Session 1: Overview of Financial Accounting and Control

Accounting is a system that provides information like the amount of resources, the
means of financing them, and the results achieved through using them to the people in an
organization so that they can work effectively. Accounting abides by the principles established
by the Financial Accounting Standards Board (FASB) called Generally Accepted Accounting
Principles or more in common, GAAP.
Financial statement is a report as on a particular period of time showing the current
financial position of the company and how the firm has allocated the funds from its
shareholders and lenders. The three components of a financial statement are Income
Statement, Balance Sheet and Cash Flow Statement.
Income Statement or Profit and Loss Account shows the financial performance i.e. profit
earn or loss incurred over a specific accounting period. The Balance Sheet shows how much
assets, liabilities and shareholders equity a company has a specific period of time. Cash Flow
Statement shows the inflow or outflow of cash for a business from its operating, investing and
financing activities.
Dissolution of a business may be due to the end of contract, bankruptcy, death of a
partner, mutual consent, etc. In the absence of any agreement during the time of incorporation
about how profits must be distributed at the time of dissolution, the profits must be shared
equally among the partners.
There are some concepts which are followed while recording transactions in the books
of company. Some of the concepts are:
Money measurement
Only those transactions or information that can be expressed in terms of money are
recorded.
Entity
According to this concept, the business or organization and the persons associated with
the entity are treated separately and only the activities of the business are recorded for
preparing accounts.
Going Concern
An entity is assumed that it will continue its operation for a long period of time in future
Cost
The Cost Concept or the Historical Cost says that assets should be recorded at the cash
amount or cash equivalent at the time of their acquisition
Dual aspect
 The terms debit and credit are used to record increase or decrease of an account. All
transactions must be recorded into two places i.e. total debits must be equal to total credits.
Since a debit in one account would be cancelled out by a credit in another, the sum remains
equal. Since all the assets of a business are claimed by either the owners or creditors and as
these claims have to be lesser than or equal to the total assets, it gives the basic accounting
equation:
Assets= Liabilities + Owners Equity
Accounting Period
Accounting period is the time range over which business transactions are recorded. It is
usually a quarter or a whole year.
Conservatism
According to this concept, uncertain losses or expenses must be recoded but uncertain
or estimated gains should not be recorded.
Realization
Revenue should be recognized only when goods are actually transferred to the
customer and not when the goods are ordered or paid i.e. revenue should be recognized only
when it is earned
Matching
Expenses should be recorded and recognized only when the revenue from these
expenses can be matched
Consistency
Consistency concept says that once accounting methods are adopted, they must be
followed consistently in the future too.
Materiality
The materiality concept allows accountants to omit some accounting concept if such
action does not have a significant impact on the companys financial statements.
 Session 2: Balance Sheet

Balance Sheet or Statement of financial position shows how much assets, liabilities and
shareholders equity a company has in a specific period of time. Balance Sheet includes Assets
on one side and Liabilities on the other. Liabilities include Owners Equity and the Liabilities of
the company. Owner's equity is used when the company is a sole proprietorship and
shareholders' equity is used when the company is a corporation. The relation is

Assets = Liabilities + Equity.

For better understanding, let us discuss about the items under the two sides of the Balance
Sheet.

Assets:
Assets are economic resources that are controlled by an entity and whose cost (or fair value) at
the time of acquisition could be objectively measured. An asset must be an economic resource
acquired in a transaction. It must be controlled by the business and its cost at the time of
acquisition must be objectively measurable. Assets are usually classified into Current Assets and
Non-Current Assets. The latter could be further categorized into Property, Plant, and
Equipment and Other Assets (Investments, Goodwill).

Current Assets:
Those assets which are expected to be realized as cash or sold or consumed during the normal
operating cycle (usually within a year, whichever is longer), are called Current Assets. Below are
some of the current assets of a balance Sheet:
Cash
Cash includes all currency, both coins and bank notes held by a business in hand and
in bank accounts and cash equivalents.
Marketable Securities
Those investments that are readily marketable and expected to be converted into
cash within a year are called Marketable Securities. They are securities or debts that are to
be sold or redeemed within a year. Eg: government bonds, common stock or certificates of
deposit.
Accounts Receivable
Accounts Receivable is the payment which the company will receive from its
customers who have purchased its goods and services on credit. Amounts owed to the
company by parties other than the customers would be recorded under the head notes
receivable or other receivables.
Inventories
Inventories may refer to those items that are
Ready for sale ( Finished Goods)
 Work in Progress: in the process of production for sale
Raw Materials: soon to be consumed in the production of good or services that
will be made available for sale
Inventory relate to only those items which are kept for sale in the ordinary course of
business. Eg: A computer used by the business to maintain records wouldnt be an inventory
but the dozens of computer kept in the warehouse for sale would be accounted as inventories.
Prepaid Expenses
Future Expenses that have been paid in advance. They are asset for the current year but
expenses for the year in which the expenses have to be made.

Property, Plant, and Equipment

The assets that are tangible and have a life span for a long period are called Fixed
Assets. These assets are used by the entity to produce goods and services that will generate
cash inflow. They are not meant for resale. As these assets have been in use for longer periods
and their value decreases which is accounted using Depreciation (the wear and tear of assets).

Other Assets
Investments are securities of one company owned by another either in order to control
the other company in anticipation of earning a long-term return from their investment. They
are different from marketable securities, which are a current asset reflecting short-term use of
excess cash. Those assets which are valuable and controlled by the business but cannot be
touched like goodwill, patents, copyrights, etc are called Intangible Assets.

Liabilities
A liability is an obligation to transfer assets or provide services to outside parties
because of past transactions or events. It is any type of borrowing for improving a business or
personal income which is payable after a period of time. Liabilities can be categorized as
Current Liabilities, Other Liabilities and Owners Equity.

Current Liabilities:
Accounts payable
It is money owned by a business from its suppliers. Amounts owed to financial
institutions are called notes payable or short term loans.
Taxes payable
Those taxes which hOave to be paid to the government agencies.
Accrued Expenses
Expenses that have been incurred by outside parties but havent been paid by
the entity. Eg: Wages and Salaries of employees not paid will come under accrued
expenses.
Deferred Revenues (Unearned Revenue)
 The amount received by the entity from outside parties for services agreed to be
provided in the future.

Other Liabilities
Liabilities that a company has to pay but are too small or the payment to be paid over a period
of one year (long-term debt).

Owners Equity
Owners Equity shows the amount the owners have invested in the entity. The
terminology for this section varies with the types of organizations. In case of a corporation, it is
under the head, Shareholders equity or stockholders equity. The items under this are:
Capital
It refers to the funds raised to support a particular business or project
Retained Earnings
The percentage of net earnings not paid out as dividends, but retained by
company for future use or to pay debts.

SAMPLE BALANCE SHEET

AS Anand Company
Balance Sheet
as on 31st December, 2017
ASSETS Amount LIABILITES Amount
Current Assets Current Liabilities
Cash in hand 2000 Accounts Payable 5000
Cash at bank 500 Notes Payable 3000
Temporary Investments 1000 Taxes Payable 1000
Petty Cash 500 Accrued Expenses 2000
Inventory 3000 Unearned Revenue 500
Accounts Receivable 1500 Total Current Liabilities 11500
Prepaid Insurance 300
Supplies 2000 Other Liabilities
Total Current Assets 10800 Bonds Payable 2000
Long term loans 3000
Investments 5000 Mortgage 200

Property, Plant, & Total Liabilities 16700

Equipment
Land 3000 Owners Equity
Buildings 4000 Common Stock 10000
Equipment 5000 Retained Earnings 8400
Less: Accumulated
Depreciation (1200)
 Net Prop, Plant & Equipment 15800

Intangible Assets
Goodwill 3000
Patents 500

Total Assets 35100 Total Liabilities 35100

In the absence of any specific agreement as to how accounts should be treated at the time of
acquisition, the Partnership Act laid down the following provisions (Sec. 48) for settlement of
accounts.

(a) Losses, including deficiencies of capital, shall be paid first out of profit, next out of capital,
and lastly, if necessary, by the partners individually in their profit-sharing ratio.

(b) The assets of the firm including any sums contributed by the partners to make up deficien-
cies of capital shall be applied in the following manner and order:

(i) In paying the debts of the firm to third parties.

(ii) In paying each partner ratably what is due to him from the firm for advances.

(iii) In paying to each partner ratably what is due to him on account of capital, and

(iv) The surplus, if any, will be divided among the partners in their profit sharing ratio.
 Session 6- Income Statement-Service Firms
Objective- To explain how the costs are accrued in the service firms and preparation of
classified financial statements.
Seshan S (2003) Symphony Theatre IIMA No. F&A0126R, Indian Institute of
Management Case Repository

Accrual accounting is that form or practise in accounting wherein we record all the revenues
and expenses in a given accounting period, whether these revenue has been actually gained or
the expenses has been paid within the period. In this practise, we mention each and every
transaction within a period even if the customer has not paid to the seller but the customer has
availed the facility or opted for it within the period thus records even if there is no payment
done.
The service firms these days normally practice this accrual accounting. It is completely different
from the cash accounting where records are maintained in the financial statements only if there
is cash involved for any sort of transaction (cash payments and cash receipts). In the services
firm this concept help to distinguish between the receipt of cash for a service and the right to
receive cah.
The term given to the revenue that has been done within the accrual accounting period where
the customer hasnt paid comes under Accounts Receivable.
Similarly, when there is a liability that comes to the company but is not yet done comes under
amount payable is accrued liability which can be realised in the near future.
An accrued expense is an accounting term refers to an expense the firm owes before they
actual pay the expense. Accrued expenses is thus unpaid debts that are also known as accrued
liabilities.
Costs that can be accrued in the service firms may be of the following types similar to as in the
Symphony Theatre case.
Most of the firm activity work with the same accrual financial concept as it help to expand the
business even through it has no cash in hand for a particular fiscal year
Sales is mentioned in the financial statements when the invoice is created for the product or
service even if the cash is not received for the case.
Expense within the firm when a product is ordered is maintained even if it is not being utilised
the same day for which it was allocated.
Depreciation expense is an example of a non-cash expense.
Revenues from sales of goods and services are said to be realized revenues by the seller only
when there is trust upon the buyer so that the seller will actually receive payment. Recognize
incoming revenues as sales revenues is very necessary. The seller has to actually deliver the
goods and services before declaring the revenues.
Unearned revenue or deferred revenue accounts refer to funds received by the seller for goods
or services not delivered to the buyer yet. Like the case when the land owner makes an initial
deposit for a property, the seller has unearned revenue or deposit until the transaction of the
sales is closed and ownership is transferred.
The choice of fiscal or financial year for the accrual concept implementation of the company
helps to well plan their accounts
The double entry system helps the firm to realise the correct value even though there is not
enough
Cash In hand
There is also a downside for it as we have to consider the tax for the revenue even through the
cash has not been gained.
The generally accepted accounting principles (GAAP) for businesses in most countries,
incorporate the matching concept. Closing the Sales and providing gods and services has led to
the two bookkeeping entries.
Accrual basis accounting records two entries when the payment is owed and other when
payment is done by cash.

Liabilities and equity Assets

Particulars Amount Particulars Amount

4,00,00,00 Cost of Theatre(cost+demolition-sale of

Owners capital 0 scrap) 80,00,000
2,50,00,00
Retained Earnings 13,23,000 Building 0
Financial Agency 90,00,000 Accumulated Depreciation -10,00,000
1,00,00,00
Friends & Relatives 45,00,000 Sound system 0
Salary Payable 1,50,000 Accumulated Depreciation -5,00,000
Ticket recipt
payable 6,50,000 Air conditioning 50,00,000
Electricity payable 1,20,000 Accumulated Depreciation -2,50,000
Furniture 50,00,000
Accumulated Depreciation -5,00,000
 Integrated communication 1,10,000
Accumulated Depreciation -22,000
Receivables from distributor(First film) 3,95,000
Provison for doubtful debts -1,95,000
Prepaid municipal tax 3,00,000
Prepaid insurance 2,00,000
Prepaid communication 15,000
Receivables from advertisement 50,000
Stationery in hand 4,000
Cash in hand 41,36,000

5,57,43,00 5,57,43,00
0 0
 Session 7 - Revenue Recognition
Objective: To explain the revenue recognition methods used when the critical event and
measurability conditions for revenue recognition are not satisfied at the point of sale.
Revenue and Monetary Assets
Grennell Farm

Revenue recognition is that principle of accounting under the accrual concept where the
revenue earned are recognised when they are realised and are earned regardless of the time
when cash is received. In is strictly in contrary to the concept in cash accounting.
Revenue= (price at which goods or services are sold) * (number of units or amount sold)
Revenue recognition states that revenue should not be recorded until it is earned and the
matching of actual costs with estimated revenues
A service firm can recognise revenue from its activities as soon as they complete the service,
even though the firm havent got any payment since a long time from the customer being
served.
When revenue is recognised before cash is received, it comes under Accrued revenue, and on
the other hand in deferred revenue it is recognised after cash is received.
Approaches to revenue recognition can be
Revenues and expenses are all recognized at the critical event, regardless of when they are
incurred. Expense are qualified as assets because they would generate resources or sales
revenue at critical event. As revenue is recognised, costs that havent been incurred will be
accrued as estimated liabilities and deferred expenses will be expensed. Revenues and
expenses are all recognized at critical event no matter when they are incurred.

Revenue Recognition Methods

Sales: When goods are shipped and services are provided
Collection: When payment is done
Production: If before delivery production is done then we say it as zero inventory and the entire
balance stock sale is calculated as current price.