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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 20,00,000 Savings Account 39,500
Gold and silver coins 10,00,000
Cash in hand 500
50,00,000 50,00,000

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

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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.

49

(Simplified) Balance Sheet of a business

Liabilities and Equity Rs. Assets Rs.
Home Loans/ Bank Loans etc. 30,00,000 PPE 35,00,000
Furniture 4,60,000
Net worth/ Equity (Capital + RE) 20,00,000 Current bank Account 39,500
Investments 10,00,000
Cash in hand 500
50,00,000 50,00,000

This is for illustration only. 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.

51

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.

53

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/ Non-current 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. for 2021 were $24.373B, a 7.75% increase from 2020
• Alphabet goodwill and intangible assets for the quarter ending March 31, 2022 were $24.323B,
a 0.66% 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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List of Assets
• Cash and bank balances
• Land
• Property, Plant and Equipment
• Trade receivables/ Trade debtors/ Accounts receivables
• Amount collectible for sale of goods on credit,
from the customers.
• Prepaid expense
• Business pays for services before they have been
received.
• Debtors
• Amount collectible for sale of goods and assets on credit, Including trade receivables
• Marketable Securities
• Bills receivables – legal document containing a right to receive a certain sum of
money at a specified date.

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List of Assets
• Cash and bank balances
• Land
• Property, Plant and Equipment
• Trade receivables/ Trade debtors/ Accounts receivables
• Amount collectible for sale of goods on credit,
from the customers.
• Prepaid expense
• Business pays for services before they have been
received.
• Debtors ( Including Trade receivables)
• Amount collectible for sale of goods and assets on credit, Including trade
receivables
• Bills receivables – legal document containing a right to receive a certain
sum of money at a specified date.

58

Liabilities accounts
• Trade payables/ trade creditors/ Accounts payables
• Amount payable for purchase of goods, to the suppliers
• Creditors (including Trade payables)
• Amount payable for purchase of assets and goods on credit, (includes trade payables)
• Unearned revenue (liability)
• Supplier’s version of prepaid expenses.
• When you receive money before providing services. (it is a liability)
• Income tax payable
• Dividend payable
• Interest payable
• Long term liabilities
• Secured and unsecured liabilities

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List of Assets
• Cash and bank balances
• Land
• Property, Plant and Equipment
• Trade receivables/ Trade debtors/ Accounts receivables
• Amount collectible for sale of goods on credit,
from the customers.
• Prepaid expense
• Business pays for services before they have been
received.
• Debtors ( Including Trade receivables)
• Amount collectible for sale of goods and assets on credit, Including trade
receivables
• Bills receivables – legal document containing a right to receive a certain
sum of money at a specified date.

60

Liabilities accounts
• Trade payables/ trade creditors/ Accounts payables
• Amount payable for purchase of goods, to the suppliers
• Creditors
• Amount payable for purchase of assets and goods on credit, (includes trade payables)
• Unearned revenue (Liabilities)
• Supplier’s version of prepaid expenses.
• When you receive money before providing services. (it is a liability)
• Income tax payable
• Dividend payable
• Interest payable
• Long term liabilities – LT Loans/ Debentures/ corporate Bonds
• Secured and unsecured liabilities

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Terms used in Accounting

• Drawings (used in sole proprietorship business, partnership business)
• Cash or goods withdrawn by the owner, reduces the capital (claim) in the business.

• Dividend – When a portion of profit is distributed to the owners/ shareholders.

• Google Inc. (1998, N/A), Microsoft (1975, 2003)

• Goods or merchandise
• Part of core activity of the business, primary activity of the business
• Items, commodities that are sold by the business
• manufactured (converting raw material into finished goods) or purchased.
• Stock/ Inventory – unsold goods
• Sales revenue
• Income generated from core business activity.
• Amount for which goods are sold or services are rendered.
• For Vodafone, income generated from telecom business is revenue
• AGR in telecom sector in India
• Other Revenues/ Income
• All sources of Income generated by business including core business activity.
• For Vodafone, income generated from any other activity than telecom business is an income but not revenue.

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Terms used in Accounting

• Drawings (used in sole proprietorship business, partnership business)
• Cash or goods withdrawn by the owner, reduces the capital (claim) in the business.

• Dividend – When a portion of profit is distributed to the owners/ shareholders.

• Google Inc. (1998, N/A), Microsoft (1975, 2003)

• Goods or merchandise
• Part of core activity of the business, primary activity of the business
• Items, commodities that are sold by the business
• manufactured (converting raw material into finished goods) or purchased.
• Stock/ Inventory – unsold goods
• Sales revenue
• Income generated from core business activity.
• Alphabet announced revenue of $75 billion in Q4 of 2021. Of that, $61.2 billion came from Google advertising.
• Amount for which goods are sold or services are rendered.
• For Vodafone, income generated from telecom business is revenue
• AGR in telecom sector in India
• Other Revenues/ Income
• All sources of Income generated by business including core business activity.
• For Vodafone, income generated from any other activity than telecom business is an income but not revenue.

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Basis of Accounting
• Cash basis/ Cash system – recorded when cash is received or paid
• Incomes are recorded only when the cash is received.
• Expenses are recorded only when the cash is paid.
• Accrual basis/ Mercantile system – Accrual accounting means revenue and
expenses are recognized and recorded when they occur.
• Incomes and expenses are recorded when they accrue irrespective of cash has been received
or paid.
• E.g. Goods sold at Rs. 10,00,000 during the year (incl. credit sales - Rs. 960,000).
• Cash received in respect of credit sales – 950,000.
• As per Cash basis of accounting = 950,000 + 40,000 = 990,000
• As per Accrual basis of accounting = 10,00,000.
• Section 128 (1) – every company shall record financial transactions as per
accrual basis of accounting and double entry book keeping system.

64

Basis of Accounting
• In accrual basis of accounting, revenues and expenses are recognized
when the transaction that causes them occurs, not necessarily when cash
is received or paid.
• That is, revenues are recognized when they are earned and expenses
when they are incurred.
• The two basic accounting principles that determine when revenues and
expenses are recorded under accrual basis accounting are the revenue
principle and the matching principle.
• Revenues are recognized when they are earned and received/ receivable.
• Expenses incurred during the period matched with the revenue of the period.

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Revenues
• Companies earn revenues from the sale of goods or services to
customers.
• Revenues normally are reported for goods or services that have been sold to a
customer whether or not they have yet been paid for.
• Retail stores such as Walmart and McDonald’s often receive cash at the time of
sale.
• Iphone sale, Macbook sale for apple
• Infosys – Finacle
• Services you receive from urban company – service charges are revenue
• E.g. Silverline Corporation – revenue from selling - computer peripherals,
laptops, PCs etc.
• If they sell AC which they were using – profit from sale of that AC, is not core business
activity – other incomes.

66

Revenues
• Companies earn revenues from the sale of goods or services to
customers.
• Revenues normally are reported for goods or services that have been sold to a
customer whether or not they have yet been paid for.
• Retail stores such as Walmart and McDonald’s often receive cash at the time of
sale.
• Iphone sale, Macbook sale for apple
• Infosys – Finacle
• Services you receive from urban company – service charges are revenue
• E.g. Silverline Corporation – revenue from selling - computer peripherals,
laptops, PCs etc.
• If they sell AC which they were using – profit from sale of that AC, is not core business
activity – other incomes.

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Expenses
• Reduction in resources
• Expenses represent the Dollar/ Rupee amount of resources the entity used
to earn revenues during the period.
• Expenses reported in one accounting period may actually be paid for in
another accounting period. Some expenses require the payment of cash
immediately while others require payment at a later date.
• Product cost & Period cost
• Cash & Non-cash expenses – Depreciation
• Mfg, S &D, Gen. Exps.
• Fixed and Variable

68

Expenses
• Reduction in resources
• Expenses represent the Dollar/ Rupee amount of resources the entity used
to earn revenues during the period.
• Expenses reported in one accounting period may actually be paid for in
another accounting period. Some expenses require the payment of cash
immediately while others require payment at a later date.
• Product cost & Period cost
• Cash & Non-cash expenses – Depreciation
• Mfg, S &D, Gen. Exps.
• Fixed and Variable

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• The INCOME STATEMENT (Statement of Income, Statement of Earnings,

Statement of Operations) reports the revenues less the expenses of the
accounting period.

• Net profit/ Net loss

• Total Incomes > Total expenses, Net Profit = Total Incomes – Total Expenses
• Total Expenses > Total Incomes, Net Loss = Total Expenses – Total Incomes

70

Basis of Accounting for recognition of revenue and expenses

• Cash basis – recorded when cash is received or paid
• Incomes are recorded only when the cash is received.
• Expenses are recorded only when the cash is paid.
• Accrual basis – Accrual accounting means revenue and expenses are recognized
and recorded when they occur.
• Incomes and expenses are recorded when they accrue irrespective of cash has been received
or paid.
• E.g. Goods sold at Rs. 10,00,000 during the year (incl. credit sales - Rs. 960,000).
• Cash received in respect of credit sales – 950,000.
• As per Cash basis of accounting = 950,000 + 40,000 = 990,000
• As per Accrual basis of accounting = 10,00,000.
• Section 128 (1) – every company shall record financial transactions as
per accrual basis of accounting and double entry book keeping system.

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Basis of Accounting
• In accrual basis of accounting, revenues and expenses are recognized when
the transaction that causes them occurs, not necessarily when cash is
received or paid.
• That is, revenues are recognized when they are earned and expenses when
they are incurred.
• The two basic accounting principles that determine when revenues and
expenses are recorded under accrual basis accounting are the revenue
principle and the matching principle.
• Revenues are recognized when they are earned and received/ receivable.
• Expenses incurred during the period matched with the revenue of the period.

72

Revenues
• Sales revenue
• Income generated from core business activity.
• Amount for which goods are sold or services are rendered.
• For Vodafone, income generated from telecom business is revenue
• AGR in telecom sector in India
• Companies earn revenues from the sale of goods or services to customers.
• Revenues normally are reported for goods or services that have been sold to a customer
whether or not they have yet been paid for.
• Retail stores such as Walmart and McDonald’s often receive cash at the time of sale.
• Selling iPhones , MacBook for apple
• Infosys – Finacle
• Services you receive from urban company – service charges are revenue
• E.g. Silverline Corporation – revenue from selling - computer peripherals, laptops, PCs etc.
• If they sell AC which they were using – profit from sale of AC, is not core business activity – other
incomes.
• Other Revenues/ Income
• All sources of Income generated by business including core business activity.
• For Vodafone, income generated from any other activity than telecom business is an income
but not revenue.

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Terms used in Accounting - Expenses

• Depreciation
• Reduction in the value of the tangible assets overtime due to usage, wear and tear,
afflux of time.
• Amortization
• Process of gradually writing off the initial cost of an asset, generally intangible
assets.
• Patent, trademark, copyright (right to the creator), goodwill - reputation, Brand,
special contracts
• Depletion
• Exhaustion of the supply of the resources
• Used for coal mines

• Cash Expenses or not?

74

• Sales and Sales returns

• Sales – represents sale of goods @ selling price, (recorded at proceeds)
• Sales returns – When sold goods, return back from customers

• Purchases and Purchase returns

• Purchases – Purchase of goods (merchandise, part of core business activity)
• Purchase returns – When Purchased goods, returned to the supplier.

• Dividend (share of profit distributed to shareholders)

• Not an expense, distribution of profit

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Terms used in Accounting

• Expenditure
• Assets, goods or commodities acquired by a firm which has future economic benefit.
• When economic benefit is for longer period – it is called long term assets or fixed
assets.
• When economic benefit does not exceed one year and supports business activity – it is
called expense.

• E.g. Orange store (official retail outlet to sell O-phones)

• Purchase of Furniture – when purchased – Expenditure
• Economic benefit – for longer period – Fixed asset
• Pepper-dry Furniture store
• Incurred 2000 on carriage for supplying furniture to the client
• Carriage supports core business activity – short term in nature - Expense

76

Expenditure – Asset – Expense

Benefit less than one year

Expensed in the period in
which it is incurred
Revenue Expenditure

Expenditure Benefit more than one year

Capital Expenditure /
Expensed over period
Fixed Asset/
Deferred revenue
Expenditure

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Expenditure
Raw Material purchased = Rs. 10L
Cost
Raw Material used in factory
(for 100 units, 10K per unit) (Goods sold = 40 units )
for prodn. of 60 units. =Rs.
6L Expenses
Salary paid = 2L Material expense = Rs. 4L
Salary paid = 2L
Salary paid = 2L

78

Terms used in Accounting

• Cost
• Sum of expenses for a cost object
• Measurement of resources used for some purpose.

• Expense
• Item of Cost incurred which relates to the current period.
• Current period portion of expenditure.
• Reduction in future economic benefit
(resources) or increase in liabilities.

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Expenses

• How to recognize –
• (1) Costs associated with activities of the period are expenses of the period and
• (2) costs that cannot be associated with revenues of future periods are expenses of the current
period.
• Expenses represent the Dollar/ Rupee amount of resources the entity used to earn
revenues during the period.
• An outflow/reduction of the economic benefit
• Either decrease in assets or increase Liabilities
• Decreases owner’s equity
• Expenses reported in one accounting period may actually be paid for in another
accounting period. Some expenses require the payment of cash immediately while
others require payment at a later date.

80

Expenses: Product costs and Period Cost

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Kinds of Expenses
• Product costs/ Inventoriable costs
• 10 L O-Phones sold – for $1000 Mn.
• Company has purchased – 1.2 Mn. O-Phones – $600 Mn.
• How much is product cost?

• Period Costs
• Rent – 100 Mn.

82

Criteria to recognize expenses

• Product cost and period cost

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Product Costs
Material cost
Assembly cost
iPhone Manufacturing Cost Estimates Production/ manufacturing cost
Flash Memory & RAM
Display & Touchscreen
Processor Direct Material
Sensors
Indirect Material costs
Cameras
Direct Labour
Cellular Radio
Indirect Labour
Wireless Radio
Manufacturing costs
Battery
Power Management glue, solder (a low-melting alloy
Mechanical Parts
used to join metals together), and
Packaging
nails
Production
Licensing Fees
cost of supervisors, janitors, plant
Total Cost Approx. $230 managers, machine repair
technicians, materials ordering
personnel, and receptionists for
the plant would be placed

84

Period Costs
• R & D Costs
• Selling General and Administrative costs – including salary
of CEO
• Salary of staff, employees working in various departments
• Storage costs
• Selling Expenses
• Salesman salary
• Advertisement cost
• Shipping and transportation cost
• After sales service cost

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WORLDCOM
• US based telecommunications company provides phone and mobile
services

86

Line Cost
• To provide services to customers, WorldCom had to pay other companies to
use their cables and towers

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ASSETS VS. EXPENSES

ASSETS EXPENSES

An outflow/reduction of the
A resource controlled by entity
economic benefit

As a result of past events Either decrease assets or increase

(transactions) Liabilities

For which future economic

benefits are expected to flow to Decreases owner’s equity
the entity

88

ASSETS VS. EXPENSES

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Worldcom’s Announcements
• WorldCom announced that it had overstated net profits by 3.8 billion
in 2001 and early 2002 because $3.8 bln of line costs had been
treated as an Asset instead of an expense.

90

Impact of fraud

- Filed for bankruptcy in July

2002

- Bought by Verizon

- CEO Bernie Ebbers received a

25-year prison sentence.

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Product costs and Period Cost

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• Cost of goods manufactured

• Total Cost of goods manufactured during the period
• Only in case of manufacturing business

• Cost of goods sold (also called cost of sales)

• Total cost of goods sold during the period
• 10 Acs purchased for 50,000 each
• 8 Acs sold for 55,000 each

• Cost of goods sold = 8 Acs x 50000 = 400000

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Expenditure
Raw Material purchased = Rs. 10L
Cost
Raw Material used in factory
(for 100 units, 10K per unit) (Goods sold = 40 units )
for prodn. of 60 units. =Rs.
6L Expenses
Salary paid = 2L Material expense = Rs. 4L
Salary paid = 2L
Salary paid = 2L

94

Terms used in Accounting

• Depreciation
• Reduction in the value of the tangible assets overtime due to usage, wear and tear,
afflux of time.

• Amortization
• Process of gradually writing off the initial cost of an asset, generally intangible
assets.
• Patent, trademark, copyright (right to the creator), goodwill - reputation, Brand,
special contracts

• Depletion
• Exhaustion of the supply of the resources
• Used for coal mines

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• Sales and Sales returns

• Sales – represents sale of goods @ selling price, (recorded at proceeds)
• Sales returns – When sold goods, return back from customers

• Purchases and Purchase returns

• Purchases – Purchase of goods (merchandise, part of core business activity)
• Purchase returns – When Purchased goods, returned to the supplier.

• Debenture (long term liabilities/ debt)

• a long-term debt security yielding a fixed rate of interest, issued by a company and, generally
secured against assets.
• Bonds are units of corporate debt issued by companies and securitized as tradeable assets. A bond is
referred to as a fixed income instrument since bonds traditionally paid a fixed interest rate (coupon)
to debtholders.

• Loan (Long term liability)

• Money raised from financial institutions.

• Dividend (share of profit distributed to shareholders)

• Not an expense, distribution of profit

96

Terms used in Accounting

• Net profit/ Net loss
• Total Incomes > Total expenses, Net Profit = Total Incomes – Total Expenses
• Total Expenses > Total Incomes, Net Loss = Total Expenses – Total Incomes

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Terms used in Accounting

• Expenditure
• Assets, goods or commodities acquired by a firm which has future economic benefit.
• When economic benefit is for longer period – it is called Capital Expenditure or long
term assets or fixed assets.
• When economic benefit does not exceed one year and supports business activity – it
is called expense.

• E.g. Orange store (official retail outlet to sell O-phones)

• Purchase of Furniture – when purchased – Expenditure
• Economic benefit – for longer period – Fixed asset
• Pepper-dry Furniture store
• Incurred 2000 on carriage for supplying furniture to the client
• Carriage supports core business activity – short term in nature - Expense

98

Expenditure – Asset – Expense

Benefit less than one year

Expensed in the period in
which it is incurred
Revenue Expenditure

Expenditure Benefit more than one year

Capital Expenditure /
Expensed over period
Fixed Asset/
Deferred revenue
Expenditure

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Terms used in Accounting

• Cost
• Sum of expenses for a cost object
• Measurement of resources used for some purpose.

• Expense
• Item of Cost incurred which relates to the current period.
• Current period portion of expenditure.
• Reduction in future economic benefit
(resources) or increase in liabilities.

100

Business - Auto repairs shop

List of expenses
Rent
Utilities
-Employee wages
- Auto parts
Office supplies
- Transporting auto
parts
Legal fees
insurance

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• Trade discount (not an expense – not recorded in the books)

• Discount offered by the seller on listed price or printed price at the time of
purchase.
• It is offered for sales promotion, keeping relation with the customer or selling in a
Bulk quantity.
• It is not recorded in the books of accounts.

• Cash discount (Expense)

• Discount offered for prompt payment within a specified time.
• E.g. 2 /10, net 30 - 2% cash discount if payment made within 10 days, credit period 30 days
• E.g. 3/30, net 90
• To encourage prompt payment of money by customers.
• Financing cost incurred by the seller for receiving early payment.
• It is recorded in the books of accounts.

102

Terms used in Accounting

• Direct Cost
• that can be directly tied to the production of
specific goods or services - i.e. cost object
• (cost object product, service, employees,
entire dept.)
• Salary of an instructor?
• Wages, direct material

• Indirect Cost
• Rent of the premise, salary of supervisor etc.

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Users of accounting information

• Internal
• Shareholders/ owners – they have invested money in the business.
• Directors and Managers – they are given the responsibilities to achieve certain goals
measured financially.
• Employees – for their future, bonuses.

104

Users of accounting information

• External
• Lenders – company’s capacity to repay the debt. (before offering and periodically)
• Suppliers – credit worthiness
• Customers – industrial consumers – for continuous supply of inputs, after sales
support for high cost equipment.
• Investors
• Financial analysts
• Public – activists, journalists, analysts, academicians.
• Government – tax authorities etc.

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Limitations of Financial Accounting

• Ignores qualitative information
• It does not include qualitative information in the books of accounts which may be
important for decision making
• Historical prices
• It does not provide the value of assets and expenditure in terms of today’s value
• E.g. land purchased in 1990 for 10,00,000, market value today – 2 crore.
• Balance sheet may not reflect the value today.
• Measurement unit – transactions are recorded in terms currency. And
currencies are not a stable unit of measurement. – inflation, exchange rate
movement.
• No future assessment – based on past information and may not help in
estimating future.

106

Limitations of Financial Accounting

• Error in judgement – accounting data are sometimes recorded based on
certain assumptions which we may not be able to accurately estimate. E.g.
life of the asset.
• Life of the asset for the purpose of depreciation.
• Not free from bias – Business man may change the adopted accounting
policies to gain in the short run.
• E.g. Change in method of depreciation/ Inventory valuation
• Errors and frauds – not full proof.
• E.g. Satyam Scandal – Inflated revenues and profits.

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Regulatory framework for corporate financial reporting

• Role of Accounting standards
• Comparison across companies becomes easier.
• Important after liberalization – FDI and FII

108

Overview of Financial Reporting requirements for

various forms of business
• Sole proprietorship business – Tax compliance
• No tax levied at the business level
• Sole proprietors are suppose to pay taxes

• Partnership firm pays flat 30% tax.

• Companies
• Companies act 2013
• Accounting standards

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• Companies shall follow Ind AS either Voluntarily or Mandatorily. Once a

company follows Indian AS, either mandatorily or voluntarily, it can't revert to
old method of Accounting.

• Mandatory Applicability (1 April 16)

• Every Company with Net worth of not less than 500 crores (5 billion).
• Mandatory Applicability from Accounting Period beginning on or after 1 April 2017
• Every Listed Company.
• Unlisted Companies with Net worth greater than or equal to Rs. 250 crore (2.5 billion) but less than
Rs. 500 crore (5 billion)(for any of the below mentioned periods).
• Net worth shall be checked for the previous four Financial Years (2013–14, 2014–15, 2015–16, and
2016–17)

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Regulatory framework for corporate financial reporting

• Accounting body – Self regulatory earlier
• After Satyam scandal and Nirav Modi scandal – need for a regulator was
necessary.
• ICAI - Institute of Chartered Accountants of India (ICAI)
• is a statutory body established by an Act of Parliament,
• Functions under the administrative control of the Ministry of Corporate Affairs, GOI.
• Managed by a council of 40 members – 32 elected by CAs, 8 nominated by central
government representing SEBI, Controller and Auditor general of India, MCA, ministry of
finance, and other stake holders.
• (28 Accounting standards, 40 IndAS)

• NFRA – National Financial Reporting Authority

• As per the companies act, 2013 – tasked with recommending accounting and auditing
standards, ensuring compliance.
• Power to investigate professional misconduct by CA firms.
• To oversee auditing and accounting standards in India.

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 7/6/22

112

Financial
Statements
• Balance Sheet
• Income Statement
• Cash Flow Statement

117

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