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A Brief Introduction to

Financial Accounting

Dr. Rajib Bhattacharya


Associate Professor
Need of Financial Accounting in Business
Studies

Prime objective of
PROFIT
doing business

Revenue Less Expenses


How will the business generate revenue?
 The business will have to have some properties which
will help the business to generate revenue;

 These properties can be tangible or intangible;

 These properties are called ASSETS;

How will the business acquire Assets?


 The business, which is a separate entity from that of
the owners, has no resource of its own;

 Hence to acquire assets it needs money or credit from


others to acquire assets;

 These money and credits from others (including


owners) are called LIABILITIES
There is a need to measure four things in order to have a
complete information regarding the operations of a
business:

• Revenue;
The Four
• Expense;
Pillars of
Financial
• Assets;
Accounting
• Liabilities;

 In order to measure anything, we need a SCALE;

 Income, Expense, Assets & Liabilities are measured in


MONETRARY UNITS.
Financial Accounting is that set of techniques, which:

Measures Revenue, Expenses, Assets and Liabilities in


Monetary Terms
AND
Presents these measured amounts in Statements which
are drawn up in SPECIFIC FORMATS (specially for
corporate organizations)

Why is a specific format needed?


To standardize the presentations (accounting
communications) for facilitating comparison of
presentations of different businesses by
STAKEHOLDERS.
Stakeholders are entities who are interested or might be
interested in the affairs of the organization i.e. the owners,
lenders, creditors, government and general public.
Stakeholders are very important for corporates.
Information Name of the Format
Reported Statement governed by

Statement of Part II of
Revenue Profit & Loss Schedule III of
& Or The
Expenses Income Companies
Statement Act, 2013

Part I of
Assets Schedule III of
& Balance Sheet The
Liabilities Companies
Act, 2013
The following two very important statements are also
drawn up and presented along with the Income
Statement and Balance Sheet:

 The Cash Flow Statement; and

 The Statement of Change in Equity


Income Statement, Balance Sheet, Cash Flow Statement
along with other ancillary statements are together called
Financial Statements.

The Financial Statements of Corporate Organizations are


statutorily required to be drawn up, get them audited
and communicated to the stakeholders within stipulated
time lines.

Note: Apart from the above three statements, other


statements may also be prepared which may / may not
be mandatory.

The Financial Statements along with the statutory &


other non-financial statements are contained in the
ANNUAL REPORT.
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Usual contents of an Annual Report
 Message from the CEO
 Brief history of the Company till date
 Mission, Vision, Objectives and Obligations
 Board of Directors
 Core Team & Senior Management Team
 Main Offices & Major Units
 Auditors, Registrar , Transfer Agent, Stock Exchanges, Bankers,
Trustee
 Group Companies & Joint Ventures
 Financial Highlights (usually for the last 5 – 10 years)
 Awards & Recognitions
 Directors' Report (followed by reports on SC/ST/OBC, CSR,
Secretarial Audit, Energy Conservation, Extract of Annual Return)
 Management’s Discussion & Analysis
 Business Responsibility Report
 Report on Corporate Governance
 Standalone Financial Statements with Notes & Auditor’s Report
Consolidated Financial Statements
 Notice
 Attendance Slip & Proxy Form 9
GAAP (Generally Accepted Accounting
Principles) – The Code of Conduct for
Financial Accounting
Accounting Principles

Accounting Concepts Accounting Conventions

Separate Entity
Going Concern
Materiality
Consistency
Money Measurement
Accounting Period
Historical Cost
Prudence /
Dual Aspect
Conservatism
Substance over Form
Accrual & Matching
Realization
The Concept of Dual Aspect
 Financial Accounting deals with summarization of
numerous financial transactions;

 A transaction essentially involves two entities between


whom value is exchanged i.e. one of them gives and the
other takes;

 This Giving & Taking, is conceptualized between two


Accounts and in the parlance of Financial Accounting,
are called “Debit” and “Credit”, though there are
specific rules regarding this called the Golden Rules;

 Thus every financial transaction has a Dual Effect;

 Dual Aspect can also be expressed through the


Accounting Equation:
ASSETS = CAPITAL + LIABILITIES
 In India, The Accounting Standard Board (ASB)
Institute of Chartered Accountants of India has
formulated Indian Accounting Standards which govern
the accounting for specific transactions in accordance
with the GAAP;

 International Financial Reporting Standards (IFRS)


issued by International Accounting Standards
Committee (IASC) govern the accounting procedure for
specific transactions in the global arena;

 The Accounting Standards in every nation are being


revised to reduce the differences with the IFRS
(harmonization).
Basic Anatomy of Income Statement

Expenses Amounts Income Amounts


Current Previous Current Previous
Year Year Year Year

The Income Statement shows the Operating Results for


the Accounting Period
Basic Anatomy of Balance Sheet

Liabilities Amounts Assets (Uses of Amounts


(Sources of Fund) Current Previous Funds) Current Previous
Year Year Year Year

The Balance Sheet shows the Financial Position i.e. the


break-up of total Assets as at the end of the Accounting
Period vis-à-vis how the assets have been funded.
Format of Cash Flow Statement

Particulars Amounts
Net Cash Flow from Operating Activities $$$$$$$$
Net Cash Flow from Investing Activities $$$$$$$$
Net Cash Flow from Financing Activities $$$$$$$$
Net Cash Flow $$$$$$$$
Add: Opening Balance of Cash & Cash Equivalents $$$$$$$$
Closing Balance of Cash & Cash Equivalents $$$$$$$$

The format for the Cash Flow Statement is contained in


Indian Accounting Standard 7.

This statement shows the amount and nature of cash


flows during the accounting period.
Thus four fundamental queries of stakeholders
regarding the performance and financial position of any
organization in which they have either invested or are
contemplating to invest in, are addressed by Financial
Statements:

 How valuable are the assets of the organization?

 How did the organization raise the funds required to


finance these assets?

 How profitable are these assets?

 How much uncertainty (or risk) is associated with


these assets & in the modes of financing them?

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Linkage of Financial Accounting with
Management Accounting, Cost Accounting
and Financial Management
Financial
Accounting

Management
Accounting

Cost
Accounting

Financial
Management
How does knowledge of Financial Statements help in
managerial decision making?

Past Oriented

Business Financial Financial


Transactions Accounting Statements

Management
Accounting

Extracts
Decisions for
Hidden
the Future
Information

Future Oriented

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