Class 2

Financial AccountingFinancial AccountingFinancial AccountingFinancial Accounting

Prof Padmini SrinivasanProf Padmini Srinivasan

You cant manage what you cant measure

Recap of Class 1Recap of Class 1Recap of Class 1Recap of Class 1

Identification

Select economic events

Business transactions

Recording

Record, classify

and summarize

Accounting Reports

SOFTBYTEAnnual Report

Accountingreports

Analyze and interpretfor users

Communication

ACCOUNTING SYSTEMACCOUNTING SYSTEM

FILTERS

Audit

Input Process Output

Monetary

Financial Statements• Accounting Reports• The Statement of Financial

position• The statement of Financial

performance• The Cash Flow statement

Balance Sheet

Accounting Concepts• The Entity Concept• Going Concern Concept• Money Measurement

The Accounting Equation

Assets

Owners’Equity

Liabilities

Assets = Liabilities + Owners’ Equity

Understanding Understanding Financial statements Financial statements

Understanding Understanding Financial statements Financial statements

Balance Sheet

EQUITY AND LIABILITIES

1)Shareholders’ Funds

2) Non-current liabilities

3) Current liabilities

ASSETS1) Non-current assets

(2) Current assets

Form as per Schedule VI of Companies Act.

Balance Sheet

EQUITY AND LIABILITIESShareholders’ Funds(a) Share capital(b) Reserves and surplus(2) Share Application moneypending allotment(3) Non-current liabilities(a) long-term borrowings(b) Deferred tax liabilities(c) Other long termliabilities(d) long-term provisions(4) Current liabilities(a) Short term borrowings(b) Trade payables(c) Other current liabilities(d) Short-term provisions

ASSETS-Non-current assets(a) Fixed Assets i. Tangible assets ii) Intangible assetsIii) Capital Work in progress(b) Non-current Investments(c) Deferred tax assets (net)(d) Long-term Loan and Advances(e) Other Non-current assets(2) Current assets(a) Current investments(b) Inventories(c) Trade receivables(d) Cash and cash equivalents(e) Short-term loans and advances(f) Other current assets

ASSETSASSETS

Assets are resources owned /(controlled) by a business.

They are capable of providing future benefits or cash flows

They must arise out of a past identifiable event and are objectively measurable

They are usually recorded at cost

ASSETSASSETS

They arise because of the investment decisions of the firm

BROADLY CLASSIFIED AS:Non current Assets (other than current assets (see

definition of current, later)

(a) Fixed Assets(b) Non-current Investments(c) Deferred tax assets (net)(d) Long-term Loan and Advances(e) Other Non-current assets

FIXED ASSETS

• General Characteristics• Meant to be used for producing goods or

services, renting out or for administrative use• Useful life of more than 1 year• They are not held for sale in the ordinary

course of business, Building, computer etc• Eg: Machinery• Disclosed as: • Gross Block• Less: Accumulated depreciation• Net Block Materiality

Concept

INVESTMENTS• Are assets held for “Accretion in wealth”

through distribution or for capital appreciation

• Eg. Investment in Shares and other securities of companies etc

• Classified as: • Long term/Current (based on holding 12

months• Current Investments with current Assets• Others under Non current asset• Quoted or unquoted (For example say in any

stock exchange )

Current Assets• Current assets are assets that form part of

the circulating capital (operating cycle) and take interrelated form, it is expected to be realized in, or is intended for sale or consumption

• It also includes assets that are expected to be converted into cash in next 12 months from the Balance sheet date

• Eg:- Inventory ( Raw Material Stock, Work in Progress, Finished Goods)

• Receivables (Sundry Debtors and Others)• Cash

LIABILITIES

LIABILITIESLIABILITIES

Liabilities are claims against assets.They are present obligations.Generally discharging the liability will

result in the decline of the assetsBroadly Classified into:

Debt (Borrowings) Current Liabilities

An entity can fall under all three categories too

OWNERS EQUITYOWNERS EQUITY

The ownership claim on total assets is known as Shareholder’s equity.

Divided into units called as a share, with a face value.

The share holders equity in a company’s balance sheet consists of:

• 1 Paid-UP (contributed) capital• 2 Retained earnings (Reserves

and Surplus)

Shareholders Equity / Share Capital

Amount contributed by owners towards the capital of the firm

They are residual claims on the total assets of the company.

They are divided into units called sharesTypes: Equity share• Preference shares

Retained Earnings/ Reserves and Surplus

Retained Earnings/ Reserves and Surplus

• Reserves and Surplus or Retained Earnings : Is the Net Profit or Loss from the business operations which is not distributed to the Shareholders ( retained in the business)

•INCREASE DECREASE•INCREASE DECREASE

Investments by

shareholders

Revenues

Owners’ Equity

Dividends toshareholders

Expenses

INCREASES AND DECREASES INOwners Equity

INCREASES AND DECREASES INOwners Equity

Non current Liabilities

• Loans: Amounts borrowed by the firm to be repaid as per agreed terms and are usually interest bearing

• Non current Provisions and other non current liabilities

Current Liabilities and Provisions

• Current Liabilities• Amounts due on account of

purchase goods/services and is expected to be settled in the company’s normal operating cycle;

• c. it is due to be settled within twelve months after the reporting date;

Current Liabilities and Provisions

• Provisions• Are also liabilities payable But the

exact amount cannot be quantified i.e they require estimation

• Eg: Provision for Doubtful debts etc

Question ?• All performance (operations)

changes the Balance sheet or the financial position of the company

• Can we say that all changes in the balance sheet is on account of performance ??