Fundamentals of Accounting

Fundamentals of
Accounting
for
BBA Emphasis (Hons.)
Kathmandu University
School of Management
(KUSOM)
04/27/2020 harigopal@kusom.edu.np 1
Course Outline &
Sessi
on Session Plan
Topics to be dealt Activities
Faculty Presentation and

Accounting and Governance
(12 hours) discussions
1&2
Understanding Business Organizations Discussion on articles by Joel S.
Accounting, Capital markets and corporate Demski and John C. Fellingham
governance “Is Accounting an Academic
Introduction about Financial and Management Discipline?”
Accounting
Users of accounting information and their
needs
Accounting as an Academic Discipline
Financial statements: conceptual framework Discussion and Comparative
The balance sheet (the statement of Analysis of Balance sheets &
3 & 4 financial position) Income Statements of different
An income statement
A statement of changes in owners’ equity companies (e.g., Nepal Telecom,
What information is communicated through the Butwal Power & Commercial
balance sheet, income statement, and Banks)
statement of retained earnings?
Discussion and presentation on real life
Financial Statements: How Accountants
Communicate
5 Ethics in accounting Quiz/test shall take place at the
What is the critical role that ethics play in beginning of the session - I
providing useful financial information? Discussion on Famous Business
Sessio Topics to be dealt Activities
n
Basis of Recording Transactions (10 Topic Presentation
Hours) by students,
7
Discussion on Economic Events: The Basis for discussions and
feedback from the
Recording Transactions
faculty – G2
Role of source documents in an accounting
system
Faculty
Chart of accounts Presentation and
8&9 Discussion on an account “ The T Account “ discussions
Topic Presentation
The double-entry System: the basis of by students,
modern accounting discussions and
feedback from the
Debits and Credits Principles faculty – G3
Faculty
Posting to the Ledger Accounts Presentation,
10 & discussions and
Journal and trail balance some exercises
11
Mid-Term Examination
Analyzing the Effects of Transactions on the
Accounting Equation harigopal@kusom.edu.np Quiz/test shall take
04/27/2020 place at the end3 of
n
12,13 & Reporting Financial Statements (12 Faculty Presentation, discussions
14 Hours) and some exercises
Understanding Financial statements:
Case Analysis: 1. Maynard
Classified balance sheet, Income statements Company 2. Music Mart Inc. 3.
Statements of retained earnings , Lone Pine Café
Statements of cash flows
Understanding the annual reports
Corporate disclosure policy
Objective of financial reporting
Qualitative characteristics
15,16 &17 Real life Elements of an Annual Report of any Faculty Presentation, discussions
financial institutions on real life Annual reports of
different Industries
What Makes Accounting Information Useful?
Annual report of a Manufacturing and Trading A Guest lecture shall be invited
Company
Overview on International perspective of Projects shall be discussed and
financial reporting assigned.
Preparation and presentation of Financial
Report as per Nepal Accounting standard
(NAS) 01
Accounting for Merchandising Faculty Presentation, discussions
Transactions (4 Hours) and some exercises
18
Income measurement for a merchandising
One Quiz/test shall take place at
enterprises
04/27/2020Revenue from sales harigopal@kusom.edu.npthe end of the session - III 4
n
20 Income measurement Adjusting Topic Presentation by
Entries (10 Hours) students, discussions and
Concept of Income Measurement feedback from the faculty –
Concept of Accrual Accounting G6
Accrual basis of accounting and adjusting
entries
Topic Presentation by
Recognition and measurement in financial students, discussions and
21 &
statements feedback from the faculty –
22
Overview of the accounting cycle G7 & G8
Overview of closing entries
Quiz/test shall take place
at the end of the session -
IV
Faculty Presentation,
Using the work sheet discussions on real life
23
Post closing Trial Balance worksheet, post closing
trial balance and exercises
24
End-Term Examination
Project Presentation and report
submission (4 Hours)
04/27/2020 harigopal@kusom.edu.np
Revision and discussion (if needed 5
25
Evaluations &
Grading
Test Activities No. Weight
Quizzes & Class tests 3-5 15%
Assignments (Individual) 2-3 10%
Class participation & Topic Presentation - 10%
Attendance - 5%
Mid Term Exam 1 15%
Project work & presentation ( Group ) 1 15%
End-term Exam 1 30%
TOTAL 100%
Grading
Marks and corresponding grading rule for internal evaluation shall be as
follows:
Marks Above 85 -
Range 90 90 80 - 85 75 – 80 70 – 75 65 – 70 60 – 65
A A- B+ B B- C+ C
Grade
Grade 4 3.7 3.3 3 2.7 2.3 2
Point
Note: Students securing less than 60% are required to re-register for the
course when offered.

Note: 1. Students are required to come prepared for every session as
stated above. In addition, Faculty may introduce new and relevant cases/
topics/articles and students shall be assigned to go through them, analyze
and make the presentation. The faculty may also conduct some quizzes
and class test without prior information.
Note: 2. Students from non-management background are requested to

consult with the faculty on a regular basis as per requirement and
compulsorily on Fridays (10:00 AM to 12:00 PM).
List of books for reference
• Gary A. Porter and Curtis L Norton “Financial Accounting: The Impact on Decision Makers”, 8 th
edition, (2012), Thomson South western
•Financial Accounting A Managerial Perspective, 5th edition, R. Narayanaswamy, PHI Learning

Private Limited, 2014
•Anthony Robert N, and Reece, James S (2004) Accounting principles, 6 th edition, USA: Richard
D., Irwin Inc.
•International Financial Reporting Standards (IFRS) and Nepalese Financial Reporting Standards
(NFRS)
•Anthony Robert N, Hawkins D and Merchant Kenneth A; “Accounting Text and Cases”,12 th
edition,(2007) Tata McGraw-Hill
What is Business?
to provide with
members goods
Activities of an and
economic services
system
Classification of business by type
of activity
• Product companies - provide goods or
product
• Suppliers - supply raw materials needed to make
the product
• Manufacturers/Producers - transform the raw
materials obtained from the suppliers into a
finished product
• Distributors - sell the finished product to others
– Wholesalers - sell to retail outlets
– Retailers - sell to consumers
• Service companies - provide a service.

Service providers are becoming
increasingly important in today’s economy.
Non-business Entities
Government Entities Private Organizations
Federal, State, and

Local Governments Hospitals, Universities,
Cooperatives
Non-business Entities
– Exist to serve the needs of various
segments of society
– Lack of identifiable owner
– Even though there is a lack of a profit
motive in non-business entities, still
need information provided by an
accounting system
– Hospitals, municipal government,
colleges, are non-business entities
Forms of Organization
Sole Proprietorship One owner
Partnership Two or more owners
Corporation Entity organized under

laws of a particular state
Sole proprietorship
• A business organization with a single owner

• Many small businesses are sole
proprietorships
• Economic entity concept: the affairs of the
business and the owners must be kept
separate. A single, identifiable unit must be
accounted for in all situations
• Economic entity concept is an accounting
concept, not a legal concept. Therefore, a sole
proprietorship is not a taxable entity
• Any profits earned are included on the tax
return of the owner.
Partnership
• A business owned by two or more

individuals
• Partnership agreement - determines
how profits will be divided and how
much each partner will contribute. Can
be oral or written
• Public accounting firms, law firms are
often partnerships
• Not a taxable entity: Any profits earned
are taxed on the return of the owners
Corporations
• Corporations control the majority of resources in the US,

even though sole proprietorships and partnerships
dominate in number.
• Business organized under the laws of a particular state
• Articles of incorporation must be filed with the state.

Once approved, a corporate charter is issued and
corporation can sell stock
• Stock certificate - evidence of ownership in a corporation
• Stocks can be sold on organized stock exchanges

(NEPSE)
Advantages/Disadvantages of Sole Proprietorships
Advantages Disadvantages
Freedom Unlimited Liability
Ease of Formation Lack of Continuity
Difficulty
Low Start-up Costs
Raising Money
Single Taxation Reliance On

One Person
Advantages/Disadvantages of General Partne

Larger Talent Pool Unlimited Liability
Larger Money Pool Lack of Continuity
Ownership
Ease of Formation Transfer Difficult
Possibility
19
of
Single Taxation Conflict
Advantages/Disadvantages of
Corporations
Limited Liability Stockholder Revolts
Continuity
High Start-up cost
Greater likelihood of
professional Management
High Cost of Regulatio
Easier Access to Money
Double Taxation
The Nature of Business Activity
Financing Investing Operating
Activities Activities Activities
Examples:
•Borrowing • Purchase of assets
• Sale of
•Sale of stock
products/services
•Payment of • Costs incurred
Dividends to operate
business 21
Financing activities
• How a business obtains money (capital) for its needs
• Accounting is called the “language of business” and has its own

unique terminology
• Includes the sale of stock or borrowing to finance operations
• Liabilities: an obligation of a business. Notes payable, bonds

payable, accounts payable
• Capital stock: - the dollar amount of stock sold to the public.

Indicates the owners’ contributions to a corporation
• Stockholder (shareholder) provides permanent form of financing and

need not be repaid
• Creditor (lender) expects repayment of the amount loaned plus

interest
Investing activities
• Once the funds are generated from
financing activities, the money is now
available to invest
• Includes the purchase of assets for the

business
• Assets: a future economic benefit to the

business. Accounts receivable, patents,
cash are examples
– Not all assets are tangible in nature
Operating activities
• Once investments are made in assets,

company can begin operations
• Includes the sale of products or services and
the costs incurred to operate the business
• Revenues are the inflow of assets resulting
from the sale of goods and services.
Represents the dollar amount of sales of
products and services for a specific period of
time
• Expenses are the outflow of assets resulting
from the sale of goods and services. They
are the costs incurred in operating a business
What is Accounting?
Accounting is not just a procedural

record-keeping activity done by people
“Who are good at math”. In fact,
Accounting is “the process of
identifying, measuring and
communicating economic information to
permit informed judgments and
decisions by users of the information”
04/27/2020
American Accounting
harigopal@kusom.edu.np 26
What is Accounting?
Identifying
Economic to
Measuring
Information various
users
Communicating
Characteristics of Accounting
Economic Entity Financial Statements Additional Information
Financial Balance
Balance Sheet President’s letter
Information
Income
Income Statement
Statement Prospectuses,
Accounting?
Statement
Statement of
of Cash
Cash SEC Reporting
Identifies Flows
Flows News releases
and Statement
Statement of
of Forecasts
Measures Owners’
Owners’ or
or
Stockholders’
Stockholders’ Equity
Equity Environmental
and Reports
Communicates Note
Note Disclosures
Disclosures
Etc.
Internal and External
Users of Accounting Information
Bankers
Creditors
Existing
and
Potential
Investors Internal
Users – Financial
Management Analysts
Researchers
Suppliers Government
Agencies
Why
Why do
do we
we need
need to
to Understand
Understand Accounting?
Accounting?
Common Questions Asked? Users &Decisions

related with
1. Can we afford to give
our employees a pay Human
raise? Resources
2. Did the company earn a
satisfactory income? Investors
3. Which product line is most
profitable? For the Management
decision
4. Is cash sufficient to pay making!
dividends to the Finance
stockholders?
5. What price for our product
will maximize net income? Marketing
6. Will the company be able
to pay its short-term Creditors
debts?
Decisions Made with Financial Information
Add new
Invest??
product line??
Borrow $$??
Build new plant??
Extend credit $$?? Loan $$??
Start new business?? Sell stocks or bonds??

Users of Accounting
Information
Internal Users
External
Users
•Lenders •Consumer •Managers •Sales Staff

•Shareholder Groups
•Officers •Budget
s •External Officers
•Internal
•Government Auditors
04/27/2020 Auditors
harigopal@kusom.edu.np •Controllers32
s •Customers 1-32
Users of Accounting
Information
External Internal Users

Users
Financial accounting Managerial accounting

provides external users provides information needs
with financial statements for internal decision makers
(shareholders, lenders, (officers, managers, etc.).
04/27/2020 etc.). harigopal@kusom.edu.np 33
1-33
Financial and Management
Accounting
• The major distinction between financial
and management accounting is the
users of the information.
– Financial accounting serves external users.
– Management accounting serves internal
users, such as top executives,
management, and administrators within
organizations.
Accounting
The primary questions about an
organization’s success that decision
makers want to know are:
What is the financial picture of the

organization on a given day?
How well did the organization do during
a given period?
Accounting
Accountants answer these primary questions
with three major financial statements.
• Balance Sheet - financial picture on a given
day
• Income Statement - performance over a
given period
• Statement of Cash Flows - performance over
a given period
Accounting
• Annual report - a document
prepared by management and
distributed to current and potential
investors to inform them about the
company’s past performance and
future prospects.
– The annual report is one of the most
common sources of financial information
used by investors and managers.
Accounting
• The annual report usually includes:
– a letter from corporate management
– a discussion and analysis of recent
economic events by management
– footnotes that explain many elements of
the financial statements in more detail
– the report of the independent auditors
– a statement of management’s
responsibility for preparation of the
financial statements
– other corporate
04/27/2020 information
harigopal@kusom.edu.np 38
Financial/Management
Accounting
Features Financial Acc Management
Acc
User Types Outsider Insider
(External) (Internal)
Level of Global (Entire Detailed or
Aggregation Company) subunits
Characteristic Objective, Estimates and
s reliable, projections
consistent,
historical
Time Horizon Historical Present &
04/27/2020 harigopal@kusom.edu.np Future 39
Corporate Governance
• Definition:
– “The system by which business corporations are
directed and controlled. The corporate
governance structure specifies the distribution of
rights and responsibilities among different
participants in the corporation, such as, the
board, managers, shareholders and other
stakeholders, and spells out the rules and
procedures for making decisions on corporate
affairs.”
OECD, April 1999
Corporate Governance and Capital
Markets
Source: A McKinsey Survey of Global Investors

Role of the Accounting Profession
in Corporate Governance
• Principles of Corporate Governance

– Directors
– Directors’ remuneration
– Accountability and audit
– Relations with shareholders
– Institutional shareholders
Combined Code, 2006
Corporate Governance and Capital
Markets
• Investment is an act of faith
• Poor governance
– Undermines integrity of corporations and discourages the use of
public markets as a means to intermediate savings
– Particularly the areas of transparency and disclosure have been a
major factor behind instability in the financial markets across the
globe
• Good corporate governance
– Essential pre-requisite for the integrity and credibility of capital
market players
– Contributes to the development of a vibrant economy and robust
capital markets
• Recent events have repeatedly proven the importance of
corporate governance standards, including the collapse of large
global corporations
Corporate Governance and
Capital Markets
• Equity investment requires good
corporate governance.
• Good corporate governance requires
credible disclosure by the issuer.
• Disclosure Requirements, Good
Accounting Standards, Independent
Auditors and Effective Enforcement
helps in Capital Markets.
Corporate Governance is the
Equity Contract
• We are all familiar with the debt contract: a
detailed document specifies the interest rate, the
repayment date, the debtor’s covenants, and the
events of default.
• What is the equity contract?
– The corporate governance system specifies the rights of
an equity holder and the steps available if management
breaches its responsibilities
• Gilson’s rule of value: you pay for what you get!
Good Governance Requires
Credible Disclosure
• The corollary to Gilson’s rule of value:
– You get what you can measure.
• The algebra of governance and disclosure:
– You pay for what you get = you get what you can
measure
– Canceling yields:
– You pay for what [you get] = [you get what] you can
measure:
• You pay for what you can measure!
• The difference between disclosure and credible
disclosure.
Independent Auditors
• Credible disclosure requires honest, competent,
and independent auditors.
– The annual audit process is more effective than a
government agency.
• The problem is independence.
– What is the impact on auditor independence of the
consolidation of the profession into 5 multi-national,
multi-disciplinary professional service firms.
• What happens to independence when non-audit fees climb?
• Current focus of the U.S. Securities and Exchange
Commission.
Any Questions???
Thank You


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Fundamentals of

BBA Emphasis (Hons.)

Faculty Presentation and

Note: 2. Students from non-management background are requested to

List of books for reference

•Financial Accounting A Managerial Perspective, 5th edition, R. Narayanaswamy, PHI Learning

• Service companies - provide a service.

Government Entities Private Organizations

Federal, State, and

Sole Proprietorship One owner

Partnership Two or more owners

Corporation Entity organized under

• A business organization with a single owner

• A business owned by two or more

• Corporations control the majority of resources in the US,

• Business organized under the laws of a particular state

• Articles of incorporation must be filed with the state.

• Stock certificate - evidence of ownership in a corporation

• Stocks can be sold on organized stock exchanges

Single Taxation Reliance On

Advantages/Disadvantages of General Partne

Larger Money Pool Lack of Continuity

• Accounting is called the “language of business” and has its own

• Includes the sale of stock or borrowing to finance operations

• Liabilities: an obligation of a business. Notes payable, bonds

• Capital stock: - the dollar amount of stock sold to the public.

• Stockholder (shareholder) provides permanent form of financing and

• Creditor (lender) expects repayment of the amount loaned plus

• Includes the purchase of assets for the

• Assets: a future economic benefit to the

• Once investments are made in assets,

Accounting is not just a procedural

Common Questions Asked? Users &Decisions

Start new business?? Sell stocks or bonds??

•Lenders •Consumer •Managers •Sales Staff

External Internal Users

Financial accounting Managerial accounting

What is the financial picture of the

Source: A McKinsey Survey of Global Investors

• Principles of Corporate Governance

Combined Code, 2006

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