A

PROJECT ON
ROLE OF FINANCIAL ACCOUNTING IN BUSINESS

A Project Submitted to
University of Mumbai for partial completion of the degree of
Master in Commerce
Under the Faculty of Commerce

By
AATISH SHARADCHANDER DWIVEDI
Under the Guidance of
PROF. KEVAL KANDU

D. T. S. S. Collage of Commerce
Kurar Village, Malad (East), Mumbai - 400 097

Semester IV
Academic Year 2020-2021
 Declaration by Learner

I the undersigned Mrs. AATISH SHARADCHANDRA DWIVEDI here by, declare that the work
embodied in this project work titled “ROLE OF FINANCIAL ACCOUNTING IN BUSINESS ”,
forms my own contribution to the research work carried out under the guidance of PROF. KEVAL
KANDU is a result of my own research work and has not been previously submitted to any other
University for any other Degree/ Diploma to this or any other University.

Wherever reference has been made to previous works of others, it has been clearly indicated as such
and included in the bibliography.

I, here by further declare that all information of this document has been obtained and presented in
accordance with academic rules and ethical conduct.

AATISH DWIVEDI

Certified by
PROF. KEVAL KANDU
 Acknowledgment

To list who all have helped me is difficult because they are so numerous and the depth is so
enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimensions in the
completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do this project.

I would like to thank my Principal, Dr. M. S. KURHADE / I/C Principal Dr. SUSSMITA
DAXINI for providing the necessary facilities required for completion of this project.

I take this opportunity to thank our Co-ordinator Mr. NAGARAJU KANDURI, for his moral
support and guidance.

I would also like to express my sincere gratitude towards my project guide PROF. . KEVAL
KANDU whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference books and
magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me in the
completion of the project especially my Parents and Peers who supported me throughout my
project.
 INDEX

Chapter Title of Chapter Page No.

No.
1.1 Introduction 2
1.2 Basic Charge 6
1.3 Chargeability 7
1.4 Applicability of section22 12
1.5 Principal of mutuality vis-a-vis 13
section 22
1.6 Annual Value Of House Property 14
1.7 Computation of income from house 21
property
1.8 Deduction from Taxable Income 29
2 Literature Review 31
3 Research Methodology 40
4 Data Analysis 47
5 Suggestion and Conclusion 53
6 Bibliography 55
 EXECUTIVE SUMMARY

A business may borrow money by issuing bonds. Bonds are sold to investors and normally require
repayment with interest at a specific time in the future. Bonds are a type of long-term financing,
with a face amount that is normally due after several years have passed. For example, Lucent
Technologies currently has bonds due in 2028. In contrast, the interest on bonds is normally paid
semiannually.

Most large corporations also borrow money by issuing commercial paper and negotiating lines of
credit with financial institutions. Commercial paper is debt obligations that are sold to investors,
such as banks and insurance companies, based upon the general creditworthiness of the
corporation. Similarly, lines of credit are negotiated with financial institutions in such a way that
the corporation may borrow on the line of credit as needed. For example, Hershey Foods has a
$500 million line of credit with a syndicate of banks. However, as of December 31, 2001, it had
borrowed slightly over $250 million on its credit line. When a corporation issues commercial paper
or borrows on a line of credit, it incurs a note payable. A note payable requires payment of the
amount of borrowing plus interest. Notes payable may be issued either on a short-term or a
longterm basis.
 INTRODUCTION

1.1 INTRODUCTION

Accounting has rightly been termed as the language of the business. The basic function of a
language is to serve as a means of communication Accounting also serves this function. It
communicates the results of business operations to various parties who have some stake in the
business viz., the proprietor, creditors, investors, Government and other agencies. Though
accounting is generally associated with business but it is not only business which makes use of
accounting. Persons like housewives, Government and other individuals also make use of a
accounting. For example, a housewife has to keep a record of the money received and spent by her
during a particular period. She can record her receipts of money on one page of her "household
diary" while payments for different items such as milk, food, clothing, house, education etc. on
some other page or pages of her diary in a chronological order. Such a record will help her in
knowing about :

(i) The sources from which she received cash and the purposes for which it was utilised.

(ii) Whether her receipts are more than her payments or vice-versa?

(iii) The balance of cash in hand or deficit, if any at the end of a period.

In case the housewife records her transactions regularly, she can collect valuable information
about the nature of her receipts and payments. For example, she can find out the total amount
spent by her during a period (say a year) on different items say milk, food, education,
entertainment, etc. Similarly she can find the sources of her receipts such as salary of her husband,
rent from property, cash gifts from her relatives, etc. Thus, at the end of a period (say a year) she
can see for herself about her financial position i.e., what she owns and what she owes. This will
help her in planning her future income and expenses (or making out a budget) to a great extent.
The need for accounting is all the more great for a person who is running a business. He must
know : (i) What he owns? (ii) What he owes? (iii) Whether he has earn a profit or suffered a loss on
account of running a business? (iv) What is his financial position i.e. whether he will be in a position
to meet all his commitments in the near future or he is in the process of becoming a bankrupt.

ORIGIN AND GROWTH OF ACCOUNTING

Accounting is as old as money itself. However, the act of accounting was not as developed as it is
today because in the early stages of civilisation, the number of transactions to be recorded were so
small that each businessman was able to record and check for himself all his transactions.
Accounting was practised in India twenty three centuries ago as is clear from the book named
"Arthashastra" written by Kautilya, King Chandragupta's minister. This book not only relates to
politics and economics, but also explain the art of proper keeping of accounts. However, the
modern system of accounting based on the principles of double entry system owes it origin to Luco
Pacioli who first published the principles of Double Entry System in 1494 at Venice in Italy. Thus,
the art of accounting has been practised for centuries but it is only in the late thirties that the study
of the subject 'accounting' has been taken up seriously.

MEANING OF ACCOUNTING

The main purpose of accounting is to ascertain profit or loss during a specified period, to show
financial condition of the business on a particular date and to have control over the firm's property.
Such accounting records are required to be maintained to measure the income of the business and
communicate the information so that it may be used by managers, owners and other interested
parties. Accounting is a discipline which records, classifies, summarises and interprets financial
information about the activities of a concern so that intelligent decisions can be made about the
concern. The American Institute of Certified Public Accountants has defined the Financial
Accounting as "the art of recording, classifying and summarising in as significant manner and in
terms of money transactions and events which in part, at least of a financial character, and
interpreting the results thereof". American Accounting Association defines accounting as "the
process of identifying, measuring, and communicating economic information to permit informed
judgements and decisions by users of the information.

From the above the following attributes of accounting emerge :

(i) Recording : It is concerned with the recording of financial transactions in an orderly

manner, soon after their occurrence In the proper books of accounts.
(ii) Classifying : It Is concerned with the systematic analysis of the recorded data so as to
accumulate the transactions of similar type at one place. This function is performed by
 maintaining the ledger in which different accounts are opened to which related
transactions are posted.
(iii) Summarising : It is concerned with the preparation and presentation of the classified
data in a manner useful to the users. This function involves the 5 preparation of
financial statements such as Income Statement, Balance Sheet, Statement of Changes in
Financial Position, Statement of Cash Flow, Statement of Value Added.
(iv) Interpreting : Nowadays, the aforesaid three functions are performed by electronic
data processing devices and the accountant has to concentrate mainly on the
interpretation aspects of accounting. The accountants should interpret the statements
in a manner useful to action. The accountant should explain not only what has
happened but also (a) why it happened, and (b) what is likely to happen under specified
conditions.

DISTINCTION BETWEEN BOOK-KEEPING AND ACCOUNTING

Book-keeping is a part of accounting and is concerned with the recording of transactions

which is often routine and clerical in nature, whereas accounting performs other
functions as well, viz., measurement and communication, besides recording. An
accountant is required to have a much higher level of knowledge, conceptual
understanding and analytical skill than is required of the book-keeper.

An accountant designs the accounting system, supervises and checks the work of the
book-keeper, prepares the reports based on the recorded data and interprets the
reports. Nowadays, he is required to take part in matters of management, control and
planning of economic resources.

DISTINCTION BETWEEN ACCOUNTING AND ACCOUNTANCY

Although in practice Accountancy and Accounting are used interchangeably yet there is
a thin line of demarcation between them. The word Accountancy is used for the
profession of accountants - who do the work of accounting and are knowledgeable
persons. Accounting is concerned with 6 recording all business transactions
systematically and then arranging in the form of various accounts and financial
statements. And it is a distinct discipline like economics, physics, astronomy etc. The
word accounting tries to explain the nature of the work of the accountants
(professionals) and the word Accountancy refers to the profession these people adopt

NATURE OF ACCOUNTING

The various definitions and explanations of accounting has been propounded by

different accounting experts from time to time and the following aspects comprise the
nature of accounting :
i) Accounting as a service activity
Accounting is a service activity. Its function is to provide quantitative information,
primarily financial in nature, about economic entities that is intended to be useful in
making economic decisions, in making reasoned choices among alternative courses of
action. It means that accounting collects financial information for the various users for
taking decisions and tackling business issues. Accounting in itself cannot create wealth
though, if it produces information which is useful to others, it may assist in wealth
creation and maintenance.
(ii) Accounting as a profession
Accounting is very much a profession. A profession is a career that involve the acquiring
of a specialised formal education before rendering any service. Accounting is a
systematized body of knowledge developed with the development of trade and
business over the past century. The accounting education is being imparted to the
examinees by national and international recognised the bodies like The Institute of
Chartered Accountants of India (ICAI), New Delhi in India and American Institute of
Certified Public Accountants (AICPA) in USA 7 etc. The candidate must pass a vigorous
examination in Accounting Theory, Accounting Practice, Auditing and Business Law. The
members of the professional bodies usually have their own associations or
organisations, where in they are required to be enrolled compulsorily as Associate
member of the Institute of Chartered Accountants (A.C.A.) and fellow of the Institute of
Chartered Accountants (F.C.A.). In a way, accountancy as a profession has attained the
stature comparable with that of lawyer, medicine or architecture.

(iii) Accounting as a social force

In early days, accounting was only to serve the interest of the owners. Under the
changing business environment the discipline of accounting and the accountant both
have to watch and protect the interests of other people who are directly or indirectly
linked with the operation of modern business. The society is composed of people as
customer, shareholders, creditors and investors. The accounting information/data is to
be used to solve the problems of the public at large such as determination and
controlling of prices. Therefore, safeguarding of public interest can better be facilitated
with the help of proper, adequate and reliable accounting information and as a result of
it the society at large is benefited.
(v) Accounting as a language
Accounting is rightly referred the "language of business". It is one means of reporting
and communicating information about a business. As one has to learn a new language
to converse and communicate, so also accounting is to be learned and practised to
communicate business events.
A language and accounting have common features as regards rules and symbols. Both
are based and propounded on fundamental rules and symbols. In language these are
known as grammatical rules and in accounting, these are 8 termed as accounting rules.
The expression, exhibition and presentation of accounting data such as a numerals and
words and debits and credit are accepted as symbols which are unique to the discipline
of accounting.
(vi) Accounting as science or art
Science is a systematised body of knowledge. It establishes a relationship of cause and
effect in the various related phenomenon. It is also based on some fundamental
principles. Accounting has its own principles e.g. the double entry system, which
explains that every transaction has two fold aspect i.e. debit and credit. It also lays
down rules of journalising. So we can say that accounting is a science.
Art requires a perfect knowledge, interest and experience to do a work efficiently. Art
also teaches us how to do a work in the best possible way by making the best use of the
available resources. Accounting is an art as it also requires knowledge, interest and
experience to maintain the books of accounts in a systematic manner. Everybody
cannot become a good accountant. It can be concluded from the above discussion that
accounting is an art as well as a science.
(vii) Accounting as an information system
Accounting discipline will be the most useful one in the acquisition of all the business
knowledge in the near future. You will realise that people will be constantly exposed to
accounting information in their everyday life. Accounting information serves both profit-
seeking business and non-profit organisations. The accounting system of a profit-
seeking organisation is an information system designed to provide relevant financial
information on the resources of a business and the effect of their use. Information is
relevant and valuable if the decision makers can use it to evaluate the financial
consequences of various alternatives.

Accounting generally does not generate the basic information (raw financial data),
rather the raw financial data result from the day to day transactions of the business. As
an information system, accounting links an information source or transmitter (generally
the accountant), a channel of communication (generally the financial statements) and a
set of receivers (external users).

OBJECTIVES OF ACCOUNTING

The following are the main objectives of accounting :

1. To keep systematic records : Accounting is done to keep a systematic record of

financial transactions. In the absence of accounting there would have been terrific
burden on human memory which in most cases would have been impossible to
bear.

2. To protect business properties : Accounting provides protection to business

properties from unjustified and unwarranted use. This is possible on account of
accounting supplying the following information to the manager or the proprietor:
(i) The amount of the proprietor's funds invested in the business.
(ii) How much the business have to pay to others?
(iii) How much the business has to recover from others?
(iv) How much the business has in the form of (a) fixed assets, (b) cash in hand, (c) cash
at bank, (d) stock of raw materials, work-in-progress and finished goods?
Information about the above matters helps the proprietor in assuring that the funds of
the business are not necessarily kept idle or underutilised.

3. To ascertain the operational profit or loss : Accounting helps in ascertaining the net
profit earned or loss suffered on account of carrying the business. This is done by
keeping a proper record of revenues and expense of a particular period. The Profit and
Loss Account is prepared at the end of a period and if the amount of revenue for the
period is more than the expenditure incurred in earning that revenue, there is said to be
a profit. In case the expenditure exceeds the revenue, there is said to be a loss.
Profit and Loss Account will help the management, investors, creditors, etc. in knowing
whether the business has proved to be remunerative or not. In case it has not proved to
be remunerative or profitable, the cause of such a state of affairs will be investigated
and necessary remedial steps will be taken
4. To ascertain the financial position of the business : The Profit and Loss Account
gives the amount of profit or loss made by the business during a particular period.
However, it is not enough. The businessman must know about his financial position i.e.
where he stands ?, what he owes and what he owns? This objective is served by the
Balance Sheet or Position Statement. The Balance Sheet is a statement of assets and
liabilities of the business on a particular date. It serves as barometer for ascertaining the
financial health of the business.

5. To facilitate rational decision making : Accounting these days has taken upon itself
the task of collection, analysis and reporting of information at the required points of
time to the required levels of authority in order to facilitate rational decision-making.
The American Accounting Association has also stressed this point while defining the
term accounting when it says that accounting is the process of identifying, measuring
and communicating economic information to permit informed judgements and
decisions by users of the information. Of course, this is by no means an easy task.
However, the accounting bodies all over the world and particularly the International
Accounting Standards Committee, have been trying to grapple with this problem and
have achieved success in laying down some basic postulates on the basis of which the
accounting statements have to be prepared.

6. Information System : Accounting functions as an information system for collecting

and communicating economic information about the business enterprise. This
information helps the management in taking appropriate decisions. This function, as
stated, is gaining tremendous importance these days.

USERS OF ACCOUNTING INFORMATION

The basic objective of accounting is to provide information which is useful for persons
inside the organisation and for persons or groups outside the organisation. Accounting
is the discipline that provides information on which external and internal users of the
information may base decisions that result in the allocation of economic resources in
society.
I. External Users of Accounting Information : External users are those groups or persons
who are outside the organisation for whom accounting function is performed. Following
can be the various external users of accounting information:
1. Investors, Those who are interested in investing money in an organisation are
interested in knowing the financial health of the organisation of know how safe the
investment already made is and how safe their proposed investment will be. To know
the financial health, they need accounting information which will help them in
evaluating the past performance and future prospects of the organisation.
Thus, investors for their investment decisions are dependent upon accounting
information included in the financial statements. They can know the profitability and
the financial position of the organisation in which they are interested to make that
investment by making a study of the accounting information given in the financial
statements of the organization
2. Creditors. Creditors (i.e. supplier of goods and services on credit, bankers and other
lenders of money) want to know the financial position of a concern before giving loans
or granting credit. They want to be sure that the concern will not experience difficulty in
making their payment in time i.e. liquid position of the concern is satisfactory. To know
the liquid position, they need accounting information relating to current assets, quick
assets and current liabilities which is available in the financial statements.

3. Members of Non-profit Organisations. Members of non-profit organisations such as

schools, colleges, hospitals, clubs, charitable institutions etc. need accounting
information to know how their contributed funds are being utilised and to ascertain if
the organisation deserves continued support or support should be withdrawn keeping
in view the bad performance depicted by the accounting information and diverted to
another organisation. In knowing the performance of such organisations, criterion will
not be the profit made but the main criterion will be the service provided to the society.
4. Government. Central and State Governments are interested in the accounting
information because they want to know earnings or sales for a particular period for
purposes of taxation. Income tax returns are examples of financial reports which are
prepared with information taken directly from accounting records. Governments also
needs accounting information for compiling statistics concerning business which, in turn
helps in compiling national accounts.
5. Consumers. Consumers need accounting information for establishing good
accounting control so that cost of production may be reduced with the resultant
reduction of the prices of goods they buy. Sometimes, prices for some goods are fixed
by the Government, so it needs accounting information to fix reasonable prices so that
consumers and manufacturers are not exploited. Prices are fixed keeping in view fair
return to manufacturers on their investments shown in the accounting records.
6. Research Scholars. Accounting information, being a mirror of the financial
performance of a business organisation, is of immense value to the research scholars
who wants to make a study to the financial operations of a particular firm. To make a
study into the financial operations of a particular firm, the research scholar needs
detailed accounting information relating to purchases, sales, expenses, cost of materials
used, current assets, current liabilities, fixed assets, long term liabilities and
shareholders' funds which is available in the accounting records maintained by the firm.

II Internal Users of Accounting Information.

Internal users of accounting information are those persons or groups which are within
the organisation. Following are such internal users :

1.’ Owners. The owners provide funds for the operations of a business and they want to
know whether their funds are being properly used or not. They need accounting
information to know the profitability and the financial position of the concern in which
they have invested their funds. The financial statements prepared from time to time
from accounting records depicts them the profitability and the financial position.
2. Management. Management is the art of getting work done through others, the
management should ensure that the subordinates are doing work properly. Accounting
information is an aid in this respect because it helps a manager in appraising the
performance of the subordinates. Actual performance of the employees can be
compared with the budgeted performance they were expected to achieve and remedial
action can be taken if the actual performance is not upto the mark. Thus, accounting
information provides "the eyes and ears to management".
 The most important functions of management are planning and controlling.
Preparation of various budgets, such as sales budget, production budget, cash budget,
capital expenditure budget etc., is an important part of planning function and the
starting point for the preparation of the budgets is the accounting information for the
previous year. Controlling is the function of seeing that programmes laid down in
various budgets are being actually achieved i.e. actual performance ascertained from
accounting is compared with the budgeted performance, enabling the manager to
exercise controlling case of weak performance. Accounting information is also helpful to
the management in fixing reasonable selling prices. In a competitive economy, a price
should be based on cost plus a reasonable rate of return. If a firm quotes a price which
exceeds cost plus a reasonable rate of return, it probably will not get the order. On the
other hand, if the firm quotes a price which is less than its cost, it will be given the order
but will incur a loss on account of price being lower than the cost. So, selling prices
should always be fixed on the basis of accounting data to get the reasonable margin of
profit on sales.

3. Employees. Employees are interested in the financial position of a concern they

serve particularly when payment of bonus depends upon the size of the profits earned.
They seek accounting information to know that the bonus being paid to them is correct.
 BRANCHES OF ACCOUNTING

To meet the ever increasing demands made on accounting by different 15 interested

parties such as owners, management, creditors, taxation authorities etc., the various
branches have come into existence. There are as follows :
1. Financial accounting. The object of financial accounting is to ascertain the results
(profit or loss) of business operations during the particular period and to state the
financial position (balance sheet) as on a date at the end of the period.
2. Cost accounting. The object of cost accounting is to find out the cost of goods
produced or services rendered by a business. It also helps the business in controlling the
costs by indicating avoidable losses and wastes.
3. Management accounting. The object of management accounting is to supply relevant
information at appropriate time to the management to enable it to take decisions and
effect control.

In this lesson we are concerned only with financial accounting. Financial accounting is
the oldest and other branches have developed from it. The objects of financial
accounting, as stated above, can be achieved only by recording the financial
transactions in a systematic manner according to a set of principles. The art of recording
financial transactions and events in a systematic manner in the books of account is
known as book-keeping. However, mere record of transactions is not enough. The
recorded information has to be classified, analysed and presented in a manner in which
business results and financial position can be ascertained.
 ROLE OF ACCOUNTING

Accounting plays an important and useful role by developing the information for
providing answers to many questions faced by the users of accounting information :
(1) How good or bad is the financial condition of the business?
(2) Has the business activity resulted in a profit or loss ?
(3) How well the different departments of the business have performed in the past?
(4) Which activities or products have been profitable?
(5) Out of the existing products which should be discontinued and the production of
which commodities should be increased
6) Whether to buy a component from the market or to manufacture the same?
(7) Whether the cost of production is reasonable or excessive?
(8) What has been the impact of existing policies on the profitability of the business?
(9) What are the likely results of new policy decisions on future earning capacity of the
business?
(10) In the light of past performance of the business how should it plan for future to
ensure desired results?
Above mentioned are few examples of the types of questions faced by the users of
accounting information. These can be satisfactorily answered with the help of suitable
and necessary information provided by accounting.
Besides, accounting is also useful in the following respects :
(a) Increased volume of business results in large number of transactions and no
businessman can remember everything. Accounting records obviate the necessity
of remembering various transactions.
(b) Accounting records, prepared on the basis of uniform practices, will enable a
business to compare results of one period with another period.
(c) Taxation authorities (both income tax and sales tax) are likely to believe the facts
contained in the set of accounting books if maintained according to generally
accepted accounting principles.
(d) Accounting records, backed up by proper and authenticated vouchers, are good
evidence in a court of law.
(e) If a business is to be sold as a going concern, then the values of different assets as
shown by the balance sheet helps in bargaining proper price for the business.

LIMITATIONS OF FINANCIAL ACCOUNTING

Advantages of accounting discussed in this lesson do not suggest that accounting is
free from limitations. Any one who is using accounting information should be well
aware of its limitations also. Following are the limitations :
(a) Financial accounting permits alternative treatments
No doubt accounting is based on concepts and it follows "generally accepted
accounting principles", but there exist more than one principle for the
treatment of any one item. This permits alternative treatments within the
framework of generally accepted accounting principles. For example, the
closing stock of a business may be valued by any one of the following methods :
FIFO (First-in-first-out); LIFO (Last-in-first-out); Average price, Standard price
etc., Application of different methods will give different results but the methods
are generally accepted. So, the results are not comparable.

(b) Financial accounting is Influenced by personal judgements

Inspite of the fact that convention of objectivity is respected in accounting but
to record certain events estimates have to be made which requires personal
judgement. It is very difficult to expect accuracy in future estimates and
objectivity suffers. For example, in order to determine the amount of
depreciation to be charged every year for the use of fixed asset it is required to
estimate (a) future life of the asset, and (b) scrap value of the asset. Thus in
accounting we do not determine but measure the income. In other words, the
income disclosed by accounting is not authoritative but approximation.
(c) Financial accounting ignores important non-monetary information
Financial accounting takes into consideration only those transactions and
events which can be described in money. The transactions and events, however
important, if non-monetary in nature are ignored i.e., not recorded. For
example, extent of competition faced by the business, technical innovations
possessed by the business, loyalty and efficiency of the employees etc. are the
important matters in which management of the business is highly interested
 but accounting is not tailored to take note of such matters. Thus any user of
financial information is, naturally, deprived of vital information which is of non-
monetary character.
(d) Financial accounting does not provide timely information
Financial accounting is designed to supply information in the form of
statements (Balance Sheet and Profit and Loss Account) for a period, normally,
one year. So the information is, at best, of historical interest and only
postmortem analysis of the past can be conducted. The business requires timely
information at frequent intervals to enable the management to plan and take
corrective action. For example, if a business has budgeted that during the
current year sales should be Rs. 12,00,000 then it requires information –
whether the sales in the first month of the year amounted to Rs. 1,00,000 or
less or more? Traditionally, 19 financial accounting is not supposed to supply
information at shorter intervals than one year.
(e) Financial accounting does not provide detailed analysis
‘ The information supplied by the financial accounting is in reality aggregate of
the financial transactions during the course of the year. Of course, it enables to
study the overall results of the business activity during the accounting period.
For proper running of the business the information is required regarding the
cost, revenue and profit of each product but financial accounting does not
provide such detailed information product-wise. For example, if a business has
earned a total profit of, say, Rs. 5,00,000 during the accounting year and it sells
three products namely petrol, diesel and mobile oil and wants to know profit
earned by each product. Financial accounting is not likely to help him.
(f) Financial accounting does not disclose the present value of the business
In financial accounting the position of the business as on a particular date is
shown by a statement known as balance sheet. In balance sheet the assets are
shown on the basis of going concern concept. Thus it is presumed that business
has relatively longer life and will continue to exist indefinitely, hence the asset
values are going concern values. The realised value of each asset if sold today
can't be known by studying the balance sheet.

SYSTEMS OF ACCOUNTING

The following are the main systems of recording business transactions:

 (a) Cash System. Under this system, actual cash receipts and actual cash
payments are recorded. Credit transactions are not recorded at all until the
cash in actually received or paid. The Receipts and Payments Account prepared
in case 20 of non-trading concerns such as a charitable institution, a club, a
school, a college, etc. and professional men like a lawyer, a doctor, a chartered
accountant etc. can be cited as the best example of cash system. This system
does not make a complete record of financial transactions of a trading period as
it does not record outstanding transactions like outstanding expenses and
outstanding incomes. The system being based on a record of actual cash
receipts and actual cash payments will not be able to disclose correct profit or
loss for a particular period and will not exhibit true financial position of the
business on a particular day.
(b) Mercantile (Accrual) system. Under this system all transactions relating to a
period are recorded in the books of account i.e., in addition to actual receipts
and payments of cash income receivable and expenses payable are also
recorded. This system gives a complete picture of the financial transactions of
the business as it makes a record of all transactions relating to a period. The
system being based on a complete record of the financial transactions discloses
correct profit or loss for a particular period and also exhibits true financial
position of the business on a particular day

SUMMARY

Accounting can be understood as the language of financial decisions. It is an

ongoing process of performance measurement and reporting the results to
decision makers. The discipline of accounting can be traced back to very early
times of human civilization. With the advancement of industry, modern day
accounting has become formalized and structured. A person who maintains
accounts is known as the account. The information generated by accounting is used
by various interested groups like, individuals, managers, investors, creditors,
government, regulatory agencies, taxation authorities, employee, trade unions,
consumers and general public. Depending upon purpose and method, accounting can
be broadly three types; financial accounting, cost accounting and management
accounting. Financial accounting is primarily concerned with the preparation of
financial statements. It is used on certain well-defined concepts and conventions and
helps in framing broad financial policies. However, it suffers from certain limitations.

KEYWORDS

Book-keeping: It is the art of recording in the books of accounts the monetary

aspect of commercial or financial transactions.
Accounting: It is the means of collecting, summarising and reporting in
monetary terms, information about the business.
 Financial accounting: Financial accounting deals with the maintenance of
books of accounts with a view to ascertain the profitability and the financial
status of the business.
Transaction: A transaction is a stimulus from one person and a related response
from the another.

ACCOUNTING STANDARDS

The accounting concepts and conventions discussed in the foregoing pages are
the core elements in the theory of accounting. These principles, however,
permit a variety of alternative practices to co-exist. On account of this the
financial results of different companies can not be compared and evaluated
unless full information is available about the accounting methods which have
been used. The lack of uniformity among accounting practices have made it
difficult to compare the financial results of different companies. It means that
there should not be too much discretion to companies and their accountants to
present financial information the way they like. In other words, the information
contained in financial statements should conform to carefully considered
standards. Obviously, accounting standards are needed to :

a) provide a basic framework for preparing financial statements to be uniformly

followed by all business enterprises,
b) make the financial statements of one firm comparable with the other firm
and the financial statements of one period with the financial statements of
another period of the same firm
, c) make the financial statements credible and reliable, and
d) create general sense of confidence among the outside users of financial
statements.
In this context unless there are reasonably appropriate standards, neither the
purpose of the individual investor nor that of the nation as a whole can be
served. In order to harmonise accounting policies and to evolve standards the
need in the USA was felt with the establishment of Securities and Exchange
Commission (SEC) in 1933. In 1957, a research oriented organisation called
Accounting Principles Boards (APB) was formed to spell out the fundamental
accounting principles. After this the Financial Accounting Standards Board
(FASB) was formed in 1973, in USA. At the international level, the need for
standardisation was felt and therefore, an International Congress of
accountants was organised in Sydney, Australia in 1972 to ensure the desired
level of uniformity in accounting practices. Keeping this in view, International
Accounting Standards Committee (IASC) was formed and was entrusted with the
responsibility of formulating international standards.
In order to harmonise varying accounting policies and practices, the Institute of
Chartered Accountants of India (ICAI) formed the Accounting Standards Board
 (ASB) in April, 1977. ASB includes representatives from industry and
government. The main function of the ASB is to formulate accounting
standards. This Board of the Institute of Chartered Accountants of India has so
far formulated around 27 Accounting Standards, the list of these accounting
standards is furnished. Regarding the position of Accounting standards in India,
it has been stated that the standards have been developed without first
establishing the essential theoretical framework. As a result, accounting
standards lack direction and coherence. This type of limitation also existed in
UK and USA but it was remedied long back.
Hence, there is an emergent need to make an attempt to develop a conceptual
framework and also revise suitably the Indian Accounting Standards to reduce
the number of alternative treatments.

Classification of Accounts

The classification of accounts is given as follows :

1. Personal Accounts : Accounts which are related to individuals, firms,
companies, co-operative societies, banks, financial institutions are known as
personal accounts. The personal accounts may further be classified into three
categories
(i) Natural Personal Accounts : Accounts of individuals (natural persons) such
as Akhils' A/c, Rajesh's A/c, Sohan's A/c are natural personal accounts.
(ii) Artificial Personal Accounts : Accounts of firms, companies, banks, financial
institutions such as Reliance Industries Ltd., Lions Club, M/s Sham & Sons,
Punjab National Bank, National College are artificial personal accounts.
iii) Representative Personal Accounts : The accounts recording transactions
relating to limited expenses and incomes are classified as nominal accounts. But
in certain cases (due to the matching concept of accounting) the amount on a
particular date, is payable to the individuals or recoverable from individuals.
Such amount (i) relates to the particular head of expenditure or income and (ii)
represents persons to whom it is payable or from whom it is recoverable. Such
accounts are classified as representative personal account e.g., Wages
outstanding account, Pre-paid insurance account etc.
2. Real Accounts : Real accounts are the accounts related to assets/properties.
These may be classified into tangible real account and intangible real account.
The accounts relating to tangible assets (which can be touched, purchased and
sold) such as building, plant, machinery, cash, furniture etc. are classified as
tangible real accounts. Intangible real accounts (which do not have physical
shape) are the accounts related to intangible assets such as goodwill,
trademarks, copyrights, patents etc.
3. Nominal Accounts : The accounts relating to income, expenses, losses and
gains are classified as nominal accounts. For example Wages Account, Rent
Account, Interest Account, Salary Account, Bad Debts Accounts, Purchases;
Account etc. fall in the category of nominal accounts.

10 3.3 RULES OF DEBIT AND CREDIT

Basically, debit means to enter an amount to the left side of an account and
credit means to enter an amount to the right side of an account. In the
abbreviated form Dr. stands for debit and Cr. stands for credit. Both debit and
 credit may represent either increase or decrease depending upon the nature of
an account.
The Rules for Debit and Credit are given below :

Types of Account Rules for Debit Rules for Credit

(a) For Personal Accounts Debit the receiver Credit the giver
(b) For Real Accounts Debit what comes in Credit what goes out
(c) For Nominal Account Debit all expenses and losses Credit all incomes and gains

Illustration 3 : How will you classify the following into personal, real and nominal accounts ?

(i) Investments

(ii) Freehold Premises

(iii) Accrued Interest to Ram

(iv) Haryana Agro Industries Corporation

(v) Janata Mechanical Works

(vi) Salary Account

(vii) Loose Tools Accounts

(viii)Purchases Account

(ix) Corporation Bank Ltd.

(x) Capital Account

(xi) Brokerage Account

(xii) Toll Tax Account

(xiii) Dividend Received Account

(xiv) Royalty Account

(xv) Sales Account

Solution :
Real Account : (i), (ii), (vii), (viii), (xv) Nominal Account : (vi), (xi), (xii), (xiii), (xiv) Personal Account :
(iii), (iv), (v), (ix), (x)

What Is Accounting and Its Role in Business?

How do stakeholders get information about the financing, investing, and

operating activities of a business? This is the role of accounting. Accounting
provides information for managers to use in operating the business. In addition,
accounting provides information to other stakeholders to use in assessing the
economic performance and condition of the business. In a general sense,
accounting can be defined as an information system that provides reports to
stakeholders about the economic activities and condition of a business.
We will focus our discussions in this text on accounting and its role in business.
However, many of the concepts in this text also apply to individuals,
governments, and other types of organizations. For example, individuals must
account for activities such as hours worked, checks written, and bills due.
Stakeholders for individuals include creditors, dependents, and the
government. A main interest of the government is making sure that individuals
pay the proper taxes.
Accounting is sometimes called the “language of business.” This is because
accounting is the means by which business information is communicated to the
stakeholders. For example, accounting reports summarizing the profitability of a
new product help Coca-Cola’s management decide whether to continue
offering the new product for sale. Likewise, financial analysts use accounting
reports in deciding whether to recommend the purchase of Coca-Cola’s stock.
Banks use accounting reports in deciding the amount of credit to extend to
Coca-Cola. Suppliers use accounting reports in deciding whether to offer credit
for Coca-Cola’s purchases of supplies and raw materials. State and federal
governments use accounting reports as a basis for assessing taxes on Coca-Cola.
As we described above, accounting serves many purposes for business. A
primary purpose is to summarize the financial performance of the firm for
external users, such as banks and governmental agencies. The branch of
accounting that is associated with preparing reports for users external to the
business is termed financial accounting. Accounting also can be used to guide
management in making decisions about the business. This branch of accounting
is called managerial accounting. Financial and managerial accounting overlap in
many areas. For example, financial reports for external users are often used by
managers in considering the impact of their decisions.
In this text, we focus on financial accounting. The two major objectives of
financial accounting are:
1. To report the financial condition of a business at a point in time.
2. To report changes in the financial condition of a business over a period of
time.
The relationship between the two financial accounting objectives is shown in
Exhibit 4. You may think of the first objective as a still photograph (snapshot) of
the business and the second objective as a moving picture (video) of the
business. The first objective measures the financial status of a business. This
measure is used by stakeholders to evaluate the business’s financial health at a
point in time. The second objective measures the change in the financial
condition of a business for a period of time. This measure is used by
stakeholders to predict how a business may perform in the future.
The objectives of accounting are satisfied by (1) recording the economic events
affecting a business and then (2) summarizing the impact of these events on the
business in financial reports, called financial statements. We will describe and
illustrate the basic financial statements next.
 Nature of Business

You are familiar with many large companies, such as General Motors, Barnes &
Noble, and AT&T. You are also familiar with many local businesses, such as gas
stations, grocery stores, and restaurants. You may work for one of these
businesses. But what do they have in common that identifies them as
businesses?

In general, a business is an organization in which basic resources (inputs), such

as materials and labor, are assembled and processed to provide goods or
services (outputs) to customers.1 Businesses come in all sizes, from a local
coffee house to General Motors, which sells several billion dollars worth of cars
and trucks each year. The customers of a business are individuals or other
businesses who purchase goods or services in exchange for money or other
items of value. In contrast, a church is not a business because those who
receive its services are not obligated to pay for them.
The objective of most businesses is to maximize profits by providing goods or
services that meet customer needs. Profit is the difference between the amount
received from customers for goods or services provided and the amount paid
for the inputs used to provide the goods or services. Some businesses operate
with an objective other than to maximize profits. The objective of such not-for-
profit businesses is to provide some benefit to society, such as medical research
or conservation of natural resources. In other cases, governmental units such as
cities operate water works or sewage treatment plants on a not-for-profit basis.
Our focus in this text will be on businesses operated to earn a profit. However,
many of the concepts and principles also apply to not-forprofit businesses.

Types of Businesses
There are three different types of businesses that are operated for profit:
manufacturing, merchandising, and service businesses. Each type of business
has unique characteristics.
Manufacturing businesses change basic inputs into products that are sold to
individual customers. Examples of manufacturing businesses and some of their
products are shown below.

Manufacturing Business Product General

General Motors Automobiles, trucks, vans
General Mills Breakfast cereals
Boeing Jet aircraf
Nike Athletic shoes
Coca-Cola Beverages Beverages
Sony Stereos,televisions, radios

Merchandising businesses also sell products to customers. However, they do

not make the products but purchase them from other businesses (such as
manufacturers). In this sense, merchandisers bring products and customers
together. Examples of merchandising businesses and some of the products they
sell are shown below.

Merchandising Business Product

Wal-Mart General merchandise
Toys“R”Us Toys
Barnes & Noble Books
Best Buy Consumer electronics
Amazon.com Books
Service businesses provide services rather than products to customers.
Examples of service businesses and the types of services they offer are shown
below.

Service Business Service

Disney Entertainment
Delta Air Lines Transportation
Marriott Hotels Hospitality and lodging
Merrill Lynch Financial
Sprint Telecommunica tions
 Forms of Business

A business is normally organized as one of three different forms: proprietorship,

partnership, or corporation. A proprietorship is owned by one individual. More
than 70 percent of the businesses in the United States are organized as
proprietorships. The popularity of this form is due to the ease and low cost of
organizing. The primary disadvantage of proprietorships is that the financial
resources available to the business are limited to the individual owner’s
resources. Small local businesses such as hardware stores, repair shops,
laundries, restaurants, and maid services are often organized as
proprietorships.

As a business grows and requires more financial and managerial resources, it

may become a partnership. A partnership is owned by two or more individuals.
Like proprietorships, small local businesses such as automotive repair shops,
music stores, beauty shops, and men’s and women’s clothing stores may be
organized as partnerships. Currently, about 10 percent of the businesses in the
United States are organized as partnerships.
Like proprietorships, a partnership may outgrow its ability to finance its
operations. As a result, it may become a corporation. A corporation is organized
under state or federal statutes as a separate legal entity. The ownership of a
corporation is divided into shares of stock. A corporation issues the stock to
individuals or other businesses, who then become owners or stockholders of
the corporation.
A primary advantage of the corporate form is the ability to obtain large
amounts of resources by issuing shares of stock, which are ownership rights in
the corporation. For this reason, most companies that require large investments
in equipment and facilities are organized as corporations. For example,
Toys“R”Us has raised over $800 million by issuing shares of common stock to
finance its operations. Other examples of corporations include General Motors,
Ford, International Business Machines (IBM), Coca-Cola, and General Electric.
About 20 percent of the businesses in the United States are organized as
corporations. However, since most large companies are organized as
corporations, over 90 percent of the total dollars of business receipts are
received by corporations. Thus, corporations have a major influence on the
economy.

The three types of businesses we discussed earlier—manufacturing,

merchandising, and service—may be either proprietorships, partnerships, or
corporations. However, because of the large amount of resources required to
operate a manufacturing business, most manufacturing businesses are
corporations. Likewise, most large retailers such as Wal-Mart, Sears, and JC
Penney are corporations. Because most large businesses are corporations, they
tend to dominate the economic activity in the United States. For this reason, we
focus our attention in this text on the corporate form of organization. However,
many of the concepts and principles that we discuss also apply to
proprietorships and partnerships.
 Business Strategies

How does a business decide which products or services to offer its customers? For example,
should Best Buy offer warranty and repair services to its customers? Many factors influence this
decision, but ultimately the decision is made on the basis of whether it is consistent with the
overall business strategy of the company.

A business strategy is an integrated set of plans and actions designed to enable the business to gain
an advantage over its competitors, and in doing so, to maximize its profits. The two basic strategies
a business may use are a low-cost strategy or a differentiation strategy.

Under a low-cost strategy, a business designs and produces products or services of acceptable
quality at a cost lower than its competitors. Wal-Mart and Southwest Airlines are examples of
businesses with a low-cost strategy. Such businesses often sell nofrills, standardized products to
the most typical customer in the industry. Following this strategy, businesses must continually
focus on lowering costs.

Businesses may try to achieve lower costs in a variety of ways. For example, a business may employ
strict budgetary controls, use sophisticated training programs, implement simple manufacturing
technologies, or enter into cost-saving supplier relationships. Such supplier relationships may
involve linking the supplier’s production process directly to the client’s production processes to
minimize inventory costs, variations in raw materials, and record keeping costs
A primary concern of a business using a low-cost strategy is that a competitor may copy its low
costs or develop technological advances that enables it to achieve even lower costs. Another
concern is that competitors may differentiate their products in such a way that customers no
longer desire a standardized, no-frills product. For example, local pharmacies most often try to
compete with Wal-Mart on the basis of personalized service rather than cost.

Under a differentiation strategy, a business designs and produces products or services that possess
unique attributes or characteristics for which customers are willing to pay a premium price. For the
differentiation strategy to be successful, a product or service must be truly unique or perceived as
unique in quality, reliability, image, or design. To illustrate, Maytag attempts to differentiate its
appliances on the basis of reliability, while Tommy Hilfiger differentiates its clothing on the basis of
image.

Businesses using a differentiation strategy often use information systems to capture and analyze
customer buying habits and preferences. For example, many grocery stores such as Kroger and
Safeway issue magnetic cards to preferred customers that allow the consumer to receive special
discounts on purchases. In addition to establishing brand loyalty, the cards allow the stores to track
consumer preferences and buying habits for use in purchasing and advertising campaigns.

Companies may enhance differentiation by investing in manufacturing and service technologies,

such as flexible manufacturing methods that allow timely product design and delivery. Some
companies use marketing and sales efforts to promote product differences. Other companies use
unique credit-granting arrangements, emphasize personal relationships with customers, or offer
extensive training and after-sales service programs for customers.

A business using a differentiation strategy wants customers to pay a premium price for the
differentiated features of its products. However, a business may provide features that exceed the
customers’ needs. In this case, competitors may be able to offer customers less differentiated
products at lower costs. Also, customers’ perceptions of the differentiated features may change. As
a result, customers may not be willing to continue to pay a premium price for the products. For
example, as Tommy Hilfiger clothing becomes more commonplace, customers may be unwilling to
pay a premium price for Hilfiger clothing. Over time, customers may also become better educated
about the products and the value of the differentiated features. For example, IBM personal
computers were once viewed as being differentiated on quality. However, as consumers have
become better educated and more experienced with personal computers, Dell and Gateway
computers have also become perceived as high quality.

A business may attempt to implement a combination strategy that includes elements of both the
low-cost and differentiation strategies. That is, a business may attempt to develop a differentiated
product at competitive, low-cost prices. For example, Andersen Windows allows customers to
design their own windows through the use of its proprietary manufacturing software. By using
flexible manufacturing, Andersen Windows can produce a variety of windows in small quantities
with a low or moderate cost. Thus, Andersen windows sell at a higher price than standard low-cost
windows, but at a lower price than a fully customized window built on site.

As you might expect, a danger of a business using a combination strategy is that its products might
not adequately satisfy either end of the market. That is, because its products are differentiated, it
cannot establish itself as the low-cost leader, and, at the same time, its products may not be
differentiated enough that customers are willing to pay a premium price. In other words, the
business may become “stuck in the middle.” For example, JC Penney has difficulty competing as a
low-cost leader against Wal-Mart, Kmart, Goody’s Family Clothing, Fashion USA, T.J. Maxx, and
Target. At the same time, JC Penney cannot adequately differentiate its stores and merchandise
from such competitors as The Gap, Old Navy, Eddie Bauer, and Talbot’s so that it can charge higher
prices.

A business may also attempt to implement different strategies for different markets. For example,
Toyota segments the market for automobiles by offering the Lexus to image- and quality-conscious
buyers. To reinforce this image, Toyota developed a separate dealer network. At the same time,
Toyota offers a low-cost automobile, the Echo, to price-sensitive buyers.

Exhibit 1 summarizes the characteristics of the low-cost, differentiation, and combination

strategies. In addition, some common examples of businesses that employ each strategy are also
listed.

Value Chain of a Business

Once a business has chosen a strategy, it must implement the strategy in its value chain. A value
chain is the way a business adds value for its customers by processing inputs into a product or
service, To illustrate, Delta Air Lines’ value chain consists of taking inputs, such as people, aircraft,
and equipment, and processing these inputs into a service of transporting goods and passengers
throughout the world. The extent to which customers value Delta’s passenger service is reflected
by the air fares Delta is able to charge as well as passenger load factors (percentage of seats
occupied). For example, the extent to which Delta can, on average, charge higher fares than
discount airlines, such as AirTran, implies that passengers value Delta’s services more than
AirTran’s. These services may include newer, more comfortable aircraft, the ability to earn
frequent flyer miles, more convenient passenger schedules, passenger lounges for frequent flyers,
and international connections.

A business’s value chain can be divided into primary and supporting processes. Primary processes
are those that are directly involved in creating value for customers. Examples of primary processes
include manufacturing, selling, and customer service. Supporting processes are those that facilitate
the primary processes. Examples of support processes include purchasing, personnel, and
accounting.2 For Delta Air Lines, primary processes would include aircraft maintenance, baggage
handling, ticketing, and flight operations. Secondary processes for Delta Air Lines would include the
accounting and finance functions, contracting for fuel deliveries, and investor relat

Business Stakeholders
A company’s business strategy and how well the company implements its strategy directly affect
its economic performance and its stakeholders. For example, Kmart was unsuccessful in
implementing a business strategy that would allow it to compete effectively against Wal-Mart. The
result was that Kmart filed for bankruptcy protection in early 2002, and Kmart stakeholders,
including employees, creditors, and stockholders, suffered.

A business stakeholder is a person or entity that has an interest in the economic performance and
well-being of a business. For example, stockholders, suppliers, customers, and employees are all
stakeholders in a corporation. Business stakeholders can be classified into one of the four Capital
market stakeholders provide the major financing for the business in order for the business to begin
and continue its operations. Banks and other long-term creditors have an economic interest in
recovering the amount they loaned the business plus interest.

Owners and stockholders want to maximize the economic value of their investments and thus also
have an economic interest in the business. Capital market stakeholders expect to receive a return
on their investments proportionate to the degree of risk they are taking on their investments. Since
banks and long-term creditors have first preference to the assets in case the business fails, their
risk is less than that of the owners and stakeholders, and thus their overall return is lower. Product
or service market stakeholders include customers who purchase the business’s products or services
as well as the vendors who supply inputs to the business.

Customers have an economic interest in the continued success of the business. For example,
customers of the Internet provider @home.com were initially unable to retrieve their e-mail or
connect with the Internet when @home.com declared bankruptcy. Customers who purchase
advance tickets on Southwest Airlines have an economic interest in whether Southwest will
continue in business. Similarly, suppliers are stakeholders in the continued success of their
customers. Suppliers may invest in technology or other capital equipment to meet a customer’s
buying and manufacturing specifications.

If a customer fails or cuts back on purchases during downturns, suppliers may see their business
decline also. Various governments have an interest in the economic performance of businesses. As
a result, city and state governments often provide incentives for businesses to locate in their
jurisdictions. City, county, state, and federal governments collect taxes from businesses within
their jurisdictions.

The better a business does, the more taxes the government can collect. In addition, workers are
taxed on their wages. In contrast, workers who are laid off and unemployed can file claims for
unemployment compensation, which results in a financial burden for the government. Internal
stakeholders include individuals employed by the business. The managers are those individuals
who the owners have authorized to operate the business. Managers are primarily evaluated on the
economic performance of the business. The managers of businesses that perform poorly are often
fired by the owners.

Thus, managers have an incentive to maximize the economic value of the business. Owners may
offer managers salary contracts that are tied directly to how well the business performs. For
example, a manager might receive a percent of the profits or a percent of the increase in profits.
Employees provide services to the company they work for in exchange for pay. Thus, employees
have an interest in the economic performance of the business because their jobs depend upon it.
During business downturns, it is not unusual for a business to lay off workers for extended periods
of time. In the extreme, a business may fail and the employees lose their jobs permanently.
Employee labor unions often use the good economic performance of a business to argue for wage
increases. In contrast, businesses often use poor economic performance to argue for employee
concessions such as wage decreases.

Business Activities

Regardless of whether the company is Microsoft or General Motors, all

businesses are engaged in the activities of financing, investing, and operating.
First, a business must obtain the necessary funds to finance the costs to
organize, pay legal fees, and pay other startup costs. Next, a business must
invest funds in the necessary assets such as building and equipment to begin
operations. For example, Milton Hershey invested in the German chocolate-
making machinery he saw at the Chicago International Exposition. Finally, a
business must utilize its assets and resources to implement its business
strategy. Milton Hershey’s business strategy was to mass-produce chocolate
candies at an affordable cost.
As we will discuss later in this chapter, a major role of accounting is to provide
stakeholders with information on the financing, investing, and operating
activities of businesses. Financial statements are one source of such
information.

Financing Activities
Financing activities involve obtaining funds to begin and operate a business.
Businesses seek financing through the use of the capital markets. This financing
may take the form of borrowing or issuing shares of ownership. Most major
businesses use both means of financing.
When a business borrows money, it incurs a liability. A liability is a legal
obligation to repay the amount borrowed according to the terms of the
borrowing agreement. For example, when you use your credit card, you incur
an obligation to pay the issuer (bank). When a business borrows from a vendor
or supplier, the liability is called an account payable. In such cases, the business
is buying on credit and promising to pay according to the terms set forth by the
vendor or supplier. Most vendors and suppliers require payment within a
relatively short time, such as thirty days. As of December 31, 2001, Hershey
Foods Corporation reported approximately $150 million of accounts payable
. A business may borrow money by issuing bonds. Bonds are sold to investors
and normally require repayment with interest at a specific time in the future.
Bonds are a type of long-term financing, with a face amount that is normally
due after several years have passed. For example, Lucent Technologies
currently has bonds due in 2028. In contrast, the interest on bonds is normally
paid semiannually. Bond obligations are reported as bonds payable, and any
interest that is due is reported as interest payable. Examples of well-known
companies that have bonds outstanding include American Telephone and
Telegraph (ATT), John Deere, and Xerox.
Most large corporations also borrow money by issuing commercial paper and
negotiating lines of credit with financial institutions. Commercial paper is debt
obligations that are sold to investors, such as banks and insurance companies,
based upon the general creditworthiness of the corporation. Similarly, lines of
credit are negotiated with financial institutions in such a way that the
corporation may borrow on the line of credit as needed. For example, Hershey
Foods has a $500 million line of credit with a syndicate of banks. However, as of
December 31, 2001, it had borrowed slightly over $250 million on its credit line.
When a corporation issues commercial paper or borrows on a line of credit, it
incurs a note payable. A note payable requires payment of the amount of
borrowing plus interest. Notes payable may be issued either on a short-term or
a longterm basis.
A business may also finance its operations by issuing shares of ownership. For a
corporation, shares of ownership are issued in the form of shares of stock.
Although corporations may issue a variety of different types of stock, the basic
type of stock issued to owners is called common stock. For our purposes, we
will use the term capital stock To include all the types of stock a corporation
may issue.3 Investors who purchase the stock are referred to as stockholders.
The claims of creditors and stockholders on the assets of the corporation are
different. In case of a corporation’s liquidation or bankruptcy, creditors have
first claim on its assets. Only after the creditors’ claims are satisfied can the
stockholders obtain corporate assets. In addition, while creditors expect to
receive timely payments of their claims, which may include interest,
stockholders are not entitled to regular payments. However, many corporations
distribute earnings to stockholders on a regular basis as long as the claims of
creditors are being satisfied. These distributions of earnings to stockholders are
called dividends.During 2001, Hershey paid stockholders almost $130 million in
dividends.

Investing Activities
Once financing has been obtained, a business uses investing activities to obtain
the necessary resources to start and operate the business. Depending upon the
nature of the business, a variety of different resources must be purchased. For
example, Milton Hershey purchased the German chocolate-making machinery
and later constructed a building to house the Hershey operations. In addition to
machinery and buildings, other resources could include computers, office
furnishings, trucks, and automobiles. Although most resources have physical
characteristics, such as equipment, some resources are intangible in nature. For
example, a business may purchase patent rights for use in a manufacturing
process or product.
The resources that a business owns are called assets. A business may acquire
assets through the financing, investing, and operating activities. Assets are
acquired through financing activities when the business acquires cash through
borrowing or issuing shares of stock. Cash is used to purchase assets through
investing activities, such as in the preceding paragraph. Finally, assets may be
acquired through operating activities, as we will describe in the next section
Assets may take a variety of different forms. For example, tangible assets
include cash, land, property, plant, and equipment. Assets may also include
intangible items, such as rights to patents and rights to payments from
customers. Rights to payments from customers are called accounts receivable.
Other intangible assets, such as goodwill, copyrights, or patents, are often
grouped together and reported as intangible assets. A business may also prepay
for items such as insurance or rent. Such items, which are assets until they are
consumed, are normally reported as prepaid expenses.
Operating Activities
Once resources have been acquired, a business uses operating activities to
implement its business strategy. Hershey’s strategy was to mass-produce and
distribute chocolate candies at affordable prices. When Hershey sold its
chocolates, it received revenue from its customers. Revenue is the increase in
assets from selling products or services. Revenues are often identified according
to their source. For example, revenues received from selling products are called
sales. Revenues received from providing services are called fees.
To earn revenue, a business incurs costs, such as wages of employees, salaries
of managers, rent, insurance, advertising, freight, and utilities. Costs used to
earn revenue are called expenses. Depending upon the nature of the cost,
expenses may be identified in a variety of ways. For example, the cost of
products sold is often referred to as the cost of merchandise sold, cost of sales,
or cost of goods sold. Other expenses are often classified as either selling
expenses or administrative expenses. Selling expenses include those costs
directly related to the selling of a product or service. For example, selling
expenses include such costs as sales salaries, sales commissions, freight, and
advertising costs. Administrative expenses include other costs not directly
related to the selling, such as officer salaries and other costs of the corporate
office. 3 Types of stock are discussed in Chapter 11, “Stockholders’ Equity:
Capital Stock and Dividends.” Chapter 1 • The Role of Accounting in Business 13
As we will discuss later in this chapter, by comparing th
 Data analysis & interpretation

PRIMARY DATA ANALYSIS

As a part of primary data analysis, researcher has firstly conducted pilot study and also
analysed the same. Finally researcher has prepared final questionnaire containing 36
different questions which were asked to respondents and respondents gave their
feedbacks for the same. The structure of final questionnaire is as follows:

Questionnaire Strategies

Question Set 1: The Impact of IFRS on
Business Operations
Question Set 2: The Effect of IFRS on
Performance Measurement
Management of Organisation
Question Set 3: Benefits of IFRS as
compare to Indian GAAP
Question Set 4: IFRS and Compliance
with Domestic Accounting
Standards
Question Set 5: IFRS and Accounting
Technicalities
Summary Based Questions:
Question Set A -
The convergence with IFRS will provide
improvement in public
Containing Six questions having Five
Points Likert’s Scale
Containing Eight questions having Five
Points Likert’s Scale
Containing Ten questions having Five
Points Likert’s Scale
Containing Four questions having Five
Points Likert’s Scale
Containing Six questions having Five
Points Likert’s Scale
Containing questions for Ten areas
sector having Five Points Likert’s Scale
undertakings as compare to Indian
GAAP.

Question Set B -
Which challenge from the following will Containing Seven different challenges
you consider as a biggest one for The not having any scale measurement
convergence with IFRS at the time of
implementation.
RELIABILITY TEST

Cronbach's alpha is the most common measure of internal consistency ("reliability"). It is

most commonly used when you have multiple Likert questions in a survey/questionnaire
that form a scale and you wish to determine if the scale is reliable.

Cronbach's alpha is a measure of internal consistency, that is, how closely related a set of
items are as a group. Cronbach's alpha can be written as a function of the number of test
items and the average inter-correlation among the items. Below, for conceptual purposes,
researcher shown the formula for the standardized Cronbach's alpha:

Here N is equal to the number of items, c-bar is the average inter-item covariance among
the items and v-bar equals the average variance.

One can see from this formula that if you increase the number of items, you increase
Cronbach's alpha. Additionally, if the average inter-item correlation is low, alpha will be
low. As the average inter-item correlation increases, Cronbach's alpha increases as well
(holding the number of items constant).

Reliability Statistics Q 1 to 34

Cronbach's Alpha N of Items

.948 34
The alpha coefficient for the thirty four items is 0.948, suggesting that the items have
relatively high internal consistency. (Note that a reliability coefficient of .70 or higher is
considered "acceptable" in most social science research situations.)

Reliability Statistics Q 35

Cronbach's Alpha N of Items

.889 10

The alpha coefficient for the thirty ten items is 0.889, suggesting that the items have
relatively high internal consistency. (Note that a reliability coefficient of .70 or higher is
considered "acceptable" in most social science research situations.)

QUESTION SET 1: THE IMPACT OF IFRS ON BUSINESS OPERATIONS

This particular set of questions is containing six different questions which are focusing on
the impact of IFRS Convergence on Business Operations such as finance functions,
human resource functions and business processes as a whole.

1. The Convergence with IFRS changes business processes and operations.

SCALES STRONGLY AGREE NEUTRAL DISAGREE STRONGLY

AGREE DISAGREE
RESPONDENTS 19 130 22 34 00
PERCENTAGES 9% 63 % 11 % 17 % 0%
 The Convergence with IFRS changes business processes and
operations.
Strongly Disagree
Disagree 0%
17%
Strongly Agree 9%

Neutral
11%

Agree
63%

INTERPRETATION

From the above table it can be concluded that 63.4 % of the total respondents agree with
the statement of “The Convergence with IFRS changes business processes and
operations” while 9.3 % strongly agree with the statement. None of the respondents
believing that there is no change in business operations and processed with IFRS
Convergence.
2. IFRS Convergence creates major opportunities for transformation in the finance
function.

Table 8.3 Question Set 1.2

SCALES STRONGLY AGREE NEUTRAL DISAGREE STRONGLY

AGREE DISAGREE
RESPONDENTS 18 113 44 30 00
PERCENTAGES 9% 55 % 21 % 15 % 0%

IFRS CONVERGENCE CREATES MAJOR OPPORTUNITIES FOR

TRANSFORMATION IN THE FINANCE FUNCTION.

Strongly Disagree
Disagree
0%
15%
Strongly Agree 9%

Neutral
21%

Agree
55%

INTERPRETATION

From the above table it can be concluded that 55.1 % of the total respondents agree with
the statement of “IFRS Convergence creates major opportunities for transformation in the
finance function” while 8.8 % strongly agree with the statement. None of the respondents
strongly believing that IFRS Convergence is not creating major opportunities for
transformation in the finance function.

3. Sources of finance becomes easy when convergence is made with IFRS.

Table 8.4 Question Set 1.3

SCALES STRONGLY AGREE NEUTRAL DISAGREE STRONGLY

AGREE DISAGREE
RESPONDENTS 17 129 41 18 00
PERCENTAGES 8% 63 % 20 % 9% 0%

Figure 8.3 Question Set 1.3

SOURCES OF FINANCE BECOMES EASY WHEN CONVERGENCE IS

MADE WITH IFRS.
Strongly Disagree
Disagree
0%
9%
Strongly Agree 8%

Neutral
20%

Agree
63%

INTERPRETATION

From the above table it can be concluded that 62.9 % of the total respondents agree with
the statement of “Sources of finance becomes easy when convergence is made with
IFRS” while 8.3 % strongly agree with the statement. None of the respondents strongly
believing that Sources of finance would not become easy when convergence is made with
 IFRS.

Sources of finance becomes easy when convergence is made with IFRS.

Table 8.4 Question Set 1.3

SCALES STRONGLY AGREE NEUTRAL DISAGREE STRONGLY

AGREE DISAGREE
RESPONDENTS 17 129 41 18 00
PERCENTAGES 8% 63 % 20 % 9% 0%

Figure 8.3 Question Set 1.3

SOURCES OF FINANCE BECOMES EASY WHEN CONVERGENCE IS

MADE WITH IFRS.
Strongly Disagree
Disagree
0%
9%
Strongly Agree 8%

Neutral
20%

Agree
63%

INTERPRETATION

From the above table it can be concluded that 62.9 % of the total respondents agree with
the statement of “Sources of finance becomes easy when convergence is made with
IFRS” while 8.3 % strongly agree with the statement. None of the respondents strongly
believing that Sources of finance would not become easy when convergence is made with
IFRS.

The convergence with IFRS will facilitate more financial information for the benefit
of internal and external stakeholders.

Table 8.5 Question Set 1.4

SCALES STRONGLY AGREE NEUTRAL DISAGREE STRONGLY

AGREE DISAGREE
RESPONDENTS 35 136 28 6 00
PERCENTAGES 17 % 66 % 14 % 3% 0%

Figure 8.4 Question Set 1.4

The convergence with IFRS will facilitate more financial

information for the benefit of internal and external
stakeholders.
Disagree Strongly Disagree
3% 0%

Neutral Strongly Agree

14% 17%

Agree
66%

INTERPRETATION

From the above table it can be concluded that 66.3 % of the total respondents agree with
the statement of “The convergence with IFRS will facilitate more financial information
for the benefit of internal and external stakeholders” while 17.1 % strongly agree with the
statement. None of the respondents strongly believing that the convergence with IFRS
will not facilitate more financial information for the benefit of internal and external
stakeholders.

4. The convergence with IFRS will result into developmental changes in information
technology.

Table 8.6 Question Set 1.5

SCALES STRONGLY AGREE NEUTRAL DISAGREE STRONGLY

AGREE DISAGREE
RESPONDENTS 5 130 60 10 00
PERCENTAGES 3% 63 % 29 % 5% 0%

Figure 8.5 Question Set 1.5

The convergence with IFRS will result into developmental

changes in information
technology Strongly Disagree
Disagree . 0%
5%
Strongly Agree 3%

Neutral
29%

Agree
63%

INTERPRETATION

From the above table it can be concluded that 63.4 % of the total respondents agree with
the statement of “The convergence with IFRS will result into developmental changes in
information technology” while 2.4 % strongly agree with the statement. None of the
respondents strongly believing that the convergence with IFRS will not result into
developmental changes in information technology.
5. The convergence with IFRS will result into positive changes or development in
human resources.

Table 8.7 Question Set 1.6

SCALES STRONGLY AGREE NEUTRAL DISAGREE STRONGLY

AGREE DISAGREE
RESPONDENTS 3 135 51 16 00
PERCENTAGES 1% 66 % 25 % 8% 0%

Figure 8.6 Question Set 1.6

The convergence with IFRS will result into positive changes or

development in human
resources. Strongly Disagree
Disagree 0%
8%

Strongly Agree
Neutral 1%
25%

Agree
66%

INTERPRETATION

From the above table it can be concluded that 65.9 % of the total respondents agree with
the statement of “The convergence with IFRS will result into positive changes or
development in human resources” while 1.5 % strongly agree with the statement. None of
the respondents strongly believing that the convergence with IFRS will not result into
positive changes or development in human resources.
QUESTION SET 2: THE EFFECT OF IFRS ON PERFORMANCE
MEASUREMENT MANAGEMENT OF ORGANISATION

This particular set of questions is containing eight different questions which are focusing
on the effect of IFRS Convergence on Performance Measurement Management of
Organisation. Mainly this set is focusing on various aspects of an organisation in the
context of performance and efficiency measurement with IFRS convergence.

1. The convergence with IFRS will cause heavy investment in planning, budgeting,
forecasting and management reporting by management personnel.

Table 8.8 Question Set 2.1

SCALES STRONGLY AGREE NEUTRAL DISAGREE STRONGLY

AGREE DISAGREE
RESPONDENTS 4 140 47 14 00
PERCENTAGES 2% 68 % 23 % 7% 0%

Figure 8.7 Question Set 2.1

The convergence with IFRS will cause heavy investment in

planning, budgeting, forecasting and management reporting by
management
personnel. Strongly Disagree
0%
Disagree
Neutral 7% Strongly Agree 2%
23%

Agree
68%
INTERPRETATION

From the above table it can be concluded that 68.3 % of the total respondents agree with
the statement of “The convergence with IFRS will cause heavy investment in planning,
budgeting, forecasting and management reporting by management personnel” while 2 %
strongly agree with the statement. None of the respondents strongly believing that The
convergence with IFRS will not cause heavy investment in planning, budgeting,
forecasting and management reporting by management personnel.

2. Organisations will pursue new performance requirements under IFRS.

Table 8.9 Question Set 2.2

SCALES STRONGLY AGREE NEUTRAL DISAGREE STRONGLY

AGREE DISAGREE
RESPONDENTS 11 118 44 32 00
PERCENTAGES 5% 58 % 21 % 16 % 0%

Figure 8.8 Question Set 2.2

Organisations will pursue new performance requirements

under IFRS.
Strongly Disagree
Disagree 0% Strongly Agree
16% 5%

Neutral
21%

Agree
58%
INTERPRETATION

From the above table it can be concluded that 57.6 % of the total respondents agree with
the statement of “Organisations will pursue new performance requirements under IFRS”
while 5.4 % strongly agree with the statement. None of the respondents strongly
believing that Organisations will not pursue new performance requirements under IFRS.

3. The Convergence with IFRS will facilitate better information for management in
decision making.

Table 8.10 Question Set 2.3

SCALES STRONGLY AGREE NEUTRAL DISAGREE STRONGLY

AGREE DISAGREE
RESPONDENTS 9 121 41 34 00
PERCENTAGES 4% 59 % 20 % 17 % 0%

Figure 8.9 Question Set 2.3

The Convergence with IFRS will facilitate better information for

management in decision making.
Strongly Disagree
Disagree Strongly Agree
0%
17% 4%

Neutral
20%

Agree
59%
INTERPRETATION

From the above table it can be concluded that 59 % of the total respondents agree with
the statement of “The Convergence with IFRS will facilitate better information for
management in decision making” while 4.4 % strongly agree with the statement. None of
the respondents strongly believing that The Convergence with IFRS will not facilitate
better information for management in decision making.
 Conclusion

Information regarding financial accounting is important for its users in the process of making
various decisions. As regards small or large companies – the advantages of financial accounting
information are different. Literature analysis showed that the importance of financial accounting
information could be revealed through Porter’s five forces. Financial accounting information can be
used for buyers monitoring and debt risk controlling.

Also, it disclosed the size of resources of main activities or investing, finance planning, ensuring
cash flow and strategic planning. Depending on the 80 Finiz 2018 The Role of Financial and Non-
Financial Reporting in Responsible Business Operation Accounting, Audit and Forensic Science
company’s size, the list of financial accounting information could be different. Surely, financial
accounting information must assure true and fair image of the company.

Therefore, today it is necessary to discuss sustainable accounting. Sustainable accounting can have
a positive impact on business decisions. 2. The empirical research revealed that Lithuanian
companies mostly use financial accounting information to make decisions related to sales
(controlling of sales, marketing analysis and planning, profit management). Following Porter’s five
forces, Lithuanian companies apply financial accounting information for making decisions related
to entry barriers, rivalry and substitutes. It looks strangely, but Lithuanian companies do not tend
to apply financial accounting information to financial planning, cost control and cash flow
controlling.
 RECOMMENDATIONS

The present study has covered three areas namely, environmental accounting, reporting, and
auditing. Keeping in view the observations of the study, suggestions have been made in each of
these three areas. The recommendations are for the benefit of professional accounting bodies,
government, regulatory authorities, professional accountants, companies, and various
stakeholders.

ENVIRONMENTAL ACCOUNTING

Environmental accounting at the corporate level includes preparation of environmental accounts

for external reporting purposes as well as use of this information in internal decision-making. It was
observed that in the absence of any regulatory framework and accounting guidelines on the issue,
the companies in India find it difficult to incorporate environment related information formally in
the books of accounts. Though the companies have started considering these issues for managerial
decision- making, most of them do not prepare environmental accounts for external reporting. The
following recommendations have been made to improve the use of environmental accounting
system in India: The study reinforces a great need for development of a separate conceptual
framework and a standard on EAR to help companies in properly identifying, measuring,
recognizing and disclosing relevant environmental costs, benefits, assets, liabilities and
contingencies. Hence, it is recommended that professional accounting bodies at national and
international levels should develop a separate conceptual framework on EAR (on the lines 299
prescribed by FEE) specifying objectives, general assumptions, qualitative characteristics and
guidelines for the companies. A standard should also be issued giving basis on which
environmental costs should be bifurcated from other costs, basis for expensing and capitalization
of` environmental costs, depreciation of environmental assets, recognition of environmental
benefits and measurement and recognition of environmental liabilities and contingencies. Some
guidelines should also be provided for treatment of environmental costs relating to prior period in
the books of accounts and on recovery and impairment of environmental assets. Existing
accounting standards can also be modified to take care of environmental issues. The ICAI should
also develop a separate standard on Carbon (Emission and Sequestration) Accounting (CES
Accounting) which needs to be consistent with the Intergovernmental Panel on Climate Change
(IPCC) principles. In addition, the measurement of externalities, tax treatment of environmental
activities and verification of an entity's environmental accounts by independent duly qualified
assurors are some other issues to be considered by the ICAI. With growing legal and social
awareness, there has been a significant increase in environmental costs and liabilities, to the extent
that they have become a significant part of total costs and liabilities. Concealing them or their
improper disclosure might expose interested stakeholders to unknown levels of risk. Hence,
significant environmental costs and liabilities should be properly measured and reflected in the
financial reports. It might not be possible for a company to account for external effects of
environmental pollution and degradation within the current accounting framework. But the
enterprises should take initiative to track internal environmental costs and benefits to products
and processes. They should try to determine full extent of their environmental costs and integrate
them into decision-making.