FINANCIAL ACCOUNTING FOR BEGINNERS

2. TABLEOF CONTENTS DEFINITIONOF ACCOUNTING THE BALANCE SHEET STANDARD SETTING FORMAT OFTHE BALANCE SHEET ACCOUNTING INFORMATION THE INCOME STATEMENT OPERATING INFORMATION COMPONENTSOFTHE INCOME STATEMENT FINANCIALACCOUNTING INFORMATION RETAINED EARNINGSAND DIVIDENDS MANAGEMENT ACCOUNTING INFORMATION FORMAT OFTHE INCOME STATEMENT FINANCIAL STATEMENTS THE CASH FLOW STATEMENT © 2023 Dr. Meera Sharma

3. DEFINITION OF ACCOUNTING  PROCESS OF IDENTIFYING, MEASURING AND COMMUNICATING ECONOMIC INFORMATIONTO PERMIT INFORMED JUDGMENTS AND DECISIONS BY USERS OFTHE INFORMATION  SOURCE : AMERICAN ACCOUNTING ASSOCIATION © 2023 Dr. Meera Sharma

6. STANDARD SETTING  IN INDIA THE ACCOUNTING STANDARDS BOARD OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) IS THE STANDARD SETTING ORGANIZATION  http://www.icai.org © 2023 Dr. Meera Sharma

9. ACCOUNTING INFORMATION OPERATING INFORMATION relates to day to day activities of the organization and is used by the accounting process to generate FINANCIALACCOUNTING INFORMATION and MANAGEMENT ACCOUNTING INFORMATION © 2023 Dr. Meera Sharma

11. OPERATING INFORMATION  Operating Information captures the day-to-day activities of the organization  Examples:  Hours worked by employees for payroll purposes  Finished goods available for sale  Amounts owed by customers  Parts and accessories on hand © 2023 Dr. Meera Sharma

12. FINANCIAL ACCOUNTING INFORMATION  Financial accounting information is generated by the accounting process and used by investors to make buy, sell or hold decisions  For example FINANCIAL STATEMENTS:  Income statement  Balance sheet  Statement of cash flows © 2023 Dr. Meera Sharma

13. MANAGEMENT ACCOUNTING INFORMATION  Management accounting information is meant for internal users, i.e. managers for  Planning  Implementation  Control  For example BUDGETS © 2023 Dr. Meera Sharma

14. FINANCIAL STATEMENTS  Income statement—A summary of the revenue and expenses for a specific period of time.  Balance sheet—A list of the assets, liabilities, and owners’ equity as of a specific date.  Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time. © 2023 Dr. Meera Sharma

19. FINANCIAL STATEMENTS  QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS  RELEVANCE  EVALUATE PAST AND PRESENT  CONFIRM OR CORRECT PAST EVALUATIONS  PREDICT FUTURE OUTCOMES © 2023 Dr. Meera Sharma

21. FINANCIAL STATEMENTS  QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS  RELIABILITY  FAITHFUL REPRESENTATION  SUBSTANCEOVER FORM  NEUTRALITY/OBJECTIVITY  PRUDENCE (OF ESTIMATES)  COMPLETENESS  COMPARABILITY © 2023 Dr. Meera Sharma

22. FINANCIAL STATEMENTS  CONSTRAINTS ON QUALITATIVE CHARACTERISTICS  BALANCE BETWEENTIMELINESSAND RELIABILITY  BALANCE BETWEEN COSTAND BENEFIT  BALANCEAMONGTHE QUALITATIVE CHARACTERISTICS © 2023 Dr. Meera Sharma

27. THE BALANCE SHEET  ASSETS  RESOURCES FROM WHICH FUTURE ECONOMIC BENEFITSARE LIKELYTO FLOW IN  Eg.Cash, machinery, investments, inventory  LIABILITIES  OBLIGATIONS WHOSE SETTLEMENT IS LIKELY TO RESULT INAN OUTFLOWOF RESOURCES  Eg. Long term and short term loans  EQUITY  RESIDUAL INTEREST OF OWNERS IN ASSETS AFTER DEDUCTINGALL LIABILITIES  Includes paid in capital and retained earnings © 2023 Dr. Meera Sharma

28. THE BALANCE SHEET  EQUITY  CONSISTS OF PAID IN CAPITAL AND RETAINED EARNINGS  VALUE OF EQUITY IS DEPENDANT ON THE MEASUREMENT OF ASSETS AND LIABILITIES  ASSETS - LIABILITIES = OWNERS’ EQUITY © 2023 Dr. Meera Sharma

32. THE INCOME STATEMENT  REVENUES are increases in owner’s equity as a result of selling services or products  For eg. Value of goods or services sold, fees, commission  EXPENSES are the resources consumed to generate revenue  For eg. Cost of goods or services sold, rent expense, interest on debt © 2023 Dr. Meera Sharma

34. RETAINED EARNINGS AND DIVIDENDS  NET INCOME CAN BE DISTRIBUTED TO OWNERS AS DIVIDENDS  OR IT CAN BE RETAINED AND REINVESTED INTHE BUSINESS  OFTEN COMPANIES DO BOTH, SPLITTING NET INCOME INTO DIVIDENDS AND RETAINED EARNINGS © 2023 Dr. Meera Sharma

35. RETAINED EARNINGS AND DIVIDENDS PROFIT AFTER TAX OR NET INCOME RETAINED EARNINGS DIVIDEND REINVESTED IN THE COMPANY, ADDS TO THE OWNERS’ EQUITY IN COMPANY PAID TO OWNERS SPLITS INTO © 2023 Dr. Meera Sharma

36. FORMATOF THE INCOME STATEMENT Sales Revenue Less Cost of Sales Gross Margin Less Operating Expenses Income before taxes Provision for income taxes Net Income  VERTICAL FORMAT © 2023 Dr. Meera Sharma

37. FORMATOF THE INCOME STATEMENT Income Sales Other Income Expenditure Raw Materials Selling Expenses Interest Charges Profit for the Year Provision for Tax Profit After tax  ALTERNATIVEVERTICAL FORMAT © 2023 Dr. Meera Sharma

38. THECASH FLOW STATEMENT THE CASH FLOW STATEMENT REPORTS CASH FLOWS FROM THREE TYPES OF ACTIVITIES  Cash flows from operating activities  Cash flows from investing activities  Cash flows from financing activities © 2023 Dr. Meera Sharma

39. THECASH FLOW statement  Cash flows from operating activities – cash transactions that affect the income statement  Examples of INFLOWS are sale of goods, fees or commission earned  Examples of OUTFLOWS are purchases of goods, payments of rent, utilities, and wages © 2023 Dr. Meera Sharma

40. THECASH FLOW STATEMENT  Cash flows from investing activities – cash transactions that affect long term assets  Examples of INFLOWS are sale of plant, machinery, sale of investments  Examples of OUTFLOWS are purchases of plant, machinery, fixed assets, long term investments © 2023 Dr. Meera Sharma

41. THECASH FLOW STATEMENT  Cash flows from financing activities – cash transactions that affect debt and equity  Examples of INFLOWS are availing loans and issuing equity  Examples of OUTFLOWS are repayments of loans, dividend payments © 2023 Dr. Meera Sharma

42. SUMMARY  The process of accounting uses principles laid down by standard setting organizations to convert operating information to financial accounting information and management accounting information  Financial accounting information is disseminated in the form of reports like the Balance Sheet, the Income Statement and the Cash Flow Statement  The Balance Sheet is a summary of assets, liabilities and equity while the Income Statement is an annual summary of earning performance. The Cash Flow Statement is a summary of annual cash inflows and outflows. © 2023 Dr. Meera Sharma

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