Part A - Introduction To Financial Accounitng

Symbiosis Institute of Telecom Management
ACCOUNTING CONCEPTS
A.V.Chirputkar, Faculty - Finance, SITM.
M.Com. F.C.A. M.B.F. (ICAI), C.I.S.A. (USA)
2006 Cisco Systems, Inc. All rights reserved.
Cisco Public
INTRODUCTION
Accounting is; An Information System :Accounting System should generate information to meet the requirements of users i.e. Internal management & Outsiders. Language of business Useful to personal and business life
Social Science
SITM
2006 Cisco Systems, Inc. All rights reserved. Cisco Public
21-Oct-12
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Types of Business Entities

Corporate Non Corporate
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Definition
Definition by American Institute of CPA: Accounting is an art of recording, classifying & summarizing in a significant manner & in terms of money, transactions & events which are , in part at least, of a financial character & interpreting the results thereof. Definition by American Accounting Association: the process of identifying, measuring & communicating information to permit judgment & decisions by the users of accounts.
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Functions of Accounting
Recording Classifying
Summarising
Deals with financial transactions Analysis & Interpretation
Communication
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Users of Accounts & their Information Needs

Internal Management Investors Employees Lenders, Suppliers & other creditors Customers
Government
Public at large
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Objectives of Accounting
To keep systematic records To protect business properties To ascertain operational profit / loss To ascertain financial position To facilitate in decision making others
To comply with law

Disclosure to stakeholders
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Meaning & Scope

There are four sub-parts of accounting; Book keeping; Financial Accounting; Management Accounting; Social Responsibility Accounting ( also other parts like Inflation Accounting etc)
(Book keeping is different from Accounting, Accounting relates to other subjects like economics, law, statistics etc.)
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Accounting Elements
Assets Balance Sheet Liabilities Balance Sheet Equity Balance Sheet ( The Balance Sheet gives you a financial position) Income Profit & Loss Account
Expenses Profit & Loss Account

( The profit & loss account gives you profit / loss)
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Accounting Procedure
We follow double entry system of Accounting developed in 15th century in Italy by Luca Pascioli The basic accounting equation is;
Equity + Liabilities = Assets

The entire accounting is based on three fundamental rules of debit and credit. Every transaction has two aspects which can be recorded with the help of these rules.
Three types of Accounts Personal, Real, Nominal
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Accounting Basics
Money has two aspects receipt and payment i.e. inflows (credit) and outflows (debit). The Receipt indicates Income and Liabilities and outflow indicates Expenses and Assets. Income and Expenses are called as nominal accounts. Income an inflow so credit, liabilities an inflow hence a credit and other persons who give credit like supplier;
For inflow credit rule applies - Credit all income and gains, credit the giver and credit what goes out.
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Accounting Basics
For an outflow, debit rule applies. Debit all expenses and losses, debit what comes in after you spent on asset and debit the receiver.
Rule for Nominal Account Debit all expenses and losses and credit all incomes and gains.
Rule for Real Account Debit what comes in and credit what goes out.
Rule for personal Account Debit the receiver and credit the giver.
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Accounting Structure
Structure:
Business Entity
Financial Objectives
Profit Maximisation
Wealth Maximisation
Financial Statements
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Structure
Financial Statements Cash Flow Statement

Cash inflow & Cash outflow
Profit & Loss Account Income & Expenses
Balance Sheet Assets & Liabilities
Types of Accounts
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Structure
Types of Accounts
Real Accounts Personal Accounts
Nominal Accounts Profit & Loss Account
Balance Sheet
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Rules of Debit & Credit

Increase in Asset Debit Decrease in Asset Credit
Increase in Liability/ Capital Credit

Decrease in Liability / Capital Debit Expenses / Losses Debit
Income / Gains - Credit
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Accounting Principles
Meaning & Importance of Accounting Principles GAAP Generally Accepted Accounting Principles
Accounting Principles consists of

Accounting Concepts & Accounting Conventions
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Accounting Concepts
The term concept includes those basic assumptions or conditions upon which the science of accounting is based.
The term conventions include those customs or traditions which guide accountant while preparing the accounting statements.
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Accounting Concepts
Separate Entity Concept Going Concern Concept Money Measurement Concept Cost Concept Dual Aspect Concept Accounting Period Concept
Matching concept
Realisation concept
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Accounting Conventions
Convention of Conservatism Full Disclosure
Consistency
Materiality (Reliability and Objectivity)
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Fundamental Accounting Assumptions

There are three fundamental assumptions; Going Concern
Consistency
Accrual Separate disclosure is required if fundamental accounting assumptions are not followed.
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Accounting Policies
It includes basic principles, conventions, rules in preparing financial statements. The management should select a policy which suits an organisation. The following factors should be considered while selecting an appropriate accounting policy and preparing a financial statement; Prudence, Substance over form and Materiality.
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Basic Financial Statement

There is an accounting process; The end result of accounting process is Financial Statement which includes Income Statement ( P & L Account) Statement of Retained Earnings
Balance Sheet
Cashflow Statement
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Four Phases in Accounting Process

Journalising of transactions & events; Ledger posting & balancing;
Preparation of Trial balance;

Preparation of Final Accounts.
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Legal Aspect of Financial Statements

In India, every company presents its financial statement in the form and contents prescribed u/s 211 of the Companies Act, 1956. (Refer to Companies Bill 2009 Section 117) The form and content requirement is given in Sch. VI to the Companies Act, 1956. For Insurance Company Insurance Act, 1938, General Insurance Business (nationalisation ) Act, 197 and IRDA Act 1999. Other legal provisions shall also be considered.
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Nature of Financial Statement

It is a statement of recorded facts. Use of Accounting conventions, principles.
Application of Accounting assumptions.

Personal judgment. Applying Accounting Standards/(IFRS) and guidance notes.
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Limitations of Financial Statement

These are interim reports (Periodicity convention) Requires personal judgment in preparation It considers only financial factors Not absolutely final and accurate Window dressing It is prepared focusing shareholders
Existence of different principles, methods like depreciation, valuation etc.
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Recent Trends in Presentation of Financial Statements

Summarised Balance Sheet and Profit & Loss Account Vertical Form Cashflow statement Disclosure of Accounting Policies Summarised highlights of financial information
Management discussion and analysis
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Different types of Reports accompanied

Risk Management report Corporate Governance report Shareholder information Additional information Selected historical data
Human resource and Brand Valuation

Environment, health and safety reports
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Developments
Role of Computerisation; Changes in Legal provisions;
Introduction of IFRS
Introduction of XBRL Globalisation & Liberlisation
Financial Reporting Systems by Companies
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Part A - Introduction To Financial Accounitng

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Part A - Introduction To Financial Accounitng

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Symbiosis Institute of Telecom Management

A.V.Chirputkar, Faculty - Finance, SITM.

M.Com. F.C.A. M.B.F. (ICAI), C.I.S.A. (USA)

2006 Cisco Systems, Inc. All rights reserved.

Types of Business Entities

Users of Accounts & their Information Needs

To comply with law

Meaning & Scope

Expenses Profit & Loss Account

Equity + Liabilities = Assets

Three types of Accounts Personal, Real, Nominal

Financial Statements Cash Flow Statement

Profit & Loss Account Income & Expenses

Balance Sheet Assets & Liabilities

Nominal Accounts Profit & Loss Account

Rules of Debit & Credit

Increase in Liability/ Capital Credit

Income / Gains - Credit

Accounting Principles consists of

Fundamental Accounting Assumptions

Basic Financial Statement

Four Phases in Accounting Process

Preparation of Trial balance;

Legal Aspect of Financial Statements

Nature of Financial Statement

Application of Accounting assumptions.

Limitations of Financial Statement

Existence of different principles, methods like depreciation, valuation etc.

Recent Trends in Presentation of Financial Statements

Management discussion and analysis

Different types of Reports accompanied

Human resource and Brand Valuation

Financial Reporting Systems by Companies

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