Hello everyone, welcome to Devika's Commerce and Management Academy. Today is the first class. I would like to give you a detailed information about the introduction of financial accounting.
What is financial accounting? What are the objectives? And how it works? What are the concepts and conventions?
This is what I want to speak today. You know that every businessman is interested to know his profits and losses. If he is not showing interest, The day will come he will be left without any anything.
He will become an insolvent. The same thing is applicable to every kind of business whether it's a small business or big business whatever it may be. So that's the reason we should know financial accounting properly. Why do we prepare this financial accounting?
The main purpose is that to know the accuracy of the accountancy, what is happening in the organization, how is the position of the organization, to know the profits or loss. So any kind of, that is the interest of the creditors, interest of the owners, interest of the stakeholders, all these things together, if we maintain a proper accounting, then we will come to know exactly what is happening in the organization. That's the reason we must know financial accounting very well.
Financial accounting is the base of commerce. So if you see the definition, definition is given that is American Institute of Certified Public Accounts. In short we can call it as a AICPA. So what is the definition is given by this American Institute of Certified Public Accounts? Accounting is an art of recording, classifying, summarizing.
Recording, classifying and summarizing in a significant manner in terms of money, transactions and events which are in a part at least of financial character. and interpreting the results thereof. So one definition is giving the entire picture of this financial accounting.
What is financial accounting? It is an art of recording. Recording all the transactions properly and classifying.
After recording, what we need to do? We have to classify according to the requirement, according to the nature of the transactions, nature of the accounts. We will classify and we will summarize. We will summarize in a liquid lucid form to the management.
So we will summarize this and in a significant manner in terms of money only money transactions not any other transaction in terms of money transactions and events which are in a part at least of financial character only financial character and interpreting the results thereof. Why interpreting? We prepare the accounts but if a manager if a If the owner of the account does not have any kind of account knowledge then he will be blank by looking at the account. So we need to interpret what happened and what is the result and how we got the profit, what we can do.
Like all interpretation summarizing is also needed. So this is the simple definition given by the AICP. American Institute of Certified Public Accounts.
And after that let's go for the objectives of account. Why we have to prepare the account. Only four objects are there. The first object is to maintain records of the business. Whether the transaction is small or big.
Every day in any business we find a lot of transactions. All these transactions must be recorded properly. How do we record all the transactions? First we will prepare journal entries.
Then after that ledgers. Ledgers to trial balance. Then profit and loss account and balance sheet will be prepared.
Like basically we have to Record all the transactions. So that's recording the recording for the business suppose suppose in future You would like to know what is happening and how much we have spent and what is the profit we got and what are the? Expenses we have occurred. So all these things if you want to know you have to record all the transactions How do we record with the proof with a witness with a prop?
Proper proof like any kind of suppose you are purchasing any asset. So for that a receipt will be given to you Invoice that invoice must be attached to this transaction if no invoice that's a way transaction like recording all the business transactions in a proper way that's the main object of accounting and the second object is calculation of profit or loss. Why we have to calculate the profit or loss? The main object or ambition of any manager is that want to know the profit or loss so that he will come to know. How my organization is running and what kind of expenses we are having and how we can do the business in future and want to have a forecasting plans and If it is occurred loss then how we can overcome the loss and if it is in profits how we can make it double and all these things are possible unless you will come to know at a particular period whether the organization is getting profits or loss.
That is the second objective that calculation of profit or loss of any organization when at a particular period. The third one is depiction of financial position. How do we come to know the financial position? If you maintain proper accounts, if you record all the transactions with proper witness, proof, then we will come to know exactly the financial position through the balance sheet.
Balance sheet will reveal, we will come to know about the balance sheet in the coming videos. Balance sheet will reveal the exact picture of the organization, exact true position of the organization. Whether the organization is going well or not, any kind of doubts are there, any kind of contingent liabilities are there.
How is the current position, current financial position of the organization and how many liabilities they are having, how many assets they are having and what is the outstanding liabilities and what is the amount to be received like entire picture of the organization will tell you the balance sheet. So that is the reason what is needed depiction of the financial position is the third objective. How do we come to the financial position through the balance sheet, preparing proper accounts and maintaining proper balance sheet that will give you the.
financial position so that you can forecast so that you can take the decisions in future and last one is that to make information available to various groups accounting information is to be clear and and clear it has to be revealed properly to the various groups who are the groups the main persons are company owners company owners and who are the founders of the organization and sometimes company or maybe appointing a management appointed maybe the ceos or company directors board of directors these people are the main people because they have to take the decisions they have to book vote on the organization so that is the reason they must know the position of the any organization so accounting information is needed for the company owners or company ceos or directors and company employees they are working in the organization they would like to know so what is the position of the company so it's going well it's through the profits and it's earning very well and their position is not good not bad or anything worst so all these things they would like to know that they can contribute they can decide they can trace out exactly what is happening and they want to continue or not continue or work with lot of enthusiasm all these things depends on the financial position of the organization so employees are willing to know the company's position and the third one third character can be financial creditor creditors means the company is taking loans from many people from whom they are taking loan they are called as creditors creditors when they are giving loan to this organization they would like to position of the organization how is the organization position good bad worst according to that they are willing to provide the loan to the organization so that is why creditors would like to know the financial position of the organization and it is a tax authorities Tax authorities because they have to assess the tax. As per the assessment here they have to give the assessment or they have to assess the tax. For that purpose tax authorities and government authorities everyone would like to know the position of the organization. That's the reason the information must be available to the various groups of people. Now we will see the accounting branches.
Accounting is having three forms of branches which will serve in various aspects to the various people and it has to give the information as per the requirement. So what are these three types of branches? The first one is financial accounting is the first branch. What is this financial accounting?
It is main the transactions are recorded into the financial accounting and once if the transactions are recorded and the transactions are to be prepared are to be sent, are to be converted into the necessary accounts. What kind of accounts are needed? According to that they have to prepare accounts.
Then after that appraising the information to the management according to the need. So this is financial accounting. And just now we spoke about financial accounting.
Financial accounting is nothing but the transactions are recording and analyzing the transactions, interpreting the information to the management. So the first basic one is that financial accounting. Once the financial accounting is ...occur properly, are taken properly, recorded properly, then...
We can go to the next branch that is cost accounting. Now what is this cost accounting? Cost accounting is basically related to the manufacturing company.
At the manufacturing level, what is the total cost of the product? And what is the unit cost of the product? Suppose the product cost is, one product cost is 1000 rupees.
Then total unsum is how much? If we are preparing for say 1 lakh products, how much will be the cost? and if you go for two likes like each product wise will concentrate in the cost accounting so in cost accounting mainly what we'll do is that we'll see the cost of the product cost of each product cost of bulk products we'll see and how to control the cost cost controlling techniques also will be seeing in the cost accounting and third one is that management accounting the word management is saying that the accounting which is useful for the management Taking the basic information of accounting and we are preparing this accounting which is useful for the management in decisions making. So that is called as management accounting. What is the main object of management?
Management objecting is always minimizing the losses and cost and maximizing the profit. This is the main object of any management. So to fulfill this, to give them more information, to make their ambition to be true.
And we have to give the, this management accounting has to give the information to the management in a proper way by taking the information from the financial accounting and it has to be submitted in a proper way with a interpretation, with the suggestions properly to the management. That's called as management accounting. Basically, strictly I am speaking that financial accounting is the base of accounting. Once if you prepare financial accounting, from this financial accounting, We prepare cost accounting and we prepare management accounting. So base is the financial accounting.
From this base we will prepare. So how many branches of accounts are there? One is financial accounting, cost accounting and management accounting. Now we will see the cycle of accounting. We can say it as accounting cycle or accounting process.
How it goes? So that cycle, mainly the transactions are going to start with one point. What is the point business transactions? First a transaction should be taken place into the business.
Like say we are purchasing any assets, we are selling any assets, we are spending any expenses, we are getting any income or purchasing anything or any kind of transactions, issuing shares or any transaction has to take place. That's the main first transaction. First stage of accounting.
That is what we say it as a business transaction has to take place first. Once the business transaction has been occurred then next step is that, this is the first step and second step is that journal entries. The transaction we have to enter into the journal, make it entry, journal entry will prepare. So after preparing this journal entry what do we do?
We will take this into the ledgers means ledger means nothing but accounts. These entries we are making into accounts, needful accounts. which are needed and according to the requirement will prepare different kinds of accounts based on the journal entries.
Once the base accounts are prepared then fourth stage will be will prepare the trial balance. So trial balance will give you the exact picture of the organization. If any transactions are misguided or misleading or any kind of mistakes are taken place so that will guide you that will be the trial balance.
Reveal you the facts of the organization, facts of the accounts by the trial balance. So once if you prepare general entries, ledgers will prepare the trial balance. After trial balance, we can go to the next step that is final accounts.
Fifth stage is that final accounts. In final accounts what do we do? Finally the transactions of the organization, the organization is getting profit or loss that will prepare trading account at manufacturing level. Are we getting gross profit or gross loss? Then after that profit and loss account that's about the exactly office level that we are getting profit or loss that we call it as a net profit or net loss.
Then after that we will go to the balance sheet. Balance sheet will reveal the exact picture of the any organization. So totally we have discussed today about definition of the accounting then objects of accounting and we have discussed about the branches of accounting and accounting cycle.
So in the coming video, I will be discussing about the accounting concepts and conventions.