FINANCIAL ACCOUNTING
To measure is to manage
Financial Accounting
Management Accounting
Financial Management
Cost Accounting
Financial Accounting and its role in business decisions
Capital maintenance
Productive capital
Profitable operations
Accounting as a measurement and valuation system
A manager may be required to take the
following decisions :
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Buy, sell , hold an investment
Purchase or hire an asset
Determine the performance of management
Impact of taxation policies
Determine dividend to be paid
Regulate the activities of the business
Decide expansion, takeover, amalgamation
Users of Accounting information
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investors ( Institutional and retail )
lenders
financial analysts
managers
employees
customers
suppliers
government and regulatory bodies
public
Financial Statements
Balance Sheet
Profit and Loss Account
Notes to Account
Cash Flow Statement
Accounting Principles – Concepts and conventions
GAAP
Accounting framework
Components of Financial Statements
Objectives of Financial statements
Users and their information needs
Underlying assumptions
Qualitative characteristics of financial statements
Concepts and Conventions
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Business entity
Going concern
Money Measurement
Periodicity
Consistency
Accrual
Conservatism
Materiality
Matching
Forms of business organization
Proprietary concerns
Partnership firms
Companies – pvt /public/govt/listed/unlisted
Statutory corporation
Regulatory bodies :Though Accounting is not governed by any Act , there are bodies
which influence and regulate accounting and financial reporting.
Government ( Company Law Board ). Companies Act regulates the form and
contents of financial reports , books of accounts to be maintained, audit etc.
ICAI : ICAI has issued various standards known as Accounting Standards which deals
with accounting and reporting practices on various matters. It gives professional
opinion on various accounting matters which has an influence on accounting
practices.
SEBI : SEBI regulates companies whose stocks are listed in the stock exchanges. Its
main function is to protect the interests of investors and promote a healthy
securities market. SEBI has also involved itself in ensuring that financial statements
give a true and fair view of state of affairs of the company. The requirements as to
preparation of cash flow statement , submission of quarterly results etc. is a step
towards that direction.
CBDT : Income Tax authorities also influence the preparation of financial statements
through various provisions for computing tax on income. Such provisions ensure
that accounting practices are not misused to avoid or evade taxes.
RBI : RBI has also from time to time prescribed accounting and reporting
requirements for financial institutions
International Accounting Standards Board : With a view to bring about uniformity in
accounting practices and reporting IASB has developed International Financial
Reporting Standards. With globalization and listing of shares in foreign markets , it
is necessary that a uniform set of Accounting practices be followed across .
Importance of Ethics in Accounting
Accounting Standards
International Financial Reporting Standards (IFRS)
Accounting terms :
Assets
Liabilities
Capital
Creditors
Debtors
Reserves
Incomes
– Sales
– Other incomes
– Profit on sale of assets
Expenses
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Cost of goods sold
Direct expenses
Administrative expenses
Financial expenses
Selling expenses
Profit – Gross /Net
Dividend
Taxes
Provisions
Bad debts
• A company purchases shares of a limited co. as investment. The
company has vanished after the IPO. Can the shares be called as
asset ?
• A case is pending before the consumer court for damages of Rs.1.00
lac as at the end of the accounting year. Is there a liability ?
• A company is engaged in giving consultancy services to its clients. As
at the end of the year , the company has completed project worth
Rs.2.5 lac? How should it treat that amount
• ABC Ltd. purchases goods worth 5.00 lacs on credit . Is there an
expense involved ?
• ABC Ltd. pays Rs.2.00 to a supplier for materials purchased last year.
Is there an expense ?
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Accounting equation
Accounting equation shows the relationship between
assets and liabilities of a company. It is the relationship
between what a company owns and what it owes to
others. It is given as :
Assets = Owners capital +Liabilities
The effect of every business transaction can be analysed
from the above equation. Any change in one component
will have a balancing change in another.
If Assets increases :
Another asset will decrease /
Liability will increase
If Assets decreases : Another asset will increase /
liability will decrease
If liability increases :
Asset will increase /Another
liability will decrease
If liability decreases
Asset will decrease / Another
liability will increase
A Ltd. issues equity shares of Rs.50.00 lacs
A Ltd. purchases Building for Rs.20.00 lacs
A ltd. purchases Plant & machinery for Rs.15 lacs
A Ltd. takes a loan of Rs.5.00 lacs from Bank
A Ltd.purchases raw materials for Rs.5.00 lacs
A Ltd.pays salaries Rs.1.00 lac
A ltd. sells goods for Rs. 2.00 lacs in cash
A ltd. sells goods for Rs. 10.00 lacs on credit
A Ltd. purchases equipments for Rs.5.00 lacs on credit
A Ltd. repays bank loan Rs.2.00 lacs
Arrive at the final results of the above transactions on
the accounting equation.
Jai Services had the following balances as at the end of Mar 2010
Cash – Rs.29000, Debtors – Rs.40000, Office Supplies – Rs.12000,
Office equipment –Rs.15000, Creditors – Rs.18000, Capital –
Rs.78000
The following transactions took place:
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Collected payments from customers Rs.18000
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Billed clients for professional services Rs. 35000
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Purchased supplies on credit Rs. 4000
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Purchased computer Rs.25000
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Received commission Rs.3000
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Paid office rent :Rs.4000
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Withdrew cash for personal use Rs.1500
8.
Paid staff salary Rs.9000
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Paid creditors Rs.6000
10. Took a bank loan Rs.32000.
Help Jai to find his business results.
Alpha , Beta and Gamma – three friends decided to start a business of
dealing in spare parts. Each one of them contributed Rs. 50000 for the
business and started ABC & Co. In the month of April 2010, they took a
place on rent @ Rs. 5000 p.m . They purchased some furniture for Rs.
50000 , Office equipment for Rs.50000 and some tools for Rs10000. They
also hired two assistants on a monthly salary of Rs.7000 each.
In May 2010, they entered into a purchase contract with Delta Ltd. for spares
worth Rs.300000. Half of the amount will be paid in cash and remaining will
be paid after a period of 30 days. They immediately sent quotations ( margin
20% ) for getting orders from customers . Kapoor & Co. placed an order with
them for spares worth Rs.240000 on 30 days credit terms.
During the period the following expenses were incurred : Printing and
stationery :Rs.1200 , Travelling Rs.600 , Entertainment expenses : Rs.800.
ABC & Co. made the following sales and purchases during the quarter AprJun on the same terms
June : Purchases Rs. 300000
Sales
Rs. 360000
In the month of June they also took a loan of Rs.50000 from Money Bank
and purchased a computer for Rs.25000.
At the end of the quarter, they wanted to assess the results of their business
. Help them .
Venus Music corner provides is in the business of providing audio CDs to customers.
During March the accounts were maintained by a professional accountant On March
31, the records showed a balance of Rs.21140 in his capital account. Since he
could not afford an accountant , he starts maintaining the accounting records himself.
He prepared the statements for the month of April 2010 and was shocked to find that
his business had not fared well. He wants you to review his statements.
Profit & Loss A/c for the month ended April’10
Expenses
Revenues
Salaries
5600
Investments by owner
Electricity
410
Unearned service revenue
Advertisement
130
Rent
300
Drawings
4000
Loss for the month
10440
6840
10440
Balance Sheet as on April 30, 2010
Liabilities
Assets
Creditors
2510
Recording equipment
Service revenue
Supplies
earned
12660
Debtors
Capital
14300
Cash
29470
25500
2190
1210
570
29470
3000
600