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Dr.S.Balamurugan, M.Com.,M.Phil.,Ph.D.,

Vice-Principal and Head,

PG and Research Department of Commerce,

C.P.A College, Bodinayakanur.

FINANCIAL ACCOUNTING

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ACCOUNTING - Meaning

“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 financial character and interpreting the result thereof”. American Institute of Certified Public Accountant’s Committee on Terminology.
Concepts of Accounting
Separate business entity concept. * Accounting period concept
Going concern concept * Realisation Concept
Money measurement concept * Dual aspect concept
Cost concept * Accrual concept
Matching concept

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KINDS OF ACCOUNTS

Personal Accounts

Real Accounts

Nominal Accounts

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RULES

Personal Account: Debit the Receiver and credit Giver.
Real Account: Debit what comes in hand and Credit what goes out.
Nominal Account: Debit Expenses or loss Credit Income or gain.

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CAPITAL AND RENENUE

An expenditure which has been incurred for the purpose of obtaining longterm benefits of the firm

Capital Expenditure

Purchase of additional , plant or machinery ,furniture etc

An income which does not grow out of the operating of the business

Capital Income

Profit on sale of machinery or plant

A receipt from the owners of the business by way of additional capital or from sale of fixed assets of the business firm.

Capital Receipt

Deferred Revenue Expenditure

An expenditure which is incurred during an accounting period, but it is applicable either wholly or in part to future period.

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CAPITAL AND RENENUE

Revenue Expenditure

Expenditure arises out of regular business

Administrative expenses, Cost of goods purchased

Revenue Income

An income arises out of regular transactions

Profit from sale of goods

Revenue Loss

Loss arises during normal course of business

Loss of bad debts

Revenue Receipt

A receipt by business during the normal course of operating the firm.

Sale of goods

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Financial statements

Financial statements are written records that convey the business activities and the financial performance of a company. ... Financial statements include: Balance sheet. Income statement. Cash flow statement.

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Components of Financial Statements

Balance Sheet
Income Statement or P & L Account
Statement of Appropriation of Profit
The statement of Changes in Financial Position

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Partnership-Admission of a Partner

When the new partner brings his share of goodwill in cash
When the new partner brings his share of goodwill in cash, the payment be made to the old partners, as if outside/private transaction.
Sacrificing ratio is the ratio in which old or existing partners forego, i.e., sacrifice their share of profit in favor of the new or incoming partner. This share may be given (sacrificed) to the new partner by all the old partners equally or by all or some of the partners in an agreed ratio.�

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Retirement of a Partner

In a partnership, a partner may retire:
With the consent of all the partners,
In accordance with an express agreement by the partners, or.
The partnership is at will, by giving notice in writing to all the other partners of his intention to retire. Calculation of New Profit and Loss Sharing Ratio: When a partner of a firm retires, it is for the continuing partners to agree amongst themselves as to in what ratio, they shall share the profit and loss of the firm in future. The ratio so agreed upon is called New Profit Sharing Ratio.
Goodwill of the firm is valued in the manner prescribed by the partnership deed. ... The retiring partner's capital account is credited with his share of goodwill and the amount is debited to the remaining partners' capital accounts in the ratio of their gain.

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Death of a Partner

On the death of a partner, the partnership ceases to exist. But the firm may not cease to exist as the other remaining partners may decide to continue the business. In case of death of a partner, the treatment of various items is similar to that at the time of retirement of the partner.
The retiring or the deceased partner will not be sharing future profits. Therefore all continuing partners pay to retiring partner the share of Goodwill in gaining ratio. It is fair to compensate the retiring or deceased partner for the same.
A Revaluation Account is prepared in order to ascertain net gain or loss on revaluation of assets and liabilities and bringing unrecorded items into books. The Revaluation profit or loss is transferred to the capital account of all partners including retiring or deceased partners in their old profit sharing ratio.

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Dissolution of Firm

Dissolving a partnership firm means discontinuing the business under the name of said partnership firm. In this case, all liabilities are finally settled by selling off assets or transferring them to a particular partner, settling all accounts existed with the partnership firm.
Realization Account is prepared at the time of dissolution of a partnership firm. This account is prepared to know the profit made or loss incurred at the time of dissolution of a firm. ... In last if total of credit side exceeds debit side, it means there is profit and that is transferred to partner's capital accounts

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�Modes of Dissolution of a Firm�

1] By Agreement (Section 40) ...
2] Compulsory Dissolution (Section 41) ...
3] On the happening of certain contingencies (Section 42) ...
4] By notice of partnership at will (Section 43) ...
1] Insanity/Unsound mind. ...
3] Misconduct. ...
4] Persistent Breach of the Agreement. ...
5] Transfer of Interest.