Financial Accounting: Introduction to Financial Accounting
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The Financial Accounting slide from WE School introduces the subject as not just a science – in the way the data is recorded) but an art too – in the way it is interpreted. Accounting is an information system which measures, processes and communicates financial information to decision makers. To know more about Welingkar's Distance Learning Program and courses offered, visit: http://www.welingkaronline.org/distance-learning/online-mba.html This Slide is the sole Property of the Welingkar School of Distance Learning – Reproduction of this material , without prior consent, either wholly or partially will treated as a violation of copyright.
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Financial Accounting: 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!”