Commercial

Accounting
“the language of the business”
98th Foundation Course

Rajesh Pathak
Indian Institute of Management
Raipur
Accounting: A Perspective
• What is it?
• A language or a system that provides information of an entity about its performance,
financial position & cash-flow.
• Through set of general-purpose financial statements and reports
• Financial Statements describe firm’s economic wealth at a point in time and changes in economic wealth over
a period.

• How does it function?

• What set of Information does it disseminate?
• Qualitative Vs Quantitative (Monetary Vs Non- Monetary)
• To whom?
• Investors, lenders, suppliers, employees, customers, others (i.e., Govt., regulatory bodies, media,
academicians, society at large etc.)

• Economics of Accounting Information:

• Alleviating Information Asymmetry
• Improving Contract Efficiency
 Accounting: A Perspective
• Development:
• Evolved over a period of many centuries and certain rules & terminologies are now accepted as useful.
• The first complete description of this system appeared in 1494, by Luca Pacioli, an Italian Monk.
• Key Characteristics
• Generally Accepted Accounting Principle (GAAP)
• Relevance: Information is relevant if it can influence the economic decisions of users by helping them evaluate past,
present or future events.
• Materiality: Information is material if its omission or misstatement could influence the economic decisions of users taken on the
basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its
omission or misstatement.
• Objectivity or Reliability: Measurement is free from material error and bias.
• Prudence: Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required
under conditions of uncertainty. Estimates expected to be free from material error.
• Comparability and Timeliness
• Current State of Accounting Domain
• ASB of ICAI sets accounting standards which are notified by MCA, SEBI offers additional disclosure requirements.
• IndAS (Standards prescribed under Section 133 of the Indian Companies Act, 2013) in convergence with IFRS (Global
Reporting Standard)
• AS (applicable to Indian companies including Small and Medium sized Companies to whom Indian Accounting Standards (Ind
AS) are not applicable )
Accounting: End Products
• Set of Financial Statements (IndAS01)
• The Balance Sheet or Statement of Financial Position
• Purpose: To present the financial health of a business at a point in time
• The Income Statement or Statement of Profit and Loss
• Purpose: To reveal the profitability of the firm over a period of time
• The Cash-flow Statement
• Purpose: To summarize the activities resulting in cash changing hands for the business during a period of time.
• Statement of Changes in Equity
• Purpose: To highlight the factors that cause a change in the owners' equity over the accounting periods.
• Notes to Accounts:
• To present significant accounting policies and other explanatory information in supplementary schedules.

• Status Vs. Flow Report

• The preparation and the true and fair presentation of these statements are the responsibility of the
top management of the company.

• Mandatory Annual Report

The Balance Sheet- A Status Report
Equity and Liabilities Assets
Assets are valuable resources
Sources of funds Resources owned/controlled by the entity,
Owner’s money/equity Machinery result of past transaction; bring
F& F future economic benefits
Loans Computer
Van Liabilities are obligations of the
Supplier’s credit Inventory entity to outside non owner parties
Cash who have furnished resources in
past, results in outflow of
economic benefits in future
Total Liability
Total Assets
TA= TL
Equity is the residual claim of
TA= OE+OL (Elements in fundamental equation) shareholders. Source of fund.
 Balance Sheet Elements in Detail Note: Under IndAS, B/S is strictly to be presented
in the form prescribed in Schedule III, divison II of
Companies Act, 2013.

Assets classifications Equity & Liabilities classification

• Non-Current Assets • Equity
• PPE (long lived Assets) • Equity Share Capital
• Machinery, F&F, L&B, Computer, ROU • Other equity
asset, Capital WIP etc. • Retained earnings, reserves, surplus, securities
premium, OCI etc.
• Intangible Assets
• Copyright, Patent, Trade-mark`, R&D • Non-Current liabilities
• Goodwill • Financial Liabilities
• Financial Assets • Bonds, loans, lease liability etc.

• Investments & Investment Property • Current Liabilities

• Equity in subsidiary, associates, property • Financial Liabilities
• Accounts payables, bank overdraft
• Current Assets
• Others
• Inventory (RM, WIP & FG) • Unearned revenue, outstanding expenses
• Financial Assets
• Trade receivables, Cash & equivalents.
 Schedule III to the Companies Act, 2013
(Division II)*- Balance Sheet (Ind AS)

• *Division I contains the for Financial Statements applicable to those companies who are required to prepare their financials as per the existing Accounting Standards (ASs); Division III contains
Financial Statements for a Non-Banking Financial Company (NBFC)

*Division I contains the for Financial Statements applicable to those companies who are required to prepare their financials as per the existing
Accounting Standards (ASs); Division III contains Financial Statements for a Non-Banking Financial Company (NBFC)
The Income or P&L Statement
• Reflects on
• The results of a company’s operations over a period of time.
• What goods were sold or services performed that provided revenue for the
company?
• What costs were incurred in normal operations to generate these revenues?
• What are the earnings or company profits?

• Records
• Revenues (includes gains)
• Expenses (includes losses)
• Net Profit (Net Loss)
• Revenues – Expenses
• Various measures of profits:
• Gross Profit (Sales-COGS); Operating Profits (GP-operating exp.+ Non operating income);
PBIT(OP+non-operating income-non operating loss); PBT (PBIT-I); PAT or NI (PBT-Tax
expense)
Transaction Analysis
• Accounting Equation
• TA= OE+OL
• TA= Capital+ RE(Incomes-Expenses)+OL
• TA+ Exp= Capital + Incomes + OL
Statement of Cash Flows
• Reports the amount of cash collected and paid out by a company in operating, investing and financing
activities for a period of time.
• Operating activities – Transactions and events that enter into the determination of operating income.
• Investing activities – Transactions and events that involve the purchase of securities, property, plant,
equipment, and other assets not generally held for resale.
• Financing activities – Transactions and events whereby resources and obtained from, or
repaid to, owners and creditors.

Operating Investing Financing

• No format under IndAS Activities Activities Activities

CASH INFLOWS
• Direct and Indirect Method.

• Reflects
• How did the company receive cash?
• How did the company use its cash? CASH OUTFLOWS

• Complementary to the income statement. Operating Financing

Activities Investing Activities
Activities
Accrual vs. Cash-Basis Accounting

• In accrual accounting, you record transactions when they occur, rather than when
cash flows occur.
• Revenues are recorded when a product or service is sold, not when the customer pays for that
product or service.
• Expenses are recorded consistently, with the expenses associated with producing the sold
product or service shown in the period, even though you may have spent the money in a prior
period or will not pay until a future period.

• In cash accounting, you record revenues when you get paid for providing a
product or service, and expenses when you pay.

• Unless you are a small or personal business, you will have to follow accrual
accounting rules.
Notes to the Financial Statements
• Notes are used to convey information required by GAAP or to provide
further explanation.
• Helps users understand and interpret the umbers in the body of financial
statements.

• General types of notes:

❖Summary of significant accounting policies: assumptions and estimates.
❖How inventory is valued; method of depreciation; types of financial investment
classification etc.
❖Disclosure of important information that is not recognized in the financial
statements.
❖Related party transactions (RPT)-Mandatory; Segment Reporting- Voluntary
❖ RPT occurs when companies transact with individuals or other businesses which are in some
ways connected with its management or board.
❖ Transaction with family members of board members; transaction between subsidiaries of
same parent company
❖ Companies generally break down revenues by geography, business segment etc.
Workbook Exercise
Thanks
References
• https://www.indianaccounting.in/2017/12/indian-accounting-
standard-indas-1.html
• https://www.indianaccounting.in/2017/12/indian-accounting-
standard-18.html
• Accounting: Text & Cases (Anthony, Hawkins and Merchant),
McGrawHill publishers, 13th edition