Introduction to Financial Accounting
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Welingkar’s Distance Learning Division
Financial Accounting
CHAPTER-1. Introduction to Financial Accounting
We Learn – A Continuous Learning Forum
Financial Accounting Introduction to Financial Accounting Chapter 01
ImportanceImportance Accounting all incomes, expenses, assets & liabilities in
monetary terms
is the sole determinant of all economic activities
of all businesses, industry, trade ,commerce as well as software giants, media
and even NGOs like CRY or Lijjat Papad.
Financial Accounting Introduction to Financial Accounting Chapter 01
ImportanceImportance
Accounting helps recording all financial transactions thus enabling preparation of these principal financial
statements:
- Trial Balance- Profit & Loss Account- Balance Sheet- Cash Flow Statement
Financial Accounting Introduction to Financial Accounting Chapter 01
ImportanceImportanceSeveral segments of the Society called
Stakeholders need to use Financial Statements.
Shareholders Investment Advisors Creditors Investment AnalystsSuppliers, Vendors Workers, EmployeesLocal, State, Central ResearchersGovernments Students of Finance
Financial Accounting Introduction to Financial Accounting Chapter 01
LimitationsLimitations
£ Reflects and records only monetary values of all transactions and hence quantitative measurements; hence qualitative aspects are ignored.
£ On account of inflation value of rupee fluctuates and decreases; but no adjustments made in the accounts.
Financial Accounting Introduction to Financial Accounting Chapter 01
ScopeScope
A financial accounting system provides
summarized and categorized information
about the company’s performance and state of affairs
mainly for external decision makers.
Financial Accounting Introduction to Financial Accounting Chapter 01
ScopeScope A financial accounting system provides summarized and
categorized information about the company’s performance and state of affairs mainly for external decision makers, allowing them to answer questions: $ Is the company earning satisfactory
income? $ How does the company compare in size
and profitability with competitors?$ Will the company be able to pay its debts when they become due?
Financial Accounting Introduction to Financial Accounting Chapter 01
GAAPGAAP
Financial accounting is governed by rules or guidelines collectively called
Generally Accepted Accounting Principles (GAAP).
Financial Accounting Introduction to Financial Accounting Chapter 01
GAAPGAAP
Financial accounting is governed by rules or guidelines collectively called Generally Accepted Accounting Principles (GAAP).
- many of these are mandatory by law of the country.
Financial Accounting Introduction to Financial Accounting Chapter 01
GAAPGAAP
Financial accounting is governed by rules or guidelines collectively called Generally Accepted Accounting Principles (GAAP).
- many of these are mandatory by law of the country.- those that are not mandatory, have considerable
persuasive force.
Financial Accounting Introduction to Financial Accounting Chapter 01
GAAPGAAP
Financial accounting is governed by rules or guidelines collectively called Generally Accepted Accounting Principles (GAAP).
- many of these are mandatory by law of the country.- those that are not mandatory, have considerable
persuasive force. - primary agency responsible for GAAP in India, is the
Standards Board of the Institute of Chartered Accountants of India.
Financial Accounting Introduction to Financial Accounting Chapter 01
ConceptsConcepts Є Entity Concept
“ An accounting entity is a separate
and distinct unit, standing apart from its
owners & shareholders”.
Financial Accounting Introduction to Financial Accounting Chapter 01
ConceptsConcepts Є Entity Concept “ An accounting entity is a separate and distinct unit, standing
apart from its owners & shareholders”.
Hence :
$ Share Capital and reserves of the company ( really belonging to owners) are shown under liabilities.
Financial Accounting Introduction to Financial Accounting Chapter 01
ConceptsConcepts Є Entity Concept “ An accounting entity is a separate and distinct unit, standing
apart from its owners & shareholders”. Hence :
$ Share Capital and reserves of the company ( really belonging to owners) are shown under liabilities. $ Losses are shown under assets ( because they represent what owners owe the business).
Financial Accounting Introduction to Financial Accounting Chapter 01
ConceptsConcepts Є Entity Concept Є Reliability Principle
“ accounting records and statements must be based on the most objective data available”
- hence importance of bills, invoices, vouchers during audit.
Financial Accounting Introduction to Financial Accounting Chapter 01
ConceptsConcepts Є Entity Concept Є Reliability Principle Є Historical Cost Concept
“ acquired assets, inventories and services are recorded at their actual costs.”
- Hence current market value not considered.
Financial Accounting Introduction to Financial Accounting Chapter 01
ConceptsConcepts Є Entity Concept Є Reliability Principle Є Historical Cost ConceptЄ Going Concern Concept
“assumes that the accounting entity will continue in the foreseeable future”
- hence fixed assets held by the business are always shown at actual cost less accumulated depreciation.
Financial Accounting Introduction to Financial Accounting Chapter 01
ConceptsConcepts Є Entity Concept Є Reliability Principle
Є Historical Cost Concept Є Going Concern Concept
Є Stable Monetary Unit Concept
“ business transactions are recorded in terms of single currency (rupees in India) , and no adjustment is made for inflation”
Financial Accounting Introduction to Financial Accounting Chapter 01
ConceptsConcepts Є Entity Concept Є Reliability Principle
Є Historical Cost Concept Є Going Concern Concept Є Stable Monetary Unit Concept
Є Full Disclosure Principle
“ all circumstances and events that are likely to make a difference to users of the financial statements must be disclosed”.
Financial Accounting Introduction to Financial Accounting Chapter 01
ConceptsConcepts Є Entity Concept Є Reliability Principle Є Historical Cost Concept Є Going Concern Concept
Є Stable Monetary Unit Concept Є Full Disclosure PrincipleЄ Materiality
“ The constraint of determining whether an item is large enough to likely influence a decision”.
Financial Accounting Introduction to Financial Accounting Chapter 01
ConceptsConcepts Є Entity Concept Є Reliability Principle Є Historical Cost Concept Є Going Concern Concept
Є Stable Monetary Unit Concept Є Full Disclosure Principle Є Materiality
Є Conservatism“ The constraint of determining whether an item is large enough to likely influence a decision”.
“ In addition to these principles, the Institute of Chartered Accountants of India has issued 28 accounting standards for compliance with varying degrees of legal compulsion”
Financial Accounting Introduction to Financial Accounting Chapter 01
“ The importance of accounting is that it is the universal language of business, and a basic understanding of it is necessary for almost any job in the business world!”
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