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Accounting & Financial Analysis

An Introduction

Prof. Raman Chawla


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

Accounting is the art of identifying,


recording, classifying and summarizing in
a significant manner and in terms of
money transactions and events which are,
in part at least of a financial character and
interpreting the result thereof.
Characteristics of financial
accounting
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
ascertaining the financial results by showing the best way of
recording, classifying and summarizing the business transaction.

Recording, Classifying and summarizing- It provides information


about all the transactions of financial in nature, recorded in journal,
classifying in forms of ledgers, preparation of trial balance for
checking the accuracy of accounts.

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


terms of money.

Interpreting the results- It provide the tools for their analysis, through
which various parties of business obtain information related to them.
Objectives or functions of
accounting
Knowledge of sales and purchase
Providing information of closing stock
Knowledge of financial position
Information related for working capital
Knowledge of profit & loss of the business
Provide information to various parties
Provide Information about embezzlement & frauds
Evidence in court.
Accounting Process
Recording of transaction (Journal entry)

Classification (Ledger Posting)

Summarizing (Trial balance)

Interpreting (Income &position statement)

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

Cost accounting is concerned with the


recording, classifying and appropriate
allocation of expenditure for the
determination of the cost of products or
services and for the presentation of
suitably arranged data for purposes of
control and guidance pf the management.
Management accounting
It is concerned with the collecting
systematically and regularly all such
information as will help management in
discharging its functions of planning,
control, decision making, etc. this is also
named as accounting for management.
Users of accounting information
Owners
Management
Creditors
Government
Investors
Employees
Researches
Lenders
Generally Accepted Accounting
principles (GAAP)
Business Entity Concept
Going Concern concept
Dual Aspect Concept
Cost concept
Money measurement Concept
Accounting period Concept
Matching Concept
Accrual concept
Business entity concept
Business is treated as a unit or entity apart
from its owner. The owner of an
organization is always considered to be
separate and distinct from the business
which he controls. that is why, the capital
of the owner is always entered in liability
side of balance sheet. It is considered as
the creditor of the business.
Going concern concept
It is assumed that the business will exist
for the foreseeable future and
transactions are recorded from this point
of view. It should continue to operate at
its present scale in the foreseeable
future.
Dual Aspect Concept
Financial accounting has dual aspect of
recording. Every debit has its
corresponding credit & every credit has its
corresponding debit. The modern
accounting system basically based on
dual aspect of accounting.
Cost concept
The underlying idea of cost concept is
that-
Assets is recorded at the price paid to
acquire it, that is, at cost, and..
This cost is the basis for all subsequent
accounting for the asset.
The change in the real worth of an asset
with the passage of time is not ordinarily
recorded in the account books.
Money measurement concept
The money concept underlines the fact
that in accounting every worth recording
event, happening or transaction is
recorded in terms of money. In other
words, a fact or a happening which cannot
be expressed in terms of money is not
recorded in the accounting books.
Accounting period concept

Accounts choose some shorter and


convenient time for the measurement of
income. Twelve- month period is normally
adopted for this purpose. this time interval
is called accounting period.
Matching concept
It is based on the determination of the
profit & loss of a particular accounting
period is the process of matching the
revenue earned during the period and the
expenses incurred during the period to
obtain such revenue.
Accrual concept

Under this method revenue recognition


depends on its realization and not actual
receipt. Likewise costs are recognized
when they are incurred and not when paid.
Accounting conventions
Consistency
Full disclosure
Conservatism
Consistency
The convention of consistency aims at
making the financial statements more
comparable and useful. The convention
holds that in accounting processes, all
concepts, principles and measurement
approaches should be applied in a similar
or consistent way from one period to
another period.
Full disclosure
This convention specifies that there should
be complete and understandable reporting
in the financial statements of all significant
information relating to the economic affairs
of the entity. All information which is of
material interest to the users of the
accounting information should be
disclosed in accounting statements.
Conservatism
This is the policy of playing safe.
Accounting permits for making reserves to
face the uncertainty situations of the
business.
Double entry system

It is a common system of book-keeping whereby


the two aspects of every transaction i.e., It is based
on the dual aspect concept. This method of writing
every transaction in two different accounts on
opposite sides for equal value is known as the
double entry system of book keeping. This is the
most accurate, complete and scientific system of
accounting.
Advantages of double entry system
It keeps a complete record of business transactions.
It provides complete information concerning the business.
It provides a check on the arithmetical accuracy of books of
accounts.
It discloses the operating results .
It makes possible a meaning full comparison of operating and
financial performance over a period of time and enable the
businessman to evaluate the progress of his business.
It also enables a business man to plan and control his operations.
It reduces the chances of committing fraud.
Past details with regard to any account are easily and accurately
obtainable in this system.
Some common terms in
accountancy
Book-Keeping:-It means recording of business
transactions in the books of accounts in accordance with
the principles of accounting.
Account:- It is a statement of various dealings that occur
between a customer and the firm.
Classification of accounts
In order to understand the rules of double entry system,
it is essential to know which classes of accounts are
affected by a particular transaction. For this purpose, all
accounts are classified into two classes:
1) personal accounts
2) Impersonal accounts
A) real account
B) nominal account
Journal
The journal records all daily transactions of a business in
the order in which they occur. It is the book in which the
transactions are recorded first of all under the double
entry system. Thus, Journal is a book of original record. A
journal does not replace but precedes the Ledger.
The process of recording transactions in a journal is
termed as journalizing Performa of journal is given below.

DATE PARTICULARS L.F AMOUNT AMOUNT


Explanation

1. Date: The date on which the transaction was entered


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

Real account- Debit what comes in,


Credit what goes out.
Personal account- Debit the
receivers, Credit the givers.
Nominal account- Debit the expenses
& losses, Credit the incomes & gains.
ACCOUNTING STANDARDS
Accounting bodies all over the world have
tried to achieve some uniformity in the
accounting policies by prescribing certain
accounting standards in order to narrow the
range of alternatives available to an
organization in respect of collection and
presentation of accounting information.
International accounting standard
Accounting bodies throughout the world are
striving to achieve a reasonable degree of
uniformity in the accounting policies by
prescribing certain accounting standards with
respect to the collection and presentation of
accounting information. To formulate the
accounting standards, they have established a
committee called the International Accounting
standards committee (IASC) in 1973.Accounting
bodies of most of the countries, including the
institute of chartered accountants of India, are
the members of this bodies.
Objectives of committee
i) formulating, publishing and promoting
the use of the accounting standards
worldwide,
ii) To work for improvement.

The IASC has so far issued forty one


accounting standard
Indian accounting standards

Recognizing the need to harmonized the diverse


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

The role of mandatory accounting standards in


presenting clear-cut account on a uniform basis
can not overemphasized. The standards
represent the ideal practice of accounting and
ensure comparability of accounts because of
uniformity in the presentation. Hence, such
accounts are bound to show the clear position of
the state of affairs.
Accounting standards issued by
ASB of ICAI
The ASB of the institute of chartered
accountants of India, has in line with the
international standards, issued twenty nine
standards to be followed by its members
while auditing the accounts of companies.
These are –
IAS

(AS 1) Disclosure of accounting policies


(AS 2) Valuation of Inventories
(AS 3) Cash flow statements
(AS 4) Contingencies and events
occurring after the balance sheet date
(AS 5) Net profit or loss for the period,
prior period and extraordinary items and
changes in accounting policies
(AS 6)