Part a - Introduction to Financial Accounitng

7/31/2019 Part a - Introduction to Financial Accounitng

http://slidepdf.com/reader/full/part-a-introduction-to-financial-accounitng 1/30

© 2006 Cisco Systems, Inc. All rights reserved. Cisco Public 1

Symbiosis Institute of Telecom Management

ACCOUNTING

CONCEPTS

A.V.Chirputkar, Faculty - Finance, SITM.

M.Com. F.C.A. M.B.F. (ICAI), C.I.S.A. (USA)




221-Oct-12SITM

INTRODUCTION

Accounting is;

An Information System :Accounting System shouldgenerate information to meet the requirements of users

i.e. Internal management & Outsiders.Language of business

Useful to personal and business life

Social Science




321-Oct-12SITM

Types of Business Entities

Corporate

Non – Corporate




421-Oct-12SITM

Definition

Definition by American Institute of CPA:

“Accounting is an art of recording, classifying & summarizing in asignificant manner & in terms of money, transactions & eventswhich are , in part at least, of a financial character & interpreting

the results thereof.”

Definition by American Accounting Association:

“the process of identifying, measuring & communicatinginformation to permit judgment & decisions by the users of

accounts.”




521-Oct-12SITM

Functions of Accounting

Recording

Classifying

Summarising

Deals with financial transactions

Analysis & Interpretation

Communication




621-Oct-12SITM

Users of Accounts & their Information Needs

Internal Management

Investors

Employees

Lenders, Suppliers & other creditors

Customers

Government

Public at large


http://slidepdf.com/reader/full/part-a-introduction-to-financial-accounitng 7/30© 2006 Cisco Systems, Inc. All rights reserved. Cisco Public 7

721-Oct-12SITM

Objectives of Accounting

To keep systematic records

To protect business properties

To ascertain operational profit / loss

To ascertain financial position

To facilitate in decision making

others

• To comply with law

• Disclosure to stakeholders



821-Oct-12SITM

Meaning & Scope

There are four sub-parts of accounting;

Book keeping;

Financial Accounting;

Management Accounting;

Social Responsibility Accounting

( also other parts like Inflation Accounting etc)

(Book keeping is different from Accounting, Accounting relates to

other subjects like economics, law, statistics etc.)



921-Oct-12SITM

Accounting Elements

Assets – Balance Sheet

Liabilities – Balance Sheet

Equity – Balance Sheet

( The Balance Sheet gives you a financial position)

Income – Profit & Loss Account

Expenses – Profit & Loss Account

( The profit & loss account gives you profit / loss)



1021-Oct-12SITM

Accounting Procedure

We follow double entry system of Accounting developed in 15th century in Italy by Luca Pascioli

The basic accounting equation is;

Equity + Liabilities = Assets The entire accounting is based on three fundamental rules of debit

and credit. Every transaction has two aspects which can berecorded with the help of these rules.

Three types of Accounts – Personal, Real, Nominal



1121-Oct-12SITM

Accounting Basics

Money has two aspects – receipt and payment i.e.inflows (credit) and outflows (debit). The Receiptindicates Income and Liabilities and outflow indicatesExpenses and Assets.

Income and Expenses are called as nominal accounts.Income an inflow so credit, liabilities an inflow hence acredit and other persons who give credit like supplier;

For inflow credit rule applies - Credit all income and

gains, credit the giver and credit what goes out.



1221-Oct-12SITM

Accounting Basics

For an outflow, debit rule applies. Debit all expensesand losses, debit what comes in – after you spent onasset and debit the receiver.

Rule for Nominal Account – Debit all expenses andlosses and credit all incomes and gains.

Rule for Real Account – Debit what comes in and creditwhat goes out.

Rule for personal Account – Debit the receiver andcredit the giver.



Accounting Structure

Structure:

1321-Oct-12SITM

Business Entity

Financial Objectives

Profit Maximisation Wealth Maximisation

Financial Statements




Structure

1421-Oct-12SITM

Financial Statements

Profit & Loss Account

BalanceSheet

Cash FlowStatement

Income &Expenses Assets & Liabilities

Cash inflow &

Cash outflow

Types of Accounts




Structure

1521-Oct-12

SITM

Types of Accounts

Nominal Accounts Real Accounts Personal Accounts

Profit & Loss Account Balance Sheet



1621-Oct-12

SITM

Rules of Debit & Credit

Increase in Asset – Debit

Decrease in Asset – Credit

Increase in Liability/ Capital – Credit

Decrease in Liability / Capital – Debit

Expenses / Losses – Debit

Income / Gains - Credit



1721-Oct-12

SITM

Accounting Principles

Meaning & Importance of Accounting Principles

GAAP – Generally Accepted Accounting Principles

Accounting Principles consists of

Accounting Concepts &

Accounting Conventions



1921-Oct-12

SITM

Accounting Concepts

Separate Entity Concept

Going Concern Concept

Money Measurement Concept

Cost Concept

Dual Aspect Concept

Accounting Period Concept

Matching concept

Realisation concept



2021-Oct-12

SITM

Accounting Conventions

Convention of Conservatism

Full Disclosure

Consistency

Materiality

(Reliability and Objectivity)



2121-Oct-12

SITM

Fundamental Accounting Assumptions

There are three fundamental assumptions;

Going Concern

Consistency

Accrual

Separate disclosure is required if fundamentalaccounting assumptions are not followed.



2221-Oct-12

SITM

Accounting Policies

It includes basic principles, conventions, rules inpreparing financial statements. The managementshould select a policy which suits an organisation. Thefollowing factors should be considered while selectingan appropriate accounting policy and preparing afinancial statement;

Prudence, Substance over form and Materiality.



2421-Oct-12

SITM

Four Phases in Accounting Process

Journalising of transactions & events;

Ledger posting & balancing;

Preparation of Trial balance;

Preparation of Final Accounts.




2521-Oct-12

SITM

Legal Aspect of Financial Statements

In India, every company presents its financial statement in the formand contents prescribed u/s 211 of the Companies Act, 1956.(Refer to Companies Bill 2009 – Section 117)

The form and content requirement is given in Sch. VI to the

Companies Act, 1956.

For Insurance Company – Insurance Act, 1938, General InsuranceBusiness (nationalisation ) Act, 197 and IRDA Act 1999.

Other legal provisions shall also be considered.




2621-Oct-12

SITM

Nature of Financial Statement

It is a statement of recorded facts.

Use of Accounting conventions, principles.

Application of Accounting assumptions.

Personal judgment.

Applying Accounting Standards/(IFRS) and guidancenotes.




2721-Oct-12

SITM

Limitations of Financial Statement

These are interim reports (Periodicity convention)

Requires personal judgment in preparation

It considers only financial factors

Not absolutely final and accurate

Window dressing

It is prepared focusing shareholders

Existence of different principles, methods like depreciation,

valuation etc.




2821-Oct-12

SITM

Recent Trends in Presentation of FinancialStatements

Summarised Balance Sheet and Profit & Loss Account – Vertical Form

Cashflow statement

Disclosure of Accounting Policies

Summarised highlights of financial information

Management discussion and analysis




2921-Oct-12

SITM

Different types of Reports accompanied

Risk Management report

Corporate Governance report

Shareholder information

Additional information

Selected historical data

Human resource and Brand Valuation

Environment, health and safety reports



3021-Oct-12

SITM

Developments

Role of Computerisation;

Changes in Legal provisions;

Introduction of IFRS

Introduction of XBRL

Globalisation & Liberlisation

Financial Reporting Systems by Companies

Part a - Introduction to Financial Accounitng

Documents

Transcript of Part a - Introduction to Financial Accounitng