financial accounting. to measure is to manage financial accounting management accounting financial...

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FINANCIAL ACCOUNTING

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Page 1: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

FINANCIAL ACCOUNTING

Page 2: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

To measure is to manage

Page 3: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

Financial Accounting

Management Accounting

Financial Management

Cost Accounting

Page 4: 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

Page 5: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

A manager may be required to take the following decisions :

• 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

Page 6: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

Users of Accounting information

investors ( Institutional and retail ) lenders financial analysts managers employees customers suppliers government and regulatory bodies public

Page 7: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

Financial Statements

Balance Sheet

Profit and Loss Account

Notes to Account

Cash Flow Statement

Page 8: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

Accounting Principles – Concepts and conventions

GAAP

Page 9: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

Accounting framework

Components of Financial Statements

Objectives of Financial statements

Users and their information needs

Underlying assumptions

Qualitative characteristics of financial statements

Page 10: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

Concepts and Conventions Business entity Going concern Money Measurement Periodicity Consistency Accrual Conservatism Materiality Matching

Page 11: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

Forms of business organization

Proprietary concernsPartnership firms Companies – pvt /public/govt/listed/unlistedStatutory corporation

Page 12: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

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 .

Page 13: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

Importance of Ethics in Accounting

Page 14: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

Accounting Standards

International Financial Reporting Standards (IFRS)

Page 15: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

Accounting terms :

Assets Liabilities Capital CreditorsDebtorsReservesIncomes

– Sales – Other incomes– Profit on sale of assets

Expenses– Cost of goods sold– Direct expenses– Administrative expenses– Financial expenses– Selling expenses

Profit – Gross /NetDividendTaxesProvisionsBad debts

Page 16: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

• 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 ?

Page 17: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

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 +LiabilitiesThe 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

Page 18: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

A Ltd. issues equity shares of Rs.50.00 lacsA Ltd. purchases Building for Rs.20.00 lacsA ltd. purchases Plant & machinery for Rs.15 lacsA Ltd. takes a loan of Rs.5.00 lacs from BankA Ltd.purchases raw materials for Rs.5.00 lacsA Ltd.pays salaries Rs.1.00 lacA ltd. sells goods for Rs. 2.00 lacs in cashA ltd. sells goods for Rs. 10.00 lacs on creditA Ltd. purchases equipments for Rs.5.00 lacs on creditA Ltd. repays bank loan Rs.2.00 lacs

Arrive at the final results of the above transactions on the accounting equation.

Page 19: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

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:1. Collected payments from customers Rs.180002. Billed clients for professional services Rs. 350003. Purchased supplies on credit Rs. 40004. Purchased computer Rs.250005. Received commission Rs.30006. Paid office rent :Rs.40007. Withdrew cash for personal use Rs.15008. Paid staff salary Rs.90009. Paid creditors Rs.600010. Took a bank loan Rs.32000.

Help Jai to find his business results.

Page 20: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

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 Apr- Jun on the same termsJune : Purchases Rs. 300000

Sales Rs. 360000In 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 .

Page 21: FINANCIAL ACCOUNTING. To measure is to manage Financial Accounting Management Accounting Financial Management Cost Accounting

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’10Expenses Revenues

Salaries 5600 Investments by owner 3000Electricity 410 Unearned service revenue 600Advertisement 130Rent 300Drawings 4000 Loss for the month 6840

10440 10440

Balance Sheet as on April 30 , 2010 Liabilities Assets

Creditors 2510 Recording equipment 25500Service revenue Supplies 2190earned 12660 Debtors 1210Capital 14300 Cash 570

29470 29470