Accounting & Financial Analysis

What is accounting
Accounting is the art of identifying, recording,
classifying and summarizing in a significant
manner and in terms of money transactions
and events which are, in part at least of a
financial character and interpreting the result
thereof.
Accounting is a system in which all the
financial transaction are recorded in a
proper and systematic way.
In other words.
Accounting is an art as well as a science of:
Recording,
Classifying
Summarising
the business transactions and events, which are, in
part at least of financial nature, express in terms of
money and
Interpreting the results thereof, and
Communicating the results to persons who must
make decisions or form judgements.
Recording Journal
Classifying Ledger
Summarising Trial Balance
Interpretation Profit & Loss a/c
and Balance Sheet
Objectives of accounting

To maintain accounting records
To calculate the results of operation
To ascertain the financial position
To communicate the information to the users




Accounting Cycle
Recording of transaction (Journal entry)

Classification (Ledger Posting)

Balancing

Summarizing (Trial balance)

Interpreting (Income &position statement)

Analysis of transactions (Balance Sheet)
Branches of Accounting
Financial Accounting:- It is concerned with
recording and processing the financial
transactions which affect the financial position
of the business. It leads to the preparation of
income statement & position statement of the
business.


Cost accounting is concerned with the
recording, classifying and appropriate
allocation of expenditure for the
determination of the cost of products or
services and for the presentation of suitably
arranged data for purposes of control and
guidance of the management.
Management accounting: It is concerned with
the collecting systematically and regularly all
such information as will help management in
discharging its functions of planning, control,
decision making, etc. this is also named as
accounting for management.
Users of accounting information
Owners
Management
Creditors
Government
Investors
Employees
Researches
Lenders
Generally Accepted Accounting Principles
(GAAP)
Financial accounting practice is governed by concepts and
rules known as generally accepted accounting principles
(GAAP).


Those rule of action or conduct which are derived from
experience and practice and when they prove useful, they
become accepted as principles of accounting

Accounting Concepts
Are the necessary assumptions and conditions upon
which accounting is based, some important concepts
are:
Business Entity Concept
Going Concern Concept
Money Measurement Concept
Accounting Period Concept

Business entity concept:
Business is treated as a unit or
entity apart from its owner. The owner of an
organization is always considered to be
separate and distinct from the business which
he controls. that is why, the capital of the
owner is always entered in liability side of
balance sheet. It is considered as the creditor
of the business.
Going concern concept:
It is assumed that the
business will exist for the foreseeable future
and transactions are recorded from this
point of view. It should continue to operate
at its present scale in the foreseeable
future.
Money measurement concept:
The money measurement
concept underlines the fact that in accounting
every worth recording event, happening or
transaction is recorded in terms of money. In
other words, a fact or a happening which
cannot be expressed in terms of money is not
recorded in the accounting books.
Accounting period concept:
Accounts choose some
shorter and convenient time for the
measurement of income. Twelve- month
period is normally adopted for this purpose.
this time interval is called accounting period.

.


Economic life of a business divided into artificial time periods.

Business will run through long period. hence accounts of each
period is recorded.
Results of operations can be known precisely only after
business ceases to operate and entire assets are sold and entire
liabilities paid.
But one is interested in periodical operating results of business
say yearly or half yearly or quarterly.
Hence all the expenses or income during this accounting period
has to be taken into consideration irrespective of whether they
are realised in cash or paid in cash
Accounting conventions
Consistency
Full disclosure
Conservatism
Consistency
The convention of consistency aims at making
the financial statements more comparable
and useful. The convention holds that in
accounting processes, all concepts, principles
and measurement approaches should be
applied in a similar or consistent way from one
period to another period.
Ex: LIFO Method for Dep.
Full disclosure
This convention specifies that there should be
complete and understandable reporting in the
financial statements of all significant
information relating to the economic affairs of
the entity. All information which is of material
interest to the users of the accounting
information should be disclosed in accounting
statements.
Conservatism
This is the policy of playing safe. Accounting
permits for making reserves to face the
uncertainty situations of the business.
Financial Statements
Trading A/c: To calculate gross profit/gross loss
Profit & Loss A/c: To calculate net profit/net
loss
Balance Sheet: To reflect financial position of
the business.

Trial Balance : What is it?
At the end of an accounting period a balance is struck on each ledger
account.

Before using the account balances to prepare Final Accounts, an attempt is
made to prove that the total of accounts with debit balances is in fact
equal to the total of accounts with credit balances. This proof of the
equality of debit and credit is called a Trial Balance.
Trial Balance is a list of account balances taken from the ledger to test the
mathematical accuracy of the ledger as indicated by an equality of debits
and credits.

The way to proceed:

Total all debits and all credits
Debits exceed credits = debit balance
Credits exceed debits = credit balance
Rules to be followed while preparing
Trial Balance.
1. The balances of all accounts relating to:
a) Assets; b) Expenses; c) Losses
d) Drawings; and e) Debtors,
Should be placed in the debit column of the Trial Balance.
2. The balances of all accounts relating to:
a) Liabilities; b) Income and Revenues;
c) Gain; and d) Creditors,
Should be placed in the credit column of the Trial Balance.

Profit and Loss Account
This account gives the overall profit or loss made or
suffered during a particular period.

Importance:
Knowledge of net profit or net loss
Calculation of expenses ratio to sales
Comparison of actual performance with the desired
performance
Maintaining provision and reserves
Determining future line of action

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Profit and Loss Account
Profit and Loss Account for the year ended 31.03.2006
Expence Income
Salaries and Bonus Gross Profit
Rent Commission
Traveling Other Incomes
Postage
Printing and Stationery
Telephone Expenses
Bad debts (Limitation Act)
Vehicle maintenance
Interest on Bank Loan
Discount
Commission & Brokerage
Depreciation
Bank charges
Insurance premium(Gen.Insurance only)
All other expenses (except personal expenses and capital expenses)
Net profit
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Balance sheet
A balance sheet is a mirror which reflects the true position of
assets and liabilities on a particular date.

Assets = Liabilities + Capital

Characteristics:
Balance sheet is a statement
Prepared on a specified date
It is a statement of assets and liabilities
Knowledge about the nature of assets and liabilities
Knowledge of financial position
Assets and Liabilities tally each other

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Balance Sheet
Balance sheet as at 31.03.2006
Liabilities

Opening Capital
Add: Net Profit
Less: Drawings
Closing Capital

Loan from
Financial Institutions

Current Liabilities


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Assets

Current Assets
Fixed Assets
(At Book value-as reduced
by Depreciation)






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