The Ultimate Resource for Financial Accounting 2 Pdf Notes: Tips, Examples, and Exercises
Financial Accounting 2 Pdf Notes
If you are a student of BBA or BCOM, you might be looking for some useful notes on financial accounting. Financial accounting is one of the core subjects that you need to master to understand the financial performance and position of any business entity. In this article, we will provide you with a comprehensive overview of financial accounting 2 pdf notes that cover all the important topics and concepts that you need to know. We will also provide you with some links to download free pdf notes from reliable sources. By reading this article, you will be able to:
Financial Accounting 2 Pdf Notes
Learn the meaning, objectives, branches, and users of financial accounting
Understand the accounting principles and standards that guide the preparation and presentation of financial statements
Follow the accounting cycle and record the accounting transactions using journal entries, ledger accounts, trial balance, and adjustments
Prepare the final accounts of a sole proprietorship or a partnership firm using manufacturing account, trading account, profit and loss account, and balance sheet
Distinguish between capital and revenue items and measure the income of a business entity
Explain the concept, causes, methods, and accounting treatment of depreciation, provisions and reserves
Know the basics of company accounts such as types, formation, share capital, issue of shares, buyback of shares, and ledger preparation
Access free pdf notes on financial accounting from various sources
What is Financial Accounting?
Financial accounting is the branch of accounting that deals with recording, summarizing, analyzing, and reporting the financial transactions and events of a business entity. The main objective of financial accounting is to provide useful information to the external users such as investors, creditors, regulators, tax authorities, etc. who are interested in knowing the financial performance and position of a business entity.
Financial accounting follows a set of rules and conventions that are called accounting principles. These principles ensure that the financial statements prepared by different entities are comparable, consistent, reliable, and relevant. Some of the common accounting principles are:
The going concern principle: This principle assumes that a business entity will continue its operations for a foreseeable future and will not liquidate or cease its activities.
The accrual principle: This principle states that the revenue and expenses should be recognized in the period in which they are earned or incurred rather than when they are received or paid.
The matching principle: This principle requires that the expenses incurred to generate revenue should be matched with the revenue recognized in the same period.
The consistency principle: This principle requires that an entity should follow the same accounting policies and methods from one period to another unless there is a valid reason to change them.
The prudence principle: This principle requires that an entity should not overstate its assets or income or understate its liabilities or expenses. It also requires that an entity should provide for all possible losses or contingencies.
Financial accounting also follows a set of standards that are issued by various bodies to ensure uniformity and transparency in the financial reporting. These standards are called accounting standards. Some of the prominent accounting standards are:
International Accounting Standards (IAS): These are the standards that were issued by the International Accounting Standards Committee (IASC) from 1973 to 2000. They are still applicable in some countries.
International Financial Reporting Standards (IFRS): These are the standards that are issued by the International Accounting Standards Board (IASB) from 2001 onwards. They are adopted by more than 140 countries across the world.
Accounting Standards in India (AS): These are the standards that are issued by the Institute of Chartered Accountants of India (ICAI) based on the IAS and IFRS. They are applicable to all entities in India except for some specified entities.
Financial accounting also uses some accounting concepts that are the basic assumptions or ideas that underlie the accounting process. Some of the common accounting concepts are:
The entity concept: This concept states that a business entity is separate and distinct from its owners and other entities. Therefore, the financial statements of a business entity should reflect only its own transactions and events.
The money measurement concept: This concept states that only those transactions and events that can be measured in terms of money should be recorded in the financial statements.
The dual aspect concept: This concept states that every transaction or event has two aspects, a debit and a credit, that affect the accounting equation. The accounting equation is: Assets = Liabilities + Equity
The periodicity concept: This concept states that the life of a business entity can be divided into equal intervals of time called accounting periods. The financial statements of a business entity should be prepared for each accounting period.
Accounting Cycle and Transactions
The accounting cycle is the sequence of steps that an entity follows to record, summarize, analyze, and report its financial transactions and events. The accounting cycle consists of the following steps:
Identify and analyze the transactions and events: The first step is to identify and analyze the transactions and events that affect the financial position and performance of an entity. A transaction is an exchange of value between two parties, such as buying goods, selling services, paying salaries, etc. An event is a happening that affects an entity, such as depreciation, loss by fire, etc.
Record the transactions and events in journal entries: The second step is to record the transactions and events in journal entries. A journal entry is a record of a transaction or event that shows the accounts and amounts involved. A journal entry consists of two parts: a debit part and a credit part. The debit part shows the account(s) that increase or decrease on the left side of the journal entry. The credit part shows the account(s) that increase or decrease on the right side of the journal entry. The total amount of debit must be equal to the total amount of credit in each journal entry.
Post the journal entries to ledger accounts: The third step is to post the journal entries to ledger accounts. A ledger account is a record of all the transactions and events that affect a particular account. A ledger account consists of two sides: a debit side and a credit side. The debit side shows all the debits made to an account on the left side of the ledger account. The credit side shows all the credits made to an account on the right side of the ledger account. The difference between the total debit and total credit in each ledger account is called the balance of that account.
Prepare a trial balance: The fourth step is to prepare a trial balance. A trial balance is a list of all the ledger accounts and their balances at a given point of time. A trial balance is prepared to check whether the total debit is equal to the total credit in all the ledger accounts. If they are equal, it means that there are no errors in recording and posting. If they are not equal, it means that there are some errors that need to be located and corrected.
Make adjustments: The fifth step is to make adjustments. Adjustments are entries made at the end of an accounting period to update some accounts and bring them in line with the accrual principle and matching principle. Some examples of adjustments are: accrued revenue, accrued expenses, prepaid expenses, unearned revenue, depreciation, bad debts, etc.
Continuing the article:
Prepare the adjusted trial balance: The sixth step is to prepare the adjusted trial balance. An adjusted trial balance is a list of all the ledger accounts and their balances after making the adjustments. An adjusted trial balance is prepared to check whether the total debit is equal to the total credit in all the ledger accounts after making the adjustments.
Prepare the financial statements: The seventh and final step is to prepare the financial statements. Financial statements are the reports that summarize the financial position and performance of an entity for a given period of time. The main financial statements are: income statement, statement of changes in equity, balance sheet, and statement of cash flows.
Final Accounts and Income Measurement
Final accounts are the accounts that are prepared at the end of an accounting period to determine the net profit or net loss and the financial position of a business entity. Final accounts consist of two parts: trading and profit and loss account, and balance sheet.
Trading and profit and loss account is an account that shows the gross profit or gross loss and the net profit or net loss of a business entity for a given period of time. Trading and profit and loss account consists of two parts: trading account, and profit and loss account.
Trading account is an account that shows the gross profit or gross loss of a business entity from its trading activities for a given period of time. Trading account consists of two sides: debit side and credit side. The debit side shows all the direct expenses incurred to purchase or produce the goods sold. The credit side shows all the direct incomes earned from selling the goods. The difference between the total debit and total credit in the trading account is called the gross profit or gross loss.
Profit and loss account is an account that shows the net profit or net loss of a business entity from its non-trading activities for a given period of time. Profit and loss account consists of two sides: debit side and credit side. The debit side shows all the indirect expenses incurred to run the business. The credit side shows all the indirect incomes earned from other sources. The difference between the total debit and total credit in the profit and loss account is called the net profit or net loss.
Balance sheet is a statement that shows the financial position of a business entity at a given point of time. Balance sheet consists of two sides: assets side and liabilities side. The assets side shows all the resources owned by the business entity. The liabilities side shows all the obligations owed by the business entity. The difference between the total assets and total liabilities in the balance sheet is called the owner's equity or capital.
Income measurement is the process of determining the amount of income earned by a business entity in a given period of time. Income measurement involves distinguishing between capital and revenue items. Capital items are those items that affect the financial position of a business entity, such as assets, liabilities, and capital. Revenue items are those items that affect the financial performance of a business entity, such as revenues, expenses, gains, and losses.
Depreciation, Provisions and Reserves
Depreciation is the systematic allocation of the cost of a non-current asset over its useful life. Depreciation reflects the reduction in value or usefulness of a non-current asset due to wear and tear, obsolescence, passage of time, etc. Depreciation is an expense that reduces the income of a business entity and also reduces the carrying amount of the non-current asset on the balance sheet.
There are various methods of calculating depreciation, such as straight-line method, diminishing balance method, units of production method, etc. The choice of the method depends on the nature and usage of the asset, the expected pattern of benefits, and the accounting policy of the entity. The accounting standard on depreciation provides guidance on how to estimate the useful life, the residual value, and the depreciation method of a non-current asset.
Provisions are liabilities of uncertain timing or amount. Provisions are created to recognize the present obligations of a business entity arising from past events that are expected to result in an outflow of economic benefits. Provisions are estimated based on the best available information and judgment. Some examples of provisions are provision for bad debts, provision for warranty, provision for taxation, etc.
Reserves are amounts set aside out of profits for a specific purpose or to meet a future contingency. Reserves are created to strengthen the financial position of a business entity or to comply with legal requirements. Reserves are classified into two types: revenue reserves and capital reserves. Revenue reserves are created out of revenue profits and can be distributed as dividends. Capital reserves are created out of capital profits and cannot be distributed as dividends. Some examples of reserves are general reserve, dividend equalization reserve, capital redemption reserve, etc.
Company accounts are the accounts that are prepared by a company, which is a type of business entity that is registered under the Companies Act and has a separate legal identity from its owners. A company can be classified into two types: public company and private company. A public company is a company that can offer its shares to the public and has a minimum of seven members. A private company is a company that cannot offer its shares to the public and has a maximum of 200 members.
Company accounts involve the following aspects:
Formation of a company: Formation of a company involves the following steps: promotion, incorporation, subscription, commencement of business.
Share capital: Share capital is the amount of money raised by a company by issuing shares to its members. Share capital can be classified into two types: equity share capital and preference share capital. Equity share capital is the share capital that carries voting rights and variable dividends. Preference share capital is the share capital that carries preferential rights in terms of repayment of capital and fixed dividends.
Issue of shares: Issue of shares is the process of offering shares to the prospective investors for subscription. Issue of shares can be done at par, at premium, or at discount. Issue of shares can also involve under subscription, over subscription, pro rata allotment, calls in arrears, calls in advance, forfeiture, reissue, etc.
Buyback of shares: Buyback of shares is the process of purchasing its own shares by a company from its existing shareholders. Buyback of shares can be done for various reasons, such as to improve earnings per share, to enhance shareholder value, to prevent hostile takeover, to utilize surplus funds, etc.
Ledger preparation: Ledger preparation is the process of recording the transactions and events related to company accounts in ledger accounts. Ledger accounts for company accounts include share capital account, share allotment account, share call account, bank account, forfeited share account, etc.
In this article, we have provided you with a comprehensive overview of financial accounting 2 pdf notes that cover all the important topics and concepts that you need to know. We have also provided you with some links to download free pdf notes from reliable sources. By reading this article, you have learned:
The meaning, objectives, branches, and users of financial accounting
The accounting principles and standards that guide the preparation and presentation of financial statements