accounting & financial analysis ii

8/14/2019 Accounting & Financial Analysis II

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Accounting & Financial AnalysisAccounting & Financial Analysis

An IntroductionAn Introduction

Prof. Raman ChawlaProf. Raman Chawla


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What is accountingWhat is accounting

Accounting is the art of identifying,Accounting is the art of identifying,

recording, classifying and summarizing inrecording, classifying and summarizing in

a significant manner and in terms oa significant manner and in terms omoney transactions and events which are,money transactions and events which are,

in part at least of a financial character andin part at least of a financial character and

interpreting the result thereof.interpreting the result thereof.

Accounting is a system in which all theAccounting is a system in which all thefinancial transaction are recorded in afinancial transaction are recorded in aproper and system way.proper and system way.


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Characteristics of financialCharacteristics of financial

accountingaccountingAccounting is an art- Art is that part of knowledge which helps us inAccounting is an art- Art is that part of knowledge which helps us inattaining our aim. Accounting helps us in attaining our aim ofattaining our aim. Accounting helps us in attaining our aim ofascertaining the financial results by showing the best way ofascertaining the financial results by showing the best way ofrecording, classifying and summarizing the business transaction.recording, classifying and summarizing the business transaction.

Recording, Classifying and summarizing- It provides informationRecording, Classifying and summarizing- It provides informationabout all the transactions of financial in nature, recorded in journal,about all the transactions of financial in nature, recorded in journal,classifying in forms of ledgers, preparation of trial balance forclassifying in forms of ledgers, preparation of trial balance forchecking the accuracy of accounts.checking the accuracy of accounts.

In terms of money-Only those transaction are recorded which are inIn terms of money-Only those transaction are recorded which are in

terms of money.terms of money.

Interpreting the results- It provide the tools for their analysis, throughInterpreting the results- It provide the tools for their analysis, throughwhich various parties of business obtain information related to them.which various parties of business obtain information related to them.


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Objectives or functions ofObjectives or functions of

accountingaccounting

Knowledge of sales and purchaseKnowledge of sales and purchase

Providing information of closing stockProviding information of closing stock

Knowledge of financial positionKnowledge of financial position

Information related for working capitalInformation related for working capital

Knowledge of profit & loss of the businessKnowledge of profit & loss of the business

Provide information to various partiesProvide information to various parties

Provide Information about embezzlement & fraudsProvide Information about embezzlement & frauds

Evidence in court.Evidence in court.


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Accounting ProcessAccounting Process

Recording of transaction (Journal entry)Recording of transaction (Journal entry)

Classification (Ledger Posting)Classification (Ledger Posting)

Summarizing (Trial balance)Summarizing (Trial balance)

Interpreting (Income &position statement)Interpreting (Income &position statement)

Analysis of transactionsAnalysis of transactions


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Branches of AccountingBranches of Accounting

Financial Accounting:- It is concerned withFinancial Accounting:- It is concerned with

recording and processing the financialrecording and processing the financial

transactions which affect the financialtransactions which affect the financial

position of the business. It leads to theposition of the business. It leads to the

preparation of income statement &preparation of income statement &

position statement of the business.position statement of the business.


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Cost accountingCost accounting

Cost accounting is concerned with theCost accounting is concerned with the

recording, classifying and appropriaterecording, classifying and appropriate

allocation of expenditure for theallocation of expenditure for the

determination of the cost of products ordetermination of the cost of products or

services and for the presentation ofservices and for the presentation of

suitably arranged data for purposes ofsuitably arranged data for purposes of

control and guidance pf the management.control and guidance pf the management.


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Management accountingManagement accounting

It is concerned with the collectingIt is concerned with the collecting

systematically and regularly all suchsystematically and regularly all such

information as will help management ininformation as will help management in

discharging its functions of planning,discharging its functions of planning,

control, decision making, etc. this is alsocontrol, decision making, etc. this is also

named as accounting for management.named as accounting for management.


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Users of accounting informationUsers of accounting information

OwnersOwners

ManagementManagement

CreditorsCreditors

GovernmentGovernment

InvestorsInvestors

EmployeesEmployees

ResearchesResearchesLendersLenders


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Generally Accepted AccountingGenerally Accepted Accounting

principles (GAAP)principles (GAAP)

Business Entity ConceptBusiness Entity Concept

Going Concern conceptGoing Concern concept

Dual Aspect ConceptDual Aspect Concept

Cost conceptCost concept

Money measurement ConceptMoney measurement Concept

Accounting period ConceptAccounting period Concept

Matching ConceptMatching Concept

Accrual conceptAccrual concept


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Business entity conceptBusiness entity concept

Business is treated as a unit or entity apartBusiness is treated as a unit or entity apart

from its owner. The owner of anfrom its owner. The owner of an

organization is always considered to beorganization is always considered to be

separate and distinct from the businessseparate and distinct from the business

which he controls. that is why, the capitalwhich he controls. that is why, the capital

of the owner is always entered in liabilityof the owner is always entered in liability

side of balance sheet. It is considered asside of balance sheet. It is considered asthe creditor of the business.the creditor of the business.


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Going concern conceptGoing concern concept

It is assumed that the business will exisIt is assumed that the business will existfor the foreseeable future andfor the foreseeable future andtransactions are recorded from this pointransactions are recorded from this point

of view. It should continue to operate aof view. It should continue to operate atits present scale in the foreseeableits present scale in the foreseeablefuture.future.


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Dual Aspect ConceptDual Aspect Concept

Financial accounting has dual aspect ofFinancial accounting has dual aspect of

recording. Every debit has itsrecording. Every debit has its

corresponding credit & every credit has itscorresponding credit & every credit has its

corresponding debit. The moderncorresponding debit. The modern

accounting system basically based onaccounting system basically based on

dual aspect of accounting.dual aspect of accounting.


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Money measurement conceptMoney measurement concept

The money concept underlines the factThe money concept underlines the fact

that in accounting every worth recordingthat in accounting every worth recording

event, happening or transaction isevent, happening or transaction is

recorded in terms of money. In otherrecorded in terms of money. In other

words, a fact or a happening which cannotwords, a fact or a happening which cannot

be expressed in terms of money is notbe expressed in terms of money is not

recorded in the accounting books.recorded in the accounting books.


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Accounting period conceptAccounting period concept

Accounts choose some shorter andAccounts choose some shorter and

convenient time for the measurement ofconvenient time for the measurement of

income. Twelve- month period is normallyincome. Twelve- month period is normallyadopted for this purpose. this time intervaladopted for this purpose. this time interval

is called accounting period.is called accounting period.


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Matching conceptMatching concept

It is based on the determination of theIt is based on the determination of the

profit & loss of a particular accountingprofit & loss of a particular accounting

period is the process of matching theperiod is the process of matching the

revenue earned during the period and therevenue earned during the period and the

expenses incurred during the period toexpenses incurred during the period to

obtain such revenue.obtain such revenue.


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Accrual conceptAccrual concept

Under this method revenue recognitionUnder this method revenue recognition

depends on its realization and not actualdepends on its realization and not actualreceipt. Likewise costs are recognizedreceipt. Likewise costs are recognized

when they are incurred and not when paid.when they are incurred and not when paid.


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Accounting conventionsAccounting conventions

ConsistencyConsistency

Full disclosureFull disclosure

ConservatismConservatism


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ConsistencyConsistency

The convention of consistency aims atThe convention of consistency aims at

making the financial statements moremaking the financial statements more

comparable and useful. The conventioncomparable and useful. The convention

holds that in accounting processes, allholds that in accounting processes, allconcepts, principles and measurementconcepts, principles and measurement

approaches should be applied in a similarapproaches should be applied in a similar

or consistent way from one period toor consistent way from one period toanother period.another period.


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Full disclosureFull disclosure

This convention specifies that there shouldThis convention specifies that there should

be complete and understandable reportingbe complete and understandable reporting

in the financial statements of all significantin the financial statements of all significant

information relating to the economic affairsinformation relating to the economic affairsof the entity. All information which is oof the entity. All information which is o

material interest to the users of thematerial interest to the users of the

accounting information should beaccounting information should bedisclosed in accounting statements.disclosed in accounting statements.


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ConservatismConservatism

This is the policy of playing safe.This is the policy of playing safe.

Accounting permits for making reserves toAccounting permits for making reserves to

face the uncertainty situations of theface the uncertainty situations of the

business.business.


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Double entry systemDouble entry system

It is a common system of book-keeping wherebyIt is a common system of book-keeping whereby

the two aspects of every transaction i.e., It is basedthe two aspects of every transaction i.e., It is based

on the dual aspect concepton the dual aspect concept

.

. This method of writingThis method of writingevery transaction in two different accounts onevery transaction in two different accounts on

opposite sides for equal value is known as theopposite sides for equal value is known as the

double entry system of book keeping. This is thedouble entry system of book keeping. This is the

most accurate, complete and scientific system ofmost accurate, complete and scientific system of

accounting.accounting.


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Advantages of double entry systemAdvantages of double entry systemIt keeps a complete record of business transactions.It keeps a complete record of business transactions.

It provides complete information concerning the businessIt provides complete information concerning the business..

It provides a check on the arithmetical accuracy of books ofIt provides a check on the arithmetical accuracy of books ofaccounts.accounts.

It discloses the operating results .It discloses the operating results .

It makes possible a meaning full comparison of operating andIt makes possible a meaning full comparison of operating and

financial performance over a period of time and enable thefinancial performance over a period of time and enable the

businessman to evaluate the progress of his business.businessman to evaluate the progress of his business.

It also enables a business man to plan and control his operations.It also enables a business man to plan and control his operations.

It reduces the chances of committing fraud.It reduces the chances of committing fraud.Past details with regard to any account are easily and accuratelyPast details with regard to any account are easily and accurately

obtainable in this system.obtainable in this system.


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Some common terms inSome common terms in

accountancyaccountancy

Book-Keeping:-It means recording of businessBook-Keeping:-It means recording of business

transactions in the books of accounts in accordance withtransactions in the books of accounts in accordance with

the principles of accounting.the principles of accounting.

Account:- It is a statement of various dealings that occurAccount:- It is a statement of various dealings that occur

between a customer and the firm.between a customer and the firm.


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Classification of accountsClassification of accounts

In order to understand the rules of double entry system,In order to understand the rules of double entry system,it is essential to know which classes of accounts areit is essential to know which classes of accounts areaffected by a particular transaction. For this purpose, allaffected by a particular transaction. For this purpose, allaccounts are classified into two classes:accounts are classified into two classes:

1) personal accounts1) personal accounts2) Impersonal accounts2) Impersonal accounts

A) real accountA) real account

B) nominal accountB) nominal account


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JournalJournal

The journal records all daily transactions of a business inThe journal records all daily transactions of a business in

the order in which they occur. It is the book in which thethe order in which they occur. It is the book in which the

transactions are recorded first of all under the doubletransactions are recorded first of all under the double

entry system. Thus, Journal is a book of original record. Aentry system. Thus, Journal is a book of original record. A

journal does not replace but precedes the Ledger.journal does not replace but precedes the Ledger.

The process of recording transactions in a journal isThe process of recording transactions in a journal is

termed as journalizing Performa of journal is given below.termed as journalizing Performa of journal is given below.

AMOUNTAMOUNTL.FPARTICULARSDATE


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ExplanationExplanation

1. Date: The date on which the transaction was entered1. Date: The date on which the transaction was enteredis recorded here.is recorded here.

2. Particulars: The two aspect of transaction are2. Particulars: The two aspect of transaction arerecorded in this column,i.e, the details regardingrecorded in this column,i.e, the details regardingaccounts which have to be debited and credited.accounts which have to be debited and credited.

L.F: It means ledger folio. The transactions entered inL.F: It means ledger folio. The transactions entered inthe journal are later on posted to the ledger. Procedurethe journal are later on posted to the ledger. Procedureregarding posting the transactions in the ledger has beenregarding posting the transactions in the ledger has beenexplained in the succeeding chapter.explained in the succeeding chapter.

Debit. In this column, the amount to be debited isDebit. In this column, the amount to be debited isenteredenteredCredit. In this column, The amount to be credited isCredit. In this column, The amount to be credited isshownshown


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Golden rules of accountingGolden rules of accounting

Real account- Debit what comes in,Real account- Debit what comes in,

Credit what goes out.Credit what goes out.

Personal account- Debit thePersonal account- Debit thereceivers, Credit the givers.receivers, Credit the givers.

Nominal account- Debit the expensesNominal account- Debit the expenses

& losses, Credit the incomes & gains.& losses, Credit the incomes & gains.


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ACCOUNTING STANDARDSACCOUNTING STANDARDS

Accounting bodies all over the world haveAccounting bodies all over the world havetried to achieve some uniformity in thetried to achieve some uniformity in the

accounting policies by prescribing certainaccounting policies by prescribing certainaccounting standards in order to narrow theaccounting standards in order to narrow therange of alternatives available to anrange of alternatives available to anorganization in respect of collection andorganization in respect of collection and

presentation of accounting information.presentation of accounting information.


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International accounting standardInternational accounting standard

Accounting bodies throughout the world areAccounting bodies throughout the world arestriving to achieve a reasonable degree ofstriving to achieve a reasonable degree ofuniformity in the accounting policies byuniformity in the accounting policies byprescribing certain accounting standards withprescribing certain accounting standards with

respect to the collection and presentation ofrespect to the collection and presentation ofaccounting information. To formulate theaccounting information. To formulate theaccounting standards, they have established aaccounting standards, they have established acommittee called the International Accountingcommittee called the International Accountingstandards committee (IASC) in 1973.Accountingstandards committee (IASC) in 1973.Accounting

bodies of most of the countries, including thebodies of most of the countries, including theinstitute of chartered accountants of India, areinstitute of chartered accountants of India, arethe members of this bodies.the members of this bodies.


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Objectives of committeeObjectives of committee

i) formulating, publishing and promotingi) formulating, publishing and promotingthe use of the accounting standardsthe use of the accounting standardsworldwide,worldwide,

ii) To work for improvement.ii) To work for improvement.

The IASC has so far issued forty oneThe IASC has so far issued forty oneaccounting standardaccounting standard


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Indian accounting standardsIndian accounting standards

Recognizing the need to harmonized the diverseRecognizing the need to harmonized the diverseaccounting policies and practices prevalent inaccounting policies and practices prevalent inIndia. The institute of chartered accountants ofIndia. The institute of chartered accountants of

India constituted an accounting standard boardIndia constituted an accounting standard board(ASB) on 21(ASB) on 21stst april,1977.The main function ofapril,1977.The main function ofASB is to frame accounting standards whichASB is to frame accounting standards whichwould be formally issued under the authority ofwould be formally issued under the authority ofthe council of the institute of charteredthe council of the institute of chartered

accountants.accountants.


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Importance of accounting standardsImportance of accounting standards

The role of mandatory accounting standards inThe role of mandatory accounting standards in

presenting clear-cut account on a uniform basispresenting clear-cut account on a uniform basis

can not overemphasized. The standardscan not overemphasized. The standardsrepresent the ideal practice of accounting andrepresent the ideal practice of accounting and

ensure comparability of accounts because ofensure comparability of accounts because of

uniformity in the presentation. Hence, suchuniformity in the presentation. Hence, such

accounts are bound to show the clear position ofaccounts are bound to show the clear position ofthe state of affairs.the state of affairs.


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Accounting standards issued byAccounting standards issued by

ASB of ICAIASB of ICAI

The ASB of the institute of charteredThe ASB of the institute of chartered

accountants of India, has in line with theaccountants of India, has in line with the

international standards, issued twenty nineinternational standards, issued twenty nine

standards to be followed by its membersstandards to be followed by its memberswhile auditing the accounts of companies.while auditing the accounts of companies.

These are These are


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IASIAS

(AS 1) Disclosure of accounting policies(AS 1) Disclosure of accounting policies

(AS 2) Valuation of Inventories(AS 2) Valuation of Inventories

(AS 3) Cash flow statements(AS 3) Cash flow statements(AS 4) Contingencies and events(AS 4) Contingencies and events

occurring after the balance sheet dateoccurring after the balance sheet date

(AS 5) Net profit or loss for the period,(AS 5) Net profit or loss for the period,prior period and extraordinary items andprior period and extraordinary items and

changes in accounting policieschanges in accounting policies

(AS 6)(AS 6)


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accounting & financial analysis ii

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