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So far …
• Accounting as an information system
• Example
• Accounting is a language of business

• What is next:
• Financial Accounting definition
• Financial Accounting Process
• Financial Statements
• Objective of Financial System
• Terms of Accounting

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Financial Accounting
• What is Financial Accounting?
• the process or work of keeping financial accounts.
• Accounting is the process of identifying, measuring, recording,
classifying, summarizing, analyzing, interpreting, communicating
accounting information to the users of accounting information, so that
they can take informed decision.

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Financial Accounting
• Identifying – Economic/monetary transaction
• Based on evidence of sales bill, purchase bill, passbook, salary slip etc.
• E.g. A company has promised a job of 1 lakh per month.

• Measuring – Transactions which can be expressed in monetary terms.

• E.g. purchase of 1 truck, 100 ton raw material of raw material,
• you give the business, 1 ton gold for free.
• Single currency - We have received $1000, Yen 100000, Rs. 200,000 – economic transaction.
• As it can not be added in a meaningful way.
• Recording – original entry is made in journal, daybook, based on evidence.
• Accountant makes the initial entry in the book called daybook, Journal,
• Further divided into Secondary/ subsidiary books – when volume of transaction is higher.
• Secondary book – purchase book, sales book, purchase returns book, sales returns book, cash book (3-
column), petty cash book, Special journal

• Classifying – accounting information is then classified based on group transaction.

• Books which shows classified information is called Ledger.

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Financial accounting
• Summarizing – Outcome of recording in various books of accounts – B/S, I/S, C/F
• B/S – statement of Financial position – on a given date – CGPA, snapshot, as of….
• I/S – Statement of financial performance – profit/ Loss – always for a given period –e.g. SGPA, video,.
for the period
• C/F – cash flow statement

• Analyzing
• Analysis of the accounting data so that the users can use it for decision making.
• Which could also be used for comparison – Intra-firm, inter-firm
• Ratios, Graphs, diagrams.

• Interpreting
• Explaining the meaning of outcome and analysis for users.

• Communicating
• Providing the information to the users, so that they could take the informed decision.
• It communicated through preparation of annual reports, and distribution of annual reports

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Analyzing and Interpreting

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Communication

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Rs 10,000 Invested in 1993 Infosys IPO is Now

Worth Rs 14,56,89,600 (14.56 CRORES)

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Every business has an accountant. Why?

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Objectives of Financial Accounting

Objectives of Accounting

Systematic Ascertainment Ascertainment Communicating To know the

recording of of financial of financial information to financial
transactions results position various users solvency
Firm's capacity
Book-keeping: Manufacturing, to meet its
Journal, Ledgers, trading, profit Balance sheet Financial reports obligations-
and trial balance and loss account short term and
long term

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Objectives of Financial Accounting

• Systematic recording of financial transactions
• Rules, principles, GAAP
• Journal, ledger – T Accounts, Trial balance
• E.g. assets, liabilities, expenses, cash, bank balance
• How much ….
• Ascertainment of results of recorded transactions
• Incomes > Expenses, profitable,
• Expenses > Incomes, Losses
• IT services bellwether Tata Consultancy Services (TCS) has reported net profit of Rs 8,118 crore for the December
quarter, which is slightly higher (0.2 per cent) as compared to Rs 8,105 crore profit during the same period last
year
• Ascertainment of the financial position of the business
• Assets - resources company owns, Liabilities, net worth
• Apple has a cash problem
• Why is Apple issuing $17 billion in debt when it has $145 billion in cash?
• https://www.theverge.com/apple/2013/4/30/4286340/apple-nears-bond-deal-for-share-buyback-expansion
• Providing information to the users for decision making
• To know the solvency position – whether the firm has sufficient assets to pay debts

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Questions?
• Financial Statement represents financial position of business
• Income statement
• Balance sheet
• Cash Flow statement
• Answer – Balance sheet

• Financial statement represents financial performance of business

• Income statement
• Balance sheet
• Cash Flow statement
• Answer – Income statement

• Which one is wrong.

• Balance sheet for the period ending on 31st March, 2020
• Income statement for the period ending on 31st March, 2020
• Balance sheet as of 31st March, 2020.

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Output – Position of an Individual

Who owns it Rs. What we have Rs.
Home Loans 30,00,000 Apartment 35,00,000
Fixed deposits 4,60,000
Net worth/ Equity 20,00,000 Savings Account 39,500
Gold and silver coins 10,00,000
Cash in hand 400
50,00,000 50,00,000

This is only for illustration purpose. Format of corporate Balance sheet would differ.

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Terms used in Accounting

• Entity - Entity is an organization for which accounting reports are prepared
• Business and owners are separate entity

• Capital – Investment made by the owners in the business

• Infosys was established by seven engineers in Pune, Maharashtra, India with an
initial capital of $250 in 1981,
• Company – share capital
• Partnership firm – partners’ capital
• Sole proprietorship business – capital
• Retained Earnings – portion of profit retained in the business (belongs to
company’s owners).
• Retained earnings account represent claims of owners/ shareholders against the
general assets of the company.

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Terms used in Accounting

• Liabilities
• Claim of outsiders in the business, to be paid off by the organization
• Current Liabilities, Long term liabilities
• Current Liabilities – fall due for payment in short period (not more than 12 months).
• Non-current liabilities – do not fall for payment in short period.
• Assets
• Resources of the business with economic benefits – CONTROLLED BY BUSINESS as a result of
past events and from which future benefits are expected to flow to the entity.
• Fixed Assets – Tangible & Intangible – Assets held not for resale in normal course of
business.
• Alphabet goodwill and intangible assets for the quarter ending March 31, 2020 were $22.574B, a
12.84% increase year-over-year.
• Current Assets, Investments
• Non-current assets - Infosys – 21% intangible assets of total non current assets
• Current assets – cash and those assets, which are convertible into cash in less than 12 months.
• Equity/ Net worth = Assets - Liabilities
• Residual Claim of the owners in the business = capital + accumulated profit = 65,450 crore.

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