Session 1

Introduction, Basic Accounting Concepts and Elements of Financial

statements
Role of accounting in economic & Business
Decisions
• Accounting as old as civilization- accounting records have been found at
archaeological sites
• It is the language of business
• Many responses to why should you know accounting ? –
• Because it is in the curriculum and you have no choice.
• If a choice was given would you still take a course on accounting and why ?-
• Not to be fooled, not to lose money, to communicate financial information
etc
• Identify the major users of accounting information – shareholders, analyst,
banks, employees, suppliers, buyers, customers, government and regulators
Understand the activities of business organizations

• Business organizations provide product & services converting inputs

(raw materials) into outputs (products and services) by applying
processes.
• Merchandising (trading) vs manufacturing vs service organizations
• They perform complex processes but at the end they are cash –
generating and cash dispensing machines – how does this happen
• Cash flow- surplus and deficit- liquidity and solvency – the concept
varies across organisations
Understand the activities of business organizations

• Business organizations provide product & services converting inputs

(raw materials) into outputs (products and services) by applying
processes.
• Merchandising (trading) vs manufacturing vs service organizations
• Cash and credit transactions
• They perform complex processes but at the end they are cash –
generating and cash dispensing machines – how does this happen
• Cash flow- surplus and deficit- liquidity and solvency – the concept
varies across organisations
Common forms of Business Organisations
• Sole proprietorship
• Partnership- The Indian Partnership Act
• Company- private limited- not available to public ( 2 to 200) & public limited (7 to
any)- the meaning of limited – listed vs unlisted- companies Act 2013 – Incorporation
of a company- a) MA ( name, object, capital details, liability status ( that it is
limited)- b) AA ( internal issues such as meetings, voting rights. c) certificate of
incorporation.
• LLP or Limited Liability partnership (LLP Act of 2008)- ( 2 to any ) can have even
corporate bodies as partners/ limited liability - combination of partnership and
Company
• Corporate structure – understand various roles within the organization and the
differences between the types of Organisations – Pg 18 of the text book
Elements of financial statements

• Inputs in an accounting system- transactions

• Outputs- P&L , Balance sheet, cash flow statements, ( statement of retained earnings, statement of
changes in equity, explanatory notes, management commentary, tax returns, regulatory filings )
• Processing- accounting principles and standards, management assumptions, connected Acts

Three statements collectively are referred to financial statements of an entity:

Statement of financial position - generally referred to as Balance Sheet
Income statement
Statement of cash flows
 
Stock reports ( balance sheet)
Flow reports ( income statement and cash flows)
The Accounting Equation
• Economic resources and claims
• Assets and types
• Liabilities and types
• Equity – Reserves and surplus
• Retained earnings = Excess of income ( revenue) over expenditure
(expenses) , net of any dividend paid, also called net income
• Revenue/ Gains
• Expenses/ Losses
Entity concept :

• Accounts are kept for entities and not for the persons who are
associated with the entities. Promoters capital is a liability for the entity.
• Legally there is no distinction between proprietor and the entity,
creditors can collect their dues from the entity or from the proprietor.
However the accounting principle distinguishes between the two.
Because of this segregation it is possible for the entity to operate from
the proprietor’s premises and pay rent to the proprietor ( fixing of such
rent may be arbitrary though)
Assets
• The economic resources of an entity are called assets.
• Some assets like cash, marketable securities are monetary while some others are non
monetary ( land, building)
• For monetary asset, the standards require that the assets be valued at fair value, namely, at
what amount the asset can be exchanged in a current transaction, between willing parties
• For non monetary assets, the assets are shown cost less depreciation also referred to as
book value or written down value
• This is done as it is more feasible ( may not be relevant or objective)
• Generally if an entity pays nothing for an item it acquires, it will not be recorded as an asset.
However if an entity is purchased by another entity, paying a value higher than the aggregate
value of the net fair value of its balance sheet, the difference is recorded as ‘goodwill’.
Assets
• The economic resources of an entity are called assets.
• Some assets like cash, marketable securities are monetary while some others are non
monetary ( land, building)
• For monetary asset, the standards require that the assets be valued at fair value, namely, at
what amount the asset can be exchanged in a current transaction, between willing parties
• For non monetary assets, the assets are shown cost less depreciation also referred to as
book value or written down value
• This is done as it is more feasible ( may not be relevant or objective)
• Generally if an entity pays nothing for an item it acquires, it will not be recorded as an asset.
However if an entity is purchased by another entity, paying a value higher than the aggregate
value of the net fair value of its balance sheet, the difference is recorded as ‘goodwill’.