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FINANCIAL ACCOUNTING

MMS

By Prof. Gazia Sayed


Todays Discussion
Why Accounting?

Who uses Accounting?

What is Accounting?

How to do Accounting?
Need of Accounting
In todays competitive world, a working knowledge
of Accounts and Finance is very essential for all.
Managers need to take decisions, form strategies and
align them with the corporate objectives.
Understanding and applying the concepts of finance
is the key to making right decisions and ensuring
maximum returns.
This course covers the concepts and practices
followed in accounting and aid in interpreting of
financial statements.
Importance of Accountancy
It provides information and not data for decision making
It helps the business (small or big) to understand Investments
done and Returns Expected
It provides the details of income and expenses to calculate
Profit/Loss
It facilitate the business not only in Survival but also in
Growth
Self employed - look after your own finances and control
them
Create awareness
Stimulate further learning
Develop a Vision
Develop an ability to plan and control the problems
Users of Accounting
Owners

Employees Managers

Potential
Researchers Investors
Accounting

Bankers/FIs Suppliers

Govt. Agency Customers


Meaning of Accounting
Accounting is derive from the need to represent an
entitys financial situation and income generated
over a period of time either to outside parties,
investors, general public, management, or a
government official.

This type of accounting results in: Balance Sheet,


Income Statement, Cash Flow Statement and
Statement of Stockholders Equity.
Branches of Accounting
Accounting

Financial Cost Management


Accounting Accounting Accounting
Primarily for the Concerned with the Primarily for the
External Decision Costs of Business Internal Decision
Maker or Activities, Maker or to
External Products, Services, Assist
Reporting Departments etc. Management
Cost Accounting
It is the process of accounting for cost.

It can be referred to as the formal mechanism by


means of which cost of products or services are
ascertained and controlled.

It is used to describe the principles, conventions,


techniques and systems that are employed in a
business to plan and control the utilization of its
resources.
Management Accounting
The term Management Accounting is of recent
origin.
It deals with controllership function, financial control
management services, operational control. Production
planning and other methods connected with
management
It is concerned with accounting methods, systems and
techniques coupled with specialized knowledge and
ability and assist management in its task of
maximizing profits or minimizing losses.
Financial Accounting
Accounting is defined as:
The art of recording, classifying, and
summarizing in a significant manner and in terms
of money, transactions and events which are, in
part at least, of financial character, and interpreting
the results thereof.

- By American Institute of Certified Public


Accountants (AICPA)
Forms of Organization
Sole Proprietorship
Partnership
Joint Stock Company
Non Profit Corporation
Society
Cooperative
Accounting Systems

Accrual or
Cash System Mercantile
of Accounting System of
Accounting
Principle
s

Concepts

Standards
Why standards?
To provide economic decision makers with
useful information about the firms financial
performance and changes in financial
position
To ensure that the information is useful to
wide range of user by making financial
statements com[arable to one another and
narrowing the range of managements
reasonable estimates
Accounting Principles

Accounting Concepts Accounting Conventions

1. Entity Concept
2. Dual Aspect Concept 1. Materiality in
3. Going Concern Concept Disclosure
4. Money Measurement 2. Consistency
Concept 3. Conservatism
5. Cost Concept
6. Accounting Period
Concept
7. Matching Concept
8. Realization Concept
11 Concepts
1. Entity Concept
2. Dual Aspect Concept
3. Going Concern Concept
4. Money Measurement Concept
5. Cost Concept
6. Accounting Period Concept
7. Matching Concept
8. Realization Concept
9. Materiality in Disclosure
10. Consistency
11. Conservatism
Accounting Period Concept
Accounting measures activities for specified period
of time which is called as the accounting period.
One year or 12 months is the usual accounting
period.
The companies can adopt Financial Year or
Calendar Year or Academic Year as the Accounting
Year.
Entity Concept
This concept says that in accounting the business is
a separate and distinct entity from its owners.
In other words, any transaction between the
owner(s) and the business is like any other
transaction, so far as its accounting is concerned.
Cost Concept
This concept says that the financial transactions are
recorded at the actual cost involved in the
transaction.
This is the cost decided by or acceptable to the
parties involved in the transactions.
In accounting there is no place for personal
opinions as far as the value of the transaction is
concerned.
Money Measurement Concept
In financial accountancy, a record is made only of
information that can be expressed in monetary terms.
Thus, if a certain event, no matter how significant for
the health or even existence of the business, cannot be
measured in monetary terms, such an event is not
recorded in accounting.
For example, the retirement or death of the Chairman
of a company, even though it might have far reaching
consequences for the health of the business, is not
accounted for, since no monetary measurement of the
event is feasible.
Going Concern Concept
According to this concept every organization has
an endless life.
The financial statements are normally prepared on
the assumption that an enterprise is a going
concern (run for ever) and will continue in
operation in the foreseeable future.
Hence, it is assumed that the enterprise has neither
the intention nor the need to liquidate or curtail
materially the scale of its operations.
Matching Concept
This principle is applied while calculating profit or
loss for an accounting period.
In order to determine the profits or losses earned or
suffered in an accounting period, the expenses
must relate to the goods or services sold during the
period and all expenses / costs associated with the
earning of revenue must be matched against those
revenues.
Thus it is clear that the cost derives its relevance
only from the sale and not vice-versa.
Realization Concept
Realization concept deals with the point in time at
which revenue may be deemed to be realized or
when a sale can be said to have taken place.
Revenue is normally recognized only when goods
are transferred or services are rendered and a
reward or a promise of reward is forthcoming.
Materiality in Disclosure
As we know that number of parties in the society are
interested in the financial statements of business
organizations. All theses parities that have vested
interest in these organizations have a right to get the
correct and complete information about the financial
position of the organization through its financial
statements.
Therefore, all the business organizations must provide
true and complete information which is important or
material and which may affect the decisions of the
user of the information disclosed by the financial
statements.
Consistency
In order to render the financial statements of an
enterprise comparable from one period to another, it
is necessary that accounting policies, specific
accounting principles and the accounting methods
adopted by the enterprise in the preparation and
presentation of financial statements be followed
consistently from one period to another.
A change in an accounting policy is made only in
certain exceptional circumstances and with adequate
disclosures of its nature and impact on financial
statements.
Conservatism
No profit / income should be anticipated whereas
all known or foreseeable losses / expenses must be
provided for.
The idea behind this principle is that recognition of
revenue requires better evidence than recognition
of expenses.
This principle emphasizes that revenues are to be
recognized only when they are reasonably certain
and expenses are to be recognized as soon as they
are reasonably possible.
Verizon and AT&T case
Basketball legend Michael Jordan has filed
suit in a Chinese court against Qiaodan
Sports Company Limited, a Chinese
sportswear and footwear manufacturer, for
unauthorized use of his name.
Dual Aspect Concept
Every transaction has a Two Effects on the
accounting records.
The effects is such that

Owners Claim + Outsiders Claim = Assets


Transaction Analysis
Identifying the two accounts involved
Assigning the meaning to the Accounts identified
in terms of Debit (Dr.) and Credit (Cr.)
Meaning of Debit and Credit
On the basis of Accounting Equation:
If an account identified in a transaction affects the
accounting equation in such a way that the total
Assets of the firm get Increased or the total
Liabilities get decreased than that account is
Debited.
If an account identified in a transaction affects the
accounting equation in such a way that the total
Assets of the firm get Decreased or the total
Liabilities get Increased than that account is
Credited.
In Nutshell.
Liabilities
Assets (Owners claim +
Outsiders claim)
Increased - Debit Increased - Credit
Decrease - Credit Decreased - Debit

Assets Assets provide probable future economic


benefits controlled by an entity as a result of previous
transactions.
Liabilities Liabilities are obligations owed by an entity
from previous transactions that are expected to result in
an outflow of economic benefits in the future.
- Source : CFA (Level 1 / Book 3)
Meaning of Debit and Credit
On the basis of Golden Rule:
PERSONA
REAL NOMINAL
L
ACCOUN ACCOUN
ACCOUN
T T
T
DEBIT ALL
DEBIT
EXPENSES
WHAT DEBIT THE
AND
COMES IN RECEIVER
LOSSES
CREDIT CREDIT
CREDIT ALL
WHAT GOES THE GIVER
INCOMES
OUT
AND GAINS
Accounting Cycle

Recording
Stage

Summarizing Classification
Stage Stage
Recording of Transactions
Recording means noting the transactions in the
book of Accounts.
The book maintain is called Journal
Journal is the book of Prime origin
The activity of writing the transactions in the
Journal is called Passing of Entries
The journal entries are recorded in chronological
order.
Classification of Transactions
It means collecting or gathering all the transactions
of similar type or category at one place.
The book used to classify is called Ledger
The activity of transferring the entries from Journal
to Ledger is called Posting
Trial Balance
A trial balance is a list of all the nominal ledger
(general ledger) accounts contained in the ledger of a
business.
The value of the nominal ledger will hold either a debit
balance value or a credit value balance. The debit
balance values will be listed in the debit column of the
trial balance and the credit value balance will be listed
in the credit column.
Making a Trial Balance is not compulsory. It is
prepared only to verify the correct of ledger accounts.
There is no specific format for trial balance.
Summarizing Stage
Preparing Financial Statements
Statement of Profit and Loss

Balance Sheet

Cash Flow Statement


Profit And Loss Account
It sets out a summary of the trading events that
have affected the wealth of the business over a
particular period, the amount by which each
type of event has affected wealth, and the
resulting net effect on wealth.
The other names are Income Statement, Income
and Expenses Statement, Revenue Statement,
Statement of Financial Result or Statement of
Financial Performance
Balance Sheet
It is a statement of the manner in which the business
holds its wealth, how much of its wealth it has in each
category, how much of the wealth that the business
controls is committed to outsiders, and the net wealth
of the business.
The balance sheet shows the position at a specified
point in time.
The balance sheet includes the accounting formula:
Assets = Liabilities + Owners Equity
The other names are Statement of Financial Position or
Statement of Assets and Liabilities
Cash Flow Statement
Cash flow is the movement of cash into or out of a
business, project, or financial product. It is usually
measured during a specified, finite period of time.
Is an analysis of the cash (including short-term,
highly liquid investments) received and paid
out by the business during a period.
Cont..
Operational cash flows: Cash received or expended
as a result of the company's internal business
activities. It includes cash earnings plus changes to
working capital. Over the medium term this must be
net positive if the company is to remain solvent.
Investment cash flows: Cash received from the sale of
long-life assets, or spent on capital expenditure
(investments, acquisitions and long-life assets).
Financing cash flows: Cash received from the issue
of debt and equity, or paid out as dividends, share
repurchases or debt repayments.
Interpretation of Financial Statements
It refers to an assessment of the viability, stability
and profitability of a business, sub-business or
project.
It is performed by professionals who prepare
reports using different tools that make use of
information taken from financial statements and
other reports. These reports are usually presented
to top management as one of their bases in making
business decisions.
Limitation of Financial Statements
Assets are valued at historical cost less an
estimated depreciation
Not all assets appear e.g. Human capital, internally
generated goodwill etc.
Not all liabilities appear e.g. Contingent liability,
Off balance sheet financing etc.
Financial statements also depend on countless
estimates.
Thank
You