepares case papers forting. This book wan his patients, a lawyer keeps a brief for
each of his clients. A teacher keeps a register of his students giving particulars about their studies similarly,
a businessman is not able to remember all transactions and he must keep books of account. He can have
peace of mind only when all his business transactions are properly recorded.
In the early stages of human life, when business transactions were very few, there was no need for any
scientific system. However, the size of business units has grown considerably and factories on giant scale
have been established, run by grant-sized companies. It is not possible for the businessman in these
circumstances to remember all transactions. If a trader, after selling goods on credit to a number of
customers, does not remember from whom he has to receive what amount of money, what will be his
position "He will have to close down bus business. His employees will commit frauds and misappropriate
money Hence accounting is a necessity. All the transactions taking place in business relating to expenses,
incomes, profits, lenses, sales, purchases and assets must be systematically recorded.

DEFINITION OF ACCOUNTING

Accounting is a process of systematically recording in the books of accounts, the monetary transactions of a
person relating to a definite period of time. It means that it is a process, in which transactions of a person are
systematically recorded. Here the person includes a living being like a sole proprietor or a partner and also
an artificial or a legal person like a joint stock company, a co-operative society, a club or an institution. The
transactions recorded are monetary transactions, i.e. involves money or money's worth.
 American Institute of Certified Public Accountants has defined Accounting as follows:
"Accounting is an 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 financial character and interpreting the reasons
thereof”.

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 CHARACTERISTICS OF ACCOUNTING

(1) It is an Art:
Accounting is an art. The winter of books of account must use his skills. The rules of accounting cannot be
used mechanically. Systematic accounting records help management in taking important decisions.

(2) It is a Science:
Accounting is a science also. Science is a systematic knowledge, which has definite rules. Similarly, there
are rules and established principles in accounting Transactions are recorded on the bases of these rules.
Hence, it is a science also.

(3) Only Financial Transactions:

In accounting, only financial transactions are recorded. If they cannot value in money or money's worth,
they are not recorded in books of account Ex., a good character certificate was issued to the accountant who
has left the job. This event cannot be valued in money. Hence, it is not recorded in accounts. The
transactions must be at least, partly of financial nature, Ex., if a friend is invited to a dinner. This is not a
business transaction, neither has it any financial character.

(4) Recorded in Terms of Money:

The transactions are recorded in terms of money only. For example, if there are 6 chairs and 3 tables in the
terms have to convert them in terms of money value and then only they are recorded in books of account.

(5) Recorded in Special Books:

The transactions to be recorded are first classified eg. Cash transactions, sales transactions, purchase
transaction etc. Special books are kept for each type of transactions and they are recorded in their respective
books only.

6) Records made with particular objective:

Records made in books of account are summarized from time to time and important conclusions are drawn.
eg. What is the the amount of sales, total purchases, expenses and incomes earned during the year and what
is the profit made or loss incurred during the year Thus, howls of account are written with a particular
objective in mind.

(7) Records are correctly made:

The records made must be correct arithmetically. And there should be no error of principle.

(8) Records are continuous:

The business transactions are continuously recorded in order of dates. They are recorded in separate books
according to the nature of transactions. Hence, no transaction is left out unrecorded.
(9) Even service transactions recorded:
Not only transactions relating to goods are recorded, but even service transactions are recorded, EX.. Fees
are paid to a lawyer for legal advice. Here the lawyer has given services and in exchange money is paid to
him. Such transactions are therefore, recorded in books of account.

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Q: 2 OBJECTIVES OF FINANCIAL ACCOUNTING.
1. To recorded financial effect:
The foundational objective of financial accounting is to accurately record all financial transactions of the
business. This includes sales, purchases, expenses, and revenues, assets of business and liabilities of the
business. The aim is to record financial events in a systematic manner.

2. To Give information of business:

Other object is to give information of business transaction during a particular duration. e.g the following
information is obtained from accounts: (i) what is the total amount of purchases and sales (ii) what is the
total amount of income and what are the expenses (iii) whether a profit has been made or a loss incurred at
the end of a particular period (iv) what is the amount receivable and the amount payable (v) what are the
assets (vi) what is the capital.

3. To Give guidance to management:

The information provided by accounting provides valuable guidance for the future to the management, e.g. if
accounting data points out that profit is declining, the management will try to find out the causes and take
corrective actions on this basis.

4. Payment of taxation:
Accounting is needed in order to determine the actual amounts of various taxes payable to the governments,
e g income tax, sales tax etc

5. Compulsory by companies Act 2013:

A company has to keep accounts also because it is made compulsory by Companies Act to keep accounts.
Thus, the objective of keeping accounts is to abide by the law

6. Comparison:
The figures of the current year can be compared with those of the previous year. With the help of this
comparison, we will be able to know the trend of sales, expenses, incomes, profits, losses etc.

7. Result of the business:

The actual profit or loss made during the year can be determined on the basis of accounts only. This helps
management to determine what dividend to declare, what bonus to pay to employees etc.

8. Financial position of the business:

The objective of keeping accounts is also to know the financial position of the of business at the end of the
year by preparing a balance sheet.

Q: 3 GIVE THE DIFFERENCE BETWEEN BOOK KEEPING AND ACCOUNTING.

POINTS BOOKKEEPING ACCOUNTANCY
1.Definitions Bookkeeping is a process of recording day Accountancy is an art and science of
to day business transactions in books of preparing summary statements and
original entry and posting them. interpreting the results thereof.
2. Basis The basis of book-keeping is a transaction. The basis of Accountancy is book-keeping.
The work of Accountancy starts after the
work of book-keeping is over. It includes

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 preparation of trial balance and final
accounts.
3. Scope The book-keeping is limited in scope and The scope of Accountancy is wide and
includes steps up to preparation of trial includes book-keeping and goes further
balance only. than recording transactions.
4. Requires As the work of book- keeping is of routine As Accountancy involves analysis and
special skill nature, it does not require skill or expert interpretation, it requires special skill and
knowledge. Any person who knows the expert knowledge on the part of the
rules of double entry can write books of persons doing Accountancy work.
account.
5. Useful for Book-keeping is not useful to management As Accountancy analyses and interprets
policy decision in its policy making function. Because it accounts, it can draw useful conclusions
making includes nothing more than mere writing from it. This guides management in
books of account. making policy decisions for the future and
also keeps in making any change in
policies, if necessary.
6. Development There is no scope of development or any Accountancy has developed very fast with
changes in book-keeping. It only records the changing times. New branches such as
transactions in books of account. There is Cost Accounting. Management Accounting
no scope of change or development in the etc. have developed. Besides, new
rules of writing accounts. Of course, there dimensions like Human Resources
can be a change in keeping of subsidiary Accounting, Inflation Accounting etc.,
books. Cards can be used or transactions have developed in recent times. Computer
can be recorded with the help of computer. has brought revolutionary changes in it.

Q: 4 ADVANTAGES AND LIMITATIONS OF FINANCIAL ACCOUNTING.

ADVANTAGES
According to the language of business, we may also say that it is a mirror of business in which real image of
the business can be seen. It is a weather guide the business, a log chart of the past, a barometer of the present
and a forecast of the future. What a fresh air is to the human being for living, the accounting is to a business.
Its utility can he stated as follows:

1. It maintains complete record of all transactions:

It maintains complete record of all transactions, duty classified and summaries. The owner need not tax his
memory and it is it possible the any human being to remember everything that takes place in business from
day today.

2. Information regarding income and expenses:

It gives information of various types of expenses and incomes, which helps the owner to control them, if
necessary.

3. Result of business:
Profitability of business is revealed by accounts in the form of gross profit and net profit. The difference
between the selling price and cost price of goods sold is the gross profit and the difference between gross
profit and all other expenses of operating a business is the net profit.

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4. Data comparison:
The comparison of profits of past years with the profit of the current year will give very useful information
to the management. Steps may be taken on the basis of information provided by accounts to improve
profitability.

5. Financial position of the business:

It shows the true and fair financial position of business, i.e it gives an idea about the various types of assets,
liabilities and capital at the end of the year by preparing balance sheet.

6. Interfirm comparison:
Comparison of results of business with those of other firms as well as with these of past years of our own
business will enable the businessman to know the significant facts about the changes and to plan the future
activities.

7. Tax authorizes:
Tax authorizes like income-tax and sale tax departments trust the systematic accounts and are a big help to
the businessman.

8. Controlling over business:

It helps in controlling and detecting frauds and embezzlements of cash or goods.

9. I give useful information to outside users:

I gives useful information to outside users like banks, creditors prospective investors etc. so that they are
able to take important decisions on the basis of such information.

10. Decisions making for Top Management:

Management is able to take day to day decisions as well as important decisions like investing in new
projects, discontinuing a product etc. on the basis of accounting information.
11. Accurate value of business:
Accounting is useful in number of other ways to its owner like giving accurate value of business, if it is to be
sold se providing valuable information as evidence in court cases, for planning the future operations etc.

LIMITATIONS
Accounting is not a perfect discipline Accounting has some specific limitations which affect the accounting
procedures. Some of the limitations are as follows:

1. It is more expensive:
Generally, a business unit has to maintain Journal, subsidiary books, Ledger and other books of account. It
requires more labour and time which results in more expensive and comprehensive accounting procedure to
a business unit, which small businesses cannot afford

2. Accounting does not record non-monetary transactions:

Accounting does not record non-monetary transactions. Certain non- monetary transactions like efficiency
of business unit, creditworthiness of business unit, employee morale which affects the business position are
not recorded in the books of account

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3. Accounting is prepared on the basis of Historical cost:
Final accounts and other accounting statements are prepared on the basis of Historical costs which do not
reflect the impact of inflation on business activities. Hence, accounting does not consider changes in prices

4. Money is not a stable unit:

In accounting transactions are recorded in terms of money. Money is not a stable unit, as it changes with
passage of time. Hence, accounting discipline ignores the concept of time value of money

5. Certain accounting policies differ from business to business:

Certain accounting policies like valuation of inventories, methods of depreciation, treatment of goodwill etc.
differs from one business unit to another, even though both are performing same business activity

Q: 5 ROLE OF ACCOUNTANT

1. Maintenance of books of accounts

Role of Accountant is very crucial in maintaining systematic records of financial transactions in order to
calculate the net profit or loss for an accounting period and the financial position of an entity as on a particular
date. Maintaining proper books of accounts in the manner required by law and accounting policies followed by
the entity is important for the entity. The books of accounts of the entity also support the future planning of
business operations.

2. Statutory Audit

Usually, a Chartered Accountant audits the books of the entities like Limited companies, firms etc. according to
the law. He ensures that the entities prepare the financial statements in accordance with generally accepted
accounting principles, standards, and legal considerations. He also ensures that the financial statements show a
true and fair view of the financial position of an entity.

3. Internal Audit

Accountants, internal staff are engaged in an internal audit by large-sized entities (like listed companies,
companies required to conduct an internal audit under any law etc.) to ensure that all the accounting transactions
related to respective accounting year are recorded, classified and summarized in accordance with the accounting
policies followed by the entity. It also enables management to check whether all the instructions given by it is
followed or not.

4. Budgeting

Budgeting refers to the planning of various business activities, transactions before their occurrence. Accountants
and management prepare various plans to balance their business incomes and expenses. Actual results are
compared with the budgeted to find out the variation if any. Role of accounting is very important while
preparing the budget.

5. Taxation

Another very important role of the accountant is to plan the tax liabilities of an entity. Accountants are capable
to manage the tax matters of an entity, file returns, make representations before tax authorities, and settle the tax

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liabilities of an entity under various laws. Various tax planning advice, investments etc services can be provided
by accountants.

6. Investigation

The accountants also carry an investigation to ascertain the financial position of some parties. They perform
this function either by themselves or by hiring external professionals.

However, external professionals are more preferable than the internal staff due to their independence, which
enhances the confidentiality of investigation report.

7. Management advisory services

Reporting internal controls to management, long-term plans, advisory regarding the business operation of an
entity are the major responsibilities of an accountant.

An accountant also provides the management consultancy services in the areas of Management information
systems, expenditure control and evaluation of appraisal techniques.

8. Other Activities

The accountant also performs activities such as acting as a liquidator, cost accountant, arbitrator for settlement
of disputes etc. Thus, these activities make the role of accountants important.

Q: 6 SCOPE OF FINANCIAL ACCOUNTING

Financial Accounting has wide scope and area of application. It is not only for the business world, but
spread over in all the spheres of the society in all professions. As accounting is a dynamic subject, its scope
and area of operation have been always increasing, keeping pace with the changes in socio-economic
changes. It also practiced in non-trading institutions like schools, colleges, hospitals, chartable trust, trust
clubs, co-operative society and also in government and local self-government in the form of municipality,
panchayat.
1. Financial Accounting is a useful tool to manage and to outside parties such as Shareholders, Potential
consumer etc.
2. Financial Accounting is both an art and science which involves recording, classifying, summarizing,
interpreting and communication of transactions and business events, in terms of money.
3. Financial Accounting is a useful tool to manage and to outside parties such as Shareholders, Potential
Owners, Creditors, Costumers, Employee and Government.
4. Financial Accounting provides information regarding the results of it's operations and the financial
position of the organization.
5. Financial Accounting helps in finding the amount of turnover related to stock and also cash.
6. Financial Accounting check inflow and outflow of the business.

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