1. Course: BBA
Semester: First Semester
Name of Subject: Financial Accounting and
Analysis
Subject Code: BBA 105
Unit-I
Faculty Name: Ms. Shivani Arora,
Assistant Professor
DR. AKHILESH DAS GUPTA INSTITUTE OF TECHNOLOGY
AND MANAGEMENT
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2. Meaning & Scope of Accounting
Definition of Accounting
According to American Institute of Certified Public Accountants, “Accounting is an art of recording, classifying &
summarising 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.”
Objectives of Accounting
1. To record financial transactions & events in the books of accounts in a systematic manner.
2. To determine the financial performance i.e., profit & loss a/c incurred.
3. To determine financial position of the company.
4. To assist the management by providing financial information for decision making, exercising control,
budgeting & forecasting.
5. To provide accounting information to users who analyse them as per their individual requirements.
6. To have records of assets owned by the business which enables the management to protect
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3. Nature of Accounting
1. Identification of financial transactions & events
2. Measuring the identified transactions
3. Recording
4. Classifying
5. Summarizing
6. Analysing & Interpreting
7. Communicating
Nature of Accounting Information
1. Reliability
a) Accuracy
b) Unbiased
c) Faithful information
1. Relevance
2. Understandability
3. Comparability Fig: Functions of Accounting
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5. Interrelationship of Accounting with other Disciplines Branches of Accounting
Branches of Accounting
Financial
Accounting
Cost
Accounting
Management
Accounting
Fig: Interrelationship of Accounting with
other subjects
Fig: Branches of Accounting
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6. Limitations of Accounting
• No recording of non-monetary transactions
• No information about present value of the business
• Use of estimates or personal judgment
• Window Dressing
• Unrealistic Accounting information
• Lack of Consistency
• No basis for Managerial efficiency
• Disclosure of only material items
• Historical information only
• Static
Fig: Limitations of Accounting
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7. Accounting Principles
The term accounting principles means a number of rules or guidelines for recording business
transactions or generally accepted accounting principles. This general acceptability of
accounting principles has made them popular as Generally Acceptable Accounting Principles
briefly expressed as GAAPs.
GAAP is divided into two parts Concepts and Conventions.
• An accounting concept is a basic assumption or an opinion for recording business
transactions.
• An accounting convention is a rule or an accepted method or procedure which is adopted
either by general agreement or common consent which may be in writing or implied.
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9. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
∙ GAAP comprises of conventions, rules and procedures that constitute accepted accounting
practices at any given time.
∙ GAAP differ from country to country because of the legislative requirements of each country,
locating accounting practices, customs, usage & business environment peculiar to each country.
∙ E.g., in USA the Financial Accounting Standard Board (FASB) must follow when putting together
financial statements.
∙ GAAP aims to improve the clarity, consistency, and comparability of the communication of
financial information.
∙ This makes it easier for investors to analyse and extract useful information from the company's
financial statements, including trend data over a period of time.
∙ It also facilitates the comparison of financial information across different companies.
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10. Importance of Accounting Standards
For the following purposes, accounting standards are needed:
• For bringing uniformity in accounting methods
• For improving the reliability of the financial statements
• Simplify the accounting information
• Prevents frauds and manipulations
• Helps auditors
Objectives of Accounting Standards
1. Provide useful information about an enterprise to various stakeholders to their economic & financial
decisions.
2. The comparison of the financial statements of various reporting enterprises because of the divergence in
the methods & principles adopted by these enterprises.
3. Bring uniformity in the accounting methods & principles adopted by the various enterprises.
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11. Procedure for setting accounting standards in India
In India ASB ( Accounting standard board) is responsible is responsible for setting and formulating
accounting standard. It follows following procedure-
First of all it identifies the various segment of business which need
accounting standard.
Then a panel is formulated to study the problem and make a draft containing various details.
Detailed study of the draft is then conducted so that modifications if needed are made. The draft is then
circulated to concerned authority for approval. once it is approved then it is presented to the general public.
if any objection is raised by public then further changes are made and final accounting standard is made.
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12. List of Accounting Standards Issued
Policies related to accounting disclosure (AS 1)
This standard deals with the disclosure of significant accounting policies which are followed in preparing and
presenting Financial Statements.
Valuation of Inventories (AS 2)
This standard deals with the determination of value at which inventories are carried in the financial
statements, including the ascertainment of cost of inventories and any write-down thereof to net realizable
value.
Cash Flow Statements (AS 3)
This standard deals with the historical changes in cash & cash equivalents of an enterprise. This statement
classifies cash flows during the period from operating, investing and financing activities.
Contingencies and Events Occurring After Balance Sheet Date (AS 4)
This Standard deals with the treatment of contingencies and events occurring after the balance sheet date.
Net profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies (AS 5)
This standard should be applied by an enterprise in presenting profit or loss from activities in the normal
course of business, extraordinary items and prior period items.
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13. Cash Flow Construction Contracts (AS 7)
This standard prescribes the accounting for construction contracts in the financial statements of contractors.
Revenue Recognition (AS 9)
This standard deals with the recognition of revenue in Profit & Loss A/c of an enterprise. Revenue recognition
is concerned with the revenue arising in the course of the ordinary activities of the enterprise such as the
sale of goods, rendering of services, interest, royalties and dividends.
Property, Plant and Equipment (AS 10)
The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment
(PPE).
The Effects of Changes in Foreign Exchange Rates (AS 11)
AS 11 lays down principles of accounting for foreign currency transactions and foreign operations, i.e., which
exchange rate to utilize and how to recognize the financial effect of exchange rates fluctuations.
Government Grants (AS 12)
This standard deals with accounting for government grants. These are sometimes called as subsidies, cash
incentives, duty drawbacks, etc.
Accounting for Investments (AS 13)
This standard deals with accounting for investments in the financial statements of enterprises and related
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14. Accounting for Amalgamations (AS 14)
This standard deals with accounting for amalgamations and the treatment of any resultant goodwill or
reserves.
Employee Benefits (AS 15)
The objective of this standard is to prescribe the accounting treatment and disclosure for employee benefits
in the books of an employer except for employee share-based payments. It does not deal with accounting
and reporting by employee benefit plans.
Borrowing Costs (AS 16)
This standard should be applied in accounting for borrowing costs. It does not deal with the actual or
imputed cost of owners’ equity, including preference share capital not classified as a liability.
Reporting on financial segments (AS 17)
The objective of this standard is to establish principles for reporting financial information for different types
of segments, products, services and enterprise produces and the different geographical areas in which it
operates.
Disclosure of related party transactions (AS 18)
This standard should be applied in reporting related party transactions between a reporting enterprise. The
standard applies to the financial statements of each reporting enterprise and also to the consolidated
financial statements presented by a holding company.
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15. Accounting policies and disclosure on Lease transactions (AS 19)
The objective of this standard is to prescribe the appropriate accounting policies and disclosures in relation to
finance leases and operating leases.
Per Share Earnings or Earnings per share (AS 20)
AS 20 prescribes principles for the determination and presentation of earnings per share which will improve the
comparison of performance among different enterprises for the same accounting period and among different
accounting periods for the same enterprise.
Preparation and Presentation of Consolidated Financial Statements (AS 21)
The objective of this standard is to lay down principles and procedures for the preparation and presentation of
consolidated financial statements. Consolidated financial Statements are predetermined to present financial
information about a parent and its subsidiaries as a single economic entity.
Accounting for Taxes on Income (AS 22)
The objective of this Standard is to prescribe the accounting treatment of taxes on income since the taxable
income may be significantly different from the income displayed in financial statements due to many reasons,
posing problems in matching of taxes against revenue for a period.
Accounting for Investments in Associates (AS 23)
This standard should be applied in accounting for investments in associates in the preparation and presentation
of consolidated Financial Statements (CFS) by an investor.
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16. Discontinuing Operations (AS 24)
The objective of AS 24 is to establish principles for reporting information about discontinuing operations.
This helps the users of financial statements to make an estimate of an enterprise’s cash flows,
earnings-generating capacity, and financial position by segregating information about discontinuing
operations and continuing operations.
Interim Financial Reporting (AS 25)
This standard applies if an entity is required or elects to publish an interim financial report. The prime
objective of this standard is to prescribe the minimum content of an interim financial report. This standard
also prescribes the principles for the recognition and measurement of financial statements for an interim
period.
Intangible Assets (AS 26)
AS 26 prescribes the accounting treatment for intangible assets. Intangible assets refer to non-monetary
assets which are identifiable, without physical substance, held for use in the production or supply of goods,
services, administrative purposes, and so on.
Joint Ventures reporting of interest in Financial statements (AS 27)
The objective of AS 27 is to set out the principles and procedures for accounting for interests in joint
ventures and reporting venture assets, liabilities, income and expenses in the financial statements of
ventures and investors.
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17. Impairment of Assets (AS 28)
The objective of AS 28 is to prescribe the procedures that an enterprise applies to ensure that its assets
are carried at no more than their recoverable amount. The asset can be reported as impaired if its
carrying amount exceeds the amount to be recovered through the use or sale of the asset and it
requires the business entities to recognize an impairment loss in such cases.
Contingent Liabilities and Contingent Assets and Provisions (AS 29)
The objective of AS 29 is to ensure that appropriate recognition criteria and measurement bases are
applied to provisions and contingent liabilities. This ensures that sufficient information is disclosed in
the notes to the financial statements which enable users to understand their nature, timing, and
amount.
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18. Meaning of IFRS
It is a set of international accounting standards developed by the International Accounting Standards Board (IASB)
providing the mode of reporting particular type of transactions & events in the financial statements. They include
standards & interpretations issued by the International Accounting Standards Board (IASB) & its predecessor body, viz.,
International Accounting Standards Committee (IASC). They comprise:
a) International Financial Reporting Standards
b) International Accounting Standards, and
c) Interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC) or the former
Standing Interpretations Committee (SIC).
Objective of IFRS
∙ To make international comparison of financial statements of business enterprises.
∙ To synchronise accounting standards across the globe.
∙ They are progressively replacing the many different national accounting standards.
∙ To maintain books of account in a manner that the financial statements based on them are comparable,
understandable, reliable & relevant as the requirements of users – both internal & external.
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