Introduction to Books of Accounts and Financial Statements

Evolution of AccountingThehistory of accountingor accountancy is thousands of years old and can be traced toancientcivilisations.Accounting Records date back 7000 yearsRecording of BarterRecording numbersDouble Entry system developed in medieval Europe (13th Century)

*Different Types of AccountingFinancial AccountingCost AccountingManagement Accounting*

Financial AccountingIs mainly concerned on gathering historical financial information To prepare the statements like Balance sheet, income statement, retained earning statement and cash flow statement To meet the needs of investors, creditors, and other external users of financial information. Financial accounting doesnt give details regarding the operating efficiency of the concern.

Cost AccountingIt is defined asa technique or method for determining the cost of a project, process, or thing. . . . This cost is determined by direct measurement, arbitrary assignment, or systematic and rational allocation. Is an internal reporting system for the own management for decision making. The appropriate method of determining cost depends on the circumstances that generate the need for information

Management AccountingManagement accounting is tool for accounting and finance professionals who works inside organizations whose primary function is to design and evaluating business processes, budgeting and forecasting, implementing and monitoring internal controls, and analyzing, synthesizing, and aggregating information to help drive economic value.The role of management accounting differs from that of public accounting, since management accountants work at the beginning of the value chain, supporting decision making, planning, and control, while audit and tax functions involve checking the work after the fact. Management accountants are valued business partners, directly supporting an organizations strategic goals. With a renewed emphasis on good internal controls and sound financial reporting, the role of the management accountant is more important than ever.

So What is Financial AccountingLanguage of BusinessIdentifying a business transactionPurchasingSellingSalariesOther ExpensesNet ProfitPreparation of Business Documents.Recording of the transaction in the book of first entry Posting in the ledger Preparation of Trial Balance Preparation of Profit and Loss Account and Balance Sheet

*What are Books of Account?Books maintained to help owner find out profit or loss in his business dealings a particular year.Books of Acount will help to:Compile all information and transaction as they take place,Present all information in a readily understandable, concise and compact manner. To find out profit or loss of the business To show the position of the asset and liabilities To know the progress of the business To help in taking decisions to improve profit for future years *

*How are Books of Account maintained?Use of Double entry system of book keepingFundamental principle is that every transaction has two aspects:Receiving the benefit, and Giving the benefitThus every transaction 2 effects have to be givenTransactions can be for:Receipt of money Payment of moneyExpenses for which payment to be done later (i.e. on credit)Bills/Invoices for which money will be received laterOther adjustments like interest on capital, etc*

*Which Books of Account are normally maintained?Cash BookBank BookPetty Cash BookSales RegisterPurchase or Expense RegisterJournalLedger (maybe bifurcated into Customers Ledger, Creditors Ledger and General Ledger)*

*Books of Account Review or Scrutiny of Ledger Accounts can provide information about transactions which are entered therein. A typical ledger account looks as under:*

DebitCreditDateParticularsAmt (Rs)DateParticularsAmt (Rs.)

*Reports from Books of AccountsTrial BalanceSummary of closing balances of all Ledger A/cs at the end of the year

Final AccountsProfit and Loss AccountBalance Sheet*

**Financial Statements why required? To find out:Profitability for a period Position of assets and liabilities as on the year endPrepared for different uses and users like:management, Proprietor, Partners or Shareholders, creditors, consumers, Government agencies etc. *

**Financial Statements Some Accounting Conventions & ConceptsMateriality ConservatismConsistencyRealisationEntity ConceptMoney Measurement ConceptGoing Concern ConceptCost ConceptDual Aspect conceptAccounting Period ConceptAccrual ConceptMatching Concept

**Financial Statements Some Accounting ConceptsAssets = Liabilities + Owners Equity

Owners EquityIncreases by New InvestmentsIncomesProfits

Decreases by WithdrawalsExpensesLosses

**Financial Statements Some Accounting Concepts

IncreaseDecreaseAssetsDebitCreditLiabilitiesCreditDebitOwners Equity CreditDebit

**Financial Statements Information Processing CycleCollection of Raw dataAnalysis of transactionsRecording of transactionsPosting Transactions to LedgersPreparation of Trial BalancePassing of Adjustment EntriesPreparation of Financial Statements

**Financial Statements Financial statements include:Balance Sheet gives details of assets, liabilities and equity as on the reporting date.Profit & Loss A/c - gives the revenue, expenditure and the resultant profit for the reporting period.Schedules gives the details of items included under various heads of the balance sheet, profit and loss account and other additional information like contingent liabilities.

**Financial Statements Financial statements of a company also include:Notes to Accounts these give details of the various accounting policies followed, quantitative information and other statutory information.Cash Flow Statement that reconciles the change in cash from the beginning to the end of the reporting period.

**Financial Statements BALANCE SHEET

** Shareholders Funds in case of a companySources of Funds(Liabilities)Application of Funds(Assets)Partners Capital ** Secured & Unsecured LoansCurrent LiabilitiesFixed assetsInvestmentsCurrent Assets

*Illustrative Balance Sheet for a Proprietorship/PartnershipM/s _____ BALANCE SHEET as at 31st March 2008

LIABILITIESAMT(RS)ASSETAMT(RS)Capital or Current Accounts(for proprietor or each partner)Share Capital (for companies)Loans from BanksSundry creditorsBills Payablexxx

xxxxxxxxxxxxFixed assetsInvestmentsClosing StockDebtorsCashPrepaid expensesxxx

xxxxxxxxxxxxxxxxxx

*Illustrative Balance Sheet for a Proprietorship/Partnership

Particulars31-3-2008 Rs.31-3-2007Rs.SOURCES OF FUNDSCapital/Current Accounts or Share CapitalLoan fundsxxxxxxxxxxxxxxxxxxTOTAL RS.xxxxxx2.APPLICATION OF FUNDSFixed AssetsInvestmentsWorking capital (Current Assets less Current Liabilities)xxxxxxxxxxxxxxxxxxTOTAL RS.xxxxxx

**Financial Statements Sources of Funds or Liabilities These are amounts a company OWES. They can be:Partners Capital and Current AccountsShareholders Funds (Share Capital)Equity Shares or Preference Shares. Borrowings (secured or unsecured loans)Term loans, Debentures, Working capital loans, etc.Current Liabilities Trade creditors, provisions for taxation, etc.

*Financial Statements Capital in the case of limited companiesShare Capital:Authorised: 1,00,000 shares of Rs.10 each Rs. 10,00,000Issued, Subscribed and Paid-up:50,000 shares of Rs.10 each fully paid-up Rs. 5,00,000Less: Calls unpaid Rs. 25,000 Rs. 4,75,000Capital in the case of partnership firmsPartners capital accountsFixed CapitalsCurrent AccountsCapital in the case of proprietary ConcernsProprietors Capital Account

*Financial Statements Capital in the case of partnership firmsPartners Capitals: ARs.4,00,000 B Rs.2,00,000 Rs.6,00,000Partners Current Accounts ARs,2,65,380 B Rs.1,45,750Rs.4,11,130

Total Rs.10,11,130

**Financial Statements Application of Funds or AssetsThese are amounts that a company OWNSFixed Assets (assets used for normal conduct of the business and lasting for a number of years)Land, Building, Plant & Machinery, Equipments etc.Investments (acquired out of surplus funds)Mutual funds, Shares, Government Securities etc.Current Assets (expected to convert into cash within 1 yr) Inventories, Debtors, Cash/Bank Balances, Advances.

**Financial Statements Profit & Loss Account

IncomesExpenses

**Financial Statements Incomes can be:Operating Incomes (Incomes from the core business operations of a company).Other income (from exceptional or one-time transactions).Expenses can be:Operating expenses (Expenses for running the business including depreciation).Finance Expenses (Interest, etc).Other expenses (exceptional or one-time expenses).

**Financial Statements Additional information is normally given in Notes to AccountsNotes to accounts include:Accounting Policies followedChange in Accounting PoliciesAny deviation from fundamental assumption:Going concern,Consistency,Accrual,Disclosures required by Companies Act,2013Disclosures required by Accounting Standards

Generally Accepted Accounting Principles(GAAP)Generally accepted accounting principles(GAAP) refer to the standard framework of guidelines forfinancial accountingused in any given jurisdiction; Generally known asaccounting standardsorstandard accounting practice. These include the standards, conventions, and rules that accountants follow in recording and summarizing and in the preparation offinancial statements.

*What are Accounting StandardsTo harmonise the diverse Accounting Policies & practices followed by different entities, ICAI constituted the Accounting Standards Board (ASB). ASB after due discussion and deliberation formulates and issues the Accounting Standards. In the initial years, AS are recommendatory. Once the awareness is ensured, the AS is made mandatory.Companies Act has also notified the Companies (Accounting Standards) rules in 2006 which need to be followed by all companies.*

*Accounting Standards Areas covered by Accounting Standards are:Inventory valuation Fixed assets and Depreciation Revenue Recognition Foreign Exchange fluctuation gains/lossesInvestments Related party disclosuresSegment ReportingIntangible AssetsConsolidationEmployee Benefits, etc

Accounting Standards (AS) All companies need to mandatorily follow ASFor partnership and proprietorship concerns, the same may not be followedHowever, basic and acceptable accounting principles still need to be followed.Fixed Assets and DepreciationRevenue RecognitionInvestment valuation, etc*

**What is an Audit?Audit is an examination of the books of Account and the financial statementsAuditor checks the following:Whether books of account properly maintainedWhether all relevant entries passedWhether Accounting Standards followedWhether balance sheet and profit & loss account is properly prepared as per requirementsWhether Balance Sheet & Profit & Loss Account shows a true and fair view

*Different types of auditAudit under Companies Act, 2013 Required for all companiesReport is in 2 parts i.e. main report (contains assertions and qualifications, if any) and annexure containing comments on 21 points covering various aspects of the internal functioning of the company.Audit under Income Tax ActRequired for all entities whose turnover for the year exceeds Rs.40 lakhs (including companies)Partnership firms would be subject only to tax auditAccounts of partnership firms would consist of Auditors Report (Form 3CB, 3CD), Balance Sheet, Profit & Loss Account, Schedules and Notes to Accounts

** Auditors Report Unqualified Report: An unqualified opinion is expressed when the auditors concludes that the financial statement gives true & fair view. Modified Report:Matters that do not affect the auditors opinion:Emphasis of matter.Matters that effect auditors opinion:Qualified opinion,Disclaimer of opinion,Adverse opinion,

** Auditors Report Qualifications in Auditors reportTo find nature of qualification.Effect on profitability in current year, future yearsIllustrative Qualifications:Non-provision for expenses,No write-offs carried out for irrecoverable debtors, loans, investments, etc.,Non compliance with GAAP,Non compliance with Companies Act, 1956 and so on

**Difference between company & non corporate Entities

DescriptionCompaniesNon corporateStatute applicableCompanies Act, 1956Partnership Act, 1932Format of Financial StatementsSchedule VI of Companies Act, 1956As given by ICAI

AuditCompulsoryOptional *Applicability of AS Mandatory Optional **

* Tax Audit compulsory if turnover exceeds 40 lakhs ** Basic accounting principles to be followed

Reporting to ShareholdersDirectors ReportChairman/CEO LetterManagement Discussion & AnalysisManagement TeamCorporate Governance ReportAuditors ReportBalance Sheet/P&L/Cash Flow StatementsSchedules to the Balance SheetNotes to Accounts

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