ACCOUNTING AND

FINANCIAL
MANAGEMENT

COMPLITED BY
SHARATH KUMAR .Y
M.COM, UGC -NET
ASSISTANT PROFESSOR
THE OXFORD COLLEGE OF BUSINESS MANGAMENT
Definition of Accounting
Accounting can be defined as a process of reporting, recording, interpreting and summarizing economic
data. The introduction of accounting helps the decision-makers of a company to make effective choices,
by providing information on the financial status of the business. Today, accounting is used by everyone
and a good understanding of it is beneficial to all. Accountancy act as a language of finance. To
understand accounting efficiently, it is important to understand the aspects of accounting.
Economic Events- It is a consequence of a company has to undergo when the number of monetary
transactions is involved. Such as purchasing new machinery, transportation, machine installation on-site,
etc.
Identification, Measurement, Recording, and Communication- The accounting system should be outlined
in such a way that the right data is identified, measured, recorded and communicated to the right
individual and at the right time.
Organization-In refers to the size of activities and level of a business operation.
Interested Users of Information- It is about communicating important financial information to the
customers, according to which they will make the correct decision.

Fundamentals of Accounting
Assets- The economic value of an item which is possessed by the enterprise is referred to as Assets. To
put it in other words, assets are those items that can be transformed into cash or that generates income for
the enterprise shortly. It is useful in paying any expenses of the business entity or debt.
Liabilities- The economic value of an obligation or debt that is payable by the enterprise to other
establishment or individual is referred to as liability. To put it in other words, liabilities are the obligations
that are rising out of previous transactions, which is payable by the enterprise, through the assets
possessed by the enterprise.
Owner’s Equity- Owner’s equity is one of the 3 vital segments of a sole proprietorship’s balance sheet
and one of the main aspects of the accounting equation: Assets = Liabilities + Owner’s Equity. It depicts
the owner’s investment in the trade minus the owner’s withdrawal from the trade + the net income since
the business concern commenced.
Objectives of Accounting
The main objectives of accounting are:
1.To maintain a systematic record of business transactions
Accounting is used to maintain a systematic record of all the financial transactions in a book of accounts.
For this, all the transactions are recorded in chronological order in Journal and then posted to principle
book i.e. Ledger.
2. To ascertain profit and loss
Every businessman is keen to know the net results of business operations periodically.
To check whether the business has earned profits or incurred losses, we prepare a “Profit & Loss
Account”.
3. To determine the financial position
Another important objective is to determine the financial position of the business to check the value of
assets and liabilities.
For this purpose, we prepare a “Balance Sheet”.
4. To provide information to various users
Providing information to the various interested parties or stakeholders is one of the most important
objectives of accounting.
It helps them in making good financial decisions.
5. To assist the management
By analysing financial data and providing interpretations in the form of reports, accounting assists
management in handling business operations effectively.
Features of Accounting:
The following attributes or characteristics can be drawn from the definition of Accounting:
(1) Identifying financial transactions and events
Accounting records only those transactions and events which are of financial nature.
So, first of all, such transactions and events are identified.
(2) Measuring the transactions
Accounting measures the transactions and events in terms of money which are considered as a common
unit.
(3) Recording of transactions
Accounting involves recording the financial transactions inappropriate book of accounts such as Journal
or Subsidiary Books.
(4) Classifying the transactions
Transactions recorded in the books of original entry – Journal or Subsidiary books are classified and
grouped according to nature and posted in separate accounts known as ‘Ledger Accounts’.
(5) Summarizing the transactions
It involves presenting the classified data in a manner and in the form of statements, which are
understandable by the users.
It includes Trial balance, Trading Account, Profit and Loss Account and Balance Sheet.
(6) Analyzing and interpreting financial data
Results of the business are analyzed and interpreted so that users of financial statements can make a
meaningful and sound judgment.
(7) Communicating the financial data or reports to the users
Communicating the financial data to the users on time is the final step of Accounting so that they can
make appropriate decisions.

.
Branches of accounting
(a) Financial accounting:
Financial Accounting is that branch of accounting which involves identifying, measuring, recording,
classifying, summarizing the business transactions, i.e. it involves the steps from Identifying, Recording
of transactions to Summarization, and communicating the financial data.
(b) Cost accounting:
Cost Accounting is that branch of accounting which is concerned with the process of ascertaining and
controlling the cost of products or services.
(c) Management accounting
Management Accounting is that branch of accounting which is concerned with gathering and processing
information relating to funds, cost, profit, etc. to simplify the decision-making process of management.
Steps of the Accounting Process:
(1) Identification & Recording
For recording, we use ‘Journal’ or Subsidiary Books.
(2) Classification of transactions
Classification means segregation of transactions on the basis of nature and posting them in a format
known as Ledger Account.
(3) Summarisation
It includes preparation of Trial Balance and Financial Statements.
(4) Analysis & Interpretation
It includes an assessment of the financial reports and making some meaningful conclusions.
(5) Communicating information to the users
It includes sharing the financial reports and interprets results to the users of financial statements.
Define the term Bookkeeping, Accounting and Accountancy.

Bookkeeping Book Keeping is a part of Accounting and it is the process of identifying, measuring, recording
and classifying the financial transactions.

Accounting Accounting is a wider concept and actually, it begins where Book Keeping ends. It includes
summarizing, interpreting and communicating the financial data to the users of financial
statements.

Accountancy Accountancy refers to systematic knowledge of the principles and the techniques which are
applied in Accounting.

Difference Between Bookkeeping and Accounting.

Basis Bookkeeping Accounting

Scope Bookkeeping involves identifying, In addition to bookkeeping, Accounting also includes

measuring, recording & classifying summarizing, interpreting and communicating the
financial transactions in the ledger financial data to the users of financial statements.
accounts.

Objective The main aim is to maintain systematic The main aim is to ascertain the profitability and
records of financial transactions. financial position of the business.

Stage It is a primary stage of accounting It is a second stage and begins where book-keeping
ends.

Nature of This job is in routine and repetitive in This job is analytical in nature.
job nature.

Level of Bookkeeping does not require special It requires specialized skill to analyze, so it is
skills skills. It is performed by Junior Staff. performed by senior staff.
Advantages of Accounting.
The following are the main advantages of accounting:
1. Provide information about financial performance
Accounting provides factual information about financial performance during a given period of time
Like, profit earned or loss incurred over a period and financial position at a particular point of time.
2. Provide assistance to management
Accounting helps management in business planning, decision making and in exercising control.
For this, it provides financial information in the form of reports.
3. Facilitates comparative study
By keeping systematic records and preparation of reports at regular intervals, accounting helps in making
a comparison.
4. Helps in settlement of tax liability
Systematic accounting records help in settlement of various tax liabilities. Such as – Income Tax, GST,
etc.
5. Helpful in raising loan
Banks and Financial Institutions grant a loan to the firm on the basis of appraisal of the financial
statement of the firm.
6. Helpful in decision making
Accounting provides useful information to the management for taking decisions.

limitations of accounting are;

1. Recording only monetary items.
2. Time value of money.
3. Recommendation of alternative methods.
4. Restrain of accounting principles.
5. Recording of past events.
6. Allocation of the problem.
7. Maintaining secrecy.
8. The tendency for secret reserves.
9. Importance of form over substance.
1. Recording only monetary items
As per accounting principles, only the events measurable in terms of money are recorded in the books of
accounts. But events of great importance, if not measurable in terms of money, are not accounted for.
For that reason, recorded accounting information fails to exhibit the exact financial position of a business
concern.
2. Time Value of Money
Under the accounting system, money value is treated constantly.
But the value of money always changes due to inflation. Under existing accounting systems, accounts are
maintained considering historical cost ignoring current changed value.
As a result, the accounts maintained fail to exhibit the exact financial position of a business concern.
3. Recommendation of alternative methods
There exists an application of alternative methods in determining depreciation of assets and valuation of
stock etc.
Information regarding the activities of the business is expressed in a misleading way if an alternative
method is used to achieve a particular object.
4. Restrain of Accounting Principles
Exhibited accounting information cannot always exhibit a true and fair picture of a business concern
owing to limitations of the accounting principles used.
For example,
Fixed assets are shown after deducting depreciation. In the case of inflation, the value of fixed assets
shown in the accounts does not correspond to the real position.
5. Recording of past events
Accounting past events are accounted for. But naturally, there is no system of recording events that may
occur in the future.
6. Allocation of problem
The allocation process is an important problem in the accounting system. The value of fixed assets is
exhausted, charging depreciation for the allocated period.
The useful life of fixed assets is fixed up hypothetically, which does not stand accurately in most cases.
7. Maintaining secrecy
Secrecy cannot be ensured for the involvement of many employees in accounting work, although
maintaining secrecy is very important.
8. The tendency for secret reserves
Often management creates secret reserves intentionally by increasing or decreasing assets and liabilities
for which the total financial picture of an organization is not reflected.

9. Importance of form over substance

At the time of preparing accounts for a particular period, the emphasis is laid on the form, table, etc.
instead of giving importance to an exhibition of substantial information.
As per Company Act, preparation of the balance sheet in the prescribed form is mandatory.
Although there are some limitations in the present accounting system, accounting in the present-day
world has generally been accepted as a recognized profession.
Efforts are on throughout the world to overcome these limitations. Economic activities of any society
without accounting are neither possible nor legal.

Users of Accounting Information:

Users may be categorized into internal users and external users.
(A) Internal Users
Owners: Owners contribute capital in the business and thus they are exposed to maximum risk. So, they
are always interested in the safety of their capital.
Management: Accounting information is used by management for taking various decisions.
Employees: Employees are interested in the financial statements to assess the ability of the business to
pay higher wages and bonus.
(B) External Users
Banks and financial institutions: Banks and Financial Institutions provide loans to business. So, they are
interested in financial information to ensure the safety and recovery of the loan.
Investors: Investors are interested to know the earning capacity of business and safety of the investment.
Creditors: Creditors provide the goods on credit. So they need accounting information to ascertain the
financial soundness of the firm.
Government: The government needs accounting information to assess the tax liability of the business
entity.
Researchers: Researchers use accounting information in their research work.
Consumers: They require accounting information for establishing good accounting control, which will
reduce the cost of production.
Qualitative Characteristics of Accounting Information
Qualitative characteristics are the attributes of accounting information, which enhance its
understandability and usefulness:
Reliability: Reliability implies that the information must be free from material error and personal bias.
Relevance: Accounting information must be relevant to the decision-making requirements of the users.
Understandability: Information should be disclosed in financial statements in such a manner that these are
easily understandable.
Comparability: Both intra-firm and inter-firm comparison must be possible over different time periods.
System of accounting
There are following two systems of recording transactions in the books of accounts:
1.Double Entry System
2. Single Entry System
1.Double-entry system
The double entry system is based on the Dual Aspect Principle.
Every transaction has two aspects, ‘a Debit’ and ‘a credit’ of an equal amount.
This system of accounting recognizes and records both the aspects of the transaction.
2.Single entry system
Under this system, both aspects are not recorded for all the transactions.
Either only one aspect is recorded or both the aspects are not recorded for all the transactions.
Advantages of the Double-entry System of Accounting.
Following are the main advantages of the double-entry system of accounting:
1.Scientific system
As compared to the other systems, this system of recording transactions is more scientific and useful to
achieve the objective of accounting.
2.A complete record of the transaction
Since both the aspects of transactions are considered there is a complete recording of each and every
transaction.
Using these records we are able to compute profit or loss easily.
3.Checks arithmetical accuracy of accounts
Under this system, by preparing a Trial Balance we are able to check the arithmetical accuracy of the
records.
4.Determination of profit/loss and depiction of financial position
Under this system by preparing ‘Profit & Loss A/c’ we get to know about the profit earned or loss
incurred. By preparing the ‘Balance Sheet’ the financial position of the business can be ascertained, i.e.
position of assets and liabilities is depicted.
5.Helpful in decision making
Administration and management are able to take decisions on the basis of factual information under the
double-entry system of accounting.
Basic Accounting Concepts
Accounting is both a science and an art. And just like all other streams of science, even in accounting
certain rules are followed. Also, accounting is based on certain assumptions as well. We call these
accounting concepts or accounting concepts and principles. Let us study accounting concepts and
applications in brief.
Accounting Concepts and Conventions
Financial Accounting both practical and theory-based is built on some accounting principles. There are
some accounting equations that support these too. And these accounting principles are built on a few
assumptions that we call accounting concepts. These thirteen accounting concepts find wide acceptance
across the world by accounting professionals and auditors.
1] Business Entity Concept
This accounting concept separates the business from its owner. As far as accounting is concerned the
owner and the business are two separate entities. This will help the accountant identify the business
transactions from the personal ones. All forms of business organizations (proprietorship, partnership,
company, AOP, etc) must follow this assumption.
So for example, if the owner brings in additional capital into the business, we will treat this as
a liability on the balance sheet of the business.
2] Money Measurement Concept
This accounting concept states that only financial transactions will find a place in accounting. So only
those business activities that can be expressed in monetary terms will be recorded in accounting. Any
other transaction, no matter how significant, will not find a place in the financial accounts.
So for example, if the company underwent a major management overhaul this would have no effect on the
accounting records. This concept is actually one of the major drawbacks of accounting.
Do you know Accounting Standards, GAAP and IFRS ?
3] Going Concern Concept
The going concern concept assumes that a business will continue to operate indefinitely. So it assumes
that for the foreseeable future the business will not be winding up. This leads to the assumption that the
business will not have to sell its assets any time soon and it will meet all its obligations as well.
So it justifies the financial statements as a part of a continuous series of statements. The current
statements are tentative and only reflect the financial position of that particular period of time.
4] Accounting Period Concept
Every organization, according to its needs, chooses a specific period of time to complete an accounting
cycle. Generally, the time chosen is a year we call the accounting year. The time period is mentioned in
the financial statements.
So the indefinite life of an organization is divided into shorter, generally equal time period. This
facilitates a comparison of performances and allows stakeholders to get timely information. Also in most
cases, it is also a statutory requirement.
5] Cost Concept
This accounting concept states that all assets of the firm are entered into the books of account at their
purchase price (cost of acquisition + transport + installation etc). In the subsequent years to, the price
remains the same (minus depreciation charged). The market price of the asset is not taken into
consideration.
6] Dual Aspect Concept
This concept is the basic principle of accounting, it is the heart and soul. It basically is one of the golden
rules of accounting – for every credit, there must be a corresponding debit. So every transaction we record
must have a two-fold effect, i.e. it will be recorded in two places. This is the core concept of the double-
entry system of accounting.
So let us see an example of this in action. Say the business buys an asset worth Rs 10,000/-. So now the
Fixed Assets of the company will increase bt 10,000/-. But at the same time, the bank or cash balance will
reduce by 10,000/-. And so the transaction will have a dual effect in accounting. And also the Balance
Sheet will stay balanced.
7] Realization Concept
According to the realization accounting concept, revenue is only recognized when it is realized. Now
revenue is the cash inflow for a business arising from the sale of goods or services. And we assume this
revenue as realized only when it legally arises to be received. So in simpler terms, the profit earned will
be recorded when it is actually earned.
8] Matching Concept
This concept states that the revenue and the expenses of a transaction should be included in the same
accounting period. So to determine the income of a period all the revenues and expenses (whether paid or
not) must be included.
The matching accounting concept follows the realization concept. First, the revenue is recognized and
then we match the costs associated with the revenue. So costs are matched with revenue, the reverse
would be an incorrect system.

9] Full Disclosure Concept

This concept states that all relevant information will be disclosed in the accounting statements. A lot of
external users depend on these financial statements for their information to make investing decisions. So
no information/transactions etc of relevance to anyone of them will be omitted from these statements for
the benefit of the company.
10] Consistency Concept
Once the company decides on a certain accounting policy it should not be frequently changed. Unless
there is a statutory requirement or it allows better representation of the accounts accounting policies
should be consistent for long periods of time. This allows users to make inter-firm and inter-period
comparisons. Also, frequent changes in policies may be to manipulate the accounts and this must be
prevented.
11] Conservatism Concept
This accounting concept promotes prudence in accounting. It states that profit should not be included until
it is realized. However, losses even those not realized but with the remote possibility of occurring should
be included in the financial statements. So all losses are recognized – those that have occurred or are even
likely to occur. But only realized profits are recognized.
12] Materiality Concept
Materiality states that all material facts must be a part of the accounting process. But immaterial facts, i.e.
insignificant information should be left out. The materiality of a transaction will depend on its nature,
value and its significance to the external user. If the information can affect a person’s investing decision
then it is definitely a material fact.
13] Objectivity Concept
Finally, we come to the last accounting concept – objectivity. This concept states the obvious assumption
that the accounting transaction recorded should be objective, i.e. free from any bias of the person
recording it. So each transaction should be verifiable by supporting documents like vouchers, bills, letters,
challans, certificates, invoices etc.

Meaning of Accounting Standards

Accounting Standards are written policy documents issued by expert accounting body or by the
government or other regulatory body covering the aspects of recognition, measurement, treatment,
presentation, and disclosure of accounting transactions in financial statements
Definition of accounting standards:
According to ICAI (Institute of Chartered Accountants of India), Accounting Standards are “written
documents, policies, procedures issued by expert accounting body or government or other regulatory
body covering the aspects of recognition, measurement, treatment, presentation and disclosure of
accounting transactions in the financial statement”.
Objectives of accounting standards:
1.Standardization.
2.Comparability.
3.Reliability.
4.Fair Representations.
5.Increases the Arithmetic Accuracy.
6.Flexibility in preparation of Financial Statements.
Advantages:
1.It provides the accountancy profession with useful working rules.
2.It assists in improving quality of work performed by accountant.
3.It strengthens the accountant’s resistance against the pressure from directors to use accounting policy
which may be suspect in that situation in which they perform their work.
4.It ensures the various users of financial statements to get complete crystal information on more
consistent basis from period to period.
5.It helps the users compare the financial statements of two or more organisations engaged in same type
of business operation.

Types of Accounting Standards:

Accounting Standards may be classified by their subject-matter and by how they are enforced.
According to subject-matter, standards may be as follows:
(1) Disclosure Standards:
Such standards are the minimum uniform rules for external reporting. They require only an explicit
disclosure of accounting methods used and assumptions made in preparing financial statements. Such a
standard is likely to be controversial or creates conflicts of interest, particularly since it does not constrain
the choice of accounting policies or items to be disclosed.
(2) Presentation Standards:
They specify the form and type of accounting information to be presented. They may specify that certain
financial statements be presented (e.g., a funds-flow statement) or that items be presented in particular
order in financial statements. Such standards place only a little more constraint upon the choice of
accounting policies than disclosure standards and aim to reduce the costs to users of utilising financial
statements.
(3) Content Standards:
These standards specify the accounting information which is to be published.
There are three aspects to such standards:
(a) Disclosure:
Disclosure Content standards which specify only the categories of information to be disclosed.
(b) Specific:
Specific Construct standards which specify how specific items should be reported in accounts, e.g., a
standard which specifies that finance leases be capitalized and disclosed in balance sheet.
 (c) Conceptually:
Conceptually Based standards which specify the accounting treatment of items based upon a coherent and
complete framework of accounting. Another classification of accounting standards may be based upon
their method of preparation and enforcement.
Such standards are:
(1) Evolutionary and Voluntary Compliance Standards:
Such standards have evolved as best practices and represent the conventional approach to accounting. As
such, their general acceptability implies voluntary compliance by individual companies.

(2) Privately Set Standards:

Private accountancy bodies may formulate standards and devise means for their enforcement. Other
bodies such as trade associations or stock exchanges may set accounting standards for companies as a
condition of membership or listing. Enforcement powers are thus more readily available.
(3) Governmental Standards:
These standards may be laws relating to company accounting practices and disclosure, as in the case of
the Indian Companies Acts, or tax rules defining taxable profit. Alternatively, Government departments or
agencies may regulate accounting practices for certain industries. It is significant to note that the above
two classifications are complementary and not competitive.

LIST OF IND AS ISSUED BY MINISTRY OF CORPORATE AFFAIRS (MCA) Indian accounting

standards

IND AS No DESCRIPTION

Indian Accounting Standard (Ind AS)

First-time Adoption of Indian Accounting Standards
101

Indian Accounting Standard (Ind AS)

Share-based Payment
102

Indian Accounting Standard (Ind AS)

Business Combinations
103

Indian Accounting Standard (Ind AS)

Insurance Contracts
104

Indian Accounting Standard (Ind AS)

Non-current Assets Held for Sale and Discontinued Operations
105

Indian Accounting Standard (Ind AS)

Exploration for and Evaluation of Mineral Resources
106
Indian Accounting Standard (Ind AS)
Financial Instruments: Disclosures
107

Indian Accounting Standard (Ind AS)

Operating Segments
108

Indian Accounting Standard (Ind AS)

Financial Instruments
109

Indian Accounting Standard (Ind AS)

Consolidated Financial Statements
110

Indian Accounting Standard (Ind AS)

Joint Arrangements
111

Indian Accounting Standard (Ind AS)

Disclosure of Interests in Other Entities
112

Indian Accounting Standard (Ind AS)

Fair Value Measurement
113

Indian Accounting Standard (Ind AS)

Regulatory Deferral Accounts
114

Indian Accounting Standard (Ind AS)

Revenue from Contracts with Customers
115

Indian Accounting Standard (Ind AS) 1 Presentation of Financial Statements

Indian Accounting Standard (Ind AS) 2 Inventories

Indian Accounting Standard (Ind AS) 7 Statement of Cash Flows

Indian Accounting Standard (IndAS 8) Accounting Policies, Changes in Accounting Estimates and Errors

Indian Accounting Standard (Ind AS)

Events after the Reporting Period
10

Indian Accounting Standard (Ind AS)

Income Taxes
12

Indian Accounting Standard (Ind AS)

Property, Plant and Equipment
16

Indian Accounting Standard (Ind AS)

Leases
17

Indian Accounting Standard (Ind AS)

Employee Benefits
19

Indian Accounting Standard (Ind AS)

Accounting for Government Grants and Disclosure of Government Assistance
20
Indian Accounting Standard (Ind AS)
The Effects of Changes in Foreign Exchange Rates
21

Indian Accounting Standard (Ind AS)

Borrowing Costs
23

Indian Accounting Standard (Ind AS)

Related Party Disclosures
24

Indian Accounting Standard (Ind AS)

Separate Financial Statements
27

Indian Accounting Standard (Ind AS)

Investments in Associates and Joint Ventures
28

Indian Accounting Standard (Ind AS)

Financial Reporting in Hyperinflationary Economies
29

Indian Accounting Standard (Ind AS)

Financial Instruments: Presentation
32

Indian Accounting Standard (Ind AS)

Earnings per Share
33

Indian Accounting Standard (Ind AS)

Interim Financial Reporting
34

Indian Accounting Standard (Ind AS)

Impairment of Assets
36

Indian Accounting Standard (Ind AS)

Provisions, Contingent Liabilities and Contingent Assets
37

Indian Accounting Standard (Ind AS)

Intangible Assets
38

Indian Accounting Standard (Ind AS)

Investment Property
40

Indian Accounting Standard (Ind AS)

Agriculture
41
Most Important Differences between Accounting Standards and Accounting Principles/Concepts are as
follows:

Accounting standards Accounting principles /concepts

1. Accounting Standards are uniform rules. 1. Accounting Principles and Concepts are
various.
2. All the assesses (individuals, business
firms) should follow the Accounting 2. The assesses are at liberty to follow various
Standards. methods of accounting principles and concepts.
3. The State is the important body of 3. The State has not paid much interest in the
standard setter, having its own interests. accounting principles and concepts.
4. Accounting Standards are the new 4. Accounting principles and concepts are old-
innovation started since 1950s. fashioned and are customary in nature.
5. These have been statutorily, uniformly 5. These are being followed traditionally and in
and vigorously enforced. different ways.
6. These are rigid in nature. 6. These are flexible in nature.
7. The primary object of the accounting 7. These have multi-faceted objects, and
standards is correct measurement and practical and theoretical purposes.
disclosure.
8. Accounting Principles/Concepts are
8. The word ‘Standards’ itself is more extraordinary elusive terms. They are in no way
descriptive in nature. It implies a great bulk dependent upon changing fashions in business
of its ongoing efforts. or the evolving needs of the investment
community.
9. Accounting Standards create more
responsibility in the business circle, 9. These are less responsible.
accountants, chartered accountants and
auditors.