TOI Accounting Fundamentals

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Accounting Fundamentals

Kamalesh Mandlik


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Agenda

Need for Accounting - Why to do accounting?

Understanding of Financial Statements

What is accounting? Accounting Concepts

Rules of Accounting

Detailed accounting entries


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Need for Accounting Why to do Accounting ?

Stakeholders need to know financialstatus

Is business making or losing money?

How much is business worth?

Statutory requirements


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Users of Financial Statements

Financial Analysts

Investment Bankers

Creditors Stock Exchanges

Individual Investors

Credit Rating Agencies


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Understanding FinancialStatements


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Financial Statements

Profit & Loss A/c (OR Income

Statement)

Balance Sheet


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Profit & Loss A/c (OR IncomeStatement)

Contents

Revenues generated

Expenses Incurred Operating Profit before Interest, Tax

and Depreciation

Net Profit / Loss before tax

Profit after tax


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Balance Sheet

Contents

Assets (Fixed & Current)

Liabilities (Long-Term & Current)Owners Equity


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Ratio Analysis

Balance Sheet ratiosCurrent ratio, Debt- Equity ratio etc.

Profitability Ratios

Operating Profit ratio, Net Profit ratio, EPS

Ratios including elements of bothStatements

Return on Capital Employed (ROCE)

Return on Net worthTurnover ratios


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Balance Sheet ratios

Current Ratio

= Current Assets / Current Liabilities

Higher the better

NetWorking Capital (NWC)

= Current Assets less Current Liabilities

Debt-Equity Ratio

= Long term Debt / Equity capital

Lower the better


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Profitability Ratios

Operating Profit ratio

= Operating Profit / Sales

Net Profit ratio = Net Profit / Sales

Earnings per Share (EPS)

= Profit after tax / No. of shares outstanding


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Combination Ratios

Return on Capital Employed (ROCE)= Operating Profit /(Fixed Assets + NWC)

Return on Net worth= Profit after tax / Equity (Net worth)


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Turnover ratios

Asset Turnover Ratio= Sales / Average Total Assets

Higher the better

Inventory Turnover= COGS / Average Inventory

Should be optimal


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Valuation of Shares

FCFE - Free cash flow to equity

= PAT + Depreciation

WACC Weighted Avg Cost of capital

= Cost of equity + Cost of debt

Terminal value

= Present value of Net assets

(i.e.Assets Less Liabilities)


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Question & Answers


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What is accounting?Involves

recording, classifying, and summarizing

of transactions having financial character


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Double Entry System ofAccountingAn Italian monk Fra Luca Paciolicreated this

great & scientific system over 500 years ago.

Every time a transaction takes place

two accounts will be affected i.e. one is debited

and other is credited.


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Accounting systems

Involves

Journals Book of original entry

Sub ledgers General Ledger (Trial Balance )

Financial Statements


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Ledgers in ERP

General Ledger Sub ledgers

Inventory

Accounts Receivable Accounts Payable

Payroll

Fixed Assets Projects


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The Accounting Equation

Assets = Liabilities + Owners Equity

This is the basic equation of Accounting,which is satisfied by all transactions.


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ACCOUNTING CONCEPTS

Accruals - Revenue and expenses for a given periodconsidered whether received / paid or not.

Matching - Revenue earned in a period is matchedagainst expenses incurred.

Business Entity - Entity separate and distinct from itsowners & others.

Consistency

Dual Aspects - There are two sides to each transactionrecorded.


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ACCOUNTING CONCEPTS

continued Going Concern - Enterprise will continue in operation

for the foreseeable future. Needs disclosure if not so.

MaterialitySignificance compared to firms size

Money Measurement Items assessable in terms ofmoney

Prudence - Do not anticipate profit but do provide forlosses

Realization Profits considered on Accrual basis


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Detail Accounting Entries

Tomorrows session


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Question & Answers


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Thank you


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Session 2

Detailed Accounting Entries


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Covered in 2 Sections

General Accounting (Various transactions)

Inventory Accounting with strong ERP focus


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Steps

1 Decide if it is a event OR transaction ?

2 Determine 2 sided effect

3 Determine accounts affected4 Whether they Increase/Decrease ?

5 Debited / Credited


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Question & Answers


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Thank you

TOI Accounting Fundamentals

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