Overview of Financial Accounting

7/30/2019 Overview of Financial Accounting

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LThe lingua franca or the language of

the business

Geetha Iyer


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Monk Fra Luca Pacioli (1445-1515) is considered the

father of modern accounting.Post industrial revolution (in the later part of the 18thcentury) accounting as a profession came into vogue.

Managers realized the importance of accountinginformation for enhancing the quality and timelinessof decision making process.

Geetha Iyer


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According to AICPA

(American Institute of Certified Public Accountants)

Accounting is the art of recording, classifying andsummarizing in a significant manner and in terms ofmoney, transactions and events of a financial character,and interpreting the results thereof.

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Financial Accounting - Historical records

Cost Accounting - Cost computationManagement

Accounting - Managerial decision making

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1. How good or bad is the financial condition of the business?2. Has the business activity resulted in a profit or loss?3. How well the different departments of the business have performed in the past?4. Which activities or products have been profitable?

5. Out of the existing products which should be discontinued and the production ofwhich commodities should be increased.

6. Whether to buy a component from the market or to manufacture the same?7. Whether the cost of production is reasonable or excessive?8. What has been the impact of existing policies on the profitability of the business?9. What are the likely results of new policy decisions on future earning capacity of

the business?10. In the light of past performance of the business how it should plan for future to

ensure desired results ?

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Profit & Loss A/c - throws light onfinancial performance

during the year

The Balance Sheet - throws light onfinancial position of a

company as on a particular date

Cash Flow Statement -shows the sources and uses of cash

Annual Report -consists of directors report, chairmans

report

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1. Managers

2. Owners

3. Investors

4. Government

5. Banks and Financial Institutions

6. Employees

7. Suppliers8. Academicians, Researchers and Consultants

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Forms Of Business Organization

1. Sole Proprietorship

2. Partnership Firm

3. Corporations or Companies

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Accounting Standards

Accounting Standards are written documents containing the

Generally Accepted Accounting Principles ( GAAP )

These standards are issued by Institute Of Chartered Accountants Of

India ( ICAI ).

The ICAI constituted an Accounting Standards Board ( ASB) in1977.

The main function of ASB is to prepare Accounting Standards.

The main objective of AS is to standardize the different accounting

policies and practices followed by different business concerns. Example :

AS1Disclosure of accounting policies

AS2Valuation of inventories

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Concepts

1. Business Entity2. Going Concern3. Monetary Expression4. Matching Revenues with Expenditure of that Period

5. Realization or Accrual6. Duality / Double Entry7. Cost8. Accounting Period

Conventions

1. Consistency2. Conservatism / Prudence3. Materiality4. Disclosure

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AccrualAll expenses/income must be provided for in the books

of accounts if they relate to that period whether actually

spent/received or not.

Cash - Revenues and expenditure are to be recognized as and

when they happen . GAAP (Generally Accepted Accounting

Principles) does not permit this basis

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Double-Entry Book Keeping System

Duality concept : Recording both aspects of a transaction

with twofold affect -

Total Liabilities = Total Assets

Assets are the resources owned by the business entity. They

are the uses of funds.

Total Assets = Owners equity + Outside liabilities

Liabilities are what the business owes to outsiders

(including the owners). They are the sources of funds.

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Geetha Iyer

Capital V Revenue Exp

Capital Expenditure is investment in long term assets

fruit of which shall be enjoyed in the future.

Revenue Expenditure is the result of day-to-day

operations of the business.

WorldCom scam..- case study


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Geetha Iyer

WorldCom, Inc. - US largest telecom company.

In June 2002, WorldCom was charged by SEC with a massive

accounting fraud totaling more than $3.8 billion. WorldCom

capitalized (and so deferred) rather than expensed approximately

$3.8 billion of its costs.

There was even found one accounting entry for $500 million,

increasing computer assets and decreasing cash. No supporting

documents for these entries were found. In total, in accounting

ledgers there were found unusual accounting entries for $2 billion.


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Geetha Iyer

WorldCom Inc. Fraud

Income Statement

Revenues..xxx (no change)

Cost of Sales....xxx (no change)

Operating expenses:Fees paid to other

phone networks...xxx

Computer expenses.xxx

______________________

NET INCOME....xxx

Balance sheet

Equipmentxxxx

Inventory..xxxx

Cash..xxxx

.Total assets.xxxx

Liabilities..xxxx

Equityxxxx

Total liabilities

and equityxxx


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Thank You

Geetha Iyer

Overview of Financial Accounting

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