Lect 1 MS Semester I Paper II

7/28/2019 Lect 1 MS Semester I Paper II

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Master of Management Studies

Prepared by : M. B. Thakoor

FINANCE & COST ACCOUNTANCYLecture I

ELEMENTS OF FINANCIAL ACCOUNTANCYFinancial Accountancy

Book Keeping Accounting Auditing Consultancy Service

1. Book Keeping:

It is an Art & Science of Systematic Recording / Writing / Keeping /

maintaining in the note books of Accounts those day to day events

which are financial in nature & are related to Business.2. Accounting:

It is an Art and Science of finding out the results from the note

books of Accounts maintained.

3. Auditing:

It is an examination of Books of Accounts and necessary documents

to ascertain the accuracy of accounting transactions.

4. Consultancy Services:

These are services of expert nature rendered by a consultant in an

Advisory Capacity in return for a remuneration known as consultancy

fees.

5. Accountancy:

The profession of an Accountant is known as Accountancy.

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6. Transaction:

A Transaction is an Event or an occurrence or a happening

which can be expressed in terms of money for exchange of goods

and / or services.

There are 3 types of transactions:

1. Cash Transaction

2. Credit Transaction

3. Barter Transaction

1. Cash Transaction:

A cash transaction is a transaction where money is involved on the

spot.

For ex.

a) Mr. A goes to a cloth merchant pays Rs.1000 & purchase Cloth

b) Mr. A goes to a medical consultant pays Rs.500 & get a Medical

checkup

c) Mr. A goes to a restaurant, consumes Lunch and pay Rs.50.

2. Credit Transaction:

A credit transaction is a transaction where money is not involved on

the spot but is involved at a certain future date.

For ex.

a) Mr. A goes to a cloth merchant purchase cloth of Rs.1000 & decide

with cloth merchant to pay after 1 week.

b) Mr. A goes to a medical consultant gets a check up & decide withdoctor to pay after 1 week Rs.500/-

c) Mr. A goes to Restaurant, consume Lunch & decide with Hotel

owner to pay Rs.50 after 1 week.

3. Barter transaction:

Barter transaction is a transaction where goods & services having

money value are exchanged for goods & services having money

value.

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For ex.

a) Mr. A, a cloth Merchant give cloth of Rs.1000 to Mr. B a

stationery merchant who in return give stationery of the same value.

b) Mr. A, a cloth merchant give cloth of Rs.1000 to a medical

consultant who in return give free medical advise of the same amount.c) A Doctor give free medical advise of Rs.1000 to a lawyer who in

return give free legal advise of the equal value.

7 Goods:

Goods are those items in which the businessman deal regularly in

Buying & Selling or Manufacturing & Selling.

8 Assets:

Assets are properties of any kind movable or immovable, Tangible

or Intangible owned by a person and are not meant for sale but for

use.

They are also known as Ownings

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Goods Assets

Meaning

Goods are those items in which the

Businessman deal regularly inBuying and Selling or Manufacturing

and Selling

Assets are properties of any kind

Movable or immovable, tangible orintangible owned by a person. They

are also known as Ownings

Intention

Goods are intended for sale Assets are intended for use and not

for sale

Nature

Goods are rotating in nature Assets are stationary in the business.

Relation

All goods are assets till they are notsold.

All assets are not goods.

9 Liabilities:

Liabilities are any amount payable or owed to other persons. They

are also known as Owing.

10 Capital:

Capital is defined as excess of assets over liabilities or it is definedas excess of OWNING over OWING.

It is the net amount invested in the business.

CAPITAL = ASSETS - LIABILITIES

CAPITAL = OWNINGS - OWINGS

11. Solvent :

A business is said to be solvent when its assets are greater than or equal

to its liabilities.

Solvent = A L

12. Insolvent :

A business is said to be insolvent when its liabilities are greater

than its Assets or Assets are less than its liabilities.

Insolvent = A < L or L > A

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13 Drawing :

When the Businessman takes away from the Business, any asset i.e. cash,

goods or other assets for its personal use or household use or domestic

use or private use then they are termed as Drawings.

14 Debtor :

A Debtor is a person who has to pay to other person. (i.e. to

creditor)

15 Creditor :

A creditor is a person who has to receive from other person (i.e.

from Debtor)

Note: Debtor and Creditor are like 2 sides of the same coin.

16 Account : Abbreviation is A/c or a/c

An account is a systematic and summarised record of Business

transactions relating to person, property, income, expense, profit or

gain and losses.

17 Books of accounts :

Books of accounts are those note books where we write accounts.

18 Casting:

Casting means taking the totals of various A/cs written in the notebooks of A/cs.

19 Bad debt:

Bad debt is an amount irrecoverable from a Debtor.

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20 (a) Credit:-

The word credit can be interpreted in 4 ways

(1) A source of Transactions

(2) Reputation for solvency.

(3) Time to receive payment

(4) Time to defer payment or extend payment or prolong

payment.

The (3) and (4) above are like two sides of the same coins. Defination (3)

is used when we are creditor and Defination (4) is used when we are

debtor.

A creditor gives credit to a debtor only when he has confidence in

the ability of buyer to pay and his willingness to pay.

(B) Debit : Application or Making use of Credit is Debit.

It may be noted Application of credit is debit but application of debit is

not credit.

II Credit & Debit are 2 effects equal and opposite emerging out of

a transaction.

III (a) To Debit To Debit an account means to write on the

debit side of an Account.

(b) To Credit To Credit an account means to write on the

credit side of an Account.

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Topic II Prepared by Mr. M. B. Thakoor

Types of Account

Accounts

Personal Impersonal

Real / Property A/c. Nominal/Fictitious A/c.

Accounts are classified into 3

(1) Personal Account

(2) Real or Property A/c.

(3) Nominal or Fictitious A/c.

(1) Personal A/c

Personal Accounts are accounts of Individuals,

Firms, Companies, Institutions, Local Authorities or Any other

Organisation For e.g. Mr. As A/c., Mr. Bs A/c., Mr. AB & Co. A/c.,

Hindustan Lever Ltd., A/c., ADMIS A/c., BMC A/c. Tata Trust A/c.

Function / Use

Personal A/c. help us to find out how much we have to receive from a

person and how much we have to pay to a person.

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(2) Real Account

Accounts of Property and Assets are Real A/c.

For an Account to be real A/c. 3 tests are to be satisfied.

(1) Test of Tangibility

(2) Test of Saleability

(3) The life must be more than 1 years.

If all the above 3 tests are satisfied the Account is a Real A/c. However

there are few exceptions where the test of tangibility fails and only the

other two tests are satisfied still they are Real A/c. as an exception

and they are (1) Goodwill A/c. (2) Patents and trademark A/c. (3)

Copyright A/c. (4) Leasehold Right A/c.

For ex.

(1) Land and Building A/c.

(2) Plant and Machinery A/c.

(3) Motor Vehicle A/c.

(4) Furniture A/c.

(5) Railway Siding A/c.

(6) Goodwill A/c.

(7) Patent and Trademark A/c.

(8) Copy Right A/c.

(9) Leasehold rights A/c.

Function / Use

Real A/c. help us to find amount of property a person is owning.

(3) Nominal A/c. / Fictitious A/c.

(1) Account of expenses and losses, Income and Gains are nominal

A/c.

(2) They are dual in nature.

(3) The life is less than 1 year

(4) They do not represent anything tangible. Hence they are known

as fictitious Accounts.

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For eg.

(1) Rent A/c.

(2) Commission A/c.

(3) Consultancy Fees A/c.

(4) Salary A/c.

(5) Travelling and Conveyance A/c.

Function / use

Nominal A/c. help us to find out the total expenses or total income of theyear.

Note

When the Nominal A/c. are prefixed or suffixed by the words

outstanding, prepaid or any other word which means outstanding or

prepaid then the nominal A/c. get converted into personal A/c.

Eg. Outstanding Consultancy Fees A/c.

Prepaid Rent A/c.

Commission Receivable A/c.

Commission Payable A/c.

Consultancy Fees Receivable A/c.

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Lect 1 MS Semester I Paper II