Accounting for ManagersIntroduction to Financial Accounting: Unit- I
Meaning: Counting – reckoning- recounting Account: Dr. Cr.
Book Keeping Vs. Accounting Book keeping is the systematic recording of financial and economic transactions, while as accounting is the analysis and interpretation of book keeping records.Definition: Accounting is the art ofrecording, classifying and summarizing in asignificant manner and in terms of moneytransactions and events which are, in part atleast, of a financial character, andinterpreting the results thereof.
Characteristics/ attributes: Only financial transactions/events Records should reflect the importance ofthe transactions are recorded It should be recorded in such a way sothat the end users are able to understand it.
Basic Assumptions of Accounting: Accounting entity assumption Monetary unit assumption Accounting period assumption and Going concern assumption
The Accounting Process:Identification of transactionPreparation of business documentsRecording of transaction in JournalPosting of ledgersPreparation of unadjusted Trial BalancePassing of Adjusting Entries Profit & Loss AccountPreparation of adjusted Trial Balance Balance Sheet
The Indian Accounting standards,International Accounting Standards,forming the theoretical base ofaccountancy, and the Double EntryBookkeeping for recording thetransactions provide the practical base ofthe system.
Financial Statements/ Final Accounts: Manufacturing Account/ Trading Account Profit and Loss Account and Balance Sheet
Objectives of Accountancy:• Means of recording the monetary transactions andevents• To know the earnings of the organization• To identify the assets and liabilities of theorganization• Compulsory to maintain by certain government andregulatory bodies.• To help in financial decision making• To provide the information to the investors,customers and employees.
The Major Purposes of these statements are: To providing information in decision making To depict the financial health of theorganization To help in policies formulation To enable the management to dischargetheir obligations
Financial Accounting consists of creationof financial information and thesubsequent use of such information.Three steps in creation: Recording What to record When to record How to record (double entry system) What value to be recorded- historical cost, PV etc.
Classifying: income , expenses etc. Summarizing: trial balance Classification of Accounting: AccountingFinancial Cost ManagementAccounting Accounting Accounting
Major Financial Statements: Profit and Loss Account Balance Sheet Cash Flow Statement
Financial Analysis is Meant for whom:Usually it is carried out to study thefinancial position of the organization fromthe point of view of: o Shareholders o Debentures holders o Banks (for working capital)
o Financial Institutions (like State FinanceCorporation, IDBI, Etc.)o Statutory Agencies (Stock exchanges,Registrar of Companies)o Others ( potential buyers of theorganization in takeovers or mergers)
Format of Manufacturing Account:Particulars Amt. Particulars Amt.To opening stock of WIP **** By sale of scrap ****To R M ConsumedOpening stock RM **+ Purchase **+ Carriage inward **+ Carriage inward **+ Freight inwards **- Return outward **- Closing stock ** ****To Wages ****To salaries of works Mgr. ****To power, elect. Etc. ****To fuel ****
Continued...Particulars Amt. Particulars Amt.To postage & telephone ****To depreciation on: Plant & Machinery ** Factory L & B ** ****To Repairs to:Plant & Machinery **Factory L & B ** ****To Insurance on : By Trading Account ****Plant & Machinery ** (Cost of goods producedFactory L & B ** **** transferred)To rent & taxes **** By closing stock of WIP ****To general expenses ****To royalty on production ****
Format of Trading Account:Particulars Amt. Particulars Amt.To opening stock ** By sales **+ Purchase ** - Sales return ** ****- Purchase return ** ****To direct expenses **** By abnormal loss of stock ****To Wages & salaries **** By gross loss transferred **** to P & L A/c. (Balancing figure) ##To freight inwards ****To carriage inward ****To cartage inward ****To other direct exp. ****To GP transferred to P & **** By Closing stock ****L A/c. (Balancing figure)
In the books of … XYZ Co. Ltd. Profit and Loss Account for the year ended ……Particulars Amt. Particulars Amt.To GP b/d ## **** By G P b/d ## ****To salaries & wages **** By interest earned ****To rent rates & taxes **** By commission earned ****To fire insurance premium **** By rent earned ****To repairs & maintenance **** By profit on sale of FA ****To depreciation **** By income from invest. ****To Audit fees **** By sale of scrap ***To bank charges **** By miscellaneous **** incomeTo legal charge ****
Particulars Amt. Particulars Amt.To bad debt ****To packing expenses ****To interest on loan ****To loss by theft ****To loss by fire **** By net loss transferred **** to capital account (balancing figure) ###To loss by embezzlement ****(misuse)To net profit transferred to ****capital account (balancingfigure) ### **** ****
In the books of XYZ Co. Ltd. Trading and Profit & Loss Account for the year ending……Particulars Amt. Particulars Amt.To opening stock (WIP& FG) *** By Sales ***###To manufacturing expenses *** By closing stock ***To GP c /d (balancing figure) **** ****To administrative exp. *** By GP b/d ***To marketing exp. ***To depreciation ***To interest ***To provision for tax ***To NP c /d *** ***** ***** Continued..
Particulars Amt. Particulars Amt.To dividends *** By balance b /f (last *** year’s)To transfer to GR *** By net profit for the *** year (balancing figure)To balance c /d (balancing *** ***figure) transferred to B/S
Generally accepted format of Income StatementProfit and loss Account of XYZ Co. Ltd. For the year ended….. Particulars Amt. Income: Sales ** Other income (loss) ** *** **** Expenditure: Materials & other expenditure ** Interest ** Depreciation ** *** PBT **** - Provision for tax *** PAT ****
-Prior period adjustment ***Profit available for appropriations ****Appropriations: Investment allowance reserves ** Dividends ** General Reserve ** ***Surplus carried to Balance Sheet ****
Contents of Balance Sheet ASSETS:Fixed assets: Tangible (L& B, P &M) Intangible (Good Will, Patents, Trademarks)Investments: Long term (Equity in other firm) Short term (short term financial securities).Current Assets, Loans and Advances
Miscellaneous Expenditure (preliminary expenses)Profit and Loss Account (Losses)Contingent assets (position for a patent applied for out of the firm’s own research)
LIABILITIES: Share capital: Equity Preference Reserve and surplus Revenue Reserves ( accumulated retainedearnings from the profits of normal business e.g. generalreserve, dividend equalization reserve, Capital Reserves (arise out of gains from nonrelated business e.g. premium on issue of shares, gain onrevaluation of assets etc.
Secured Loans (debentures, loans from financialinstitutions, etc.) Unsecured Loans (fixed/public deposits, loans andadvances from promoters etc.) Current Liabilities and Provisions: (creditors,tax provision, short term loans, accruals/ unpaidexpenses, advance payments received from customers. Contingent Liability: (arrears of dividends oncumulative preference shares, bills of exchangediscounted, suit for damages against the company whichit is defending.)
Balance Sheet of ABC Co. Ltd. as on 31.03.05Liabilities Amt. Rs. Assets Amt. Rs.Share capital: Fixed Assets:Authorized: Building :5000 shares of Rs. 100 5,00,000 Cost 2,90,000each -Depr. 50,000 2,40,000Issued: Machinery:2000 shares of Rs. 100 2,00,000 Cost 1,00,000each - Depr. 55,000 45,000Subscribed: 2000 @100 2,00,000Reserves & Surplus: Investments:General reserve: 12000 shares of A 1,20,000Opening balance 40,000 Ltd. @ Rs.10each,+ addition 7,600 47,600 Rs. 8 paid upP & L A/c. 43,400
Liabilities Amt. Rs. Assets Amt. Rs.Secured Loans: Current Assets,14% debentures 2,00,000 Loans & Advances:Current Liabilities & i).C.A.:provisions: Loose tools 23,000i). C.L.: Closing stock 90,000Sundry creditors 92,000 Debtors: 1,25,000Interest accrued but not 14,000 -provision 5,000 1,20,000due on debentures Bank 30,000Outstanding salaries 2,000 Interest accrued on 2,000Unclaimed dividend 5,000 investment.ii). Provision: ii.) loans &Proposed dividend advances: 50,000Provision for tax Advance income tax. 76,000 60,000 7,30,000 7,30,000
Contents of Income Statement: Cost of Goods Sold Gross Profit Operating Expenses Operating Profit Non-operating Income (income frominvestments and gains from disposal of assets) PBIT
Users of Financial Statements: Internal Users External UsersManagement Group: Financing Public Group: Group:Board of Directors Govt. Agencies InvestorsPartners Employees LendersManagers Customers SuppliersOfficers Others – academicians, researchers, analysts, etc.
Generally Accepted AccountingPrinciples (GAAP), Conventions andConcepts:Accounting concepts are ideas and assumptionswhich are fundamental to accounting practice.Conventions are based on what is practicable andbased on logical considerations. E.g. dividing acentimeter into ten equal parts is a convention rather thana concept.
Generally Accepted AccountingPrinciples which are followed inseveral countries are as follows: Materiality Concept: True and fair preparation. Allrelatively relevant items, the knowledge of which mightinfluence the decision of the users of the financialstatements should be disclosed in the financial statement.Which information is more relevant than other is largely amatter of judgment.Information is material if its misstatement could influencethe economic decisions of user.Both, quantity and quality of misstatements need to beconsidered in determining materiality.
Money Measurement Concept: Only monetarytransactions are recorded and not the events/transactionswhich can not be converted in to money e.g. death of thechairman of the organization. Cost Concept: Cost price to be recorded not marketprice. Time period concept: Income or loss is measuredfor a specified interval of time, called the accountingperiod. Conservatism Principle: It requires that in thesituation of uncertainty and doubt, the business transactionsshould be recorded in such a manner that the profits andassets are not overstated.
Consistency Concept: consistency should bemaintained in evaluating assets. Business Entity Concept: Going Concern Concept: Duality or Accounting EquivalenceConcept: Increase in liability and decrease in assetsrepresent sources of funds, and vice versa. Owners’equity + outside liability = Assets. Realization Concept: Timeliness Principle:
Matching Concept: It is an accrual concept since,it disregards the timing and the amount of actual cashinflow or cash outflow and concentrates on theoccurrence of revenue and expenses. If revenue isrecognized on all goods sold during a period, cost ofthose goods should also be charged to that period. Thisconcept calls for adjustments to be made in respect ofprepaid expenses, outstanding expenses, accruedrevenue. It is wrong to recognize revenue on all sales, butcharge expenses only on such sales as are collected incash till that date.