Financial Accounting

842 Pages·2011·50.634 MB·English

by  KHATRI D

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About the Author
Dhanesh K Khatri, MBA, PhD (Finance), PGDFM, has over 21years of teaching
and professional experience. He has been working as a faculty at Institute of
Management Studies, B J S Rampuria Jain College, Bikaner, for the last 17 years,
teaching papers in fi nance and accounting to the MBA and other postgraduate
students. At present, he is the Head, Department of Finance.
Dr. Khatri started his career with Stock Holding Corporation of India Ltd.,
Mumbai (SHCIL) in the year 1989 and has had a good exposure to practical
aspects of fi nancial accounting, money market and capital market operations,
with special focus on the functioning of depository systems.
He has been a visiting professor at many reputed institutions: Institute of
Agri-Business Management, SKRAU, Bikaner; Faculty of Management, MNIT,
Jaipur; Faculty of Management Studies, MLS University, Udaipur; Faculty of Management, JECRC, Jaipur;
ICAI Bikaner chapter, among others.
His articles on contemporary issues and research on capital market and money market have been
published in leading journals like Journal of Indian Accounting Association; Prabandh (MLS University,
Udaipur); Bikaner Journal of Management etc. He has also published two titles—Security Analysis and
Portfolio Management andInvestment Management and SecurityAnalysis. He continues to pursue research
in the areas of accounting, fi nance, capital market, and money market. He has completed two minor research
projects sponsored by UGC and has also organized one national level seminar, sponsored by UGC.
He has successfully guided PhD students in the past and more students are currently doing their research
under his supervision.
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Dhanesh K Khatri
Head—Department of Finance
Institute of Management Studies
B J S Rampuria Jain College, Bikaner
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RQXQCRAWDLRCC
To
my wife Annu,
daughter Prachi,
and son Aaditya

Foreword
Financial accounting is a core course for business management students at post graduate level, taught either
separately or in combination with other subjects. Acquaintance with the basic concepts and applications of
accounting is a prerequisite for any successful business manager.
Dr. Dhanesh K Khatri’s book on Financial Accounting is a refreshing effort to present in a simple and lucid
manner, the core concepts and applied aspects of this branch of accounting. It is being designed specifi cally
for the business management students, many of whom do not have a previous knowledge and understanding
of the subject. The content and features of the book will help the students in having conceptual clarity in the
subject and in excelling during their course of studies.
The book also provides adequate exposure for proper application of the subject matter in day-to-day
business activities, which students would use after completing their respective courses. It provides a
comprehensive treatment of accounting principles, techniques, and practices. A good number of examples,
illustrations, and cases further aid and strengthen the comprehension. It includes cases based on the Indian
environment. Chapter-end exercises in the form of multiple choice questions, unsolved problems, and so on,
are also included. Relevant accounting standards have been taken into account in various chapters. Thus it
will also help the teachers of this subject in taking up this subject in class in an easy-to-understand manner.
With rich pedagogy and supplements, this book promises to offer a “complete package” on the subject. As
such, students of other disciplines such as commerce will also fi nd the book as a useful resource material.
Dr. Khatri has a sound background of teaching and research in the fi eld of accounting for more than two
decades. I congratulate the author for this scholarly work undertaken, and hope that the book will prove
useful to the target audience. It is my pleasure to pen down the foreword for this promising and learner
friendly treatise.

Preface
Financial Accounting is a core course offered to the students of management and commerce stream. Offered
under different names and different combinations, this course is one of the pillars for successful completion
of the academic as well as professional courses in this area.
There are a number of books on this subject in the market today, but fi nding a book with the right balance
between presentation of theoretical concepts and practical and numerical aspects of the subject is a challenging
job. It is this gap that the present book attempts to address. It discusses the core concepts of fi nancial
accounting with the right mix of theory with practical applications in a student-friendly manner. Appropriate
numerical examples and case studies, along with a rich pedagogy, offer students a good learning environment
in the subject. It blends theory and practice in a logical sequence to ignite readers’ mind for thinking, thereby
providing a good base in the subject to all the students, especially those from the management stream.
THE TEXT
The ensuing text contains 19 chapters and three appendices, giving a wide coverage from the elementary
level topics to the high-level application of accounting theory, concepts and practices followed across the
globe. Most recent changes in the related areas (effective from 1st April, 2011) have been discussed in
Appendix III.
Given below is a table, summarizing the coverage across various chapters and appendices in the book.
Chapter 1 Different forms of business enterprises, types of capital, accounting system
and elementary concepts about the presentation of fi nancial accounts.
Chapter 2 Introduction to fi nancial accounting, management accounting and cost
accounting, accounting concepts, and accounting conventions.
Chapter 3 Concepts and provisions of Indian and international accounting standards
relating to the classifi cation and measurement of assets and liabilities, thus
providing a base for further understanding and interpretation of fi nancial
statements.
Chapter 4 Foundation of accounting i.e., mechanism of double entry system, recording of
monetary transaction in journal/subsidiary books, posting to ledger accounts,
preparation of trial balance, and opening and closing entries.
x Preface
Chapter 5 Mechanism for preparing fi nal accounts – fi nancial statements, rectifi cation of
errors, provision for depreciation, provision for doubtful debts, adjustment in
fi nal accounts and preparation of adjusted trial balance.
Chapter 6 Fundamentals of fi nal accounts – fi nancial statements of limited liability
company (LLC), managerial remuneration and divisible profi ts of a corporate
entity.
Chapter 7 Financial performance analysis – ratio analysis (which is a prominent tool to
evaluate fi nancial health of a business enterprise), calculation of the ratios,
mechanism to use these and its importance for different stakeholders and
discriminant analysis.
Chapter 8 Mechanism of preparing fund fl ow statement and the mechanism of drawing
inferences for different stakeholders.
Chapter 9 Provisions of Indian and international accounting standards relating to the
preparation of cash fl ow statement and the fundamentals of making inferences
from the statement.
Chapter 10 Mechanism for inventory valuation and its control, basic input relating to
accounting for inventory, and provision of AS–02 relating to valuation and
accounting for inventory.
Chapter 11 Provisions of Indian and international accounting standards relating to
accounting for capital expenditures – fi xed assets – property, plant and
equipment, recognition of intangible assets and impairment of assets.
Chapter 12 Recognition and measurement of liabilities, provisions of accounting standards
regarding liabilities, particularly post-retirement employee benefi ts and
contingent liabilities.
Chapter 13 Complex and new subject of accounting i.e. accounting for derivatives – option,
futures and forward, provisions of accounting standards relating to foreign
exchange transactions and the mechanism of incorporating these transactions
in the fi nancial statements.
Chapter 14 Mechanism relating to accounting for issue of shares and debentures,
fundamentals and accounting mechanism relating to forfeiture of shares and
redemption of debentures.
Chapter 15 Accounting mechanism for business combination – merger and amalgamation,
provisions of IFRS–03 and AS–14 (as well as Ind – AS 103) concerning
business combination.
Chapter 16 Mechanism for preparing consolidated fi nancial statements and corporate
relationship – associate companies, holding and subsidiary companies.
Chapter 17 IFRS and its implementation across the globe, IFRS and its comparison with
Indian GAAP.
Chapter 18 Lease fi nancing, its types, and mechanism of leasing; accounting mechanism
applicable for lessor and lessee.