Accounting and financial analysis

Accounting is the language of business. The
affairs and the results of the business are
communicated to others through accounting
information, which has to be systematically
recorded and presented.

Dr. Akansha Jain email:
dr.akanshajain@gmail.com blog –
http://drakanshajain.blogspot.in
2

Accounting can be defined as the process of
identifying, measuring, recording and
communicating the economic events of an
organization to the interested users of the
information.
http://drakanshajain.blogspot.in 3

 American Institute of certified Public Accountants(
AICPA) defined Accounting as “ Accounting is art
of recording, classifying and summarizing in
terms of money transactions and events of
financial character and interpreting the result
thereof.” (1941)
 American Accounting Association(AAA) defined
accounting as “ Accounting is the process of
identifying, measuring and communicating
economic information to permit informed
judgments and decisions by users of
information.” (1966)


 Economic events
 Identification of transactions
 Measuring of transactions
 Recording of transactions
 Classifying of transactions
 Summarizing
 Analysis and Interpretation
 Communication to interested users.

5

An economic event has been defined as „a
happening of consequence‟ to a business
entity. Economic events are classified into

• External types

• Internal types.

An external event which involves the
transfer or exchange of something of value
between two or more entities.

Dr. Akansha Jain email: dr.akanshajain@gmail.com blog –

Sale of goods to customers.
• Payment of monthly rent to the landlord.
Purchase of raw materials by an
enterprise from some other business
enterprise.
Rendering of services to customers, etc.
dr.akanshajain@gmail.com blog – 8

An internal event is an economic event that
occurs entirely within one enterprise.

Eg : Supply of raw materials or equipment
by the stores department to the
manufacturing department.

It means determining what to record, i.e. to
identify recordable events. It involves
observing activities and selecting those
events that are considered to be evidence of
economic activity
Activities are of two types
1) Monetary
2) Non monetary Dr. Akansha Jain email:
10

It means quantification, including estimates
of business transactions into financial terms,
i.e. rupees and paise. If an event cannot be
quantified in monetary terms, it is not
considered for recording in financial
accounts. Dr. Akansha Jain email:

Once the economic events are identified
and measured in financial terms, they are
recorded, i.e. a chronological diary of these
measured events is kept in an orderly and
systematic manner( Journal)


 After
recording transactions in journal or
subsidiary book, the transactions are
classified by grouping similar transactions
at one place. ( Ledger)


 Itis art of presentation of classified data in
a manner which is understandable and
useful to management and other users. It
involves preparation of Trial Balance,
Income statement and Balance Sheet.


 The recorded transaction is analyzed to
make useful interpretations. This process
provides meaningful conclusion from
information


The information is communicated through
the preparation and distribution of
accounting reports to the interested users
so that they can make suitable decisions.


 Maintenance of business records
 Protecting properties of business
 Communicating the results
 Fulfillment of legal requirement
 To facilitate decision making
 Evidence in court of law
 Replaces memory

Dr. Akansha Jain email: dr.akanshajain@gmail.com blog – 17

Different categories of users need different
kinds of information for making decisions.
These users can be divided into :

•Internal Users; and

•External Users.

These are the persons who manage the
business, i.e. management at the top,
middle, and lower levels. Their requirements
of information are different because they
make different types of decisions.
19

All persons other than internal users come
in the group of external users. External
users can be divided into two groups:
those having direct interest; and
those having indirect interest
in a business organization.


Owners

Researchers management

Users of
accounting
Government creditors

Potential
Employees
investors


 Financial
Accounting
 Cost Accounting
 Management Accounting


22

 Keeping systematic records
 Preparation of financial statements
 Comparison of results
 Decision making
 Evidence in courts
 Provides information to interested parties
 Taxation benefits

23

 Records only monetary transactions
 Data based on estimates
 Valuation of fixed assets
 Inventory valuation
 Window dressing is possible

24

 Bookkeeping represents a process of recording actual
transactions of a business. Bookkeeping does not involve
any analysis of the accounting data. Bookkeeping is an
integral part of accounting, and thus, it prepares necessary
financial information for accounting.
 Bookkeeping includes recording, classifying and
summarizing data .


Assets are things of value or economic resources
used by the business in its operations.
Fixed Assets : Fixed Assets are assets held
on a long-term basis. Ex:-Land, Building,
Machinery, Plant, Furniture and Fixtures, etc
Current Assets : Current Assets are assets
held on a short-term basis. Ex:-Debtors, Bills
receivable, Stock(Inventory), Cash and Bank
balances etc.


These are obligations or debts that the
enterprise must pay in money or services at
some time in the future.

• Long-term liabilities are those that are
usually payable after a period of one year

• Short-term liabilities are obligations that
are payable within a period of one year.

Investment by the owner for use in the firm
is known as capital. Owner‟s equity is the
ownership claim on total assets. It is equal
to total assets minus total liabilities.


These are the amounts the business earns
by selling its products or providing services
to customers. Sources of revenue common
to many businesses are: sales, fees,
commission, interest, dividends, royalties,
rent received, etc.

These are costs incurred by a business in
the process of earning revenue. Generally,
expenses are measured by the cost of
assets consumed or services used during an
accounting period. Example :- depreciation,
rent, wages, salaries, interest, costs of light
and water, telephone, etc.


Purchases are total amount of goods procured
by a business on credit and for cash, for use
or sale.
In a trading concern, purchases are made of
merchandise for resale with or without
processing.
In a manufacturing concern, raw materials are
purchased, processed further into finished
goods and then sold.
Purchases may be cash purchase or credit
purchase. dr.akanshajain@gmail.com email:
Dr. Akansha Jain
blog – 32

Sales are total revenues from goods or
services sold or provided to customers.
Sales may be cash sales or credit sales.


Stock (Inventory) is a measure of
something in hand – goods, spares and
other items – in a business.

Goods which have not been sold on the
date on which the balance sheet is prepared
are called closing stock.
34

Debtors are persons and/or other entities who
owe to an enterprise an amount for receiving
goods and services on credit.

The total amount standing against such persons
and/or entities on the closing date, is shown in the
Balance Sheet as Sundry Debtors on the asset
side.

Creditors are persons and/or other entities who
have to be paid by an enterprise an amount for
providing the enterprise goods and services on
credit.

The total amount standing to the favour of such
persons and/or entities on the closing date, is
shown in the Balance Sheet as Sundry Creditors
on the liability side.

Accounting principles can be subdivided into
two categories:

Accounting Concepts; and

Accounting Conventions.


Accounting Concepts
Accounting Conventions
The term „concept‟ is used to connote
accounting postulates, that is necessary
assumptions and conditions upon which
accounting is based. The term „convention‟
is used to signify customs and traditions as
a guide to the presentation of accounting
statements. Dr. Akansha Jain email:

Accounting Concepts
• Business Entity Concept
• Money Measurement Concept
• Cost Concept
• Going Concern Concept
• Dual Aspect Concept
• Realization Concept
• Accounting Period Concept

• Convention of Consistency
• Convention of Full Disclosure
• Convention of Conservation
• Convention of Timeliness


Accounting Concepts
The term „concept‟ is used to connote
accounting postulates, that is necessary
assumptions and conditions upon which
accounting is based.


Business is treated as a separate entity or
unit apart from its owner and others. All the
transactions of the business are recorded in
the books of business from the point of view
of the business as an entity and even the
owner is treated as a creditor to the extent
of his/her capital.


In accounting, we record only those
transactions which are expressed in terms
of money. In other words, a fact which can
not be expressed in monetary terms, is not
recorded in the books of accounts.


Transactions are entered in the books of
accounts at the amount actually involved.
Suppose a company purchases a car for
Rs.1,50,000/- the real value of which is
Rs.2,00,000/-, the purchase will be recorded
as Rs.1,50,000/- and not any more. This is
one of the most important concept and it
prevents arbitrary values being put on
transactions. Dr. Akansha Jain email:

It is persuaded that the business will exists
for a long time and transactions are
recorded from this point of view.


Each transaction has two aspects, that is,
the receiving benefit by one party and the
giving benefit by the other. This principle is
the core of accountancy.


For example, the proprietor of a business
starts his business with Cash Rs.1,00,000/-,
Machinery of Rs.50,000/- and Building of
Rs.30,000/-, then this fact is recorded at
two places. That is Assets account (Cash,
Machinery & Building) and Capital accounts.
The capital of the business is equal to the
assets of the business.

Thus, the dual aspect can be expressed as
under

Capital + Liabilities = Assets
or
Capital = Assets – Liabilities

Accounting is a historical record of
transactions. It records what has happened.
It does not anticipate events. This is of
great important in preventing business firms
from inflating their profits by recording sales
and income that are likely to accrue.

Strictly speaking, the net income can be
measured by comparing the assets of the
business existing at the time of its
liquidation. But as the life of the business is
assumed to be infinite, the measurement of
income according to the above concept is
not possible. So a twelve month period is
normally adopted for this purpose. This time
interval is called accounting period.


The term „convention‟ is used to signify
customs and traditions as a guide to the
presentation of accounting statements.


In order to enable the management to draw
important conclusions regarding the working
of the company over a few years, it is
essential that accounting practices and
methods remain unchanged from one
accounting period to another. The
comparison of one accounting period with
that of another is possible only when the
convention of consistency is followed.

This principle implies that accounts must be
honestly prepared and all material
information must be disclosed therein. The
contents of Balance Sheet and Profit and
Loss Account are prescribed by law. These
are designed to make disclosure of all
material facts compulsory.


Financial statements are always drawn up
on rather a conservative basis. That is,
showing a position better than what it is,
not permitted. It is also not proper to show
a position worse than what it is. In other
words, secret reserves are not permitted.


• Keeping systematic records
• Protecting properties of the business
• Communicating the results
• Meeting legal requirements


The first function of accounting is to keep a
systematic record of financial transactions,
to post them to the ledger accounts and
ultimately prepare final statements.


The second important function is to protect
the property of the business. The system
accounting is designed in such a way that it
protects its assets from an unjustified and
unwarranted use.


The fourth and the last function of
accounting is to meet the legal
requirements under the Companies Act,
Income Tax Act, Sales Tax Act and so on.


Recording transactions in subsidiary books.
Classifying data by posting from subsidiary
books to the accounts.
Closing the books and preparation of final
accounts.


• Cash System

• Single Entry System

• Double Entry System


This system takes into account only cash
receipts and payments on the assumption
that there are no credit transactions. Even if
there are any, they will not be recorded.
This system may be suitable for charitable
institutions like schools, colleges, social
clubs, etc.


As the name itself implies, it deals with only
one aspect of transaction. This system
recognizes cash and personal items of the
transactions and it ignores the impersonal
items. So it is incomplete, inaccurate and
unscientific.


This is the most scientific system that
recognizes both the aspects of each
transaction and also records each aspect.
This system takes into account every
business transaction in its double aspect,
i.e., receiving benefit by one party and
giving the like benefit by another. So it
records the two-fold aspect of every
business transaction. Jain email:
Dr. Akansha

Example: When „A‟ purchases a car, he
receives the benefit in the form of a car and
gives the benefit in the form of money.
Similarly, the car seller receives the benefit
in the form of money and gives the benefit
in the form of a car.


Definition
The process by which the dual aspects of
business transactions are recorded is known
as the double entry book-keeping. It is a
complete book-keeping in the sense that it
records all the two aspects, debit and credit
in each business transaction, in equal value.


Every business deal with other “Person”, possesses
“Assets”, pay “Expenses” and receive “Income”.
So from the above, we can see every business
has to keep
• An account for each person
• An account for each asset and
• An account for each expense or income.


• Accounts in the names of persons are known as
“Personal Accounts”
• Accounts in the names of assets are known as
“Real Accounts”
• Accounts in respect of expenses and incomes
are known as “Nominal Accounts”


ACCOUNTS

PERSONAL IMPERSONAL
ACCOUNTS ACCOUNTS

REAL NOMINAL
ACCOUNTS ACCOUNTS

Accounts in the name of persons are known as
personal accounts.
Eg: Babu‟s A/C,
Babu & Co.‟s A/C,
Outstanding Salaries A/C, etc.


These are accounts of assets or properties. Assets
may be tangible or intangible. Real accounts are
impersonal which are tangible or intangible in
nature.
Eg:- Cash a/c, Building a/c, etc are Real
Accounts related to things which we can
feel, see and touch.
Goodwill a/c, Patent a/c, etc Real Accounts
which are of intangible in nature.

These accounts are impersonal, but invisible and
intangible. Nominal accounts are related to those
things which we can feel, but can not see and
touch. All “expenses and losses” and all “incomes
and gains” fall in this category.
Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest
Received A/C, Commission Received A/C,
Discount A/C, etc.


Each accounts have two sides – the left side and
the right side. In accounting, the left side of an
account is called the “Debit Side” and the right
side of an account is called the “Credit Side”. The
entries made on the left side of an account is
called a “Debit Entry” and the entries made on the
right side of an account is called a “Credit Entry”.


Debit the Receiver
Personal
Account
Credit the Giver

Debit what comes in
Real Accounts Credit what goes
out
Debit all Expenses
Nominal and Losses
Accounts Credit all Incomes
and Gains
73

• Find out the two accounts involved in the
transaction.

• Check whether it belongs to Personal, Real or
Nominal account.

• Apply the debit and credit rules for the two
accounts.


• General Journal
• Special Journals
• Purchase Book
• Sales Book
• Purchase Return Book
• Sales Return Book
• Bills Receivable Book
• Bills Payable Book
• Cash Book
• Petty Cash Book

Journal is the prime or original book of entry in
which all transactions are recorded in the form of
entries. Journalising is an act of recording or
entering transactions in a Journal in the order of
date.
Date Particulars LF Debit Credit
Amount Amount


Jan 1, 2012 Prakash Started a business Rs.
15,000/-
Date Particulars L Debit Credit
F Amount Amount
2012 Cash a/c Dr. 15,000
Jan 1 To Capital a/c 15,000
(Being business started
with cash.)


a) Started business with Rs50000
b) Purchase goods for cash Rs16000
c) Paid rent for cash Rs2000
d) Paid rent for the month Rs6000
e) Purchase equipments for cash Rs6000
f) Paid miscellaneous expense Rs2600
g) Paid creditors Rs11000


Accounting and financial analysis

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Accounting and financial analysis

Similar to Accounting and financial analysis (20)

More from Dr. Akansha Jain

More from Dr. Akansha Jain (7)

Recently uploaded

Recently uploaded (20)

Accounting and financial analysis