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Financial Accounting-An Overview: Course Objective

Financial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13e

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43 views6 pages

Financial Accounting-An Overview: Course Objective

Financial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13eFinancial Accounting AHM 13e

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John Doe
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Financial Accounting- An Overview

Faculty: K.S.Ranjani
Email: [email protected]

Course Objective:

To orient students to accounting, make them aware of the basic concepts in accounting,
enabling them to understand the accounting process and understanding Financial
Statements

Contents to be covered
Introduction to Accounting, Origin of Accounting, Definition
Basic Accounting concepts, Balance Sheet
Basic Accounting concepts, The Income Statement
Other concepts of Income- Accrual and Cash
Accounting Records and Systems-Accounting Process- Transaction Analysis

Introduction to Accounting, Origin of Accounting, Definition

Accounting is basically an information system- Why do we need this system? What


purpose would it serve? Who would benefit?

How does accounting provide for operating information, financial accounting


information, management accounting information and tax accounting information?

Definition:

According to American Accounting Association, accounting is the “process of


identifying , measuring, and communicating economic information to permit informed
judgements and decisions by users of the information”.

Functions of Accounting:

Recording/Book keeping: The first level of capturing data and recording them is the
process of book keeping. The recording is done in a book and is called as journal.

Classifying: This involves analysis of the data with the objective of grouping transactions
or entries of one nature at one place. This is done through a “ledger”. The book of
primary data is a journal and classified data is called ledger.
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Summarising: the data that have been recorded and classified, would by now appear in
groups- ie. Similar transactions involving similar heads of accounts will be recurring and
they could be summarized and organized into a Trial Balance.

Analysis: The Trial Balance is the summation of the data in a more organized form. This
in turn facilitates the data to be converted into an Income Statement and Balance Sheet.

Interpreting Accounting also interprets the recorded financial data in a manner that the
end users can make a meaningful judgement of the financial position and profitability of
the business.

The foundation of Accounting consists of Generally Accepted Accounting


Standards(GAAP) and in the Indian context, Accounting Standards(AS). These have
evolved over a period of time on principles of objectivity, relevance and feasibility.

Numerical Examples for preparation of Income Statement and Balance Sheet:

1. X bought 500 pens. The cost of each pen is Rs.50/- He sold 486 pens at Rs.62/-
per pen. Calculate the profit made by X.
2. Assume that he paid a servant Rs.500/- for shop assistance and calculate the
revised profit.
3. Assume that X would have otherwise been able to earn a salary of Rs.2000/- that
he could not earn because he was busy selling pens. Calculate the revised profit.
4. Ram had Rs.10,00,000/- with him on 1st of January. He bought a house worth
Rs.5,00,000/- and a car for Rs.1,50,000/-(Tata Nano, of course). Try to make his
Balance Sheet.

Basic Accounting concepts, Balance Sheet

Accounting Principles:

Accounting Principles are important because accounting is used as an information


system. Hence it is important that there is consistency and uniformity in the process of
preparation of the accounts. Mr.Arun, for example, may be sitting in Lucknow and
preparing a set of accounts. Mr.Joshi, may be doing it from Ahmedabad. But can they
report the same transaction in two different ways? If they did it, then can a third person
understand what the transaction means? Can he take any meaningful decision based on
the report?

This is why there is a need to have accounting principles, so as to ensure that there is a

Basic concepts that would assist us in preparation of Balance Sheet are:


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Money Measurement- You can only record transactions that are measurable in monetary
terms-For eg. If Aishwarya Rai is on the Board of your company, you cannot “account”
for it.

Entity Concept- Business is different from the person owning/ running it

Going Concern concept- A business is assumed to continue its operations for an


indefinite period of time

Cost concept- Assets are recorded at historical cost, not on any other basis

Dual Aspect concept- All transactions carry a dual impact on the accounting
records-“own “ and “owe” or “debit “ and “credit” Therefore Assets= Liabilities
+Owners’ equity

Basic Accounting concepts, The Income Statement

Basic concepts that would help us prepare income statement are:

Accounting Period-Accounting transactions measured for a period of time

Conservatism concept- Account for possible expenses but only for income which is
certain

Realization The amount to be recognized as revenue should be reasonably certain to be


realized

Matching concept –When a given event affects both revenues and income , both should
be recognized in the same accounting period

Consistency- The same set of Accounting principles should be applied across various
accounting periods, unless there are sound reasons to change the same

Materiality Events without significance need not be recorded- only those events that will
justify the work of recording them need to be recorded

Other concepts of Income- Accrual and Cash

Accrual basis uses the matching concept and measures income for a period as the
difference between the revenues recognized in the period and the expenses that are
matched with those revenues.

Cash basis accounting records transactions on actual collection and disbursement of cash.
It is rare to come across this form of accounting. This is not recognized by law either.
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Recognising income and accounting for expenses in such a way as to postpone income
tax liability is the Income Tax Accounting. Tax can only be postponed. It is not legally
possible to avoid taxes.

Accounting Records and Systems-Accounting Process- Transaction


Analysis

Types of Accounts- Personal, Real and Nominal

Personal Account- transactions between persons

Rule: Debit the Receiver


Credit the Giver

Real Account- Land, Building etc-Transactions that bring about tangible or real items.

Rule: Debit what comes in


Credit what goes out

Nominal Account- Transactions that are cash transactions and are identified by the name

Rule: Debit all expenses and losses


Credit all income and gains
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