1.undrstading financial accounting

8/6/2019 1.Undrstading Financial Accounting

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What is Business?y A continuous economic activity carried out to earn

profit through:

y Production and sales of goods and services tocustomers

y Generating and rendering services



Types of Business

y Manufacturing

y Merchanding/Trading Companies

y Services

y Hybrid companies



Forms of Business Organization

ySole Proprietorship/ Trading ,

yPartnership Firm,

y Joint Stock Company and

yOthers like cooperative, non-profitmaking etc.



U

sers of Accounting InformationExternal users

y Creditors and Suppliers

y Tax authorities

y Regulatory bodies

y Economics Planners

y Government

y Customers

y Shareholders and Investors

y Employees and Workers

Internal users Managers, CEO, BODS, Supervisors



Means of Accounting Information

y Income Statement,

y Balance Sheet,

y Statement Of Changes In Equity

y Statement Of Changes In Retained Earnings,

y Statement Of Cash Flow,

yManagement Disclosure and Analysisy Notes



Characteristics of InformationyRelevance: Timely, Neutral, prediction,

Feedback

yReliable : Faithful, Verifiable and Neutral

yComparability: Different companies withsame accounting principles

yConsistency: Follows same accountingmethods from year to year



Constraints of Accountingy Materiality GAAPs does not have to follow small

values

yConservatism When Doubt choose the solution that

will be least likely to overstate assets and incomes



Assumptions in Accountingy Monetary assumption: Things than can be expressed be

recorded in accounting.

y Separate entity: Every economics activities can beseparately identified and accounted for creditors,

shareholders, customers

y Time period assumption: Life of a business can bedivided into artificial time period that will be normally for

year.Monthly, quarterly, reports to shareholders andmonthly statements for internal purpose.

y Going concern assumption: will remain in operationsfor the foreseeable future.



Principlesy Cost principle: indicates that assets are recorded at

their cost price not only at the time of purchase butalso over the time assets are held.

y Full disclose principle: Events and circumstancesthat make differences in financial statements shouldbe disclosed.

y Revenue principle: Under this principle, all revenue

and incomes that are realized in cash or in some valuable consideration or resulted in some legalobligation assured to pay by customers are accountedfor.



y Dual Aspect Principle: Every transaction has twofold effects. This is also foundation of double entry

systemy Matching principle: Cost and expenses of a particular

period mush be matched with the revenues generatedfor the period to determine net income and loss.

y

Accrual accounting principle: It assumes that allrevenues are recorded as revenues of the period

whether they are received or not. Similarly, Cost arerecorded as cost whether they are paid or not.



Introduction to Accounting

y Process of identifying, measurement, classifying,

recording, summarizing and interpretation of the

transactions of a business in terms of money to

ascertain the result and financial position of businessactivities of particular period.

Ultimately, all accounting information is accumulated

to help someone make decisions. That someone may be

a company president, a production manager, a hospital

or school administrator, a sales manager, a shareholder,

a small-business owner, a politicianthe list is almost

infinite.



increased scope of accounting with increase in the

competition and business complexities.

� Almost all managers in every organization are

better equipped to perform their duties when they

have a reasonable grasp of accounting data.

� For example, a knowledge of accounting is crucial

for decisions by government agencies regarding

research contracts, defense contracts, and loan

guarantees.

� In fact, a survey of managers ranked accounting as

the most important business course for future

managers.



Accounting Process/Function

Identification

Recording

Communication

Select economic events

Record Classify and Summarize

Prepare reports and analyze



Branch of Accounting

y Financial Accounting

y Cost Accountingy Management Accounting



Cost Accountingy Accumulates, classifies and interprets costs to use in

performance evaluation and decision-makingy Deals primarily with the accumulating cost data

needed by the management to control the currentoperations and plan for future.y Provides accurate and timely information needed to

help the business and control costs.y Generally, both financial accounting and

management accounting use costs accumulated andclassified by the cost accounting for external andinternal purposes.

y Traditionally, cost accounting focused inmanufacturing cost only but at present it is also usedin non-manufacturing concerns for cost control.



Objectives of Cost Accounting

y To ascertain cost per unit of different types of products

y To ascertain the element of costs

y To disclose sources of wastages and prepare report for control

y

To provide requisite data for fixation of pricey To exercise effective control of inventory

y To provide useful data for financial decision

y To organize cost reduction programs

y

To advise management for future policies and projects



Financial Accounting

y Concerns with the preparation of financial statements

and reports like income statement and balance sheets of

specific periods for external users to show the financial

position of the company.y A summarized form of the overall financial position of

company. It provides information for external users like

shareholders, creditors, suppliers, government etc.

y Develops information for external decision makers like

shareholders, creditors, government, suppliers etc.



Objectives of financial accounting

y To keep systematic records of financial transactions

y To ascertain the results of operations

y To reveal the overall financial positions of organization

y To report past performance and future prospects



Management Accounting

y Branch of accounting, which is concerned with supplying

relevant information to managers at appropriate time to

enable them to take decisions in organization.

y

Process of accounting, which generates accountinginformation from both financial accounting and cost

accounting and provides essential accounting information to

all departments concerned.

y

Process of identifying, measuring, analyzing, interpretingand communicating accounting information to department

concerns to meet organizational goals and objectives.



Ob jectives f M gement cc nting

y Providing information to the managers the for decision making andplanning in revenue and cost projection of organization

y Assisting managers in interpretation of financial data that are not

understand by internal users

y Assisting managers in directing and controlling operations through its

attention in their function

y Motivating managers toward the achievement of organization's goals

y Measuring the performance of managers, subunits and employees

within organization

y

Assessing the organizations competitive position, and working withthe other managers to ensure organization's long term

competitiveness



Career in Accountingy Financial accountant,

y Cost accountant,

y Management accountant,

y Internal auditor,

y Account system designer,

yTax accountant,

y Statutory auditors,

y Tax consultants etc..



Accounting bodiesy ACCA, CA, CPA

y ICWA, CIM A, IM A, ICA

1.undrstading financial accounting

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