ACCOUNTING

‡ It is an information system that identifies, records and communicates the economic events of an organization to interested users. ‡ Financial Reporting

Evolution of Financial Accounting
‡ Fourteenth Century ±Italy ± Concept of Duality of Values ± benefit to the entity in the one hand and its sacrifice on the other. ‡ Franciscan Monk Fra Luca Pacioli (1445-1515) codified and published the system of Benefit & Sacrifice in his book µSumma de Arithmetica, Geometrica, Proportioni et Proportionalita¶ in 1494 ± earned him the title µ Father of Accounting¶.

Foundations of Accounting
1. Idea of Capital Maintenance: ‡ Separates the stock of resources used in economic activity, from the flow of resources generated by the stock, ‡ Capital consumed in the business (or production) is fully recovered from the revenue, in the income determining process, ‡ Income should be measured as the excess of capital at the end of the period over the capital at the beginning.

Foundations of Accounting««..contd.
2. Idea of Productive Capital ‡ Accumulation & deployment of large-scale productive capital involves problem of maintenance & preservation of such resources. 3. Idea of Profitable Operations ‡ Capital will seek the most profitable operations from among the available alternatives

Accounting links
Decision Makers (Decisions & actions)

Economic Activities

Accounting Information

Accounting Process

OBJECTIVES OF ACCOUNTING
Information About Economic Resources, Claim to Resources &
Changes in Resources & Claims (Specific)

Information useful in assessing amount, timing, and Uncertainty of future cash flows

Information useful in making Investment & Credit decisions (General)

TYPES OF ACCOUNTING INFORMATION
‡ Operating Information ± To conduct dayto-day activities of an operation. ‡ Management Accounting Information ± Used internally for planning, implementation & control. ‡ Financial Accounting Information ± Used both by management & external parties.

Out come of Financial Accounting Process
1. The Balance sheet - A report of status or stock as of a moment of time ( exact financial position on a given date). 2. The Income Statement ± A report of flow, recognizes the income generating activities of an organization. 3. The Cash flow Statement ± A report of flow recognizes the cash generating activities of a firm.

Reference Books
‡ Accounting ± Text & Cases By: Anthony, Hawkins & Merchant TMH 12th (Special Indian) Edition Financial Accounting - A Managerial Perspective By: R. Narainswamy PHI 2nd Edition Cost Accounting ± A Managerial Emphasis By: Horngren, Datar & Foster Pearson Education 11th Edition Management Accounting ± Text, Problems & Cases By: Khan & jain TMH 4th Edition

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ACCOUNTING CONCEPTS (Only for Balance sheet)

1. Money Measurement Concept
‡ Accounting records only those facts that can be expressed in monetary terms. ‡ Money is expressed in terms of its value at the time an event is recorded in the accounts. ‡ Subsequent changes in the purchasing power of money do not affect this amount.

2. The Entity Concept
‡ Accounts are kept for entities, as distinguished from the persons associated with those entities. ‡ An entity is any organization or activity for which accounting reports are prepared.

3. Going Concern Concept

‡ Accounting assumes that an entity will continue to exist indefinitely and that it is not about to be liquidated.

4. COST CONCEPT
‡ An asset is ordinarily entered in the accounts at the amount paid to acquire it. ‡ This cost, rather than the current market value, is the basis for subsequent accounting for the asset.

5. Dual ± Aspect Concept
‡ Every economic transaction affects at least two items and preserves the fundamental equation: Assets = Liabilities + Owners¶ Equity

FORMAT OF A BALANCE SHEET
1. Report Form: To list assets at the top of the page and to list liabilities & owners¶ equity beneath them. 2. Account Form : As per GAAP, assets are listed on the left and liabilities & owners¶ equity on the right side. As per Indian Accounting Standard Board in a Balance Sheet, assets are shown on the right side and the liabilities & owners¶ equity on the left.

BALANCE SHEET CONTENTS
‡ ASSETS: Resources owned by a business 1. Must be an Economic Resource, 2. Must be controlled by the entity, 3. Cost (or fair value) must be objectively measurable at the time of acquisition.

TYPES OF ASSETS
‡ Current Assets: Assets reasonably expected to be realized in cash or sold or consumed during the operating cycle of the entity or within one year, which ever is longer. ‡ Cash ‡ Marketable securities ‡ Accounts Receivables ‡ Inventories ‡ Prepaid Expenses

TYPES OF ASSETS, contd«..
‡ Fixed Assets: Assets that are tangible & relatively long-lived (non-current assets). ‡ Entity acquires & uses them to produce goods & services that will generate future cash flows. ‡ Property, Plant & Machinery. ‡ Investments ( securities of one company owned by another for long-term return or gaining control).

TYPES OF ASSETS, contd«..
‡ Intangible Assets: Valuable but nonphysical things controlled by the business. ‡ Goodwill, Patents, Copyrights, Trademarks, Franchises etc. ‡ Distinguished from Prepaid Expenses (Intangible current assets) as they have a longer life span.

TYPES OF LIABILITIES (Obligation to outsiders)
‡ Current Liabilities: Obligations expected to be satisfied by the use of current assets or by creation of further current liabilities. ‡ Accounts/ Notes/ Taxes Payable, ‡ Accrued Expenses, ‡ Deferred Revenue (Unearned revenues/ Pre-collected revenues) ‡ Current Portion of a long-term Debt (due within next year)

OWNERS¶ EQUITY
‡ 1. 2. Shareholders¶ Equity Paid-in-capital ± Amount owners have invested by purchasing shares of stock (Contributed Capital). Retained Earnings ± (Earned Capital) to be determined by: the difference between total earnings of the entity from its inception to date and the total amount of dividends paid out to its shareholders over its entire life. Drawings ± In a proprietorship/ partnership firm, the owners earnings during the period is decreased by owner¶s drawings. Drawings in an unincorporated firm are analogous to a corporation¶s dividends. Current Ratio ± Indicate entity¶s ability to meet current liabilities through current assets ± as most current assets are expected to be converted to cash within a year & most current liabilities are expected to use cash within a year.

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