Financial Accounting VU Book– MGT101 Flashcards Preview

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Flashcards in Financial Accounting VU Book– MGT101 Deck (18):

What is Financial Accounting?

It is the maintenance of daily record of All financial transactions in such a manner that it would help in
the preparation of suitable information regarding the financial affairs of a business or an individual.


What is a Budget?

Budget is a plan of income, expenses & other financial operation for a future period.


Single entry accounting/Cash accounting.

This system records only cash movement of transactions and that too up to the extent of recording one
aspect of the transactions.
This means that only receipt or payment of cash is recorded and no separate record is maintained (about
the source of receipt and payment) as to from whom the cash was received or to whom it was paid.


Double entry book keeping/Commercial accounting.

Double entry or commercial accounting system records both aspects of transaction i.e. receipt or
payment and source of receipt or payment. It also records credit transactions i.e. recording of Electricity
Bill or accruals of Salary payment etc.


Cash Accounting

It is the accounting system in which events are recorded when actual cash / cheque is received or paid.


Accrual Accounting

It is the accounting system in which events are recorded as and when they occur.
This means that income is recorded when it is earned and expense is recorded when incurred i.e. the
organization has obtained the benefit from it. Consider the above example. The electricity is utilized in
the month of January so the expense should be recorded in the month of January. Similarly the company
that is providing the electricity should record the income in the month of January.



Income is the value of goods or services that a business charges from its customers



Expenses are the costs incurred to earn revenue


Profit or Net Profit

Net income or Net Profit is the amount by which the income exceeds expenses in a specific time period.

Profit is what is left of the income after all expenses (paid and incurred) have been deducted from it.
Net Profit = Income – Expenses


Capital and Revenue Expenses

In accounting the expenses that provide benefit immediately are called “Revenue Expenses” and
those expenses whose benefit last for a longer period are called “Capital Expenses



Liabilities are the debts and obligations of the business



It signifies the receiving of benefit. In simple words it is the left hand side. DEBIT is a record of
an indebtedness; specifically an entry on the left-hand side of an account constituting an addition to an
expense or asset account or a deduction from a revenue, net worth, or liability account.



It signifies the providing of a benefit. In simple words it is the right hand side. CREDIT, in
accounting, is an accounting entry system that either decreases assets or increases liabilities; in general, it
is an arrangement for deferred payment for goods and services.



An accounting system keeps separate record of each item like assets, liabilities, etc. For example, a
separate record is kept for cash that shows increase and decrease in it.
This record that summarizes movement in an individual item is called an Account


Rules of Debit and Credit for Assets

i.Increase in Asset is Debit
ii. Decrease in Asset is Credit


Rules of Debit and Credit for Liabilities

iii. Increase in Liability is Credit
iv. Decrease in Liability is Debit


Rules of Debit and Credit for Expenses

v. Increase in Expenditure is Debit
vi. Decrease in Expenditure is Credit


Rules of Debit and Credit for Income

vii. Increase in Income is Credit
viii. Decrease in Income is Debit