unit 1 fin system
TRANSCRIPT
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 1/37
Financial Systems
Unit 1
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 2/37
Financial Statements
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 3/37
Parties Interested in FinancialStatements
Shareholders
Investors
Creditors Labour
Government
Researchers
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 4/37
Accounting Concepts
Business entity concept
Money measurement concept
Going concern concept
Accounting period concept Accounting cost concept
Duality aspect concept
Realisation concept
Accrual concept
Matching concept
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 5/37
Business entity concept
Business enterprise and its ownersare two separate independententities.
Business and personal transactions of its owner are separate
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 7/37
Money measurement concept
All business transactions must be interms of money, that is in thecurrency of a country.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 8/37
Significance
This concept guides accountants what torecord and what not to record.
It helps in recording business transactionsuniformly.
If all the business transactions areexpressed in monetary terms, it will beeasy to understand the accounts preparedby the business enterprise.
It facilitates comparison of businessperformance of two different periods of thesame firm or of the two different firms forthe same period.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 9/37
Going concern concept
Business firm will continue to carry onits activities for an indefinite period of time.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 10/37
Significance
This concept facilitates preparation of financial statements.
On the basis of this concept, depreciationis charged on the fixed asset.
It is of great help to the investors, because,it assures them that they will continue toget income on their investments.
In the absence of this concept, the cost of
a fixed asset will be treated as an expensein the year of its purchase. A business is judged for its capacity to earn
profits in future.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 11/37
Accounting period concept
All the transactions are recorded inthe books of accounts for a specifiedperiod of time.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 12/37
Significance
It helps in predicting the future prospectsof the business.
It helps in calculating tax on businessincome calculated for a particular time
period. It also helps banks, financial institutions,
creditors, etc to assess and analyse theperformance of business for a particularperiod.
It also helps the business firms to distributetheir income at regular intervals asdividends.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 13/37
Accounting cost concept
All assets are recorded in the booksof accounts at their purchase price,which includes cost of acquisition,transportation and installation andnot at its market price.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 14/37
Significance
This concept requires asset to be shown atthe price it has been acquired, which canbe verified from the supporting documents.
It helps in calculating depreciation on fixedassets.
The effect of cost concept is that if thebusiness entity does not pay anything for
an asset, this item will not be shown in thebooks of accounts.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 15/37
Duality aspect concept
Assumes that every transaction has adual effect, i.e. it affects two accountsin their respective opposite sides.Therefore, the transaction should berecorded at two places.
Assets = Liabilities + Capital
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 16/37
Significance
This concept helps accountant indetecting error.
It encourages the accountant to posteach entry in opposite sides of twoaffected accounts.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 17/37
Realisation concept
This concept states that revenue fromany business transaction should beincluded in the accounting recordsonly when it is realised. The termrealisation means creation of legalright to receive money.
Selling goods is realisation, receivingorder is not.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 18/37
Significance
It helps in making the accountinginformation more objective.
It provides that the transactionsshould be recorded only when goodsare delivered to the buyer.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 19/37
Accrual concept
Accrual concept requires that revenueis recognised when realised andexpenses are recognised when theybecome due and payable withoutregard to the time of cash receipt orcash payment.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 20/37
Significance
It helps in knowing actual expensesand actual income during a particulartime period.
It helps in calculating the net profit of the business.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 21/37
Matching concept
The matching concept states that therevenue and the expenses incurred toearn the revenues must belong to thesame accounting period.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 22/37
Significance
It guides how the expenses should bematched with revenue fordetermining exact profit or loss for aparticular period.
It is very helpful for theinvestors/shareholders to know the
exact amount of profit or loss of thebusiness.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 23/37
Accounting Conventions
Consistency
Disclosure
Conservation Materiality
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 24/37
Consistency
The convention of consistency means thatsame accounting principles should be usedfor preparing financial statements yearafter year.
Significance It facilitates comparative analysis of the
financial statements.
It ensures uniformity in chargingdepreciation on fixed assets and valuationof closing stock.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 25/37
Disclosure
All material and relevant facts concerning financialstatements should be fully disclosed.
Significance It helps in meaningful comparison of financial
statements of the different business units.
This convention is of great help to investor andshareholder for making investment decisions.
The convention of full disclosure presents reliableinformation.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 26/37
Conservation
This convention is based on theprinciple that “Anticipate no profit,but provide for all possible
losses” Profit should not be recorded until it
is realised. But if the businessanticipates any loss in the near
future, provision should be made inthe books of accounts for the same.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 27/37
Significance
It helps in ascertaining actual profit.
It is useful in the situation of uncertainties and doubts.
It helps in maintaining the capital of the enterprise
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 28/37
Materiality
Only material fact i.e. important andrelevant information should be supplied tothe users of accounting information.
Significance It helps in minimizing errors in calculation.
It helps in making financial statementsmore meaningful.
It saves time and resources.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 29/37
Branches of Accounting
Financial Accounting
Cost Accounting
Management Accounting orManagerial Accounting
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 30/37
Financial Accounting
Mainly confined to the preparation of financial statements for the use of outsiders like creditors, banks and
financial institutions etc.
Purpose is to calculate profit or lossmade by the business during the year
and exhibit financial position of thebusiness as on a particular date.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 31/37
Cost Accounting
Function of cost accounting is toascertain the cost of the product andto help the management in the
control of cost.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 32/37
Management Accounting
It is accounting for management. i.e.,accounting which provides necessaryinformation to the management for
discharging its functions. It is the reproduction of financial
accounts in such a way as will enablethe management to take decisions
and to control various businessactivities.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 33/37
Systems of Record Keeping
Double Entry
Cash System
Mercantile System( Accrual Concept)
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 35/37
Accounting Standard
Accounting standard provides uniformpractices and common techniques of accounting.
Accounting standards are applicableto all corporate enterprises.
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 36/37
Accounting Standard Board
The Institute of CharteredAccountants of India (ICAI)constituted the Accounting Standards
Board (ASB) on 21 st April, 1977.
Obj i
8/3/2019 Unit 1 Fin System
http://slidepdf.com/reader/full/unit-1-fin-system 37/37
Objectivesand Functions of the Accounting StandardsBoard
To conceive of and suggest areas in which AccountingStandards need to be developed.
To formulate Accounting Standards with a view to assistingthe Council of the ICAI in evolving and establishingAccounting Standards in India.
To examine how far the relevant International AccountingStandard/International Financial Reporting Standard can beadapted while formulating the Accounting Standard and toadapt the same.
To review, at regular intervals, the Accounting Standardsfrom the point of view of acceptance or changed conditions,and, if necessary, revise the same.
To provide, from time to time, interpretations and guidanceon Accounting Standards.
To carry out such other functions relating to AccountingStandards.