accounting

Accounting & Financial AnalysisAccounting & Financial Analysis

An IntroductionAn Introduction

Prof. Raman ChawlaProf. Raman Chawla

What is accountingWhat is accounting

Accounting is the art of identifying, Accounting is the art of identifying, recording, classifying and summarizing in recording, classifying and summarizing in a significant manner and in terms of a significant manner and in terms of money transactions and events which are, money transactions and events which are, in part at least of a financial character and in part at least of a financial character and interpreting the result thereof.interpreting the result thereof.

Accounting is a system in which all the Accounting is a system in which all the financial transaction are recorded in a financial transaction are recorded in a proper and system way.proper and system way.

Characteristics of financial Characteristics of financial accountingaccounting

Accounting is an art- Art is that part of knowledge which helps us in Accounting is an art- Art is that part of knowledge which helps us in attaining our aim. Accounting helps us in attaining our aim of attaining our aim. Accounting helps us in attaining our aim of ascertaining the financial results by showing the best way of ascertaining the financial results by showing the best way of recording, classifying and summarizing the business transaction.recording, classifying and summarizing the business transaction.

Recording, Classifying and summarizing- It provides information Recording, Classifying and summarizing- It provides information about all the transactions of financial in nature, recorded in journal, about all the transactions of financial in nature, recorded in journal, classifying in forms of ledgers, preparation of trial balance for classifying in forms of ledgers, preparation of trial balance for checking the accuracy of accounts.checking the accuracy of accounts.

In terms of money-Only those transaction are recorded which are in In terms of money-Only those transaction are recorded which are in terms of money.terms of money.

Interpreting the results- It provide the tools for their analysis, through Interpreting the results- It provide the tools for their analysis, through which various parties of business obtain information related to them. which various parties of business obtain information related to them.

Objectives or functions of Objectives or functions of accountingaccounting

Knowledge of sales and purchaseKnowledge of sales and purchase

Providing information of closing stockProviding information of closing stock

Knowledge of financial positionKnowledge of financial position

Information related for working capitalInformation related for working capital

Knowledge of profit & loss of the businessKnowledge of profit & loss of the business

Provide information to various partiesProvide information to various parties

Provide Information about embezzlement & fraudsProvide Information about embezzlement & frauds

Evidence in court.Evidence in court.

Accounting ProcessAccounting Process

Recording of transaction (Journal entry)Recording of transaction (Journal entry)

Classification (Ledger Posting)Classification (Ledger Posting)

Summarizing (Trial balance)Summarizing (Trial balance)

Interpreting (Income &position statement)Interpreting (Income &position statement)

Analysis of transactionsAnalysis of transactions

Branches of AccountingBranches of Accounting

Financial Accounting:- It is concerned with Financial Accounting:- It is concerned with recording and processing the financial recording and processing the financial transactions which affect the financial transactions which affect the financial position of the business. It leads to the position of the business. It leads to the preparation of income statement & preparation of income statement & position statement of the business.position statement of the business.

Cost accountingCost accounting

Cost accounting is concerned with the Cost accounting is concerned with the recording, classifying and appropriate recording, classifying and appropriate allocation of expenditure for the allocation of expenditure for the determination of the cost of products or determination of the cost of products or services and for the presentation of services and for the presentation of suitably arranged data for purposes of suitably arranged data for purposes of control and guidance pf the management.control and guidance pf the management.

Management accountingManagement accounting

It is concerned with the collecting It is concerned with the collecting systematically and regularly all such systematically and regularly all such information as will help management in information as will help management in discharging its functions of planning, discharging its functions of planning, control, decision making, etc. this is also control, decision making, etc. this is also named as accounting for management. named as accounting for management.

Users of accounting informationUsers of accounting information

OwnersOwnersManagementManagement

CreditorsCreditorsGovernmentGovernment

InvestorsInvestorsEmployeesEmployeesResearchesResearches

LendersLenders

Generally Accepted Accounting Generally Accepted Accounting principles (GAAP)principles (GAAP)

Business Entity ConceptBusiness Entity Concept

Going Concern conceptGoing Concern concept

Dual Aspect ConceptDual Aspect Concept

Cost conceptCost concept

Money measurement ConceptMoney measurement Concept

Accounting period ConceptAccounting period Concept

Matching ConceptMatching Concept

Accrual conceptAccrual concept

Business entity conceptBusiness entity concept

Business is treated as a unit or entity apart Business is treated as a unit or entity apart from its owner. The owner of an from its owner. The owner of an organization is always considered to be organization is always considered to be separate and distinct from the business separate and distinct from the business which he controls. that is why, the capital which he controls. that is why, the capital of the owner is always entered in liability of the owner is always entered in liability side of balance sheet. It is considered as side of balance sheet. It is considered as the creditor of the business.the creditor of the business.

Going concern conceptGoing concern concept

It is assumed that the business will exist It is assumed that the business will exist for the foreseeable future and for the foreseeable future and transactions are recorded from this point transactions are recorded from this point of view. It should continue to operate at of view. It should continue to operate at its present scale in the foreseeable its present scale in the foreseeable future. future.

Dual Aspect Concept Dual Aspect Concept

Financial accounting has dual aspect of Financial accounting has dual aspect of recording. Every debit has its recording. Every debit has its corresponding credit & every credit has its corresponding credit & every credit has its corresponding debit. The modern corresponding debit. The modern accounting system basically based on dual accounting system basically based on dual aspect of accounting. aspect of accounting.

Cost concept Cost concept

The underlying idea of cost concept is The underlying idea of cost concept is that-that-Assets is recorded at the price paid to Assets is recorded at the price paid to acquire it, that is, at cost, and..acquire it, that is, at cost, and..This cost is the basis for all subsequent This cost is the basis for all subsequent accounting for the asset. accounting for the asset. The change in the real worth of an asset The change in the real worth of an asset with the passage of time is not ordinarily with the passage of time is not ordinarily recorded in the account books.recorded in the account books.

Money measurement conceptMoney measurement concept

The money concept underlines the fact The money concept underlines the fact that in accounting every worth recording that in accounting every worth recording event, happening or transaction is event, happening or transaction is recorded in terms of money. In other recorded in terms of money. In other words, a fact or a happening which cannot words, a fact or a happening which cannot be expressed in terms of money is not be expressed in terms of money is not recorded in the accounting books.recorded in the accounting books.

Accounting period conceptAccounting period concept

Accounts choose some shorter and Accounts choose some shorter and convenient time for the measurement of convenient time for the measurement of income. Twelve- month period is normally income. Twelve- month period is normally adopted for this purpose. this time interval adopted for this purpose. this time interval is called accounting period.is called accounting period.

Matching conceptMatching concept

It is based on the determination of the It is based on the determination of the profit & loss of a particular accounting profit & loss of a particular accounting period is the process of matching the period is the process of matching the revenue earned during the period and the revenue earned during the period and the expenses incurred during the period to expenses incurred during the period to obtain such revenue.obtain such revenue.

Accrual concept Accrual concept

Under this method revenue recognition Under this method revenue recognition depends on its realization and not actual depends on its realization and not actual receipt. Likewise costs are recognized receipt. Likewise costs are recognized when they are incurred and not when paid. when they are incurred and not when paid.

Accounting conventionsAccounting conventions

ConsistencyConsistency

Full disclosureFull disclosure

ConservatismConservatism

ConsistencyConsistency

The convention of consistency aims at The convention of consistency aims at making the financial statements more making the financial statements more comparable and useful. The convention comparable and useful. The convention holds that in accounting processes, all holds that in accounting processes, all concepts, principles and measurement concepts, principles and measurement approaches should be applied in a similar approaches should be applied in a similar or consistent way from one period to or consistent way from one period to another period.another period.

Full disclosureFull disclosure

This convention specifies that there should This convention specifies that there should be complete and understandable reporting be complete and understandable reporting in the financial statements of all significant in the financial statements of all significant information relating to the economic affairs information relating to the economic affairs of the entity. All information which is of of the entity. All information which is of material interest to the users of the material interest to the users of the accounting information should be accounting information should be disclosed in accounting statements. disclosed in accounting statements.

ConservatismConservatism

This is the policy of playing safe. This is the policy of playing safe. Accounting permits for making reserves to Accounting permits for making reserves to face the uncertainty situations of the face the uncertainty situations of the business.business.

Double entry systemDouble entry system

It is a common system of book-keeping whereby It is a common system of book-keeping whereby the two aspects of every transaction i.e., It is based the two aspects of every transaction i.e., It is based

on the dual aspect concepton the dual aspect concept. . This method of writing This method of writing every transaction in two different accounts on every transaction in two different accounts on opposite sides for equal value is known as the opposite sides for equal value is known as the double entry system of book keeping. This is the double entry system of book keeping. This is the most accurate, complete and scientific system of most accurate, complete and scientific system of accounting.accounting.

Advantages of double entry systemAdvantages of double entry systemIt keeps a complete record of business transactions.It keeps a complete record of business transactions.

It provides complete information concerning the businessIt provides complete information concerning the business..

It provides a check on the arithmetical accuracy of books of It provides a check on the arithmetical accuracy of books of accounts.accounts.

It discloses the operating results .It discloses the operating results .

It makes possible a meaning full comparison of operating and It makes possible a meaning full comparison of operating and financial performance over a period of time and enable the financial performance over a period of time and enable the businessman to evaluate the progress of his business.businessman to evaluate the progress of his business.

It also enables a business man to plan and control his operations.It also enables a business man to plan and control his operations.

It reduces the chances of committing fraud.It reduces the chances of committing fraud.

Past details with regard to any account are easily and accurately Past details with regard to any account are easily and accurately obtainable in this system. obtainable in this system.

Some common terms in Some common terms in accountancyaccountancy

Book-Keeping:-It means recording of business Book-Keeping:-It means recording of business transactions in the books of accounts in accordance with transactions in the books of accounts in accordance with the principles of accounting.the principles of accounting.

Account:- It is a statement of various dealings that occur Account:- It is a statement of various dealings that occur

between a customer and the firm.between a customer and the firm.

Classification of accountsClassification of accounts

In order to understand the rules of double entry system, In order to understand the rules of double entry system, it is essential to know which classes of accounts are it is essential to know which classes of accounts are affected by a particular transaction. For this purpose, all affected by a particular transaction. For this purpose, all accounts are classified into two classes: accounts are classified into two classes: 1) personal accounts1) personal accounts2) Impersonal accounts2) Impersonal accountsA) real accountA) real accountB) nominal account B) nominal account

JournalJournal

The journal records all daily transactions of a business in the The journal records all daily transactions of a business in the order in which they occur. It is the book in which the transactions order in which they occur. It is the book in which the transactions are recorded first of all under the double entry system. Thus, are recorded first of all under the double entry system. Thus, Journal is a book of original record. A journal does not replace Journal is a book of original record. A journal does not replace but precedes the Ledger.but precedes the Ledger.

The process of recording transactions in a journal is termed as The process of recording transactions in a journal is termed as journalizing Performa of journal is given below.journalizing Performa of journal is given below.

DATEDATE PARTICULARSPARTICULARS L.FL.F AMOUNTAMOUNT AMOUNTAMOUNT

ExplanationExplanation

1. Date: The date on which the transaction was entered 1. Date: The date on which the transaction was entered is recorded here.is recorded here.2. Particulars: The two aspect of transaction are 2. Particulars: The two aspect of transaction are recorded in this column,i.e, the details regarding recorded in this column,i.e, the details regarding accounts which have to be debited and credited.accounts which have to be debited and credited.L.F: It means ledger folio. The transactions entered in L.F: It means ledger folio. The transactions entered in the journal are later on posted to the ledger. Procedure the journal are later on posted to the ledger. Procedure regarding posting the transactions in the ledger has been regarding posting the transactions in the ledger has been explained in the succeeding chapter.explained in the succeeding chapter.Debit. In this column, the amount to be debited is Debit. In this column, the amount to be debited is enteredenteredCredit. In this column, The amount to be credited is Credit. In this column, The amount to be credited is shownshown

Golden rules of accountingGolden rules of accounting

Real account- Debit what comes in, Real account- Debit what comes in, Credit what goes out.Credit what goes out.

Personal account- Debit the Personal account- Debit the receivers, Credit the givers.receivers, Credit the givers.

Nominal account- Debit the expenses Nominal account- Debit the expenses & losses, Credit the incomes & gains.& losses, Credit the incomes & gains.

ACCOUNTING STANDARDSACCOUNTING STANDARDS

Accounting bodies all over the world have Accounting bodies all over the world have tried to achieve some uniformity in the tried to achieve some uniformity in the accounting policies by prescribing certain accounting policies by prescribing certain accounting standards in order to narrow the accounting standards in order to narrow the range of alternatives available to an range of alternatives available to an organization in respect of collection and organization in respect of collection and presentation of accounting information.presentation of accounting information.

International accounting standardInternational accounting standard

Accounting bodies throughout the world are Accounting bodies throughout the world are striving to achieve a reasonable degree of striving to achieve a reasonable degree of uniformity in the accounting policies by uniformity in the accounting policies by prescribing certain accounting standards with prescribing certain accounting standards with respect to the collection and presentation of respect to the collection and presentation of accounting information. To formulate the accounting information. To formulate the accounting standards, they have established a accounting standards, they have established a committee called the International Accounting committee called the International Accounting standards committee (IASC) in 1973.Accounting standards committee (IASC) in 1973.Accounting bodies of most of the countries, including the bodies of most of the countries, including the institute of chartered accountants of India, are institute of chartered accountants of India, are the members of this bodies. the members of this bodies.

Objectives of committeeObjectives of committee

i) formulating, publishing and promoting i) formulating, publishing and promoting the use of the accounting standards the use of the accounting standards worldwide,worldwide,ii) To work for improvement.ii) To work for improvement.

The IASC has so far issued forty one The IASC has so far issued forty one accounting standardaccounting standard

Indian accounting standardsIndian accounting standards

Recognizing the need to harmonized the diverse Recognizing the need to harmonized the diverse accounting policies and practices prevalent in accounting policies and practices prevalent in India. The institute of chartered accountants of India. The institute of chartered accountants of India constituted an accounting standard board India constituted an accounting standard board (ASB) on 21(ASB) on 21stst april,1977.The main function of april,1977.The main function of ASB is to frame accounting standards which ASB is to frame accounting standards which would be formally issued under the authority of would be formally issued under the authority of the council of the institute of chartered the council of the institute of chartered accountants.accountants.

Importance of accounting standardsImportance of accounting standards

The role of mandatory accounting standards in The role of mandatory accounting standards in presenting clear-cut account on a uniform basis presenting clear-cut account on a uniform basis can not overemphasized. The standards can not overemphasized. The standards represent the ideal practice of accounting and represent the ideal practice of accounting and ensure comparability of accounts because of ensure comparability of accounts because of uniformity in the presentation. Hence, such uniformity in the presentation. Hence, such accounts are bound to show the clear position of accounts are bound to show the clear position of the state of affairs.the state of affairs.

Accounting standards issued by Accounting standards issued by ASB of ICAIASB of ICAI

The ASB of the institute of chartered The ASB of the institute of chartered accountants of India, has in line with the accountants of India, has in line with the international standards, issued twenty nine international standards, issued twenty nine standards to be followed by its members standards to be followed by its members while auditing the accounts of companies. while auditing the accounts of companies. These are – These are –

IASIAS

(AS 1) Disclosure of accounting policies(AS 1) Disclosure of accounting policies

(AS 2) Valuation of Inventories(AS 2) Valuation of Inventories

(AS 3) Cash flow statements(AS 3) Cash flow statements

(AS 4) Contingencies and events (AS 4) Contingencies and events occurring after the balance sheet dateoccurring after the balance sheet date

(AS 5) Net profit or loss for the period, (AS 5) Net profit or loss for the period, prior period and extraordinary items and prior period and extraordinary items and changes in accounting policieschanges in accounting policies

(AS 6) (AS 6)