Financial Accounting - Tutorials Point

Financial Accounting

Financial Accounting

About the Tutorial

This tutorial will help you understand the basics of financial accounting and its associated terminologies.

Audience

This tutorial has been designed to help beginners pursuing education in financial accounting or business management. Any enthusiastic reader with basic mathematics knowledge can comprehend this tutorial. After completing this tutorial, you will find yourself at a moderate level of expertise from where you can take yourself to next levels.

Prerequisites

Before you start proceeding with this tutorial, we assume that you have a basic understanding of commerce.

Copyright & Disclaimer

Copyright 2014 by Tutorials Point (I) Pvt. Ltd. All the content and graphics published in this e-book are the property of Tutorials Point (I) Pvt. Ltd. The user of this e-book is prohibited to reuse, retain, copy, distribute or republish any contents or a part of contents of this e-book in any manner without written consent of the publisher. We strive to update the contents of our website and tutorials as timely and as precisely as possible, however, the contents may contain inaccuracies or errors. Tutorials Point (I) Pvt. Ltd. provides no guarantee regarding the accuracy, timeliness or completeness of our website or its contents including this tutorial. If you discover any errors on our website or in this tutorial, please notify us at

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Financial Accounting

Table of Contents

About the Tutorial .....................................................................................................................................i Audience .................................................................................................................................................... i Prerequisites .............................................................................................................................................. i Copyright & Disclaimer ..............................................................................................................................i Table of Contents......................................................................................................................................ii

1. OVERVIEW ............................................................................................................................1

Introduction .............................................................................................................................................. 1 Definition of Accounting ...........................................................................................................................1 Objectives and Scope of Accounting .........................................................................................................2 Accounting Process ...................................................................................................................................2 Accounting Process ...................................................................................................................................3 Accounting Concepts.................................................................................................................................5 Accounting Conventions ...........................................................................................................................9 Classification of Accounts .......................................................................................................................11 Accounting Systems ................................................................................................................................12

2. FINANCIAL ACCOUNTING....................................................................................................15

Journal ....................................................................................................................................................15 Analysis and Treatment of Transactions .................................................................................................16 Posting in a Ledger..................................................................................................................................21 Ruling of Account in Ledger Account.......................................................................................................22

3. SUBSIDIARY BOOKS .............................................................................................................26

Cash Book ...............................................................................................................................................26 Triple Column Cash Book ........................................................................................................................28 Petty Cash Book ......................................................................................................................................28 Purchase Book ........................................................................................................................................28 Sale Book ................................................................................................................................................29

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Financial Accounting

Purchase Return Book.............................................................................................................................29 Sale Return Book ....................................................................................................................................29 Bills Receivables Book.............................................................................................................................30 Bills Payable Book...................................................................................................................................30 Key Features of Subsidiary Books............................................................................................................30 Bank Reconciliation ................................................................................................................................31 Trial Balance ...........................................................................................................................................32 Financial Statements...............................................................................................................................33 Owner's Equity .......................................................................................................................................34 Current Assets.........................................................................................................................................34 Current Liabilities....................................................................................................................................35 Depreciation ...........................................................................................................................................35

4. COST ACCOUNTING ............................................................................................................38

Definition of Cost Accounting .................................................................................................................38 Concepts of Cost Accounting...................................................................................................................38 Advantages of Cost Accounting...............................................................................................................41 Cost Accounting versus Financial Accounting ..........................................................................................43 Classification of Cost ...............................................................................................................................45 Elements of Cost .....................................................................................................................................48 Cost Control and Cost Reduction.............................................................................................................49 Tools and Techniques of Cost Reduction .................................................................................................53

5. COSTING TECHNIQUES........................................................................................................55

Marginal Costing.....................................................................................................................................55 Standard Costing.....................................................................................................................................57 Variance Analysis ....................................................................................................................................58 Cost-Volume-Profit Analysis ...................................................................................................................62 Break-Even Chart ....................................................................................................................................65

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Financial Accounting 6. MANAGEMENT ACCOUNTING.............................................................................................67

Definition ................................................................................................................................................ 67 Characteristics of Management Accounting............................................................................................67 Objectives of Management Accounting ..................................................................................................69 Management Accounting versus Cost Accounting...................................................................................71 Cash Flow................................................................................................................................................72

7. RATIO ANALYSIS..................................................................................................................83

Accounting Ratio.....................................................................................................................................83 Accounting Analysis ................................................................................................................................83 Ratio Analysis and its Applications..........................................................................................................83 Advantages of Ratio Analysis ..................................................................................................................84 Limitations of Ratio Analysis ...................................................................................................................84 Types of Ratio .........................................................................................................................................85 Chart of Useful Ratios .............................................................................................................................88 Working Capital ......................................................................................................................................94

8. BUDGETING ANALYSIS.........................................................................................................97

Definition ................................................................................................................................................ 97 Budget, Budgeting, and Budgetary Control .............................................................................................97 Types of Budgets.....................................................................................................................................98 Flexible Budget v/s Fixed Budget ..........................................................................................................100 Flexible Budget .....................................................................................................................................101 Cash Budget ..........................................................................................................................................102

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