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  1. 1. FINANCIAL ACCOUNTING <ul><li>Introduction </li></ul><ul><li>Traditionally accounting was regarded as a historical description of financial activities of business. </li></ul><ul><li>Role of accountant that of a record keeper </li></ul><ul><li>In modern times regarded as a service activity and a tool in the hands of management for decision making </li></ul><ul><li>It is more an information system rather than a record keeping system. </li></ul>
  2. 2. FINANCIAL ACCOUNTING <ul><li>As an information system, it can be viewed as </li></ul>Economic events measured in financial terms Recording Classifying Summarising Information to users Input Process Output
  3. 3. FINANCIAL ACCOUNTING <ul><li>It is a language of business </li></ul><ul><li>Communicates the results of business operations to various stake holders </li></ul><ul><li>Meaning </li></ul><ul><li>Accounting is a systematic recording of daily events of a business leading to presentation of complete financial picture </li></ul>
  4. 4. FINANCIAL ACCOUNTING <ul><li>. Origin </li></ul><ul><li>One can say accounting is as old as money itself. </li></ul><ul><li>In India, Chanakya in his Arthashastra has emphasized the existence and need for proper accounting and auditing. </li></ul><ul><li>The modern system of accounting known as the “Double entry system of book keeping’ owes its origin to Luca De Borgo Pacioli of Italy, who published in book form ‘double entry accounting system’ in 1494. </li></ul>
  5. 5. FINANCIAL ACCOUNTING <ul><li>Definition </li></ul><ul><li>In 1941, AICPA (The American Institute of Certified Public Accountants) has defined accounting as </li></ul><ul><li>“ Accounting is 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, and interpreting the results thereof.” </li></ul>
  6. 6. FINANCIAL ACCOUNTING <ul><li>Characteristic features </li></ul><ul><li>It is an art </li></ul><ul><li>Consists or recording, classifying and summarizing </li></ul><ul><li>Done in terms of money </li></ul><ul><li>Transactions having financial character </li></ul><ul><li>Interpretation of results </li></ul>
  7. 7. FINANCIAL ACCOUNTING <ul><li>Objectives </li></ul><ul><li>To answer the following questions </li></ul><ul><li>Amount of capital invested in the business </li></ul><ul><li>Nature and value of assets </li></ul><ul><li>Nature and value of liabilities </li></ul><ul><li>Amount due from customers/debtors </li></ul><ul><li>Amount due to suppliers/creditors </li></ul><ul><li>Amount of stock in hand </li></ul><ul><li>Cash and bank balances as on a particular date </li></ul><ul><li>Amount of liability by way of statutory payments to Government </li></ul>
  8. 8. FINANCIAL ACCOUNTING <ul><li>Objectives </li></ul><ul><li>Amount of profit earned or loss suffered </li></ul><ul><li>To maintain a permanent record of transactions for future reference </li></ul><ul><li>Review the progress of the business from year to year </li></ul><ul><li>Compare the results of the business with that of the competitors </li></ul><ul><li>To meet legal requirements </li></ul>
  9. 9. FINANCIAL ACCOUNTING <ul><li>Functions </li></ul><ul><li>To keep a systematic record of transactions </li></ul><ul><li>To protect the properties of business </li></ul><ul><li>To communicate the results </li></ul><ul><li>To meet legal requirements </li></ul>
  10. 10. FINANCIAL ACCOUNTING <ul><li>Importance </li></ul><ul><li>Can be judged by its usefulness to various parties </li></ul><ul><li>Owners </li></ul><ul><li>Management </li></ul><ul><li>Potential investors </li></ul><ul><li>Creditors/lendors </li></ul><ul><li>Employees </li></ul><ul><li>Government </li></ul><ul><li>Researches </li></ul>
  11. 11. FINANCIAL ACCOUNTING <ul><li>Generally accepted accounting principles (GAAP) </li></ul><ul><li>Principles are broad guidelines to be followed to make the financial statements meaningful to all people as far as practicable. Principles consist of concepts and conventions </li></ul>
  12. 12. FINANCIAL ACCOUNTING <ul><li>Concepts are underlying assumptions and ideas which are fundamental to accounting practice. </li></ul><ul><li>Conventions mean customs or traditions as a guide to the preparation of accounting statements </li></ul>
  13. 13. FINANCIAL ACCOUNTING <ul><li>Concepts </li></ul><ul><li>Business entity/Separate entity </li></ul><ul><li>Going concern </li></ul><ul><li>Money measurement </li></ul><ul><li>Cost </li></ul><ul><li>Accounting period </li></ul><ul><li>Matching of cost and revenues </li></ul><ul><li>Dual aspect </li></ul><ul><li>Accrual </li></ul>
  14. 14. FINANCIAL ACCOUNTING <ul><li>Conventions </li></ul><ul><li>Conservatism </li></ul><ul><li>Consistency </li></ul><ul><li>Full disclosure </li></ul><ul><li>Materiality </li></ul><ul><li>Objectively verifiable evidence </li></ul>
  15. 15. Indian Accounting Standards <ul><li>In order to bring about uniformity in terminology, approach and presentation of accounting results, the ICAI established an Accounting Standards Board (ASB) in April 1977. The main function of the ASB is to formulate Accounting Standards. </li></ul><ul><li>Accounting standards are the regulatory framework within which financial statements are to be prepared. They describe accounting principles, valuation techniques and various aspects of measurement, treatment, presentation and disclosure of accounting transactions and events. </li></ul><ul><li>The purpose of Accounting Standards is to eliminate as far as possible, incomparability of financial statements and discourage pursuance of accounting policies which are not in conformity with GAAP </li></ul>
  16. 16. Fundamental Accounting Assumptions <ul><li>There are three fundamental accounting assumptions: </li></ul><ul><ul><li>(i) Going Concern </li></ul></ul><ul><ul><li>(ii) Consistency </li></ul></ul><ul><ul><li>(iii) Accrual </li></ul></ul>
  17. 17. Components of financial statements <ul><li>A complete set of financial statements normally consists of </li></ul><ul><li>a Balance Sheet, </li></ul><ul><li>a Profit & Loss A/c and </li></ul><ul><li>a Cash Flow Statement together with </li></ul><ul><li>notes, statements and other explanatory materials that form integral parts of the financial statements. </li></ul>
  18. 18. Components of financial statements <ul><li>Information contents of different components of financial statements </li></ul><ul><li>Balance Sheet portrays value of economic resources controlled by an enterprise and the way they are financed. </li></ul><ul><li>Profit & Loss A/c presents the result of operations of an enterprise for an accounting period. </li></ul><ul><li>Cash Flow Statement shows the way an enterprise has generated cash and the way they have been used in an accounting period. </li></ul><ul><li>Notes and Schedules present supplementary information explaining different items of financial statements. </li></ul>
  19. 19. Elements of financial statements <ul><li>The items of financial statements can be classified in five broad groups depending on their economic characteristics. These five financial elements are </li></ul><ul><li>assets </li></ul><ul><li>liabilities </li></ul><ul><li>equity </li></ul><ul><li>Income/gains and </li></ul><ul><li>expenses/ losses. </li></ul>
  20. 20. Assets <ul><li>An asset is a resource owned/controlled by the enterprise from which future economic benefits are expected to flow to the enterprise. </li></ul><ul><li>The resource must have a cost or value that can be measured reliably </li></ul><ul><li>It need not have a physical substance. </li></ul><ul><li>It should generate future economic benefit. </li></ul>
  21. 21. Classification of assets Assets Non-current assets Current assets Fixed assets Monetary assets Non-monetary assets investments Tangible assets Intangible assets
  22. 22. Fixed Assets <ul><li>Assets owned by the enterprise and held to enable production of goods and to carry on the business operations, which are NOT held for resale in the normal course of business </li></ul><ul><li>Can be further classified as tangible assets and intangible assets </li></ul><ul><li>Tangible assets are those which have a physical substance eg. Plant and machinery, building, furniture etc </li></ul><ul><li>Intangible assets are those which do not have a physical existence but which provide rights or privileges to the owner eg. Goodwill, Patents, trademarks etc. </li></ul>
  23. 23. Investments <ul><li>Investments include cash invested in long term securities, with an intention of earning income or other benefits </li></ul><ul><li>If a firm has surplus funds, it may invest the surplus in securities issued by other entities. </li></ul><ul><li>It may invest in equity securities issued by other firms to obtain trade benefits. </li></ul><ul><li>Surplus can also be invested in property with a view to earn rentals or for capital appreciation </li></ul>
  24. 24. Current assets <ul><li>These are assets held </li></ul><ul><li>In the form of cash </li></ul><ul><li>For their conversion into cash </li></ul><ul><li>For their consumption in the production of goods. </li></ul><ul><li>Eg. Cash in hand, cash at bank, debtors, bills receivable, stock of raw materials, stock of finished goods </li></ul>
  25. 25. Current assets <ul><li>Current assets can be classified into </li></ul><ul><li>Monetary assets: These are moneys held and financial assets to be received in fixed or determinable amounts of money. Eg. Accounts receivables, loans and advances receivable, short term deposits. </li></ul><ul><li>Non-monetary assets: Assets which are represented by goods or services. Eg. Inventories, prepaid expenses </li></ul>
  26. 26. Liabilities Liabilities Non-current liabilities Current liabilities Secured liabilities Unsecured liabilities
  27. 27. Liabilities <ul><li>A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow of a resource embodying economic benefits </li></ul><ul><li>Liabilities can be classified as </li></ul><ul><li>long term liabilities </li></ul><ul><li>current liabilities </li></ul>
  28. 28. Long term liabilities <ul><li>These are financial obligations for repayment of money obtained for a relatively longer period of time, generally more than a year </li></ul><ul><li>These liabilities can be either </li></ul><ul><ul><li>Secured: Those liabilities for which the enterprise has provided some collateral, usually in the form of mortgage or hypothecation. Eg. debentures </li></ul></ul><ul><ul><li>Unsecured: Those liabilities for which no security has been provided. Eg. public deposits, loans from friends and relatives </li></ul></ul>
  29. 29. Current liabilities <ul><li>These represent obligations maturing within a relatively short period not exceeding one year or the normal operating cycle of the business. </li></ul><ul><li>Eg. Sundry creditors, provision for taxation, outstanding expenses, advances from customers </li></ul>
  30. 30. Equity <ul><li>It is the residual interest in the assets of an enterprise after deducting all its liabilities. </li></ul><ul><li>Equity is the excess of aggregate assets of an enterprise over its aggregate liabilities. </li></ul><ul><li>Equity represents owners’ claim consisting of items like capital and reserves, which are clearly distinct from liabilities, which are claims of parties other than owners. </li></ul>
  31. 31. Incomes and gains <ul><li>Income is the revenue that arises in the ordinary course of activities of the enterprise, e.g. sales by a trader. </li></ul><ul><li>It includes interest, dividend or royalties received by permitting others to use enterprise’s resources. </li></ul><ul><li>Gains are income, which may or may not arise in the ordinary course of activity of the enterprise, e.g. profit on disposal of fixed assets. </li></ul>
  32. 32. Expenses and losses <ul><li>Expense refers to the amount incurred in the process of earning revenues </li></ul><ul><li>It includes expenses that arise in the ordinary course of activities of the enterprise, e.g. wages paid, salary paid, cost of goods sold </li></ul><ul><li>Losses may or may not arise in the ordinary course of activity of the enterprise, e.g. loss on disposal of fixed assets. </li></ul>
  33. 33. Fundamental accounting equation <ul><li>Assets = Liabilities + capital (equity) </li></ul><ul><li>The equation signifies that assets of a business are always equal to the total of outside liabilities and proprietor’s equity. </li></ul><ul><li>This is because whatever funds are raised by the business, either through capital or from outsiders or business operations, will be tied up in one or the other form of uses (assets) </li></ul><ul><li>This equation emphasises the duality concept </li></ul>
  34. 34. Effect of business transactions on accounting equation <ul><li>Every business transaction can be analysed by or expressed in terms of its effect on the balance sheet equation. </li></ul><ul><li>Different types of business transactions may result into a maximum of nine possible effect combinations on the components of the accounting equation </li></ul>
  35. 35. Effect of business transactions on accounting equation <ul><li>The NINE possible combination of effects are: </li></ul><ul><li>Increase in one asset; decrease in another asset </li></ul><ul><li>Increase in asset; increase in liability </li></ul><ul><li>Increase in asset; increase in capital </li></ul><ul><li>Decrease in asset; decrease in liability </li></ul><ul><li>Decrease in asset; decrease in capital </li></ul><ul><li>Increase in one liability; decrease in another liability </li></ul><ul><li>Increase in a liability; decrease in capital </li></ul><ul><li>Increase in one item of capital; decrease in liability </li></ul><ul><li>Increase in one item of capital; decrease in another item of capital </li></ul>