ACCOUNTING

• It is an information system that identifies,

records and communicates the economic
events of an organization to interested
users.

• Financial Reporting
 Evolution of Financial Accounting
• Fourteenth Century –Italy – Concept of Duality
of Values – benefit to the entity in the one hand
and its sacrifice on the other.

• Franciscan Monk Fra Luca Pacioli (1445-1515)

codified and published the system of Benefit &
Sacrifice in his book ‘Summa de Arithmetica,
Geometrica, Proportioni et Proportionalita’ in
1494 – earned him the title ‘ Father of
Accounting’.
 Foundations of Accounting
1. Idea of Capital Maintenance:
• Separates the stock of resources used in
economic activity, from the flow of resources
generated by the stock,
• Capital consumed in the business (or
production) is fully recovered from the
revenue, in the income determining process,
• Income should be measured as the excess of
capital at the end of the period over the capital
at the beginning.
Foundations of Accounting……..contd.

2. Idea of Productive Capital

• Accumulation & deployment of large-scale
productive capital involves problem of
maintenance & preservation of such
resources.
3. Idea of Profitable Operations
• Capital will seek the most profitable
operations from among the available
alternatives
 Accounting links

Decision Makers
(Decisions & actions)

Economic Activities

Accounting Information Accounting Process

OBJECTIVES OF ACCOUNTING

Information About Economic Resources, Claim to Resources &

Changes in Resources & Claims
(Specific)

Information useful in assessing amount, timing, and

Uncertainty of future cash flows

Information useful in making Investment &

Credit decisions
(General)
 TYPES OF ACCOUNTING
INFORMATION

• Operating Information – To conduct day-

to-day activities of an operation.
• Management Accounting Information –
Used internally for planning,
implementation & control.
• Financial Accounting Information – Used
both by management & external parties.
 Out come of Financial Accounting
Process
1. The Balance sheet - A report of status or
stock as of a moment of time ( exact
financial position on a given date).
2. The Income Statement – A report of flow,
recognizes the income generating
activities of an organization.
3. The Cash flow Statement – A report of
flow recognizes the cash generating
activities of a firm.
 Reference Books
• Accounting – Text & Cases
By: Anthony, Hawkins & Merchant
TMH 12th (Special Indian) Edition

• Financial Accounting - A Managerial Perspective

By: R. Narainswamy
PHI 2nd Edition

• Cost Accounting – A Managerial Emphasis

By: Horngren, Datar & Foster
Pearson Education 11th Edition

• Management Accounting – Text, Problems & Cases

By: Khan & jain
TMH 4th Edition
ACCOUNTING CONCEPTS
(Only for Balance sheet)
 1. Money Measurement Concept
• Accounting records only those facts that
can be expressed in monetary terms.

• Money is expressed in terms of its value at

the time an event is recorded in the
accounts.

• Subsequent changes in the purchasing

power of money do not affect this amount.
 2. The Entity Concept

• Accounts are kept for entities, as

distinguished from the persons associated
with those entities.

• An entity is any organization or activity for

which accounting reports are prepared.
 3. Going Concern Concept

• Accounting assumes that an entity will

continue to exist indefinitely and that it is
not about to be liquidated.
 4. COST CONCEPT
• An asset is ordinarily entered in the
accounts at the amount paid to acquire it.

• This cost, rather than the current market

value, is the basis for subsequent
accounting for the asset.
 5. Dual – Aspect Concept

• Every economic transaction affects at

least two items and preserves the
fundamental equation:

Assets = Liabilities + Owners’ Equity

FORMAT OF A BALANCE SHEET
1. Report Form: To list assets at the top of the
page and to list liabilities & owners’ equity
beneath them.

2. Account Form : As per GAAP, assets are listed

on the left and liabilities & owners’ equity on
the right side.
As per Indian Accounting Standard Board in a
Balance Sheet, assets are shown on the right
side and the liabilities & owners’ equity on the
left.
BALANCE SHEET CONTENTS
• ASSETS: Resources owned by a business

1. Must be an Economic Resource,

2. Must be controlled by the entity,
3. Cost (or fair value) must be objectively
measurable at the time of acquisition.
 TYPES OF ASSETS
• Current Assets: Assets reasonably expected to
be realized in cash or sold or consumed during
the operating cycle of the entity or within one
year, which ever is longer.
• Cash
• Marketable securities
• Accounts Receivables
• Inventories
• Prepaid Expenses
 TYPES OF ASSETS, contd…..
• Fixed Assets: Assets that are tangible &
relatively long-lived (non-current assets).
• Entity acquires & uses them to produce
goods & services that will generate future
cash flows.
• Property, Plant & Machinery.
• Investments ( securities of one company
owned by another for long-term return or
gaining control).
 TYPES OF ASSETS, contd…..
• Intangible Assets: Valuable but non-
physical things controlled by the business.

• Goodwill, Patents, Copyrights,

Trademarks, Franchises etc.

• Distinguished from Prepaid Expenses

(Intangible current assets) as they have a
longer life span.
 TYPES OF LIABILITIES
(Obligation to outsiders)
• Current Liabilities: Obligations expected to
be satisfied by the use of current assets or
by creation of further current liabilities.
• Accounts/ Notes/ Taxes Payable,
• Accrued Expenses,
• Deferred Revenue (Unearned revenues/
Pre-collected revenues)
• Current Portion of a long-term Debt (due
within next year)
 OWNERS’ EQUITY
• Shareholders’ Equity
1. Paid-in-capital – Amount owners have invested by purchasing
shares of stock (Contributed Capital).
2. Retained Earnings – (Earned Capital) to be determined by:
the difference between total earnings of the entity from its
inception to date and the total amount of dividends paid out to its
shareholders over its entire life.
3. Drawings – In a proprietorship/ partnership firm, the owners
earnings during the period is decreased by owner’s drawings.
Drawings in an unincorporated firm are analogous to a
corporation’s dividends.
4. Current Ratio – Indicate entity’s ability to meet current liabilities
through current assets – as most current assets are expected to
be converted to cash within a year & most current liabilities are
expected to use cash within a year.