10 steps to learn Financial Accounting

We will have a series of blogs to understand the Financial Accounting process followed mostly in small / medium scale manufacturing Private Limited Companies. This will be of help students or anybody who wants to learn accounting and have something to refer back in future. You can refer the video given here to understand why is it important to learn Practical Accounting.

Accounting is a vast subject and can not be learnt in 15 – 20 hours. We will follow a step by step approach. This will help to understand the concepts and logic. After learning theory we will apply it. So the topics covered will be as below –

Step 1 – Understand the types of Companies in India with reference to Company’s Act 2013.

Step 2- Introduction to Tax structure in India.

Step 3 – Introduction to Accounting system, Concepts and Principles.

Step 4- Understand the End to end process of recording the business transactions.

Step 5- Get the knowledge of various types of entries.

Step 6- Do Journal entries and ledger posting for various transactions.

Step 7 – Post the  Adjusting entries.

Step 8- Take the steps in finalization and closing the books of accounts .

Step 9- Prepare the Financial Statements

Step 10- Analyze the  financial statements for control purpose.

The above will help to understand the accounting system. As we know , the Accountant has to follow the Generally Accepted Policies & Procedures for recording the monetary business transactions. The Company accounts are governed by the Company’s Act 2013. The Act lays down the Schedules to prepare financial statements.

This series of blog will help beginners as well as experienced accounts professionals to understand the end to end accounting process. The Double Entry Accounting Rules are uniform across the world.

Before we start to learn accounting process it is important to get familiar with Company’s Act 2013 because it is necessary to understand the meaning of company, types of companies, the ownership of capital, various terms forming part of share capital, Reserves & Surplus, the format of financial statements, depreciation schedule etc.

Similarly almost all the business transactions come within the purview of Direct or Indirect Tax, it becomes necessary to have the knowledge of Taxation also. All this has a direct impact on the accounting entries which the Accountant has to record. If you are just graduated from your college then start learning MS-Office (ie Word , Excel, PowerPoint) and accounting package like Tally ERP-9. This will help you to get a job.

Step 1 : To begin with, let’s get some knowledge of Company’s Act 2013.

Company’s Act defines a “company” in section 2(20) as a company incorporated under this Act or under any previous company law. A company is “an artificial person, having a separate legal entity, with a perpetual succession, a common seal (if any), and a common capital compromised of transferable shares and limited liability.”

The Act lays down the following types of companies –

I) Companies on the basis of liability-

A) Unlimited Liability Company-

      • May or may not have share capital .
      • Liability of the members is unlimited proportionate to their interest.
      • Can be a public or private company.

B) Companies limited by guarantee :

      • Liability of the members in the event of winding up of the company , is limited to the amount undertaken by them .
      • Members are guarantors of company’s debt up to the agreed amount.
      • Clubs , trade associations , research organizations are examples of such companies.

C) Companies limited by shares-

      • Liability is limited to the extent of unpaid amount of the shares if any., held by the shareholders.
      • The unpaid liability can be asked during the continuation of the company or winding up of the company.
      • If the shares are fully paid, shareholders do not owe anything to the company.
      • These can be Public limited company like Reliance Industries, Mahindra & Mahindra.
      • or a Private Limited company.

II) Types of companies on the basis of Incorporation-

A) Statutory Companies-

      • With the intention to provide public services, these are formed by the special Act in Parliament or state laws.
      • National Highway Authority, Reserve Bank of India etc are examples of such companies.

B) Registered Companies-

      • These are companies Registered under the Company Act.
      • These companies come into existence when the company gets a certificate of incorporation

Apart from above main types, there are following types of companies –

a) Public Company- The shares & debentures of the public company are freely  transferable to general public and these are traded on a stock exchange and it is required by the Law to add the words “Limited” at the end of its name. If a private limited is a part of public company then it will also be known as public company.

b) Private Company– The minimum of two shareholders are required to form the company and the maximum number of shareholders is 200. The shares of this type of company have restricted right to transfer the shares.

c) One Person CompanyHere only one person is a member of the company & he can also be Director over there. There is only one shareholder and he has to mention a nominee at the time of registration of the company.

d) Domestic Company A company registered and formed in India is known as an Indian Company.

e) Foreign CompanySection 2(42) of the Company’s Act defines the “foreign company” as any company or body corporate incorporated outside India and which has a place of business in India whether by itself or through an agent, physically or through electronic mode; and conducts any business activity in India in any other manner.

f) Small Scale Company:  “small company” as defined by Section 2(85) of the Company’s Act is a company, other than a public company whose paid-up share capital does not exceed 50 lakh rupees or such higher amount as may be prescribed which shall not be more than 10 crore rupees; and the turnover of which as per profit and loss account for the immediately preceding financial year does not exceed 2 crore rupees or such higher amount as may be prescribed which shall not be more than 100 crore rupees.

There are several exemptions and privileges available to such companies. But the provisions of this section are not applicable to the companies registered under section 8, or a body corporate, company governed by Special Act or it is a holding or subsidiary company.

The Accounts & Finance professionals have to keep themselves aware about the regulatory, statutory reforms and also the social-economic situations, calamities etc because all such things hamper the functioning of business so the accounting entries will have to be done for recording losses, damages. One such example would be the present COVID-19 pandemic. The lockdown & sluggishness in business is huge but it is extraordinary loss for the business. The journal entries for such extraordinary losses need to passed in the books of account. Here is blogpost about the Packaging and printing inks – COVID Impact written by Ms. Preeti Agarwal. DO read this post and understand the situation from digital marketing point of view also.

In the next blog, we will take a look at Taxes. See you there, till then bye.

Jayashree

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