Prof. Seema Chakrabarti Financial Accounting: An introduction Prof. Seema Chakrabarti

Accounting and Financial Reporting Accounting refers to systematic recording, classifying and summarizing of financial transactions and interpreting the results thereof. Thus, accounting encompasses financial reporting. Accounting starts with recording and ends with presentation of financial information in a manner that facilitates informed judgments and decisions by users. Financial Accounting: An introduction

Functions of Accounting System Internal routine reporting to managers for cost planning and cost control of operations, and performance evaluation of people and activities. Internal routine reporting to managers on the profitability of products, brand categories, customers etc. Internal non-routine reporting to managers for strategic and tactical decisions. External reporting through financial statements. Financial Accounting: An introduction

Accounting Trail Identify a transaction Recording Record in Primary Books Record in Secondary Books Prepare Trial Balance Prepare Financial Statements Reporting Financial Accounting: An introduction

Corporate Financial Statements What are the corporate financial statements? Balance Sheet Shows the financial position (position of assets, liabilities and equity) as on the reporting date. Profit & Loss Account Shows the financial results (profit or loss) for an accounting period. Cash Flow Statement Shows the net increase /decrease in cash and cash equivalents during the accounting period. Financial Accounting: An introduction

Financial Statements: Objective To provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements do not necessarily provide non-financial information. Financial Accounting: An introduction

Financial Statements: Elements Elements measuring financial position: Assets Liabilities Equity Elements measuring performance Income (includes gains) Expenses (includes losses) Financial Accounting: An introduction

Financial Statements: Qualitative Characteristics Understandability Relevance Reliability Faithful representation Substance over form Prudence Neutrality Comparability Financial Accounting: An introduction

Meaning of Accounting Principles Accounting principles refer to the rules and actions adopted by the accountants globally for recording accounting transactions. These are classified into two categories: Accounting concepts Accounting conventions Financial Accounting: An introduction

Basic Accounting Concepts An understanding of accounting concepts is vital to understand the process of accounting. Accounting concepts include the assumptions and conditions on which the science of accounting is based. These are also known as accounting standards. Important accounting concepts are: Important accounting concepts underlying the recording of transactions: Entity Concept Money Measurement Concept Financial Accounting: An introduction

Basic Accounting Concepts Accrual Concept Cost Concept Going Concern Concept Periodicity Concept Matching Concept Financial Accounting: An introduction

Accounting Concepts: Entity and Money Measurement Entity Concept: A business entity is an economic unit distinct from its owner(s). Such entity owns its assets and has its own obligations. Only those transactions and events which affect the financial position of the business entity will be recorded in its books of accounts. Money Measurement Concept: Only transactions and events which are measurable in monetary terms should be recorded. Financial Accounting: An introduction

Accounting Concepts: Accrual and Cost Accrual Concept: Income and expenses should be recognised as and when they are earned and incurred, irrespective of whether money is received or paid in connection thereof. An alternative of accrual basis of accounting is cash basis where transactions are recorded only when cash is received or paid. Cost Concept: Assets and liabilities should be recorded at historical cost. The recent trends in accounting show that policy makers favour fair value accounting in place of historical cost accounting. Financial Accounting: An introduction

Accounting Concepts: Going Concern and Periodicity Going Concern Concept: An entity is said to be a going concern if it has ‘neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations’. The valuation principles of assets and liabilities depend on this concept. Periodicity Concept: Accounts are prepared for a defined accounting period. Such period could be a quarter, half year, a year or, in exceptional circumstances, more than one year. This concept is essential to measure financial performance. Financial Accounting: An introduction

Accounting Concepts: Matching and Prudence Matching Concept: While measuring periodic financial results, revenue earned during an accounting period is matched with expenses incurred (to earn the revenue) in the same accounting period. Thus, expenditure incurred during construction phase should be withheld till the business starts commercial activity and earns revenue. Financial Accounting: An introduction

Accounting Conventions Accounting conventions include the customs and traditions that assists the accountants in preparing accounting statements. Important accounting conventions are: Convention of conservatism Convention of full disclosure Convention of consistency Convention of materiality Financial Accounting: An introduction

Recording of Transactions: The Double Entry Principle Each transaction has two aspects (or side): Debit and Credit. Every debit has an equal and opposite credit. Each transaction should be recorded in such a way that it affects two sides- debit and credit- equally. Thus, the first and foremost step in recording a transaction is to identify the debit and credit elements. Financial Accounting: An introduction

Accounting Equation The relationship among three elements of the balance sheet can be expressed through an equation, known as fundamental accounting equation: Assets (A) = Liabilities (L) + Equity (E) The unique feature of the above equation is that all transactions will affect the equation in such a way that the equality will always be maintained. This happens due to double entry rule. Financial Accounting: An introduction