Financial Concepts for Loans and Real Estates

Before proceeding to the budgetary control we should explain 1st budget. According to ICMA London Budget has been defining as, “A financial and/ or quantitative statement prepared and approved prior to a defined time of the policy to be pursed during that period for the purpose of attaining a given objective.”

Budgets mainly work for:

Preparing statement in terms of money or equivalent of money

It is for prior to a future period of time

The objectives to be attained and the policies to be adopted are laid down in advance.

Like it about the budgetary control ICMA London writes, “The establishment of budgets relating to responsibilities of executives to the requirement of a policy and continuous comparison of actual with budgeted results either to secure by individual action the objectives of that policy or to provide a basis for its revision.”

Now, we will define alls along with one – budget, budgeting and budgetary control:

About it we will look some references from MBA books of SMU, “Budget is the target or the objective of each section of an organization. Budgeting is the process of preparing the budgets. Budgetary control is the technique and process of fixing the targets, preparing the budgets and using them as an effective tool of planning and control.”

Most simply now we can define the objectives of budgetary control as:

Planning the policies

Coordinating activities

Controlling costs

Increases efficiency

Like this there involves some steps also in budgetary control are:

Preparation of organization chart

Establishment of budget centers

Appointment of budget committee

Preparation of Budget Manual

Determination of Budget Period

Determination of Key Factor or Budget Factor

After the huge discussion about budgetary control we can know about its some limitation also which are:

Its limitations show that it is changeable.

Budgets may kill managerial initiative.

About it people says that it is costly and time consuming. However, it is decisive chapter about accounting. For more details read continuously the financial blog, I will write the chapter with more examples.

Management accounting is not only for the record keeping but also it has broader aspects. The managers use the financial statements as resources to make decision in the field of accounting. About the management accounting we can take a look from MBA book of SMU, “Management accounting is the process of identifying, measuring, accumulating, analyzing, preparing, interpreting and communicating information that helps managers to fulfill organizational objectives.”

Here with the definition of management accounting we can say it is for the fulfill of organization objectives by the managers to use all the financial statements and resources.

Objectives of Management Accounting:

Scope of management accounting

Need for financial statements analysis and inter-firm comparisons

Relevance of cost analysis – overhead analysis, job cost analysis and process cost analysis

Relevance of marginal cost and C.V.P. analysis for short-run decision-making

We should know that all the management process single and most upper goal is decision making. So, decision-making is known as the nucleus of management process. Here we will look a chart to understand of decision-making process:

Meaning and Scope of Management Accounting:

About the meaning of management accounting Charles T. Horgren writes, “Management accounting is the process of identifying, measuring, accumulating, analyzing, preparing, interpreting and communicating information that helps managers to fulfill organizations objectives.”

As I have already mentioned that management accounting is not only the process of keeping records. Records keeping is the process of data accumulation however management accounting is the decision making process. So, the management accounting scope has broader then financial statements and record keeping.

About the evaluation of management accounting the history says that it comes with the industrial revolution from the 18th century. Management accounting is the results of capitalist system.

Management accounting has been divided into four parts – book keeping, financial accounting, accounting and cost accounting and social responsibility accounting.

Like this management accounting has one more main part that is MIS (Management Information Systems). MIS for management accounting is most important process because it collects data and gives the right way to analysis that data to take good decisions by managers.

At last we can give some facts which are necessary in functions of management accounting:

Formulation of a business plan

Implementation of the plan

Designed to achieve the goals of the plan

Formulation of business plans

These are the main function of management accounting an organization. However, we have already discussed on the management accounting chapter. Now, I think I will cover some more facts in the next chapter of financial management accounting chapter.

1st thing is trail balance purpose. It is prepared to check not only arithmetical accuracy of ledger balances but also to take an overview of the operations of the business as on a particular date. It is prepared on the basis of weekly, monthly, quarterly, half yearly and yearly. A trail balance contains the elements of financial statements – assets, liabilities, equity, income and expenses.

How to Prepare Trail Balance

I will give an example of trail balance preparation. We make an assumption that the capital of M/s XYZ as on 1st August 2006 was Rs. 1, 05,000 then the format will be:

Trail Balance As on 31st August, 2006

This is not solved. It is only format of trail balance sheet.

Final Accounts

Final accounts popularly known as the profit and loss account and the balance sheet are together called the final accounts.

Now, I want to let you know about the terms of trail balance and final accounts.

Error of Principle is the term of balance accounting and it is known as a principle and concepts. It is an error and it is committed because of lack of proper knowledge of accounting principles or concepts of finance.

Like it there are some more – error of omission, error of commission, compensation error, trading account, profit and loss account, profit and loss appropriation account, balance sheet, suspense account, gross profit and net profit. These terms are commonly known for trail balance and final accounts chapter. I will write about in the further chapter as more details.

After having completed primary books chapter now we will discuss here about secondary books from the financial accounting chapter. We already have known the nature, works and format for primary books so; I think here we should start with the introduction of secondary books in the chapter.

When we discussed about secondary books, a question comes in our mind that what is the need of secondary book? Here is the definition of secondary books from the MBA books, “To generate information out or raw data, these are to be classified in such a manner that necessary information is readily available. It calls for identifying the nature of various transactions recorded in the primary books and giving an appropriate name to an identical class of transactions and, finally, re-recording the transactions in another set of books according to the defined class. That ‘another set of books’ is called secondary books. It is ‘secondary’ because transactions are recorded for a second time.” I think now it is clear that secondary book is needed for record primary second time.

In another word we can say secondary book is a ledger book. About the work of secondary book mainly it is defined for salary account and whatever you spent in a financial account has been recorded in secondary book. In the term of secondary book we can say ledger is a set of accounts which is defined as per the requirements of an organization.

Types of Secondary Books

After the introduction of secondary books we have to read about it types. Secondary books broadly have divided into two parts – Main Ledger and Subsidiary Ledger. In the last Subsidiary ledger has been divided into three parts – General Ledger, Debtors Ledger and Creditors Ledger. Here is a diagram which will clear you about the types of secondary books:

Here is most important ledger is “General Ledger” because it is self sufficient in the terms of all entries. All the data of primary books has been entered in the general ledger of secondary books. However, Debtors ledger has separate accounts for each customer to show the transactions. Similar to it creditors ledger has a separate account for each supplier to show the transactions.

Do you know the need of subsidiary ledgers? It is for reducing the burden on the main ledger.

In the secondary books there are some more things which have to study us that are – account, sundry debtors account, sundry creditors account and balancing.

At last, the chapter secondary books is full of the example of all the entries format however all the format will be published by me further.

In the 1st chapter of financial accounting we already have discussed about the financial terms and definition. Here in the second chapter of financial accounting I have to clear and define about the primary books.

Primary book is a first entry or prime entry book of financial accounting. It is known as journals also. Primary books the process of transaction which happens 1st time during the buy and sell.

Objectives of Primary Books:

Ground Rules of Journal Entry

Various Types of Journals

Cash Book

These are three main elements of primary book which we will know after studying the chapter of primary books.

I will explain some rules of Ground Journalisation here which are:

1. Increase in assets and decrease in liabilities (also equity) = Debit
2. Decrease in assets and increase in liabilities (also equity) = Credit
3. Expanses and losses = Debit
4. Income and Gains = Credit

For the format of typical journal we normally use this:

Types of Journals

Journal can be defined as:

1. Purchases Day Book: the book records credit purchase of merchandise.
2. Sales Day Book: it records credit sale of goods.
3. Return Outward Book: The book records goods returned to the supplier(s).
4. Return Inward Book: It records good returned by the customer(s).
5. Bills Receivable book: the book records bills accepted by customers.
6. Bills Payable Book: the book records bills raised by suppliers.
7. Cash Book: The book records cash (and bank) receipts and payments.
8. Journal Proper: the book records all residual transactions.

Now, here I will give you some look of the journal book format which is necessary for primary book.

Purchases Day Book Format:

Sales day book, Return Outward book and Return Inward Book format are the same from purchase day book format.

So, I am going to let you know about the Bills Receivable book format now. Here is the format:

Bills Payable Book format is also similar to above but there are some differences also which are:

Cash Book Format

In the last journal proper: it is known as orphan entries. If the transaction does not find a place in any of the above mentioned seven books then it will be recorded in the journal proper. In the journal proper the events are included:

1. Credit purchase and sale of assets.
2. Opening entries
3. Adjustment and Rectification Entries
4. Closing Entries

These are the primary knowledge of primary book entry in the financial accounting book which is on based on my own experience.

I have started this chapter from the theoretical point of view. So, there need to introduce about the financial accounting. It is an important part of management organization to control over the resources. In another way we can say that to run a business entity depends upon many resources like – land, labour, capital and management along with many persons like – engineer, MBAs and accountant to find out the financial performance of that entity. In the conclusion we can say without accounting we can not communicate with the outside world. People says it is the language of business but I think it not necessary of only business activities but also, it is also important for non-business activities also like – accounting for charitable institution, accounting is school or family etc.

In an organization accounting broadly known for:

1. Cost planning and cost control on the evaluation of people and activities.
2. Brand, products and customer categorization.
3. Strategic and tactical decisions for managers
4. Financial statements to investors, government authorities and other parties through external reporting.

Our goal through the financial accounting concepts:

Concept of accounting

Meaning of Accounting Trail

Accounting equation

Now we will discussion on accounting concepts. Theories show that “Accounting was born without notice and reared in neglect.” I also admit that accounting was not theorized 1st it was practiced 1st.

The Entity Concept

For a business man his business is an artificial entity distinct from its proprietor(s). A business man can have their own real estate, accounts, an other assets and he can be in partnership, proprietorship or corporate entity but he is not the whole entity of all the accounts. There can be single or sole entity depends on the business and distribution.

Double Entry Accounting

The accounting term has been defined by the American Institute of Accountants which is now known as American Institute of Certified Public Accounts. According to that accounting was, “the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, an interpreting the results thereof.”

The main aspect of double entry is credit and debit. The crux of the matter of double entry is “each transaction has two aspect debit and credit equally”.

With the accounting process these sequences of activities process run:

Transaction/Event

Preparation of Vouchers

Recording in the Primary Books

Posting in the Secondary Books

Preparation of Trail Balance

Preparation of Presentation of Financial Statements

One more things have involved with the financial accounting that are financial statements that are the end products of the accounting process. In the financial statements balance sheet are main thing which contain three elements – Assets, Liability and Equity.

In the summary of the chapter I want to explain some financial terms that are:

The Accounting trail is the initial process of financial statements.

The Accounting Equation is the process of balance sheet of different elements.

Debit comes from the Latin word ‘debeo’ which meaning is ‘owned to me, the proprietor’.

Credit is also comes from the Latin word ‘credo’ which meaning is ‘trust or believe’.

These are the some main terms of financial accounting which commonly comes. Along with assets, liability, income, expenses and equity also involve in terms of financial accounting.