‡ 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

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)

‡ 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




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.

‡ 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

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.

‡ 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.

‡ 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

‡ 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).

‡ 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)

‡ 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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