Finanacial Accounting
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Transcript of Finanacial Accounting
ImportanceImportanceAccounting all incomes, expenses, assets &
liabilities in monetary terms
is the sole determinant of all economic activities
of all businesses, industry, trade ,commerce as well as software giants, media
and even NGOs like CRY or Lijjat Papad.
ImportanceImportance
Accounting helps recording all financial transactions thus enabling preparation of these
principal financial statements:
- Trial Balance- Profit & Loss Account- Balance Sheet- Cash Flow Statement
ImportanceImportanceSeveral segments of the Society called
Stakeholders need to use Financial Statements.
Shareholders Investment Advisors Creditors Investment AnalystsSuppliers, Vendors Workers, EmployeesLocal, State, Central ResearchersGovernments Students of Finance
LimitationsLimitations
£ Reflects and records only monetary values of all transactions and hence quantitative measurements; hence qualitative aspects are ignored.
£ On account of inflation value of rupee fluctuates and decreases; but no adjustments made in the accounts.
ScopeScope
A financial accounting system provides
summarized and categorized information
about the company’s performance and state of affairs
mainly for external decision makers.
ScopeScopeA financial accounting system provides summarized and categorized information about the company’s performance and state of affairs mainly for external decision makers, allowing them to answer questions:
$ Is the company earning satisfactory income?
$ How does the company compare in size and profitability with competitors?
$ Will the company be able to pay its debts when they become due?
GAAPGAAPFinancial accounting is governed
by rules or guidelines
collectively called
Generally Accepted Accounting Principles
(GAAP).
GAAPGAAP
Financial accounting is governed by rules or guidelines collectively called Generally Accepted Accounting Principles (GAAP).
- many of these are mandatory by law of the country.
GAAPGAAP
Financial accounting is governed by rules or guidelines collectively called Generally Accepted Accounting Principles (GAAP).
- many of these are mandatory by law of the country.- those that are not mandatory, have considerable
persuasive force.
GAAPGAAP
Financial accounting is governed by rules or guidelines collectively called Generally Accepted Accounting Principles (GAAP).
- many of these are mandatory by law of the country.- those that are not mandatory, have considerable
persuasive force. - primary agency responsible for GAAP in India, is the Standards Board of the Institute of Chartered Accountants of India.
ConceptsConcepts
Є Entity Concept
“ An accounting entityis a separate
and distinct unit, standing apart from its
owners & shareholders”.
ConceptsConcepts
Є Entity Concept “ An accounting entity is a separate and distinct unit,
standing apart from its owners & shareholders”. Hence :
$ Share Capital and reserves of the company ( really belonging to owners) are shown under liabilities.
ConceptsConcepts
Є Entity Concept “ An accounting entity is a separate and distinct unit,
standing apart from its owners & shareholders”. Hence :
$ Share Capital and reserves of the company ( really belonging to owners) are shown under liabilities.
$ Losses are shown under assets ( because they represent what owners owe the business).
ConceptsConceptsЄ Entity ConceptЄ Reliability Principle
“ accounting records and statements must be based on the most objective data available”
- hence importance of bills, invoices, vouchers during audit.
ConceptsConceptsЄ Entity ConceptЄ Reliability Principle
Є Historical Cost Concept
“ acquired assets, inventories and services are recorded at their actual costs.”
- Hence current market value not considered.
ConceptsConceptsЄ Entity Concept Є Reliability PrincipleЄ Historical Cost Concept
Є Going Concern Concept
“assumes that the accounting entity will continue in the foreseeable future”
- hence fixed assets held by the business are always shown at actual cost less accumulated depreciation.
ConceptsConceptsЄ Entity Concept Є Reliability PrincipleЄ Historical Cost Concept Є Going Concern Concept
Є Stable Monetary Unit Concept
“ business transactions are recorded in terms of single currency (rupees in India) , and no adjustment is made for inflation”
ConceptsConceptsЄ Entity Concept Є Reliability PrincipleЄ Historical Cost Concept Є Going Concern ConceptЄ Stable Monetary Unit Concept
Є Full Disclosure Principle
“ all circumstances and events that arelikely to make a difference to users of the financial statements must be disclosed”.
ConceptsConceptsЄ Entity Concept Є Reliability PrincipleЄ Historical Cost Concept Є Going Concern ConceptЄ Stable Monetary Unit ConceptЄ Full Disclosure PrincipleЄ Materiality
“ The constraint of determining whether an item is large enough to likely influence a decision”.
ConceptsConceptsЄ Entity Concept Є Reliability PrincipleЄ Historical Cost Concept Є Going Concern ConceptЄ Stable Monetary Unit ConceptЄ Full Disclosure Principle Є Materiality
Є Conservatism
“ The constraint of determining whether an item is large enough to likely influence a decision”.
ConceptsConceptsЄ Entity Concept Є Reliability PrincipleЄ Historical Cost Concept Є Going Concern ConceptЄ Stable Monetary Unit ConceptЄ Full Disclosure Principle Є MaterialityЄ Conservatism
“ In addition to these principles, the Institute of Chartered Accountants of India has issued 28 accounting standards for compliance with varying degrees of legal compulsion”