*******What is Financial Accounting?

Financial Accounting is the process of documenting, analyzing and reporting every

transaction of a business or an organization,
in order to assess the financial health and stability of the same.

Financial accounting is a branch of accounting which records each financial

information and analyse it to determine the
financial position of a business. It is a process of recording, summarising,
analysing and presentation of
all financial transactions of a business in the form of financial statements.
Financial accounting involves
the preparation of various financial statements like income statement, cash flow
statement, balance sheet etc.
using accounting principles.
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CONCEPTS or PRINCIPLES
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Accounting bodies classify concepts as based on assumptions or based on principles.

Every type of business—including a sole proprietorship, partnership or a public or
private company—records its
financial transactions based on these assumptions and principles. These are some of
the important concepts in accounting:

1. Business entity concept

The business entity, economic entity or separate entity concept assumes that a
business is independent of its owner.
A business may not record its owner's personal expenses, income, liabilities and
assets. It aids in tracking a
business's expenses, incomes and tax deductions without any ambiguity. In addition,
it safeguards a business owner's personal
finances and helps build their creditworthiness. It reflects cash flow and
financial position more accurately.
This clear distinction helps stakeholders and creditors take appropriate business
decisions based on a company's performance
rather than the owner's financial position.

2. Going concern concept

Going concern concept prescribes that accountants prepare financial statements on
the assumption that a business may
continue its operations for the foreseeable future. Under this concept, the
definition of a foreseeable future is a period
of 12 months from the end date of the reporting period. If a business owner or the
management is invested in scaling down
business operations to zero, they cannot apply the going concern concept for
accounting.
Accountants may no longer apply the going concern concept if a company is:

unable to pay dividends

unable to raise credit from banks and financial services
facing losses and negative operating cash flow
facing an adverse financial position
unable to pay back crucial debts
facing an unfavourable legal or regulatory action against it
3. Money measurement concept
This is an accounting concept based on assumption, and it stipulates that companies
record only those
transactions that they can quantify and measure in terms of money.
If they cannot assign a monetary value to a transaction, they do not record it in
their annual financial statement.
Though these transactions affect a company's financial performance, they may not
find a place in financial statements,
as monetising them can be challenging. Some examples of non-monetary value include
employee competence, product quality,
employee efficiency, market sentiment, business productivity and stakeholder
satisfaction.

4. Accounting period concept

The accounting period concept prescribes a timeframe within which a business
records and
reports its financial performance for the purview of internal and external
stakeholders.
An accounting period of a company may coincide with the fiscal year.
A company can determine a timeframe for internal reporting, like three or six
months, or prepare monthly
financial reports to analyse their cash flow positions. The management can
determine a convenient accounting period
for internal reporting, but the reporting for investor, government and tax purposes
is typically for the period of one year.

5. Accrual concept
Accrual is a fundamental concept that guides how a business can record cash or
credit transactions.
Under this concept, a business records a financial transaction in the period it
occurs.
It does not consider whether the business pays or receives cash at the time of the
transaction,
or if it pays cash after a certain period. For example, a company records a credit
purchase at the
time of purchase rather than when it pays back the seller. This helps record and
report income, expenses,
liabilities and receivables accurately. All modern accounting systems follow the
accrual concept in recording financial
transactions.

ITS RECORDED WHEN A FINANCIAL TRANSACTION WHEN IT TKAES PLACE NOT WHEN A SETTLEMENT
TAKES PLACE

6. Revenue realisation concept

Under the revenue realisation or revenue recognition concept, a seller records
potential revenue from a transaction,
regardless of whether they have or have not received proceeds. The ownership of a
product transfers from a buyer
to a seller during a sale. A seller recognises the transaction by creating a
receivable against the buyer's name in
their ledger. An accountant creates another entry when they receive the due amount
in the future.

7. Full disclosure concept

The full disclosure concept requires a business entity to furnish necessary
information for the benefit of those who read
financial statements and reports for investment, taxation or audit purposes. This
concept aims to provide important
financial information to investors, creditors, shareholders, clients, and other
stakeholders.
Disclosure policies cover revenue recognition,depreciation, inventory, taxes,
earnings, stock value, leases and liabilities.

8. Dual aspect concept

Dual aspect concept states that every transaction affects two accounts of a
business.
A business then records both aspects to enable accurate accounting.
Every financial transaction has a credit or debit or a giver or receiver aspect.
If an accounting process does not represent both, it may lead to faults in the
final accounting record.
The dual aspect concept is the foundation of the double-entry system of
bookkeeping, which is now a standard method
for auditing and taxation.

9. Materiality concept
The materiality concept prescribes guidelines to identify if a piece of financial
information is material and
whether it can influence the person reading a company's financial statements.
Based on this concept,
an accountant or a business may remove negligible transactions that may not have a
bearing on final accounts.
This concept is open to subjective interpretation and the basis for using the
materiality
concept varies with the size of a company. While a large company may round off
figures in the
final accounts to crores, a small firm may round off their figures to lakhs.

10. Verifiable objective evidence concept

Under this concept, a business can record only those transactions that they can
furnish
documentary proof for. Without proper and valid documentary evidence, a
transaction can be
biased or undependable, and it can increase the scope of financial irregularities.
For example,
a retail employee may present a bill for purchases and sales, and corroborate it
with sale and purchase invoices.

11. Historical cost concept

The historical cost concept states that a business 0azsAAAAAAAAAAAAAAAAAAZaz69+
may record assets and liabilities
at their historical cost rather than their current market or sale value.
It helps to maintain consistent, reliable and verifiable financial information.
Including the current value of an entity can result in financial irregularities.

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OBJECTIVE OF FINANCIAL ACCOUNTING

Financial accounting needs to fulfil the following objectives:

*Providing accounting-related information to all the concerned parties: When we

talk about a
large business or organisation, it is not just the owner who is concerned with the
financial
position of their entity. There are several other concerned parties like
shareholders, investors,
managers, tax officers, auditors, etc., who are concerned with the company’s
finances.

*To ascertain profitability: A business can either make a profit or a loss in its
operations.
To measure which way the company is going, we need financial accounting.

*Keeping systematic records: For the smooth running of any company, it is essential
to maintain
a systematic financial record and keep stakeholders abreast of the financial
situation all the time.

*Ascertaining the financial position: To know how much the business owes to other
parties or how
much is owed to it, proper financial records need to be maintained.
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SCOPE or PROCESS OF ACCOUNTING
I M Ranchod Das Chanchad Shmila Aya Chatur
I M R D C S A C
1] Identification and Measuring the financial transactions:
Accounting as a process deals only with those transactions which are measurable in
terms of money.
Anything which cannot be expressed in monetary terms does not form part of
financial accounting
howeversignificant it is.

2] Recording of information:
Accounting is the art of recording financial transactions of a business concern.
There is a limitation on human memory. It is not possible to remember all
transactions of
the business. Therefore, the information is recorded in a set of books called
Journal and
other subsidiary books and it is useful for management in its decision-making
process.

3] Classification of Data:
The recorded data arrange in a manner to group the transactions of similar nature
at one
place so that full information of these items may collect under different heads.
This is
done in the book called ‘Ledger’. For example, we may have accounts called
‘Salaries’,
‘Rent’, ‘Interest’, Advertisement’, etc. To verify the arithmetical accuracy of
such accounts,
the trial balance prepare.

4] Summmarising:
The classified information of the trial balance uses to prepare a profit and loss
account and
balance sheet in a manner useful to the users of accounting information. As well
as, the final
accounts prepare to find out the operational efficiency and financial strength of
the business.

5] Analyzing:
It is the process of establishing the relationship between the items of the profit
and loss
account and the balance sheet. Also, the purpose is to identify the financial
strength and
weaknesses of the business. It also provides a basis for interpretation.

6] Interpreting financial information:

It is concerned with explaining the meaning and significance of the relationships
established
by the analysis. It should be useful to the users, to enable them to take correct
decisions.

7] Communicating the results:

The profitability and financial position of the business as interpreted above
communicate
to the interest parties at regular intervals to assist them to make their
conclusions.
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ACCOUNTING CONVENTION
The guidelines that are followed to prepare financial statements are called
accounting conventions.
These are as follows:

Full disclosure: Convention of full disclosure states that there should be complete
reporting on the financial
statements of all important information relating to affairs of the business.
All the material facts are to be disclosed.

Consistency: Convention of consistency states that accounting practices, once

selected and adopted, should
be followed consistently year after year for a better understanding and
comparability of the
accounting information.

Prudence concept or conservatism concept: This convention states that we should not
anticipate a
profit before its realisable but provide for all possible losses which might occur
in the course
of business.
Materiality concept: The materiality concept relates to the relative information of
an item or an event.
An item is considered material when such knowledge of that could influence the
decision of an investor.
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Accounting policies

Accounting policies are the principles and methods that the company has chosen to
prepare financial
statements to give a clear overall picture of the company's finances. They are
usually submitted to
shareholders, investors, financial institutions and other entities outside the
company
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Valuation and Its Principles

In finance, valuation is the process of an estimation of the worth of something. In

other words,
the process of determining the monetary worth of something is valuation.

Valuation is an estimation that is especially done by a professional or a valuer.

The process of valuation defines the present value of an entity. The selling price
or income factors
do the valuation. Value of any entity depends on this life, efficiency, structure,
maintenance,
location, bank interest, etc.

Four Types of Accepted Valuation Principles

1. Historical Cost
2. Current Cost
3. Realizable Value
4. Present Value

Historical Cost
As the name suggests, Historical Cost is the same as the value of the asset bought.
No matter how many years pass by, the value remains the same.
In short, the selling price is now cost price.

Current Value
Current Value means an asset is purchasable in the ongoing market price.
That is, no matter how old the asset is, it is sellable in current value. The only
condition is-
the specifications must be the same.

Realizable Value
Realizable value is the value at which the seller and buyer finalize the deal.
No hard terms and conditions apply here. If the seller makes no objection, an asset
is sold.

Present Value
Present Value is the price fixed by a seller to sell the asset immediately.
The seller estimates the future expected price. And therefore, sells the asset
at some discount.
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Why do we need accounting estimates? Why do we need precise values?

In the absence of a precise value, an accountant cannot debit or credit any amount
of
arbitrary value(A value not linked to an asset or liability, but created solely for
accounting purposes)
There is a need to establish a set of principles or accounting policies
to arrive at an estimate. Therefore, accounting estimates serve the purpose of
providing
accountants with a reasonable estimate so that an amount can be entered on the
debit or
credit side of the journal.The process of arriving at estimates involves collecting
and
analyzing relevant data.
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What is GST?
Goods and Services Tax (GST) is a value-added tax levied on the supply of goods and
services
for domestic consumption. GST is, therefore, an all-encompassing, single indirect
tax law for
the entire country.

This tax is included in the final price of a product. A customer who buys said
product
pays its price inclusive of the GST. The business or seller then forwards its GST
portion to
the government.

Replaced Taxes with GST

VAT
Octroi
Entertainment Tax
Tax on Lottery
Luxury Tax
Purchase Tax
Service Tax
Additional Excise Duty
Central Excise Duty
And more

Different Types of GST

INTRA-STATE=WITHIN A STATE GST=SGST+CGST

INTER-STATE=BETWEEN A STATE IGST=EARNS BOTH STATE AND CENTRE

SGST
A State government levies SGST on the intra-state transactions of goods and
services.
The revenue collected is earned by the state government wherein this transaction
takes place.
SGST subsumes earlier taxes like purchase tax, luxury tax, VAT, Octroi, etc.

UGST
For union territories like Chandigarh, Puducherry and Andaman and Nicobar Islands,
a Union Territory Goods and Services Tax or UGST replaces SGST.

CGST
The Central government levies CGST on the intra-state transactions of goods and
services.
It is levied alongside SGST or UGST, and the collected revenues are shared equally
between
the center and the state.

IGST
When a transaction of goods and services is inter-state in nature, an IGST is
levied on them.
It is applicable to imports and exports as well. Revenues generated through this
tax are shared
between the state and the central governments.

EXAMPLE OF SGST

1.A trader from Maharashtra has sold goods to a consumer in Maharashtra worth Rs.
10,000.
Applicable GST will be divided between SGST and CGST.
If the GST rate charged is at 18%, this tax will be divided between SGST and CGST
as 9% each.
Total amount charged by the trader, in this case, stands at Rs. 11,800.
The amount of GST is Rs. 1800.
SGST is at Rs. 900 and CGST is Rs. 900.
Rs. 900 SGST goes to the Maharashtra Government.
The Central Government earns Rs. 900 as CGST

EXAMPLE OF CGST
2.A trader from Maharashtra has sold goods to a consumer in Maharashtra worth Rs.
10,000.
Applicable GST will be partly CGST and SGST.
If the GST rate charged is at 18%, this tax will be divided between SGST and CGST
as 9% each.
Total amount charged by the trader, in this case, stands at Rs. 11,800.
The amount of GST is Rs. 1800.
SGST is at Rs. 900 and CGST is Rs. 900.
Rs. 900 SGST goes to the Maharashtra Government.
The Central Government earns Rs. 900 as CGST

EXAMPLE OF IGST
3.A trader from Maharashtra has sold goods to a consumer in Karnataka worth Rs.
10,000.
Applicable GST will be IGST.
If the rate of GST charged is 18%, the entire amount is to be paid as IGST.
The total amount charged by the trader stands Rs. 11,800
The amount of GST of Rs. 1800.
The IGST is Rs. 1800.
The Central Government gets Rs. 1800 as IGST.
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VOUCHER SYSTEM

A voucher system sets up procedures to safely verify, approve, record, and issue
cash disbursements. Since cash is the most liquid asset company’s can own,
it is highly susceptible to theft and fraud. The voucher system establishes
safeguards to protect a company’s cash.
In other words, a voucher system is a set of internal controls that helps
management stop fraudulent withdrawals from the company by employees and
others outside the organization.
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DEPRECIATION

MEANING**********************************************************************

Depreciation can be defined as a continuing, permanent and gradual decrease

in the book value of fixed assets. This type of shrinkage is based on the
cost of assets utilised in a firm and not on its market value.

Causes of Depreciation
Wear and Tear due to Use or Passage of Time: Wear and tear is nothing but
deterioration and the following decrease in the value of an asset, resulting
from its use in business operations for earning revenue.

Expiration of Legal Rights: Some categories of assets lose their value after
the agreement directing their use in business comes to an end after the
expiry of the predetermined period.

Obsolescence: Obsolescence is another factor driving to the depreciation of

fixed assets. In common language, obsolescence means being “out-of-date”.
Obsolescence refers to an actual asset becoming outdated on account of the
availability of a better type of asset.

Abnormal Factors: Drop in the use of the asset may be caused by abnormal factors.
Namely, accidents due to the earthquake, fire, floods, etc.,
Accidental loss is permanent but not continuing.

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1.To ascertain true net profit or net loss−

Correct profit or loss can be ascertained when all the expenses and losses incurred
for earning revenuesare charged to Profit and Loss Account. Assets are used for
earning revenues
and its cost is charged in form of depreciation from Profit and Loss Account.

2.To show true and fair view of financial statements−

If depreciation is not charged, assets are shown at higher value than their actual
value in the
Balance Sheet; consequently, the Balance Sheet does not reflect true and fair view
of financial
statements.

3.For ascertaining the accurate cost of production−

Depreciation on plant and machinery and other assets, which are engaged in
production, is
included in the cost of production. If depreciation is not included, cost of
production is
underestimated, which will lead to low sale price and thus leads to low profit.

4.Distribution of dividend out of profit− If depreciation is not charged, which

leads to
overestimating of profit and consequently more profit is distributed as dividend,
out of
capital instead of the profit. This leads to the flight of scarce capital out of
the business.

5.To provide funds for replacement of assets− Unlike other expenses, depreciation
is not a
cash expense. So, the amount of depreciation charged will be retained in the
business and
will be used for replacement of fixed assets after its useful life.

6,Consideration of tax− If depreciation is charged, then Profit and Loss Account

will disclose
lesser profit as to when the depreciation is not charged. This depicts reduced
profit and thus
the business will be liable for lesser tax amount.