Accounting & Financial Analysis

Unit 1

Confidential

Unit-Overview

Accounting Concepts, Conventions and Principles, Accounting Equation, International Accounting Principles and Standards & Matching of Indian Accounting Standards with International Accounting Standards

Page 2

Discussion Topics
Accounting Concepts ,Conventions & Principles

Accounting Equation

International Accounting Principles and Standards & Matching of Indian Accounting Standards with International

Accounting Concepts ,Conventions & Principles

Accounting is the language of business. The affairs and the results of the business are communicated to others through accounting information, which has to be systematically recorded and presented. According to Bierman and Derbin , Accounting may be defined as the identifying , measuring , recording and communicating of financial information. Accounting can be defined as the process of identifying, measuring, recording and communicating the economic events of an organization to the interested users of the information.

Characteristics of Accounting

Economic events

Identification, measuring, recording and communication

Organization

Interested users of information

Accounting Principles
Accounting Principles can be divided between :-

1.
2.

Accounting Concepts
Accounting Conventions

The term concept is used to connote accounting postulates, which are necessary assumptions and conditions upon which accounting is based. The

term convention is used to signify customs and traditions as a guide to the

presentation of accounting statements.

Accounting Concepts
Business Entity Concept
Business is separate entity than owner. All business transaction recorded in separate books & even owner is treated as a creditor to the extent of his/her capital.

Money Measurement Concept

Only monetary transactions are recorded in accounting books.

Cost Concept

Transactions are recorded at actual cost.

Conti
Dual Aspect Concept
Every transaction has two aspects a debit & a credit'. The sum of all debits will

equal the sum of all debits.

Realisation Concept
Transactions are recorded only when they occur & not in anticipation of their occurrence.

Going Concern Concept

At the time of recording the transaction, it is assumed that entity will continue to remain
in business for as long as can be foreseen.

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Accrual Concept
Income is recorded when goods are supplied or a service is rendered, even though the

money may be received later; expenditure is recorded when goods are procured or a service
is availed, even though the money may be paid late.

Matching Concept
Income and expenses for a period are correlated to ensure that the accounts project an accurate picture. Therefore:

When an income is recorded, all expenses incurred to earn that income must be recorded.
Related income and expenditure must be recorded during the same reporting period.

Accounting Convention
Consistency
Accounting practices should remain the same from year to year.

Disclosure
All information which is essential for fully understanding the financial statement should be disclosed in addition to the information required to be disclosed by law.

Conservatism
Financial statements should be drawn up on a conservative basis i.e. anticipated income should not be recorded whereas likely losses should be provided for

Functions of Accounting
Keeping Systematic Records Systematic record of financial statements, maintain theses records in financial statements. Protecting Properties Of The Business Protect assets from an unjustified & unwarranted use. Communicating The Results Communicate & share results with stakeholders for showing true position of the business. Meeting Legal Requirements Meet the legal requirements under the Companies Act, Income Tax Act, Sales Tax Act and so on.

The Accounting Cycle

Recording transactions in subsidiary books.

Classifying data by posting from subsidiary books to the accounts.

Closing the books and preparation of final accounts.

Systems Of Accounting
Cash System
This system takes into account only cash receipts and payments on the assumption that there are no credit transactions.

Single Entry System

It deals with only one aspect of transaction. This system recognizes cash and personal items

of the transactions and it ignores the impersonal items. So it is incomplete, inaccurate and
unscientific.

Double Entry System

This system takes into account every business transaction in its double aspect, i.e. receiving
benefit by one party and giving the like benefit by another. So it records the two-fold aspect of every business transaction.

Discussion Topics
Accounting Concepts ,Conventions & Principles

Accounting Equation

International Accounting Principles and Standards & Matching of Indian Accounting Standards with International

The Accounting Equation Assets = Liabilities + Owners Equity

The resources owned by a business

Conti.. Assets = Liabilities + Owners Equity

The rights of the creditors, which represent debts of the business

Conti.. Assets = Liabilities + Owners Equity

The rights of the owners

Business Transactions

A business transaction is an economic event or condition that directly changes an entitys financial condition or directly affects its results of operations.

On November 1, 2010, John begins a business that will be known as Soft Solutions.

a. John deposits Rs.25,000 in a bank account in the name of Soft Solutions.

Assets
a. Cash 25,000 = = Owners Equity John, Capital 25,000 Investment by John

b. Soft Solutions exchanged Rs.20,000 for land.

Assets
Cash + Land Bal. 25,000 b. 20,000 +20,000 Bal. 5,000 20,000

= =

Owners Equity John, Capital 25,000 25,000

c. During the month, Soft Solutions purchased

supplies for Rs.1,350 and agreed to pay the supplier in the near future (on account).
Assets =

Cash + Supplies + Land

Bal. 5,000 c. Bal. 5,000 20,000 + 1,350 1,350 20,000 =

Owners Liabilities + Equity Accounts John , Payable Capital

25,000 + 1,350 1,350 25,000

d. Soft Solutions provided services to customers, earning fees of Rs.7,500 and received the amount in cash.
Assets =

Cash + Supplies + Land Bal. 5,000 1,350 20,000 d. + 7,500 Bal. 12,500 1,350 20,000

Owners Liabilities + Equity Accounts John, Payable Capital 1,350 25,000 + 7,500 Fees earned 1,350 32,500

e. Soft Solutions paid the following expenses: wages, Rs.2,125; rent, Rs.800; utilities, Rs.450; and miscellaneous, Rs.275.
Assets =

Cash + Supplies + Land Bal. 12,500 1,350 20,000 e. 3,650

Bal.8,850

1,350

20,000

Owners Liabilities + Equity Accounts John, Payable Capital 1,350 32,500 2,125 Wages 800 Rent 450 Util. 275 Misc. 1,350 28,850

f. Soft Solutions paid Rs.950 to creditors during the month.

Assets =

Cash + Supplies + Land Bal. 8,850 1,350 20,000 f. 950 Bal. 7,900 1,350 20,000

Owners Liabilities + Equity Accounts John, Payable Capital 1,350 28,850 950 400 28,850

g. At the end of the month, the cost of supplies on hand is Rs.550, so Rs.800 of supplies were used.
Assets =

Cash + Supplies + Land Bal. 7,900 1,350 20,000 g. 800 Bal. 7,900 550 20,000

Owners Liabilities + Equity Accounts John, Payable Capital 400 28,850 800 Supplies expense 400 28,050

h. At the end of the month, John withdrew Rs.2,000 in cash from the business for personal use.
Assets =

Cash + Supplies + Land Bal. 7,900 550 20,000 h. 2,000 Bal. 5,900 550 20,000

Owners Liabilities + Equity Accounts John, Payable Capital 400 28,050 2,000 Withdrawal 400 26,050

Effects of Transactions on Owners Equity

Owners Equity Decreased by Increased by

Owners withdrawals Expenses

Owners investments Revenues

Net income

Discussion Topics
Accounting Concepts ,Conventions & Principles

Accounting Equation

International Accounting Principles and Standards & Matching of Indian Accounting Standards with International

Introduction
Financial statements are prepared to summarize the end-result during an accounting period in monetary terms.

Comparison of financial statements poses some difficulties because of the divergence in the methods and principles adopted by different enterprises.

In order to make these methods principles uniform and comparable to the

extent possible standards are evolved.

Accounting Standards
Accounting Standards are the statements of code of practice of the regulatory

accounting bodies that are to be observed in the preparation and presentation of

financial statements.

The uniform , definite and universally accepted accounting rules developed by International Accounting Standards Committee (IASC) are known as

Accounting Standard.

Objectives of Accounting Standards

Remove variations in the treatment of several accounting aspects and to bring about

standardization in presentation.

They intent to Harmonize diverse accounting policies followed in the preparation

and presentation of financial statements by different reporting enterprises so as to facilitate intra-firm and inter-firm comparison.

Conti
The Institute of Chartered Accountants of India (ICAI) recognizing the need to harmonize the diverse accounting policies and practices at present in use in India & constituted Accounting Standards Board (ASB) on April 21, 1977. The main role of ASB is to formulate Accounting Standards from time to time.

The International Accounting Standards Board (IASB) is the independent, accounting standard-setting body of the IFRS foundation.

It is responsible for developing International Financial Reporting System(the new name for International Accounting Standards issued after 2001), and promoting the use and application of these standards.

Matching of Indian Standards with International Standards

INDIAN ACCOUTNING STANDARDS
AS 1- Disclosure of Accounting Policies AS 2- Valuation of Inventories AS 3- Cash Flow Statements

INTERNATIONAL ACCOUNTING STANDARDS

IAS 1- Disclosure of Accounting Policies

IAS 2- Valuation of Inventories

IAS 4- Depreciation Accounting

AS 4- Contingencies and Events Occurring after the Balance Sheet Date AS 5- Net Profit or Loss for the period, Prior Period Items and Changes in Accounting Policies
AS 6- Depreciation Accounting AS 7- Construction Contracts (revised 2002)

IAS 5- Information to be Disclosed in Financial ..

IAS 7 -Cash Flow Statement IAS 8- Net Profit or Loss for the period, . Fundamental Errors and change in Accounting Policies AS 9 -Revenue Recognition IAS 9- Research and Development Costs AS 10 -Accounting for Fixed Assets IAS 10 -Contingencies and Events Occurring after the Balance Sheet Date

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AS 16 - Borrowing Costs IAS 16- Property , Plant and Equipment AS 17- Segment Reporting IAS 17- Accounting for leases

AS 18- Related Party Disclosures IAS 18- Revenue

AS 19- Leases

IAS 19- Retirement Benefit Costs AS 21- Consolidated Financial Statements

IAS 21- Effect of Changes in foreign Exchanges Rates AS 22- Accounting for Taxes on Income. IAS 22 - Business Combinations AS 23- Accounting for Investments in Associates in Consolidated Financial Statements IAS 23- Borrowing Costs AS 24-Discontinuing Operations IAS 24 - Related Party Disclosures AS 25- Interim Financial Reporting IAS 25- Accounting for Investments

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AS 26- Intangible Assets
IAS 26- Accounting and Reporting by Retirement Benefit Plans AS 27- Financial Reporting of Interests in Joint IAS 27- Consolidated Financial Statements and Ventures Accounting for Investments in subsidiaries AS 28- Impairment of Assets IAS 28- Accounting for Investment in Associates AS 29- Provisions, Contingent` Liabilities and IAS 29- Financial Reporting in Hyperinflationary Contingent Assets Economics .. IAS 30- Disclosure in the Financial Statement of Banks and Similar Financial Institutions .. IAS 31- Financial Reporting of Interests in Joint Ventures IAS 32- Financial Instruments: Disclosure and Presentation IAS 33- Earnings per Share IAS 34-Interim Financial Reporting . IAS 35 -Accounting for discontinuing operations IAS 36 -Impairment of Assets . IAS 37-Provision for Contingent liabilities and assets IAS 38 -Auditing IAS 39- Financial Performance Appraisal, Recognition and Measurement