Introduction to Accounting

Session Outline
• Introduction to Finance
• Introduction to Accounting
• How finance and accounting are related
• Syllabus coverage
• Basics of Financial Accounting
Finance as art and science
• Two major areas of finance
• Corporate finance / FM
• Financial services to companies and investors
3 Major Decisions under CF / FM
• Finance
• Public Vs Pvt
• Long Vs Short Term
• Capital Structure
• Equity, Debt, Pref
shares, 60,30,10;
Financial Leverage
• Cost of capital < the
return
• Profitability
• M&A
• Foreign trade reporting and hedging
• Investment • Distribution
• Labour Vs Capital • Cash Vs Stock div
Intensive: Operating
• Share buy back
Leverage
• Short Vs Long or Current
Vs Fixed
• Mgt of drs, inventory,
cash mgt
• Capital Budgeting:
conclude on fixed
asset buying
Financial Services: Intermediary, Regulator
• Companies
• Raise funds from IPO, FPO, Debt issue:
IB, Loan syndication
• Raise funds from domestic or
foreign markets: IB
• Reporting to Exchanges, controlled by SEBI
• Business Valuation
• Regulators
• SEBI, NSE, BSE, RBI, IRDA
• IAS-ICAI, IFRS-International Accounting Standard
Board, GAAP- Financial Accounting Standard Board
• Investors: Short and Long term
• Short term: Months, intraday, prop traders
• Long term: For Div and capital gains. For Corp
control – M&A, VC or PE
• Services to these
• Business Valuation, equity research and
Analytics: Fundamental and technical
• Model building
• Market micro-structure
• Portfolio mgt / Wealth mgt / Fin Planning
• Derivative Analytics

• How share value in the secondary market impacts the company issued the share?

Time Value of Money

Basics of Accounting
• Business / Company Information
• Non-quantitative
• Quantitative
• Non-Accounting
• Accounting
• Financial Accounting: documenting, summarizing, and reporting the
transactions arising from business operations for a period of time.
• Management Accounting
• Tax Accounting
• Our approach is that of a user for analytical and data driven decision making
• Three basic criteria to judge acceptability of accounting and accounting principles:
relevance, objectivity and feasibility
Basic Terms
• Types of Organizations
• Accrual vs cash accounting
• Asset and Liabilities
• Long term Assets and Liabilities
• Tangible Vs intangible asset
• CL VS CA
• Debtors Vs Creditors
• Inventory Vs asset
• Solvency: Assets > Liabilities
• Short term solvency: CA > CL
• CA – CL = Working Capital > 0
• Long term Vs Short term
Investments
• Prepaid Vs Outstanding Expense
• Receivable Vs Unearned Income
• Cost, expenditure and expense -
Depreciation
• Capital, revenue and deferred
revenue expenditure
• Owners have residual claim
• Retained Earning
• Net-worth / Equity / Owners Equity
Financial Statements
• Financial Statements / package, show
• Balance sheet: Stock or status report
• Dual Aspect concept: Asset = Liabilities + Owner’s Equity: Accounting equation
• Resources and Claim view; Sources and Application view
• Income Statement: Flow report – subset of balance sheet
• Gross and net profit, undistributed carried f/w as retained earning
• Cashflow Statement: Flow report
• CF from operating, investing and financing activities
• Objectives of Financial Statements: To provide information that
• Is useful to present and potential investors and creditors
• Is comprehensible to those who have reasonable understanding of the business
• Is about economic resources and claims on those
• Is about the financial performance during a period
• Helps users assess the amounts, timing and uncertainty of prospective receipts of dividends,
interest or redemption of loans / securities
Accounting Concepts and Conventions; and its application
• Entity: Capital increases business liab and Drawings decreases business liab
• Money measurement: trucks, building, Inflation
• Going concern: Liquidation value Vs ongoing value
• Cost: Monetary or current asset Vs non-monetary asset or fixed asset
• Dual Aspect
• Accounting period
• Matching:
• Period costs are current year’s expense
• Cost not associated with future revenue are current year’s expense
• Consistency
• Materiality and full disclosure: Salary, electricity bill payment cycle
• Realization: Amount of Income and expense recognition: Bad debt
Cont…
• Conservatism: Timing of income and expense recognition: Prefer understatement rather
than overstatement. Anticipate no profits but anticipate all losses. Recognise revenue
when reasonably certain and recognise expense when reasonably possible
• Income recognition
• Sale or return
• Pre-collected income
• Expense recognition
• Outstanding exp
• Part of expenditure are current year’s expense
• Cost, Expenditure and Expense - Depreciation
• Revenue exp, capital exp, and deferred rev exp
Accounting Process
• Journal, Ledger, Trial Balance and Final Accounts
• Transaction Analysis and Balancing Ledger
• Trial Balance and Final Accounts, Income statement and Balance sheet