Financial Accounting

Introduction to accounting

Introduction

to

Accounting

Meaning and definition of Accounting Importance of accounting Uses and users of accounting information The scope of and inter-relationship between Financial, cost & management accounting

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

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

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)

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.

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

Objects Of Accounting
1. To maintain 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 make information available to various groups and users at a particular time to facilitate rational decision-making.

IMPORTANCE OF ACCOUNTING:
Accounting Management Users with indirect financial interest

Users with direct financial interest

IMPORTANCE OF ACCOUNTING:
Accounting is important to the following parties

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

IMPORTANCE OF ACCOUNTING:
2. 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 programmed, Negotiation of labour agreements.

IMPORTANCE OF ACCOUNTING:
3. 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

Users of Accounting Information

Users of Accounting Information

External users make decisions about the entity.

Internal users make decisions for the entity.

Users of Accounting Information

Security analysts & Investors Creditors/suppliers Government & regulatory authorities customers Competitors Researchers Taxing authorities

Financial Accounting
EXTERNAL USERS

Users of Accounting Information

Security analysts & Investors investors Creditors/suppliers creditors Government & regulatory regulators authorities customers customers Competitors competitors Researchers Taxing authorities

Financial Accounting
EXTERNAL USERS

Financial Accounting
INTERNAL USERS

owners managers employees

Uses Of Accounting
Ascertaining the operation profit or loss Ascertaining the financial position of the business Keeping systematic records Protecting and controlling business properties Facilitating rational decision-making

Planning and control operations.

Uses Of Accounting
Compliance with the legal requirements Making information available to various groups and users at a particular time. Evidence in court in case of dispute Substitute of memory Settlement of taxation liability Comparative study Sale of business The amount ,size and causes of increase or decrease of capital .

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 according statements 5. Permits alternative treatment

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. Lack of principles uniformity in accounting

11. Technical subject

DEFINITIONS OF BASIC TERMS IN ACCOUNTING

Business Transactions
Any exchange of money or moneys worth as goods and services between two parties is called a business transaction
It is an event which can be expressed in terms of money

Assets

It is any physical thing or right owned which has money valu 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

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.

Capital (Owners 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 whats left of the assets after liabilities have been deducted. Also known as networth

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 firms assets by outsiders.

Revenues include the following

Sales proceeds fees for performance of services rent interest

Expenses
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

Income
It is excess of revenue over expense

It is the favourable change in owners equity which results from operations i.e. it is an inflow of assets or decrease in liabilities resulting in increase in capital.

Other Definitions to remember:

Creditor - one to whom money is owed Debtor - one who owes money

Inventory(stock)
- goods held by a firm for resale to customers Account payable (Trade creditors) - a liability that results from the purchase of goods or services on account

Other Definitions to remember:

Drawings - any amount or goods withdrawn by the owner of the business for personal use Expenditure -It is any payment of a sum immediately or promise to pay at a future date resulting when an asset or service is acquired. -An expense is an expenditure whose benefit expires or is enjoyed immediately -A loss is an expenditure without any benefit to the concern.

Other Definitions to remember:

Vouchers - Any written document in support of a business transaction.

Compound entry - a transaction that affects more than two accounts

Branches of Accounting
Financial accounting Cost accounting

Management accounting

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.

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 .

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.

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 .

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

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

Differences Between Financial, Cost & Management Accounting

Basis
Objects

Nature

Financial Accounting Record transactions ,determine financial position & profit/ loss. Concerned with historical data.

Management Accounting Ascertainment, To assist the allocation, accumulation management in and accounting for cost decision-making & policy formulation.
Concerned with both past and present recorded(historical in nature). Deals with projection of data for the future (futuristic in nature)

Cost Accounting

Differences Between Financial, Cost & Management Accounting

Basis Financial Cost Accounting Accounting Principle Governed by Certain principles Followed GAAP followed for recording costs. Reporting Reports Gives information of frequency operating costs to management results at the as & when desired. end of years. Data used Qualitative Only quantitative aspects are aspect is recorded. not recorded Management Accounting No set principles are followed in it. Gives information of to management as & when desired. Uses both quantitative and qualitative concepts.

Distinction Between Financial, Cost & Management Accounting

Basis Financial Accounting Publication Accounts are published for the benefit of the public. Information Monetary transactions recorded. Forms Account Cost Management Accounting Accounting These are not These are not published. published. Reports are meant only for internal use only Uses both Uses both monetary and monetary and nonnon-monetary monetary information. information. of Accounts are Accounts kept Accounts kept prepared to meet Voluntarily to Voluntarily to meet the legal meet managements requirements. managements requirements. requirements.

Basis of Accounting

Are approaches for reporting/recognising revenues and expenses

The basis for accounting are as follows:

Cash basis
Accrual basis

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

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