08-08-2021

Financial Accounting and Reporting

Faculty: Kavitha P
L M Thapar School of Management
BE- MBA: MBA Semester I
Session 1 and 2

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Let us introduce ourselves…

 About Myself

 Your name?

 Place?

 Any Background in Accounting?

 Experience of starting /running a business?

 Aspiration?

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Shoshin..
"in the beginner's mind there are many
possibilities, in the expert's mind there
are few."
• Zen Mind, Beginner's Mind by Shunryu Suzuki

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Course Learning Objectives (CLO)

1. Comprehend the mechanics and the process of generating
accounting information.

2. Take-hold of the basics of financial accounting and reporting.

3. Deal with the treatment of financial transactions and accounting

events in financial statements and understand the disclosure of
notes to accounts & significant accounting policies.

4. Develop the ability to evaluate, communicate, analyze and

interpret the financial results of businesses for financial
decision-making.

5. Understand and appreciate the usefulness of ethical and

sustainable accounting.
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Evaluation and Assessment Structure

• Grade for this course will be based on a comprehensive End-Semester Test, Mid-Semester test
and an Internal Assessment. The following weights will be used in calculating your final grade:

 End-Semester Test (40 marks): The duration of the test is three hours. It would cover the entire syllabus of
this course. The questions are largely based on the cases, technical notes, illustrations and concepts
discussed in the class. All CLOS
 Mid-Semester Test (20 marks): The duration of the each MST test is of one and half hours. The syllabus
includes the following:
• 1. Conceptual Framework of Preparing the Financial Statements2. Double-entry
system, T-accounts, Depreciation, and Inventory Accounting 3. Preparation of Balance Sheet and Income
Statement. CLOS 1,2 and 3

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Evaluation and Assessment Structure

 Internal Assessment (35 marks):

• Assignment 1 & 2 (before MST): 10 marks; CLOs covered: CLO 2 & CLO 3

• Assignment 3 (after MST): 15 marks; CLOs covered: CLO 4 & CLO 5

• Class Participation*: 10 marks

• Overall Performance, Behavior and feedback (SRS)*: 05 marks

• Note: Minimum pass marks for this course are 33 out of 100. However, the final grade will be decided by the Grade
Moderation Committee based on the total marks obtained by the student.

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Topics Covered: Session 1 & 2

• Approach to Accounting
• Definition of Accounting
• Event and Transaction
• Objectives, scope & importance of accounting
• Accounting as an information system
• Users of Accounting Information
• Sub-fields of Accounting
• Basic forms of business organizations

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Approach to Accounting
• Accountant’s/creator’s viewpoint
• Expertise in designing , constructing and checking the accuracy of the accounting system

Our Approach
• View point of User’s of accounting information
• Must be able to understand what an accounting figure means, its limitations and the
circumstances where it may lead to ambiguity

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Definition of Accounting

the process of identifying, measuring, and

communicating economic information to permit
informed judgements and decisions by users of
accounting information.

-- AMERICAN ACCOUNTING ASSOCIATION COMMITTEE

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Event and Transaction

• Every business encounters several incidents and occurrences each day.
• An event is an incident or occurrence that concerns the business or impacts the business dealings.
• An event that has measurable monetary impact qualifies as a transaction and is the source of
accounting information.
• Events (other than transactions) also called non financial transactions are thus not recorded in the
books of accounts of the company.
• Events, although do not have immediate monetary impact, it is important for management to keep
track of them as they may lead to future monetary impact for the business.
• An example of an event can be death of a senior key management personnel or a large scale
employee strike.

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Imagine you own a business…

The questions that will bother you are..
1. What has happened to my investment?
2. What is the result of the business transactions?
3. What are the earnings and expenses?
4. How much amount is receivable from customers to whom goods have been sold on credit?
5. How much amount is payable to suppliers on account of credit purchases?
6. What are the nature and value of assets possessed by my business concern?
7. What are the nature and value of liabilities of my business concern?
Accounting information will provide answers to all these questions

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Importance of Accounting

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Objectives of Accounting
• Systematic recording of transactions
• Ascertainment of results (profit or loss) of above recorded transactions
• Ascertainment of financial position (what it owns and what it owes) of the business
• Providing information to the users for rational decision making
• To evaluate the liquidity and solvency position of the business

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Accounting as an information system

• What are Accounting Information Systems?
• An information system is a formal process for collecting data, processing the data into information, and distributing that information
to users.
• The purpose of an accounting information system (AIS) is to collect, store, and process financial and accounting data and produce
informational reports that managers or other interested parties can use to make business decisions.
• Although an AIS can be a manual system, today most accounting information systems are computer-based.
• Functions of an Accounting Information System
• Accounting information systems have three basic functions:
1. The first function of an AIS is the efficient and effective collection and storage of data concerning an organization’s financial
activities, including getting the transaction data from source documents, recording the transactions in journals, and posting data
from journals to ledgers.
2. The second function of an AIS is to supply information useful for making decisions, including producing managerial reports and
financial statements.
3. The third function of an AIS is to make sure controls are in place to accurately record and process data.

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Parts of an Accounting Information System

• An accounting information system typically has six basic parts:
1. People who use the system, including accountants, managers, and business analysts
2. Procedure and instructions are the ways that data are collected, stored, retrieved, and processed
3. Data including all the information that goes into an AIS
4. Software consists of computer programs used for processing data
5. Information technology infrastructure includes all the hardware used to operate the AIS
6. Internal controls are the security measures used to protect data

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Users of Accounting Information

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Sub-fields of Accounting

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Financial Accounting
• Financial accounting consist of preparation and presentation of financial statements with actual
interpretation. It’s a language to communicate the performance of business in the form of a
summary to the stakeholders of the entity.
• Financial accounting is historical in nature. Because in financial accounting we record and
summarize the transactions which had already been occurred.
• The main purpose of financial accounting is to generate financial statements and reports to depict
the true financial position of the entity. It helps in taking sound financial decisions.

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Management Accounting
• Management accounting consist of various ways of summarising the information and generating
the reports as desired by the management.
• As the management is responsible for planning , controlling , executing the business activities in an
useful manner, it requires various reports which facilitate them to take sound decisions.
• The main difference between financial accounting and management accounting is that the financial
accounting focuses on reporting to the stakeholders outside the organization where as
management accounting is for reporting to the Internal management. In simple management
accounting combines accounting ,finance and management so as to carry on the managerial
operations successfully.

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Points of Difference Financial Accounting Management Accounting

The main aim is to provide information to outside
parties. Outside parties include creditors, investors,
Aim
customers, etc. Hence, it is mainly aimed at assisting
investors in making informed decisions.
Here, the aim is different than financial accounting.
Generally, management accounting information is
meant for management to make informed business
decisions.

It is a mandatory requirement for every public

It is at the discretion of management. There is no
organization by the government. Thus, they are
Regulatory Requirements mandatory requirement but still, institutes like CIMA,
governed by Accounting Standard Boards, companies’
ICWAI, etc provide some framework and formats.
law and government.

Financial accounting statements are prepared based

There is no standard basis for preparing management
on ‘Generally Accepted Accounting Principles (GAAP)’.
Governing principles accounting statements. Hence, they are prepared
This GAAP is different for different countries with
based on the requirement of the management team.
more or less same features.

The time horizon for financial accounting is ‘past’. It has no specific time horizon but the main focus is on
Time Horizon
Generally, it is one accounting year. the future.

Management accounting reports are the monthly,

Financial accounting reports consist of profit and loss
Outputs weekly or yearly analysis of products, geographies,
statements, balance sheet and cash flow statement.
functions, etc.

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Data of management accounting is not

Relevance and Precision of Data
Data of financial accounting are 100% verifiable
necessarily 100% verifiable. So, the data should
and precise. Hence, everything has evidence to
be relevant, timely and logical. For instance,
support it.
nobody can forecast sales perfectly.

Independent audit of financial accounting reports There is no specific requirement for an

is mandatory in most countries. For instance, in independent audit. But, management at its
Independent Audit the USA, CPA conducts such audits and in India, discretion can take the initiative to conduct an
Chartered Accountants (CA) conducts such independent audit, for the sake of efficient and
audits. effective management.

Financial accounting statements are publicly
published statements and are meant for the
Confidentiality
public only. So, there is no question of
confidentiality.
Management accounting statements are meant
for management and confidentiality of the
statements is the key concern. It is because they
contain business secrets.

Perspective It has a historical perspective. It has a futuristic perspective.

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Cost Accounting
• It deals with the cost of every unit, job, process, order, service, etc, whichever is applicable and
includes the cost of production, cost of selling and cost of distribution.
• Provides data to management for decision making and budgeting for the future
• It helps to establish certain standard costs and budgets.
• provides costing data that helps in fixing prices of goods and services
• Is also a great tool to figure out the efficiency of a unit or a process. It can disclose wastage of time
and resources

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Human Resource Accounting

• As per The American Association of Accountants (AAA) ” HRA is a process of identifying and measuring data about
human resources and communicating this information to interested parties “.
• It mainly focuses on ascertaining the costs that are being incurred on human resources and the value of output the
entity is receiving from them.
• In service sector major concern is Human Resource. Recruiting , training, staffing the human resources in a manner so
that they can be used by the company in running its operations is very important. HR accounting helps these
organizations in successful management of Human Resource by providing the reports required for HR decision making.

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Social Responsibility Accounting

• Socially responsibility accounting explains various methods to ascertain the social cost incurred by enterprise’s
activities along side of ascertaining the social benefits created.

• As per Information Systems Audit and Control Association (ISACA), “Social accounting aims to assess the impact of an
organisation or company on people-both the internal and external participant environments.” It helps the stakeholders
to know the impact of organization’s activities on society & environment.

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Basic Organization Forms

• The primary aspect, based on which forms of business organisations are decided, is its characteristics. Various factors determining
the character of business include:
• Ease of Formation
• Capital or Financial Requirements
• Nature of Liability
• Control
• Stability and Continuity
• Flexibility to Conduct Operations.
• Secrecy
• Legal Aspects

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Basic Organization Forms

• Depending on the factors mentioned above, there can be seven different forms of business organisations. They are as follows:
1. Sole Proprietorship
2. Partnership
3. LLP (Limited Liability Partnerships)
4. Hindu Undivided Family
5. Company
6. Corporations or Statutory Bodies
7. Co-operative Societies

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1.Sole Proprietorship
• “Sole trader is a type of business unit where a person is solely responsible for providing the capital,
for bearing the risk of the enterprise and for the management of business.” J.L. Hansen
• Characteristics
• Formation and closure
• Unlimited Liability
• Sole risk bearer and profit recipient
• Control
• No separate entity
• Lack of business continuity

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1.Sole Proprietorship
Merits Demerits

• Quick decision making • Limited resources

• Confidentiality of information • Limited life of a business
• Direct incentive concern
• Sense of accomplishment • Unlimited liability
• Ease of formation and closure • Limited managerial ability

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