Financial Accounting aims at sharing the information outside the organization. Financial statement is prepared for stake holders, shareholders, partners, owners, government agencies and banks.
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Influencing policy (training slides from Fast Track Impact)
Introduction to Financial Accounting
1. Importance
Importance
Accounting 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.
2. Importance
Importance
Accounting helps recording all financial
transactions thus enabling preparation of these
principal financial statements:
- Trial Balance
- Profit & Loss Account
- Balance Sheet
- Cash Flow Statement
3. Importance
Importance
Several segments of the Society called
Stakeholders need to use Financial
Statements.
Shareholders Investment Advisors
Creditors Investment Analysts
Suppliers, Vendors Workers, Employees
Local, State, Central Researchers
Governments Students of Finance
4. Limitations
Limitations
£ 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.
5. Scope
Scope
A financial accounting system provides
summarized and categorized information
about the company’s performance and state of
affairs
mainly for external decision makers.
6. Scope
Scope
A 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?
7. GAAP
GAAP
Financial accounting is governed
by rules or guidelines
collectively called
Generally Accepted Accounting Principles
(GAAP).
8. GAAP
GAAP
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.
9. GAAP
GAAP
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.
10. GAAP
GAAP
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.
11. Concepts
Concepts
Є Entity Concept
“ An accounting entity
is a separate
and distinct unit,
standing apart from its
owners & shareholders”.
12. Concepts
Concepts
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.
13. Concepts
Concepts
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).
14. Concepts
Concepts
Є Entity Concept
Є Reliability Principle
“ accounting records and statements must be based
on the most objective data available”
- hence importance of bills, invoices,
vouchers during audit.
15. Concepts
Concepts
Є Entity Concept
Є Reliability Principle
Є Historical Cost Concept
“ acquired assets, inventories and services are
recorded at their actual costs.”
- Hence current market value not considered.
16. Concepts
Concepts
Є Entity Concept Є Reliability Principle
Є 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.
17. Concepts
Concepts
Є Entity Concept Є Reliability Principle
Є 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”
18. Concepts
Concepts
Є Entity Concept Є Reliability Principle
Є Historical Cost Concept Є Going Concern Concept
Є Stable Monetary Unit Concept
Є Full Disclosure Principle
“ all circumstances and events that are
likely to make a difference to users of
the financial statements must be disclosed”.
19. Concepts
Concepts
Є Entity Concept Є Reliability Principle
Є Historical Cost Concept Є Going Concern Concept
Є Stable Monetary Unit Concept
Є Full Disclosure Principle
Є Materiality
“ The constraint of determining whether an item
is large enough to likely influence a decision”.
20. Concepts
Concepts
Є Entity Concept Є Reliability Principle
Є Historical Cost Concept Є Going Concern Concept
Є Stable Monetary Unit Concept
Є Full Disclosure Principle Є Materiality
Є Conservatism
“ The constraint of determining whether an item
is large enough to likely influence a decision”.
21. Concepts
Concepts
Є Entity Concept Є Reliability Principle
Є Historical Cost Concept Є Going Concern Concept
Є Stable Monetary Unit Concept
Є Full Disclosure Principle Є Materiality
Є 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”
22. “ 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!”