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”

“ The importance of accounting is that it is the universal language of business, and a basic understanding of it is necessary for almost any job in the business world!”