financial accounting and its example

1. Financial
Accounting

2. Introduction to accounting

3. Introduction to Accounting
•Meaning and definition of Accounting
•Features of Accounting
•Functions of Accounting
•Objects of accounting
•Importance of accounting
•Uses of accounting
•Uses and users of accounting information
•The scope of and inter-relationship between
Financial, cost & management accounting

4. Accounting...
is the language of business.
Communicates the results of
operation and financial position of a
business to various stakeholders

5. Accounting
A process of identifying, recording,
summarizing, and reporting economic
information to decision makers in the form of
financial statements.

6. Definitions of Accounting
“Accounting is an art of recording, classifying, and
summarizing in a significant manner and in terms
of money transactions and events which are in
part at least of a financial character and
interpreting the results thereof”.
- American Institute of Certified Public Accountants(AICPA)

7. Definitions of Accounting
• “The process of identifying, measuring,
and communicating economic information
to permit informed judgements and
decisions by users of the information.”
—American Accounting Association (AAA)

8. FEATURES OF ACCOUNTING
1.It is the art of recording business transactions.
2.It is the art of classifying business transactions.
3.The transactions and events must be recorded in
monetary transactions and events.
4.It is the art of summarizing financial transactions.
5.It is the art of analysis and interpretation of these
transactions.
6.The results of these transactions must be
communicated to the concerned persons.

9. Functions of Accounting
• Recording
• Classifying
• Summarising
• Deal with financial transactions
• Interpretation
• Communicating

10. Functions of Accounting
1. Deals with financial transactions : Accounting records
only those transactions and events, which are of a
financial character.
2. Recording : This is the basic function of Accounting. It
is essentially concerned with not only ensuring that all
business transaction of financial character are in fact
recorded but also that they are recorded in an orderly
manner. Recording is done in the book called
“Journal”.

11. Functions of Accounting
Contd…
3. Classifying : Classification is concerned with the
systematic analysis of the recorded data, with
view to group transactions or entries of one
nature at one place .The work of classification is
done in the book called “Ledger”.

12. Functions of Accounting
Contd…
4. Summarizing : This involves presenting the classified
data in a manner, which is understandable and useful
to the internal as well as external end –users of
accounting statements. This process leads to the
preparation of the following statement :-
Trial Balance
Trading Account
Profit and Loss Account
Balance Sheet

13. Functions of Accounting
Contd…
5. Analysis and Interpretation : This is the final function
of accounting. The recorded financial data is analyzed
and interpreted in a manner that the end-users can make
a meaningful judgment about the financial condition
and profitability of the business operations.

14. Process of Accounting
Recording
Classifying
Summarizing
Journal
Ledger
Trial Balance
Preparation of Financial Statements

15. Objects Of Accounting
1. To maintain systematic records of the business
2. To ascertain profit or loss of the business .
3. To ascertain the financial position of the concern
-Nature and value of assets
-Nature and extent of liabilities
4. To facilitate rational decision-making:
To make information available to various groups and
users at a particular time to facilitate rational
decision-making.

16. IMPORTANCE OF ACCOUNTING
Accounting
Management Users with indirect
financial interest
Users with direct financial
interest

17. IMPORTANCE OF ACCOUNTING
1. Management or managers
Directors, officers of the company, managers, dept. heads
and supervisors
Decisions:
•Assessing profitability
•Financial performance in terms of plans & goals,
•Making plans and policies

18. IMPORTANCE OF ACCOUNTING
2. Users with direct financial interest
Present and potential shareholders, creditors, employees,
suppliers
Decisions:
•Share investment decision,
•Credit decisions,
•Assessing company status and prospects,
•Approving supply decisions

19. IMPORTANCE OF ACCOUNTING
3. Users with indirect financial interest
Customers, taxation authorities, financial analysts and
advisors, brokers, labour unions, consumer group,
general public, press etc.)
Decisions:
• Assessing tax
• Protecting investors and public interest
• Advising on investment decisions
• Setting economic policies
• Measuring social and environmental protection
programme
• Negotiation of labour agreements.

20. Users of Accounting Information
Financial Accounting
EXTERNAL USERS
• Security analysts &
Investors
• Creditors/suppliers
• Government & regulatory
authorities
• customers
• Competitors
• Researchers
• Taxing authorities

21. Users of Accounting Information
Financial Accounting
EXTERNAL USERS
• investors
• creditors
• regulators
• customers
• competitors
• owners
• managers
• employees
Financial Accounting
INTERNAL USERS
• Security analysts &
Investors
• Creditors/suppliers
• Government & regulatory
authorities
• customers
• Competitors
• Researchers
• Taxing authorities

22. Users of Accounting Information Users of Accounting Information
External users
make decisions
about the entity.
Internal users
make decisions
for the entity.

23. Uses Of Accounting
• Ascertaining the operation profit or loss
• Ascertaining the financial position of the
business
• Keeping systematic records
• Protecting and controlling business properties

24. Uses Of Accounting
• Facilitating rational decision-making
• Planning and control operations.
• Compliance with the legal requirements
• Making information available to various groups
and users at a particular time.
• Evidence in court in case of dispute

25. • Substitute of memory
• Settlement of taxation liability
• Comparative study
• Sale of business
• The amount ,size and causes of increase or decrease of
capital
Uses Of Accounting

26. LIMITATIONS OF ACCOUNTING
1. Records only monetary transactions
2. Effects of price level accounting is not considered
3. No realistic information due to concepts and
convention followed
4. Personal bias of accountant affects accounting
statements
5. Permits alternative treatment: Lack of uniformity in
accounting principles

27. LIMITATIONS OF ACCOUNTING
6. No real test of managerial performance as it can be
manipulated.
7. Historical in nature
8. Not helpful in price fixation
9. Cost control not possible
10. Technical subject

28. Branches of Accounting
Financial accounting
Cost accounting
Management accounting

29. Financial Accounting
It measures and records business transactions
in order to prepare financial statements
It provides financial statements based on
generally accepted accounting principles.
Its focus is on reporting to external parties.

30. Scope of Financial Accounting
1. Recording of information
2. Classification of data .
3. Making summaries
4. Dealing with financial transactions .
5. Interpreting financial information .
6. Communicating results
7. Making information more reliable .

31. Cost Accounting
It is the process of accounting for costs
It provides information for both management
accounting and financial accounting.
It measures and reports financial
and nonfinancial data.

32. Scope of Cost Accounting
1. Analysis and ascertainment of costs
2. Presentation of costs for cost reduction & cost control
3. Planning
4. Accumulation and utilization of cost data
5. Preparation of budgets and implementation of
budgetary control
6. Ascertaining profitability of each product
7. Providing useful data to the management for taking
decisions

33. Management Accounting
It measures and reports financial and non-financial
information that helps managers make decisions to
fulfill the goals of an organization.

34. Scope of Management Accounting
● Financial Accounting
● Interpretation of data
● Cost Accounting
● Control procedures & methods
● Financial Management
● Internal audit
● Budgeting & forecasting
● Tax accounting
● Inventory Control
● Office services
● Reporting to management

35. Differences Between Financial, Cost & Management Accounting
Basis Financial
Accounting
Cost Accounting Management
Accounting
Objects Record transactions
& determine
financial
position & profit or
loss.
Ascertainment, allocation,
accumulation and
accounting for cost
To assist the
management in
decision-making &
policy formulation.
Nature Concerned with
historical data.
Concerned with both past
and present
recorded(historical in
nature).
Deals with
projection of data for
the future (futuristic
in nature)
Principle
Followed
Governed by
GAAP
Certain principles
followed for recording
costs.
No set principles are
followed in it.
Data
used
Qualitative aspects
are not recorded
Only quantitative aspect is
recorded.
Uses both
quantitative and
qualitative concepts.

36. Differences Between Financial, Cost & Management Accounting
Basis Financial
Accounting
Cost Accounting Management
Accounting
Reporting
frequency
Generally at end
of year
As & when desired by
management
As & when desired by
management
Publication Published in case
of companies
NOT published NOT published
Information
recorded
Monetary
transactions
ONLY
Both monetary and
non-monetary
information.
Both monetary and
non-monetary
information
Forms of
Account
Accounts are
prepared to meet
the legal
requirements.
These are generally
kept Voluntarily to
meet the requirements
of the management.
These are generally
kept Voluntarily to
meet the requirements
of the management.

37. DEFINITIONS OF BASIC TERMS IN
ACCOUNTING

38. Business Transactions
Any exchange of money or money’s worth as goods and
services between two parties is called a business
transaction
An event which can be expressed in terms of money
May relate to purchase and sale of goods, receipt and
payment of cash and rendering of services by one party
to another.
Transactions may be:
I. Cash transaction: When payment is made immediately
II. Credit transaction: When payment is postponed to a
future date

39. • These are resources owned by the business which are
expected to give benefits in the future.
• Assets may be fixed assets or current assets
• Assets include:
– land
– building
– equipment
– goodwill
Assets
It is any physical thing or right owned which has money
value.

40. Liability
• These are amounts owed by the enterprise
to the outsiders i.e. to all others except the
owner
• These are claims of outsiders on assets of
the firm.

41. Capital (Owner’s Equity)
• It is the claim of owners on the assets of an
enterprise.
• It is the excess of assets over liabilities i.e. it
is what’s left of the assets after liabilities
have been deducted.
• Also known as networth

42. Revenues
• They are amounts received or to be
received from customers for:
– sales of products or
– performance of services or
– in return of use of the firm’s assets by outsiders.
• Revenues include the following
– Sales proceeds
– fees for performance of services
– rent
– interest

43. • An expense is the amount incurred in the process of
earning revenue.
• They are amounts that have been paid or will be paid
later for costs that have been incurred to earn revenue.
• Include:
– salaries and wages
– Utilities payments
– supplies used
– advertising
Expenses

44. Income
• It is excess of revenue over expense
• It is the favourable change in owner’s equity
which results from operations i.e. it is an inflow of
assets or decrease in liabilities resulting in increase
in capital.

45. Trade Debtor(Accounts Receivable)
• A debtor is a person who owes money.
• The amount due from a debtor as per books of account
is called book debt or Accounts Receivable.
• A trade debtor is a person who owes money as a result
of purchase of goods or services on credit

46. Trade Creditor (Accounts payable )
•A creditor person to whom money is owing or payable.
•A trade creditor is a person who owes to whom money is
owing or payable as a result of purchase of goods or services
on credit
•Accounts Payable is a liability that results from the
purchase of goods or services on account (on credit)

47. • Takes place when an asset or service is acquired.
• Include both payment of a sum immediately and a
promise to pay it at a future date.
• An expense is an expenditure whose benefit finishes or
is enjoyed immediately such as salaries, rent, etc.
• An expenditure which will provide benefits in the future
is considered as an asset
• A loss is an expenditure without any benefit to the
concern
Expenditure

48. Other Definitions to remember:
Inventory (stock)
• Includes all articles, commodities or merchandise in
which the business deals.
• Includes goods held by a firm for resale to customers
(finished goods) and raw materials
Vouchers
• Any written document in support of a business
transaction.

49. Other Definitions to remember:
Turnover:
Total trading income from cash sales and credit sales.
Drawings
Any amount or goods withdrawn by the owner of the
business for personal use

50. Basis of Accounting
Are approaches for reporting/recognising
revenues and expenses
The basis for accounting are as follows:
• Cash basis
• Accrual basis

51. Cash Basis of Accounting
Actual cash receipts and actual cash payments are
recorded
Revenue reported when cash is received
Expense reported when cash is paid
Income = cash receipts – cash payments
Does not properly match revenues and expenses

52. Accrual Basis of Accounting
Revenue reported when earned irrespective of
whether received or not
Expense reported when incurred irrespective of
whether or not cash has been paid
Properly matches revenues and expenses in
determining net income
Also referred to as mercantile system of accounting

53. System Of Book Keeping
Book keeping is the art of recording business transactions
in a regular and systematic manner.
This recording of transactions may be done according to any
of the following two systems:-
1. Single Entry System
2. Double Entry System

54. OVERVIEW OF FINANCIAL
STATEMENTS
i. Income Statement (Profit & Loss
Account)
ii. Balance Sheet
iii. Cash Flow Statement

55. Income Statement
Income Statement
For the year ended March 31, 2014 (All figures in Rs. ‘000)
Sales 16,000
Less: Cost of Goods Sold 9830
Gross Profit 6170
Less: Operating Expenses 1460
EBIDTA 4710
Less: Depreciation 700
Operating Profit (EBIT) 4010
Less: Interest Paid 360
Net Profit Before Tax(EBT) 3650
Less: Income Tax @ 30% 1095
Net profit after tax (EAT) 2555
Less: Dividends 200
Retained Earnings 2355

56. Balance Sheet as at 31 March, 2014
Liabilities Rs. Assets Rs.
Owners' Equity : Fixed Assets:
Opening balance of Capital Land & Buildings
Add/Less: Net Profit Plant & Machinery
Add capital introduced during
the year
Furniture & Fixtures
Less: Drawings
Total
Non-Current Liabilities Current Assets:
Loan from Bank Stock
Trade debtors
Current Liabilities Cash at Bank
Trade Creditors Cash in Hand
Bank Overdraft Investments
Intangible Assets
Total Total

57. Balance Sheet as at 31 March, 2014
Balance Sheet as at 31st March, 2014
Particulars
Current
Year
Previous
Yr
I. EQUITY AND LIABILITIES
(1) Shareholder's Funds
(2) Share application money pending
allotment
(3) Non-Current Liabilities
(4) Current Liabilities
Total
II.ASSETS
(1) Non-current assets
(2) Current assets
Total

58. for the year ended March 31st, 2014
Rs.(in lakhs)
Cash Flow Statement
Cash flow from Operating Activities 4400
Cash flow from Investing Activities (3600)
Cash flow from Financing Activities 520
Net Increase (Decrease) in Cash and Cash
Equivalents 1320
Opening Balance of Cash and Cash Equivalents 360
Closing Balance of Cash and Cash Equivalents 1680