CA Sonal Joglekar
 

 
 Read the syllabus
  Acquaint yourself with the
the financial statements
statements
of companies.

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 Contact details: 9881199591 (only for
emergencies)
 E-mail: sonalj23@gmail.com
sonalj23@gmail.com   (mention SCIT in
the subject)

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  Accounts is the means of communication

between the parties who have a stake in the
business.
 Earlier, accounting was a process of simply
Earlier,
recording business transactions.
 Now, accounting is considered a management

tool providing vital

organisation’s information concerning the
future.

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 Process of recording, classifying, summarising,

analysing and
analysing  and interpreting the
interpreting the financial
transactions and communicating the
communicating the results
thereof to the persons interested in such
transactions

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 Recording… 
Recording… 
 Basic function of accounting

  All business transactions of a financial nature

orderly manner.
are recorded in an orderly  manner.
 Recording is done in the book ‘Journal
‘ Journal’’ 
 Journal
Journal –
 – book
 book of first entry.

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 Classifying… 
Classifying… 
 Is concerned with systematic analysis of the
recorded data in order to group transactions or
entries of one nature at one place.
 Classification is done in the book ‘Ledger ’ 
 Ledger –
Ledger  – book
 book of second entry

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 Summarising… 
Summarising… 
 Presenting the
Presenting  the classified data in such a way that
it is understandable and useful to the internal as
well as the external end-users of the accounting
statements.
 Leads to the preparation of Trial Balance,

Income Statement 
Statement (P&L) and Balance Sheet
Sheet..

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  Analysing and interpreting… 

interpreting… 
  Analysis and interpretation in a manner that the

end-users can make a meaningful and factual

 judgement about the financial condition and the
profitability of the business operations.
 Data is also used for preparing the future plan

and for framing policies for the execution of the

plans.

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 Analysis means methodical

methodical classification of the
the
data given in the financial statements
 Interpretation means explaining the meaning

and significance of the data so simplified.

 Both are complimentary
c omplimentary to one another.
another.
Interpretation requires Analysis while Analysis is

useless without Interpretation.

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 Communication…
 This is done through preparation and distribution
of accounting reports including the balance
sheet, income statement, ratio analysis, cash
flow statements, graphs, etc.

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  Accounting only records those

those transactions and
events in terms of money which are of a
financial nature.
  Other events which may impact the business
but do not have a monetary definition will not be
recorded. Ex, strong employee base.

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 Proprietors
 Managers
 Creditors
 Prospective Investors
 Government
 Employees
 Citizens

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 Financial Accounting
 Management Accounting

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 It is the original form of accounting

 Mainly confined to preparation of financial
statements for the use of outsiders like
shareholders, creditors, banks, etc.
 Financial statements like Balance sheet and
Profit and Loss Account help in understanding

the manner in which operations of the business

have been conducted during the specific period
period..

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 It is accounting for the management.

 Provides necessary information for the
management to discharge their duties.
 Cost accounting, budgetary control, inventory
control, internal auditing, etc.

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 Objectives
  Analysing performance

 Data used

 Monetary measurement

 Periodicity of reporting

 Precision

 Nature
 Legal Compulsion

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 Objectives… 
Objectives… 
 FA is principally for the external and third parties
 MA is for the internal use by the management

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 Analysing performance… 
performance… 
 FA portrays position of the business as a whole.

It deals with aggregates and hence, cannot

reveal which part of the management action has
gone wrong or has caused the result.
 MA is interested in various depts, divisions and

reports about the profitability and performance

of each. Detailed analytical data is required for
this.
 19
 

 Data Used… 
Used… 
 FA is concerned with the monetary record of
past events. Like a post-mortem analysis of past
activity.
 MA is accounting for future. It provides data for
the present and future to enable decision

making.
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 Monetary measurement… 
measurement… 
 FA considers only such events which can be
described in monetary terms
 MA also considers factors other than those
which can be defined in monetary terms.
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 Periodicity of reporting… 
reporting… 
 Period of reporting in FA is much longer than the
one in MA.
 FA usually yearly or hal
half-ye
f-yearly
arly..
 MA usually on a frequent basis as decided by
the management requirements
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 Precision… 
Precision… 
 Less emphasis on precision for MA as
compared to FA.
 23
 

 Nature… 
Nature… 
 FA is obje
objective,
ctive, MA is mor
moree subj
subjective
ective as MA is
based on judgement rather than measurement.
 24
 

 Legal Compulsion… 
Compulsion… 
 FA is more or less compulsory to every business
 MA is not mandatory.
 25
 

1. To keep systematic records

2. To protect business properties
3. To ascertain the operational profit or loss
4. To ascertain the financial position of the
company.
5. To facilitate rational decision making
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  Aka Accounting Standards, are those rules of

action adopted by accountants universally while
recording accounting transactions. They are of
two types.
  Accounting Concepts
Concepts
  Accounting Conventions
Conventions
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 Includes those basic assumptions or conditions

upon which the science of accounting is based
1. Separate Entity Concept
2. Going Concern Concept
3. Money Measurement Concept
4. Cost Concept
5. Dual Aspect Concept
6. Accounting
Accounting Period
7. Periodic Matching of Cost and Revenue
8. Realisation
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1. Separate Entity… 
Entity… 
 It states that the accounts for an entity are kept

distinct from the people who own, run or do

business with the entity.
 Business is separate from the proprietor
proprietor..
 Not separate in all cases (for instance, in the

eyes of law)
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2. Going Concern… 
Concern… 
 It is assumed that the business will continue for

a fairly long time to come.

  an entity is expected to remain in operation for

the indefinite future.

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3. Monetary measurement… 
measurement… 
  Accounting records only the
the monetary
transactions.
 This helps in objective evaluation of the

business. (Quantitative)
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4. Cost Concept… 
Concept… 
 Closely related to the going concern concept

  Asset is recorded at acquisition

acquisition price and all
subsequent accounting for the asset is on this
basis.
 This brings objectivity in the preparation and

presentation of the financial statements.

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5. Dual Concept… 
Concept… 
 This is the basic principle of accounting

 Every business transaction has a dual effect

 For each debit there is a credit.

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6. Accounting
Accounting period concept…
concept…  
 Life of the business is divided in appropriate

segments for studying the results of the

business after each segment.
 In accounting such a segment or interval is

called accounting period. Usually a year

year..
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Revenues… 
7. Periodic matching of Costs and Revenues… 
 Based on accounting period concept.

 Essential to determine the profits or the loss for the

period or interval.
  Adjustments for all the outstanding expenses,

accrued incomes, prepaid expenses and the

unearned incomes are considered.
 The Matching Concept stipulates that expenses

should be recognized in the same period as the

relevant revenues are recognized. Costs related to

this period's activities but which may not be directly

related to products and services sold, are expensed
 
in this eriod. 35

8. Realisation…
  According to this principle, revenue is recognised

when the sale is made.

 Sale is when
the buyer andthe
he property
becomesinlegally
the goods
liablepasses
pay.on to
to pay.
 Realization plays an important role in determining
when revenue is recognized. Two conditions must

be satisfied.
which First,
typically the revenue
means must be earned,
that the customer has
received the good or service. Second, the revenue
must have been realized or realizable, implying that
the customer has paid or is expected to pay for the
merchandise.
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 IFRS recognizes revenue when all the following

conditions have been satisfied:

 The seller has transferred to the buyer the significant

risks and rewards of ownership of the goods;
 The seller retains neither continuing managerial
involvement to the degree usually associated with
ownership nor effective control over the good sold;
 The amount of revenue can be measured reliably;
 It is probable that the economic benefits associated
with the transaction will flow to the seller; and
 The costs incurred or to be incurred in respect of the
transaction can be measured reliably.
reliably.
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1. Conservatism
2. Full Disclosure
3. Consistency
4. Materiality
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1.Conservatism… 
1.Conservatism… 
  Anticipate no profit, but
but provide for all expected
losses.
 The Realization Concept and its associated
"earned" requirements provide guidance as to
when to recognize revenues and the Matching
Concept provides guidance as to when to
recognize expenses. The Conservatism Concept
goes one step further by recommending that
prudence be exercised in recording revenues
and expenses. It says that revenues should be
recognized only when reasonably certain, but
 expenses should be recognized as soon as 39
 

2.Full Disclosure… 
Disclosure… 
 The accounting reports should disclose fully and

fairly the information they purport to represent.

 The practice of appending ‘notes to accounts’
regarding the contingent liabilities or market
value of investments.
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3.Consistency… 
3.Consistency… 
 The consistency concept states that an entity

should use the same accounting methods and

 procedures from period to period unless it has a
sound reason to change methods.
 In case there is a necessity to change the

practice, a note explaining the effect of the

change on the previous as well as the current
year’s profit or loss should be included.
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4. Materiality… 
Materiality… 
 The materiality concept states that an entity

need only apply proper accounting to items that

are material, i.e., significant to potential users of
the financial statements. This concept allows the
accountant to be practical in choosing the

appropriate degree of precision in the accounts.

  Attach importance to material
material details and ignore
the insignificant ones.