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Financial accounting

lecture 01

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Financial accounting

  1. 1. Financial Accounting 1 Lecture – 01 Financial Accounting II Dr. Muhammad Naveed PhD (Corporate Finance)
  2. 2. Financial Accounting 2 Lecture – 01 What is Accounting? • It is a way of recording, analysing and summarizing transactions of a business. What is Financial Accounting • It is the maintenance of daily record of ALL financial transactions in such manner that it would help in the preparation of suitable information regarding the financial affairs of a business or an individual. Why is Financial Accounting Needed?
  3. 3. Financial Accounting 3 Lecture – 01 Objectives of Accounting? To keeping systematic record To ascertain the results of the operation To ascertain the financial position of the business To portray the liquidity position To protect business properties To facilitate rational decision – making To satisfy the requirements of law
  4. 4. Financial Accounting 4 Lecture – 01 What is Financial Statement? • The objective of financial statement is to provide information about the financial positions, performance and changes in financial positions of an enterprise that is useful to a wide range of users in making economic decisions (IAS-1) Users of Financial Statements and Accounting Information? • Managers of the company • Shareholders of the company • Trade Contacts • Taxation Authorities
  5. 5. Financial Accounting 5 Lecture – 01 Users of Financial Statements and Accounting Information? • Government and their agencies • Employees of the Company • Financial Analyst and advisers • Researchers • The Public Types of Financial Statements? a)Income Statement b)Balance Sheet c)Owner’s Equity Statement d)Cash Flow Statement
  6. 6. Financial Accounting 6 Lecture – 01 Desirable Qualities of Accounting Information • Relevance • Comprehensibility • Reliability • Completeness • Objectivity • Timelines • Comparability
  7. 7. Financial Accounting 7 Lecture – 01 The Regulatory System • National/Local Legislation • Accounting Concepts/Conventions • Accounting Standards • Generally Accepted Accounting Principles
  8. 8. Financial Accounting 8 Lecture – 01 What is Business?? ?
  9. 9. Financial Accounting 9 Lecture – 01 Forms of Business Organization •Sole Proprietorship •Partnership •Company
  10. 10. Financial Accounting 10 Lecture – 01 Forms of Business Organizations Proprietorship: An unincorporated business owned by one person. Characteristics: •80% of the total number of business world •easy to set up •Single Taxation •Legal Entity is the person who is the owner. •Unlimited Liability/Limited Life •Difficult to get financing
  11. 11. Financial Accounting 11 Lecture – 01 Forms of Business Organizations Partnership: “unincorporated business owned by two or more persons” •Similar to proprietorship but many owners •It can be registered or not •Limited life (upon the death of owner/partner)
  12. 12. Financial Accounting 12 Lecture – 01 Forms of Business Organizations Corporation •80% of global sales of products or services •A limited company registered by the state. •Can be public Ltd. or private Ltd. company •Unlimited life/limited liability •Perpetual and going concern •Separate Legal Entity
  13. 13. Financial Accounting 13 Lecture – 01 COMPANY FORMATION
  14. 14. Financial Accounting 14 Lecture – 01 Company Formation Procedure Procedure of formation of a joint stock company may be divided into four stages: 1. Promotion Stage Idea of forming a company Floatation work by promoters Detail investigation whether the idea is really profitable? Total amount of capital required to start/run? Necessary documents required to gain incorporation certificate.
  15. 15. Financial Accounting 15 Lecture – 01 Company Formation Procedure 2. Incorporate Stage • Firm is incorporated as it gets certificate of incorporation from the registrar of the companies. For this purpose following documents are to be filled by promoters of the company (i) Memorandum of Association (MOA) (ii) Article of Association (AOA) (iii) Notice and Address of head office (iv) List of directors (v) Consent of directors in written (vi) Directors contract of qualification to purchase shares (vii) Statutory declaration of fulfillment of legal conditions of incorporations. • Documents (iv, v and vi) are not required for private companies.
  16. 16. Financial Accounting 16 Lecture – 01 Company Formation Procedure 3. Raising of Share Capital • After the Incorporation of the public company, the directors will file a copy of the prospectus with the registrar. • It is an invitation to the public for subscription. • Investors can get the prospectus and application form free of charge from the company’s bankers. • Bankers will submit application along with the companies and directors' will, and then precedes the allotment of the shares to the applications.
  17. 17. Financial Accounting 17 Lecture – 01 Company Formation Procedure 4. Trading or Business Commencement Certificate: • Company through incorporation begins its business as it gets the Trading certificate upon fulfillment of following: a) Declaration by the company that the minimum subscription amounts as per prospectus is satisfied. b) Declaration by the company that all the directors have taken up and paid for their qualification shares. c) Declaration by company those all legal requirements for commencement of business has taken up.
  18. 18. Financial Accounting 18 Lecture – 01 Memorandum of Association (MOA) MOA “Charter of the Company” i. Name Clause ii.Registered Office Clause iii.Object Clause iv.Liability Clause v.Capital Clause vi.Subscription Clause
  19. 19. Financial Accounting 19 Lecture – 01 Article of Association (AOA) AOA • Second importance to memorandum of association is AOA. • AOA is the regular rules & laws governs internal organization and conduct of a company. Content of Article: Amount of share capital issue Rights of shareholders regarding voting/ dividend /return of capital. Rates regarding issuance of shares and debentures. Rates regarding appointment of directors, managing directors, agents, secretaries and treasures.
  20. 20. Financial Accounting 20 Lecture – 01 Article of Association (AOA) Qualification, remuneration, powers and liabilities of directors Declaration of dividend Matters relating to accountant audit. Rates regarding the winding up the company.
  21. 21. Financial Accounting 21 Lecture – 01 MOA and AOA These are documents that are necessary at the time of formation of a company and must be deposited with the registrar of companies who approves the incorporation of the company. MOA and AOA stand for memorandum of association and articles of association respectively and are important source of information for shareholders and other stakeholders in a company that has been duly incorporated. MOA AOA It is the Charter of the company that outlines the nature of the business, aims and objectives. AOA outlines the rules and regulations for internal management in doing the business.
  22. 22. Financial Accounting 22 Lecture – 01 MOA and AOA MOA AOA It is must for all the companies It is not must for all the companies MOA is supreme document of the company AOA cannot violate MOA. Alteration of MOA is restricted. Can be altered through special resolution. Taken together MOA and AOA are referred to as Constitution of the company.
  23. 23. Financial Accounting 23 Lecture – 01 Public VS Private Sector The differentiation between public and private sectors’ organizations is very significant in order to know their different features, aims and objectives, and scope of work. Public Sector organizations are budgeted and run by state. They are often called as state organizations. Private Sector encompasses organizations with primary objective of profit earning and further divided in to two kinds: • Public Limited Company • Private Limited Company
  24. 24. Financial Accounting 24 Lecture – 01 Private Limited Company Public Limited Company Cannot offer its share to general public. Can offer its shares to general public. Members (2 to 50) Members (atleast 7 members) Any 2 members can subscribe their names in MOA and AOA along with other requirements of the companies’ ordinance 1984. They can also apply to SEC for company’s registration. Any 7 members can subscribe their names MOA and AOA along with other requirements of the companies’ ordinance 1984. They can also apply to SEC for company’s registration. Each subscriber of the MOA shall write opposite to his name, the number of shares held by him/her.
  25. 25. Financial Accounting 25 Lecture – 01 The shareholders elect 2 members of the company as Directors. These directors form a board of directors to run the affairs of the company. The shareholders elect 7 members of the company as Directors. These directors form a board of directors to run the affairs of the company. Word “(Private) Limited” is added at the end of the name of a private limited company. Word “Limited” is added at the end of the name of a public limited company. Financial statements are private Financial statements are public
  26. 26. Financial Accounting 26 Lecture – 01 Company Registration in Pakistan Which law is applicable for incorporation of companies? • Companies Ordinance, 1984 • Companies (General Provisions and Forms) Rules, 1985 • Single Member Companies Rules, 2003 • Code of Corporate Governance for limited companies. How many types of Companies are there? 1. Company limited by shares 2. Company limited by guarantee (e.g. Charities) 3. Unlimited company