Additional Material-Lecture 2

MGT-101Financial Accounting

What is a transaction?

1. Transaction:

• Financial activity or event

• two parties

• Exchange of some goods or services

• For cash/ money or a promise of future payment

Features of transaction

• Between two parties

• Measurable in terms of money

• Transfer of property or service

• Affects the financial position of a business

What is BOOK KEEPING?

2. Book keeping:

• Part of accounting

• Systematic recording financial transactions

OR

• Art of recording business transactions in the books of accounts in systematic manner Presentation TitlePresentation Title

OBJECTIVES OF BOOK-KEEPING

• Provides financial data to management

• Provides a systematic record

• Keeps permanent record

• Provides details of each transaction

• Reflects the financial performance of a business.

OBJECTIVES OF ACCOUNTING

1. Primary:

• Maintenance of records

• Profit or loss calculation

• Financial position reflection

• Provide information to its users

Cont…

2. Secondary:

• Tax calculation & payment

• Provides evidence to prevent disputes

• Extracts correct & valid information

• Verification and counter check of cash

• Helps in future planning

USERS OF ACCOUNTING INFORMATION

Internal Users External Users

• Owners •Labor unions

• Managers •Financial analysis

• Employees •Stock Exchange

•Supplier

•Regulatory authorities

•Customers

•Financial press/media

•Trade associations

•Tax Authority

•Creditor/ investors

BOOK KEEPING VS. ACCOUNTINGBOOK KEEPING ACCOUNTING

•Nature and scope of work

Recording phase of an accounting system & basis of accounting

Summarizing phase of an accounting system & basis of business decisions.

•Skill

Does not require any special skill or knowledge

Requires special skill and knowledge and personal judgment

•Financial Statement

Not prepared from book keeping record. Prepared from accounting record.

•Financial conditions

Cannot give the complete and clear picture of the financial condition of business.

Shows complete and clear picture of the financial condition of business.

•Legality

Cannot help in complying with legal formalities.

can be complied with the help of accounting information

•Managerial decisions

Does not help in managerial decisions Helps in making managerial decisions.

SINGLE ENTRY VS. DOUBLE ENTRY

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SINGLE ENTRY DOUBLE ENTRY

incomplete records (cash transactions only)

complete records (cash & Credit transactions)

statement of profit and loss in prepared to calculate profit

trading and profit & loss is prepared in order to ascertained the profit & Loss of business.

statement of affairs is maintained balance sheet is prepared.

Two aspects of a transaction is not recorded

two fold aspects of each and every transaction is recorded.

adopted by small scale business. adopted by large scale business.

DISADVANTAGES of Single entry book keeping

• Frauds and mistakes are difficult to detect

• Partial and incomplete records are maintained

• Balance sheet is not possible to prepare

• Nominal accounts & profit and loss account cannot be prepared.

• Accurate trial balance cannot be drawn

ADVANTAGES OF DOUBLE ENTRY SYSTEM

• Balanced trial balance

• Accurate net profit and loss

• Accurate balance sheet

• Less chances of fraud

• Easy detection of errors, omissions & fraud

• Helps in the valuations of business

• Helps in managing & supervising business activities

• Reflects true financial position of a business.

Thank You…

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