Financial Accounting

By Ghanendra Fago

Unit -I: Fundamentals of Financial

Accounting

Forms of business organization

Types of Business
Business and Accounting
Accounting information,
Book Keeping Vs. Accounting,
Users of Accounting Information
Means of Accounting
information
Functions of accounting
Branches of Accounting
Career in accounting

What is Business?
A continuous economic activity
carried out to earn profit
through:
Production and sales of goods
and services to customers
Generating and rendering
services
Legal and continuous process

Types of Business
Manufacturing business
Merchandising/Trading
business
Services business
Hybrid business

Forms of Business
Organization/Entities
Sole Proprietorship/
Trading ,
Partnership Firm,
Joint Stock Company
Others like
cooperative, nonprofit making etc.

Introduction to Accounting

Process of identifying, measurement,

classifying, recording, summarizing and
interpretation of the transactions of a
business in terms of money to ascertain
the result and financial position of
business activities of particular period.

Almost all managers in every organization

are better equipped to perform their duties
when they have a reasonable grasp of
accounting data.

In fact, a survey of managers ranked

accounting as the most important business
course for future managers.

Users of Accounting Information

Almost all managers in
every organization are
better equipped to
perform their duties when
they have a reasonable
grasp of accounting data.

In fact, a survey of managers

ranked accounting as the most
important business course for
future managers.

Users of Accounting Information

External users
Shareholders and prospective investors
Bond holders ,bankers, Creditors and
Suppliers
Tax authorities
Regulatory Bodies
Government Agencies
Suppliers and others

Internal users Managers, CEO,

BODS, Supervisors

HISTORY OF ACCOUNTING
Origin of accounting is attributed to the
work of Luca Pacioli, a famous Italian
mathematician
A close friend and tutor of Leonardo Da Vinci
and contemporary of Christopher Columbus
A Text book, Summa de Arthmetica,
Geometria, Proportione et Proportionalite,
described a system to ensure that financial
information was recorded efficiently and
accurately
With even of Industrialization in 19 the
century, emergence of large corporations ,
with separate ownership, required report of

Book Keeping and Accounting

Major misconception is that
accounting and book keeping are
same.
Accounting includes
identification, recording, and
communication
Book keeping is a part of
accounting process
It is a function performed by a

Branch of Accounting
Financial Accounting
Cost Accounting
Management Accounting

Cost Accounting
Accumulates, classifies and interprets
costs to use in performance evaluation and
decision-making
Deals primarily with the accumulating cost
data needed by the management to control
the current operations and plan for future.
Provides accurate and timely information
needed to help the business and control
costs.
Generally, both financial accounting and
management accounting for external and
internal purposes.
Traditionally, cost accounting focused in
manufacturing cost only but at present it is

Objectives of Cost Accounting

To ascertain cost per unit of different
types of products
To ascertain the element of costs
To disclose sources of wastages and
prepare report for control
To provide requisite data for fixation of
price
To exercise effective control of
inventory
To provide useful data for financial
decision
To organize cost reduction programs
To advise management for future

Financial Accounting
Concerns with the preparation of financial
statements and reports like income statement
and balance sheets of specific periods for
external users to show the financial position of
the company.
A summarized form of the overall financial
position of company. It provides information for
external users like shareholders, creditors,
suppliers, government etc.
Develops information for external decision
makers
like
shareholders,
creditors,
government, suppliers etc.

Objectives of financial accounting

To keep systematic records of

financial transactions
To ascertain the results of
operations
To reveal the overall financial
positions of organization
To report past performance and
future prospects

Management Accounting
Branch of accounting, which is concerned
with supplying relevant information to
managers at appropriate time to enable
them to take decisions in organization.
Process of accounting, which generates
accounting information from both financial
accounting
and
cost
accounting
and
provides essential accounting information
to all departments concerned.
Process
of
identifying,
measuring,
analyzing, interpreting and communicating
accounting information to department

Objectives of Management Accounting

Providing information to the managers the for
decision making and planning in revenue and
cost projection of organization
Assisting managers in interpretation of financial
data that are not understand by internal users
Assisting managers in directing and controlling
operations through its attention in their
function
Motivating managers toward the achievement
of organization's goals
Measuring the performance of managers,
subunits and employees within organization

Financial Accounting: How

accountant communicates ?

Accounting equations
Income Statement,
Balance Sheet,
Statement of Retained Earnings,
Statement Of Cash Flow
Notes and Disclosures

Audit of financial statements

Financial statements are prepared by a
company accountants and are the
responsibility
of
the
companys
management.
All stakeholders are not actively involved
in the daily affairs of the business. Thus
they must rely on some one else to ensure
that management is fairy presenting the
financial statement.
The objective of auditing is to ensure
stakeholders and other users that
statements are fairly presented.

Career in Accounting

Financial accountant,
Cost accountant,
Management accountant,
Internal auditor,
Account system designer,
Tax accountant,
Statutory auditors,
Tax consultants etc..

Accounting bodies
ACCA, CA, CPA
ICWA, CIMA, IMA, ICA