F. A.: WHY TO READ ? Personal Life Professional Life An Investment for Future Strategy
BUSINESS ORGANISATIONS Merchandising (Trading) Organisations Manufacturing Organisations Service Organisations Business organisations are cash machines.
BUSINESS ORGANISATIONS Private Limited Company Public Limited Company Limited Liability Partnership
ACCOUNTING IS THE LANGUAGE OF BUSINESS. Serves as a means of communication Communicates / reports the events
Anthony & Reece: “Accounting is not exactly a foreign language; the problem of learning it is more like that of an American learning to speak English as it is spoken in Great Britain.” “Language evolve and change in response to the changing needs of society, and so does Accounting.”
ACCOUNTING IS AN INFORMATION SYSTEM INPUT (Raw Data) SYSTEM PROCESSES (Men & Equipment) OUT PUT (Reports & Information)
OUTPUTS Financial Statements Tax Returns Managerial Data and Reports Special Reports
USERS OF ACCOUNTING INFORMATION Management Shareholders and Investors Lenders Creditors Employees Customers Govt. and Regulatory Agencies General Public Others: Media, Consumer Organizations, Researchers & Analysts, etc.
EVOLUTION OF ACCOUNTING Stewardship Accounting Financial Accounting Cost Accounting Management Accounting Financial Accounting Vs. Managerial Accounting
DEFINITIONS AAA : “Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of information.” AICPA : “Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part, at least of a financial character and interpreting the results thereof.”
OBJECTIVES : F.A. To keep systematic records. To ascertain the net effects of the business operations. To ascertain the financial position of the organisations. To provide accounting information to interested parties.
ACCOUNTING PRINCIPLES Principles to be observed at the recording stage Accounting Entity Money Measurement Objective Evidence Dual Aspect Realisation Cost Accrual Principles to be observed at the reporting stage Going concern Accounting Period Matching Conservative Consistency Materiality Full Disclosure
CASH BASIS Vs. ACCRUAL BASIS OF ACCOUNTING Accounting Framework : Includes GAAP on the basis of which accounting data is processed, analyzed and reported.
GAAP A set of concepts, conventions, rules, and procedures Accepted by accountants over a period of time Guides in the preparation and presentation of financial reports
ACCOUNTING STANDARDS Specifies acceptable accounting methods Uniformity Harmonization ASB of the ICAI – AS Vs. Ind AS IASB - IFRS FASB
ACCOUNTING EQUATION Economic Resources = Sources of Resources or Claims. Assets = Liabilities Equity + Liabilities = Assets
Analysing the Effects of Business Transactions. EQUITY & LIABILITIES Creditors Rs.20,000 Suresh, Equity 50, , ASSETS Cash Rs.12,000 Equipments Rs.58, , Investment by Owner Receipt of Loan Purchase of Office Equipment
BALANCE SHEET as at 31 st March, 2011 LIABILITIES Share Capital Reserve and Surplus Secured Loans Unsecured Loans Current Liabilities and Provisions ASSETS Fixed Assets Investments Current Assets And Loans & Advances Miscellaneous Expenditures Profit & Loss A/C
BALANCE SHEET as at 31 st March, 2011 SOURCES OF FUNDS Shareholders’ Fund Loan Funds APPLICATION OF FUNDS Fixed Assets Investments Current Assets, Loans & Advances Less Current Liabilities & Provision Miscellaneous Expenditure
BALANCE SHEET as at 31 st March, 2012 EQUITY AND LIABILITIESNote No.CurrentPrevious Shareholders’ Fund Share Application Money pending allotment Non-current Liabilities Current Liabilities ASSETS Non-current Assets –Fixed Assets –Non-current Investments –Deferred Tax Assets (net) –Long term loans and advances –Other non-current assets Current Assets –Current Investments –Inventories –Trade receivables –Cash and cash equivalents –Short-term loans and advances –Other current assets
PROFIT & LOSS A/C for the year ending 31 st March I. Income II. Expenditure III.Profit before Tax IV. Provision for Taxation V. Profit after Tax VI. Balance b/f from last year VII.Profit available for appropriation Appropriations: Dividends, Reserves VIII. Balance transferred to Balance Sheet
PROFIT & LOSS STATEMENT for the year ending 31 st March 2012 I. Revenue from operations II. Other income III.Total Revenue IV. Expenses ……………. V. Profit before exceptional and extraordinary items and tax VI. Exceptional Items VII.Profit before extraordinary items and tax VIII.Extraordinary items IX.Profit before tax X.Tax expense: Current tax, Deferred tax XI.Profit/(loss) for the period from continuing operations XII.Profit/(loss) from discontinuing operations XIII.Tax expense of discontinuing operations XIV.Profit/(loss) from discontinuing operations (after tax) XV.Profit/(loss) for the period XVI.Earnings per equity share: Basic, Diluted
CASH FLOW STATEMENT for the period ending on March 31, 2012 Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Net cash increase (decrease) in cash & CE Cash & CE at beginning of the period Cash & CE at the end of the period.
FINANCIAL STATEMENTS AND REPORTS CAPITAL MARKET FORCES Investors, Lenders REGULATORY FORCES Government, Securities Regulator PRODUCT MARKET FORCES Competitors, Customers LABOUR MARKET FORCES Managers, Employees
LIMITATIONS OF FINANCIAL STATEMENTS Vegetable Accounting Focus on past / historical data Postmortem Analysis Ignore non-financial information Ignore HR Fails to provide all information to stake-holders for their decision making
LEDGER ‘T’ Account : A Ledger account in simplified form. TITLE OF ACCOUNT Left or Debit sideRight or Credit side ANY ASSET / EXPENSE ACCOUNT ( Debit )( Credit ) Increase Decrease
Ledger ANY LIABILITY / OWNER’S EQUITY / REVENUE ACCOUNT (Debit) (Credit) DecreaseIncrease Standard Form of Accounts ANY ACCOUNT Date Explanation Ref Debit Credit Balance
JOURNAL GENERAL JOURNAL DATEACCOUNT TITLE & EXPLANATION L.FDEBITCREDIT Rs. Rs. Rs. Rs.2009 June 1Cash 1, Share Capital1,00,000 Share Capital1,00,000 Invested Cash Invested Cash June 2Office Equipment 50,000 Cash20,000 Cash20,000 Creditors30,000 Creditors30,000 Purchase of office equipment on part payment Purchase of office equipment on part payment
ADVANTAGES 1.Classification of transactions 2.Reference becomes easy 3.Facilitate division of work 4.More particulars 5.Responsibility can be fixed 6.Facilitates checking
PURCHASES JOURNAL Date Name of the Supplier Invoice No. L.F. AmountRemarks
SALES JOURNAL Date Name of the Customer Out ward Invoice No L.F Amount Remarks
THREE COLUMN CASH BOOK DatePartic -ulars L.F.Disco -unt Allow -ed Rs. Cash Rs. Bank Rs. DatePartic -ulars L.F.Disco -unt Rece -ived Rs. Cash Rs. Bank Rs.
BANK RECONCILATION Cash Book Vs. Pass Book What is shown on the debit side of the Cash Book, appears on the credit side of the Customer’s A/c in Bank’s ledger and vice versa. OVERDRAFT: When cash book shows a credit balance or when pass book shows a debit balance.
CAUSES OF DIFFERENCE: 1.Cheques issued but not yet presented for payment 2.Cheques deposited into the bank but not collected 3.Bank charges 4.Interest allowed by the bank, if any. 5.Interest on overdraft. 6.Amount collected by bank on standing instructions 7.Payment made by bank as per standing instructions 8.Direct payments into the bank made by customers 9.Dishonor of cheques or bill 10.Errors
BRS Rs.Rs. Balance as per cash Book Add: Items: 1, 4, 6, 8 Less: Items: 2, 3, 5, 7, 9 Balance as per pass Book ***
TRIAL BALANCE To check arithmetical accuracy Equality of Debits & Credits
LOCATING ERRORS A debit posted in an A/C as a credit or vice versa An A/C balance incorrectly computed An A/C balance incorrectly recorded in TB A debit balance incorrectly recorded as credit balance in TB or vice versa A balance omitted entirely The TB incorrectly added Partial omission of an entry
ERRORS NOT DISCLOSED BY TB Omission from Books of Accounts Recording at a wrong amount Compensating Errors Posting in correct side but wrong A/C Recording twice in subsidiary books Errors of Principle
MEASURING BUSINESS INCOME Profits: Life blood – survival & growth Accountants prefer the term “Net Profit” instead of “Income” NP = Revenues – Expenses Gains & Losses Accounting Period Accrual Accounting Matching principle
Measuring Income – Cont. Adjustment process Outstanding Expense Prepaid Expense Accrued Income Income Received in Advance
CAPITAL AND REVENUE RULES: Items of revenue nature : Income Statement. Items of Capital nature : Balance Sheet. NEEDS: Calculation of true Profit. Determination of true Financial Position.
Capital & Revenue – Cont. CAPITAL EXPENDITURE –Acquisition of F.A. –Expenditure on F.A. to increase life –Exp. On development of land or mines –Cost of experiment: Patent –Legal charges for F.A. REVENUE EXPENDITURE - Exp. on day-to-day conduct of business -Exp. For buying goods -Exp. For maintaining F.A. & Depreciation on F.A. -Interest on Loan -Regular legal charges
DEFERRED REVENUE EXPENDITURE Exp. on advertisement for a new product Preliminary Expenses Brokerage & Underwriting Commission Cost of shifting plants to a new site
Capital & Revenue Receipts CAPITAL RECEIPTS –Capital introduced –Loan received –Sale proceeds of F.A. REVENUE RECEIPTS –Sale proceeds of goods –Other Income (Commission, Rent, Interest, etc)
PROFIT & LOSS A/C for the year ending 31 st March I. Revenue from operations II. Other income III.Total Revenue IV. Expenses ……………. V. Profit before exceptional and extraordinary items and tax VI. Exceptional Items VII.Profit before extraordinary items and tax VIII.Extraordinary items IX.Profit before tax X.Tax expense: Current tax, Deferred tax XI.Profit/(loss) for the period from continuing operations XII.Profit/(loss) from discontinuing operations XIII.Tax expense of discontinuing operations XIV.Profit/(loss) from discontinuing operations (after tax) XV.Profit/(loss) for the period XVI.Earnings per equity share: Basic, Diluted
ACCOUNTING FOR MERCHANDISING TRANSACTIONS Revenues from Sales Cost of Goods Sold Gross Profit = S – COGS Operating Expenses PBIT = GP – Op. Exp. PBT = PBIT – Int. Exp. NP = PBT – Income Tax
MERCHANDISING COMPANY Classified P & L A/C Classified Balance Sheet
INVENTORIES Raw Materials WIP Finished Goods
Inventories Physical Inventory Pricing the Inventory - Specific Identification - FIFO - LIFO - Weighted Average Cost
MANUFACTURING COMPANY Cost of Goods Manufactured - Raw Material Consumed - Direct Labour - Manufacturing Overhead - WIP MANUFACTURING ACCOUNT
MANUFACTURING COMPANY COGS - Finished Goods: Opening - Cost of Goods Manufactured - Cost of Goods Available for Sale - Finished Goods: Closing
FIXED ASSETS Investment in Long-lived Assets Source of Future Revenue Potential Fixed Assets Vs. Current Assets – Intention TANGIBLE Vs. INTANGIBLE Natural Resources
ACQUISITION OF F.A. Cost: Purchase price, Duties & taxes on purchase, and Directly attributable cost Purchase price: After Trade Discount & Rebates Directly Attributable Cost: Registration fees, Lawyer’s fees, Brokerage, Freight, Installation cost, Professional fees, Pre-production exp.
F.A. Capitalisation of borrowing costs – Directly attributable Stop capitalisation: When the F.A. is complete & ready for use Basket Purchases: Fair Values – Professional valuers – L. & B. Donated Assets: AS 20 – Grant & Asset – Recorded at fair value or nominal value Self-constructed Assets: Costs attributable
DEPRECIATION Depreciation represents the expired portion of the cost of an asset. Depreciation and Depletion Depreciation and Amortization Depreciation and Obsolescence Depreciation and Fluctuation
CAUSES 1. Wear and Tear 2. Lapse of Time 3. Obsolescence 4. Depletion
OBJECTIVES OF PROVIDING DEPRECIATION Ascertaining the true profit Ascertaining the true cost of production Presentation of true financial position Funds for replacement of assets
FACTORS INFLUENCEING DEPRECIATION 1.Cost of the asset 2.Estimated working life 3.Estimated scrap/residual/salvage value Depreciable Base = Cost – (Residual value – Cost of disposal)
DEPRECIATION METHODS 1.Fixed Installment Method or Straight-line Method: Depreciation (p.a.) = (C – S) / N 2.Written-down-Value Method or Diminishing Balance Method: Depreciation Rate = 1- (Residual value / Cost) 1/n
SPECIAL PROBLEMS Depreciation for partial periods Revision of depreciation rates Assets of low unit costs Changing the depreciation method Group depreciation Depreciation for Income Tax Disposal of F.A. Revaluation of F.A.
INTANGIBLE ASSETS Amortisation of I.A. Goodwill Brands R. & D. costs Computer software costs Deferred costs IMPAIRMENT OF ASSETS Impairment Loss = Carrying Amt. – Recoverable Amt.
NATURAL RESOURCES Wasting Assets - Depletion
LIABILITIES Obligations for future payment Current Vs. Long-term Secured Vs. Unsecured Contingent liabilities
CURRENT LIABILITIES Definite liabilities Vs. Estimated liabilities Definite Liabilities –Trade Creditors –Bills Payable –VAT Payable –Current portions of Long-term Debt –Accrued Liabilities –Unearned Revenues
RESERVES Capital Reserve & Revenue Reserve Share Premium Capital Redemption Reserve Debenture Redemption Reserve Investment Allowance Reserve APPROPRIATIONS
Buy-back of Shares Bonus Shares Stock-based Compensation EPS
CASH FLOW STATEMENT Shows the historical changes in Cash & CE During a particular period Operating, Investing & Financing activities
C.F.S. – Benefits Ability to generate Cash & CE Needs to utilise cash flows Assess Liquidity & Solvency Indicator of future cash flow Relationship: Profitability & Net Cash Flow
Cash Flow from Operating Activities-Direct Cash receipts from Customers Cash paid to Suppliers & Employees Cash generated from Operation - Income taxes paid Cash flow before Extra-ordinary items - Extra-ordinary items Net cash from Operating Activities
Cash Flow from Operating Activities-Indirect N.P. before Tax & Extra-ordinary item Adjustments for: –Depreciation –Foreign Exchange Loss –Interest & Dividend Income –Interest Expense Op. Profit before W.C. changes –Changes in S. Drs. & Inventory –Changes in S. Crs. Cash generated from Operation –Income Taxes paid Cash flow before Extra-ordinary item –Extra-ordinary Items Net Cash from Operating Activities
Cash Flow from Investing Activities Purchase of Fixed Assets Sale of F.A. Purchase of other Investments Sale of other Investments Interest Received Dividend Received Net cash from(used in) Investing Activities
Cash Flow from Financing Activities Proceeds from issue of Share Capital Proceeds from Long-term Borrowings Repayments of Long-term Borrowing Interest Paid Dividend Paid Net Cash from(used in) Financing Activities
CASH FLOW STATEMENT Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Net cash increase(decrease) in cash & CE Cash & CE at beginning of the period Cash & CE at the end of the period.
BALANCE SHEET (Figures in Lakhs) LIABILITIES AND EQUITY March 31, 2012 March 31, 2011 Share capital Reserves Profit and Loss balance Long-term borrowings Current liabilities Provisions for tax Proposed dividend TOTAL ASSETS Gross fixed assets Less: Accumulated depreciation Net fixed assets Investment (all long-term) Inventories Debtors Cash and bank balance Loans and advances TOTAL BALANCE SHEET (Figures in Lakhs) LIABILITIES AND EQUITY March 31, 2012 March 31, 2011 Share capital Reserves Profit and Loss balance Long-term borrowings Current liabilities Provisions for tax Proposed dividend TOTAL ASSETS Gross fixed assets Less: Accumulated depreciation Net fixed assets Investment (all long-term) Inventories Debtors Cash and bank balance Loans and advances TOTAL
PROFIT AND LOSS STATEMENT FOR THE YEAR ENDED MARCH 31, 2012 INCOME(Figures in Lakhs) Sales1260 Other income152 Stock adjustment18 Total1430 EXPENDITURE Raw materials consumed715 Manufacturing expenses140 Administration expenses80 Selling and distribution expenses65 Depreciation90 Interest55 Total1145 Profit before tax (PBT)285 Provision for tax120 Profit after tax (PAT)165 Profit and loss balance at the beginning of the year125 Profit available for appropriation290 Transfer to reserves100 Proposed dividend (including dividend tax)55 Balance of profit carried to balance sheet135 i. Loans and advance include income tax paid Rs.120 lakhs (previous year Rs.75 lakhs). Ii. During , 5,00,000 equity shares of Rs.10 each were issued at par. Iii. Long-term loan Rs.30 lakhs repaid during the year. Long term loan raised during the years Rs.80 lakhs. Prepare Cash flow statement.
Annual Report: Contents Highlights Financial & Production Statistics EVA Reporting HRA Reporting Environmental Reporting Social Reporting Value Added Statement Inflation Accounting
“The woods are lovely, dark and deep. But I have promises to keep. And miles to go before I sleep, And miles to go before I sleep.” Robert Frost “Arise, awake and stop not till the goal is reached.”