FINANCIAL ACCOUNTING.

FA is the process of measuring and converting the business decisions into financial statements.

This process is governed by generally accepted accounting principles (GAAP).

What you measure?

Business decisions:

• Financial decisions
• Investment decisions
• Operating decisions

Every business decisions will involve financial items.

• Income
• Expenses
• Assets
• Liabilities
• Equity

FINANCIAL STATEMENTS

• Balance sheet
o A= L +E
▪ Asset: anything which has the ability to generate future cash flows.
o E= A- L
▪ Equity is the residual claim of the owners.
▪ Equity = capital + reserves = shareholders fund.
o L= A-E
▪ Its an obligation of the firm arising out of some contract. Therefor contractual
obligation.
▪ Statutory obligation.
• Income statement

Profit= income – expenses.

• Cash flow statement.

Cash in hand= opening + receipts – payments. (if openings then op. Cash in hand)

Payments:

May result in one of the followings-

May be an expense.

Acquisition of an asset.

Reduction of liability.
 Reduction in equity (Cap+Reserves)- when u distribute dividends among shareholders, buyback of
shares.

Receipts

may result in one of the following:

Income

Reduction in asset (accnts receivble- returns from debtors)

Increase in liability

Increase in equity- issue of shares.

Cash Flow Statement.

• AS-3 or Ind AS-7

Cash flows should be classified into

o CFO
o CFF
o CFI

CIH= opening + receipts – payments.

CIH= opening

Cash from F.Activities

Receipts

• Issue of shares
• Issues of debentures/bonds
• Borrowing/loans
 Less

Payments

• BB of shares CFF: +ve or –ve.

• Redemption of bonds/debentures
• Repaymnt of loans
• Intrst paid
• Dividend.

Cash from operating activites

Receipts

• Sales CFO: +VE OR -VE

• Collecting from debtors
• Advance from collectors

less

Payments

• Purchase of stock
• Payments to the creditors
• expenses