fundamental of financial accounting.

Introduction Financial Accounting

-Nabaraj Adhikari ( Faculty of Accounting)-Nirajan silwal(RE-EDITED)

What is Accounting?

• Accounting is a process of identifying, classifying and recording the business activities to provide the economic information to interested users.

• It is one of the fastest growing concept and most popular field of study.

• Accounting can be defines as career.

• Accounting is a language of business.

• It is important for both accountants and non accountants.

• It provides the information for planning , controlling and decision making.

Users of Accounting Information

1. Internal Users- Those users who are directly involve in day to day operation of organization. They require information for internal use.

2. External Users- Those who are not directly associated with the organization but they also require information for their own purpose.

Internal Users• BOD • Managers.• Employee.• Accountants and others.

External Users• Investors/shareholders.• Suppliers.• Lenders.• Customers.• Government.• Trade Unions.• Security analyst.• Newspaper and media.

Accounting

Accounting is the process of measuring, interpreting, and communicating financial information to support internal and

external business decision making.

Business Activities Involving

Accounting1. Operating Activities.

2. Investing Activities.

3. Financing Activities.

Operating Activities• The business activities which are involved in the day to

day activities is called operating activities.• Activities which result the cash inflow or outflow in

connection with the purchase and sales of tradable items of goods.

• Such transactions may appear at least once in a year in the organization.

• For e.g. sales revenue, interest revenue, dividend received, purchase, operating expenses, interest expenses, Tax expenses etc.

Investing Activities• Those activities which are related to the purchase and

sale of business assets, investments and intangible assets is called investing activities.

• Such transactions are not necessary to be appeared at least once in a year in the business.

• For e.g. purchase and sales of plant, property and equipment, purchase and sales of intangible assets and investment.

Financing Activities• Those activities which are related with the raising funds

required for the business and repayment of fund is called financing activities.

• It is also non operating activities.• It affects the changes in long-term liabilities and stockholders

equity section in balance sheet. • For e.g. issue of shares, loan taken and repayment of loan,

issue and redemption of debt securities , dividend paid etc.

The Accounting Cycle

Accounting process - set of activities involved in converting information about transactions

into financial statements.

Relationship of Financial, Management, and Cost Accounting

FINANCIALACCOUNTING

MANAGEMENTACCOUNTING

COSTACCOUNTING

Product Costs

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Types of Accounting

1.Financial Accounting

2. Management or managerial Accounting

3. Cost Accounting

What is Financial Accounting?

• Financial accounting is the preparation and communication of financial information to its users.

• Financial accounting is based on Generally Accepted Accounting Principles[GAAP].

• It records only monetary transactions.• It is fully guided by GAAP.• The data and information which financial accounting provides is

historical natured.• Under financial accounting, the reports are generally prepared for a

certain specified period.

To be continue….

• It does not have any provision of cost control and cost planning. It merely focuses on the recording of cost in financial reporting.

• It is a statutory obligation for a firm.• Under financial accounting, the valuation of inventory is made on the

basis of cost or market value whichever is less.• The users of financial accounting are mainly external users such as

government, debtors , creditors, investors etc.• It generally intends to report the result of business operation and

financial condition for a period.• The nature of financial accounting is routine and clerical.

Managerial accountingVs.

Financial Accounting

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Managerial Accounting

Financial accounting

Nature Records material, labour and overhead costs in product or jobReports produced are for internal management and contol

Records company transaction eventsExternal financial statements are produced

Accounting system

Not based on the double entry system

Follows the double entry system

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Accounting principles

No need to use accounting principlesAdopt any accounting techniques that generates useful accounting information

Use Generally Accepted Accounting Principles for recording transactions

Users of information

Used by different levels of management or departments responsible for respective activities

Used by external parties: shareholders, creditors, government, etc

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Operation guidelines or standards

Based on management instructions and requirements

Conforms to company Ordinances, stock exchange rules, HKSSAPs

Time span

Reports are prepared whenever neededThey may be prepared on a weekly or daily basis

Reports are prepared for a definite period, usually yearly and half yearly

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Time focus

Future orientation: forecasts, estimates and historic data for management actions

Past orientation: use of historic data for reporting and evaluation

Perspective

Detailed analysis of parts of the entity, products, regions, etc

Financial summary of the whole orgainisation

Cost Accountingvs.


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Cost Accounting

Objective To provide information for planning and decision making by the management

To ascertain and control cost

Basic of recording

Concerned with transactions related to the future

Based on both present and future transactions for cost ascertainment

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Cost Accounting

Coverage Covers a wider area: financial accounts, cost accounts, taxation, etc.

Covers matters relating to ascertainment and control of cost of product or service

Utility Only the needs of internal management

The needs of both internal and external interested groups

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Cost Accounting

Types of transactions

Deals with both monetary any non-monetary transactions, covering both quantitative and qualitative aspects

Deals only with monetary transactions, covering only quantitative aspect

Cost AccountingVs.


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Cost Accounting

Objective The main objective of financial accounting is to prepare the financial statement and communicate to the users.

To ascertain and control cost

Basic of recording

Concerned with transactions related to historical.

Based on both present and future transactions for cost ascertainment

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Cost Accounting

Coverage It works with financial statements and and reporting it .

Covers matters relating to ascertainment and control of cost of product or service

Statutory obligation

It is a statutory for a firm to maintain financial accounting.

It is not a statutory for a firm to maintain cost accounting.

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Cost Accounting

Inventory valuation

Inventory Valuation is made on the basis of cost price or market price whichever is less.

Inventory Valuation is made on the basis of cost price.

Cost control

It does not have any provision of cost control.

It aims on controlling costs such as material, labor, overhead.

Users It mainly focuses on external users.

It mainly focuses on internal users.

Generally Accepted Accounting Principles. [GAAP]

• Financial Accounting has evolved accounting principles, concepts and conventions which are generally accepted and universally practiced.

• Financial accounting relies on certain standards or guides which remains same all over the world are called GAAP.

• These principles are established by International Financial Accounting Standard Board [IFASB].

Accounting concepts

1.Business entity concept.2.Money measurement concept.3.Going concern concept.4.Accounting period concept.

Accounting Principles.1.Cost Principles.2.Revenue Principles.3.Matching Principles.4.Full disclosure Principles.

What is Business?

A continuous economic activity carried out to earn profit through:

Production and sales of goods and services to customers

Generating and rendering services

Legal and continuous process

Forms of Business organization.

1.Sole trading firm.2.Partnerships.3.Corporations/Joint

stock companies.

1. Sole proprietorships.

Advantages Disadvantages-Easy to establish. -Limited capital.-effective management. -Unlimited liability.-incentive to work. -Lack of effective management.-no profit sharing. -Narrow scope.-quick decision. -No loss sharing.-tax advantage. -Lack of perpetual existence.-high secrecy.

2. Partnerships.

• Advantages-Easy to establish.-Tax advantage.-Effective management.-Easy for promotion.-Risk sharing.-New idea and skills.-Easy to collect capital.

• Disadvantages.-Unlimited liability.- Lack of perpetual existence.-Conflict.-Delay in decision making.-Lack of sufficient capital.-Profit sharing.-Difficulty in secrecy.

3. Corporations/Joint stock company.

• Advantages.-sufficient capital.-Limited liability.-Ownership transfer.-Democratic management.-Effective management.-Perpetual existence.-Popular in market.

• Disadvantages.-Difficulty in formation.-Delay in decision.-Lack of secrecy.-Profit sharing.-Excessive legal provisions.

Qualitative Characteristics of accounting information.

1. Understandability.2. Relevance.3. Reliability.4. Comparability.

5. Consistency.6. materiality.7. conservatism.

fundamental of financial accounting.

Economy & Finance

Transcript of fundamental of financial accounting.