Accounting Primer Session 1

Accounting Primer June-July, 2012

SESSION I

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Business organizations provide products and services, They convert inputs into outputs by applying processes.

Merchandising or Trading organizationsPantaloon, wal-mart, Amazon.com etc.

Manufacturing organizationsAmul, SONI, etc.

Services organizationsWork done by one person that benefits another. The recipient of a service can experience its personally but cannot transfer it to another person.

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Forms of business organizations:

From commercial and legal angles, business may be organized in many ways. The common forms of organizing business are:

Sole Proprietorship•Unlimited liability•No specific law to regulate the business

Partnership•Minimum two, maximum 20 persons trading together•Unlimited liability•Indian partnership act•Architects, lawyers , accountants etc.

Limited companyLegal entity: under the law it has most of the rights like human beingsLimited companies can be either public or private

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Private Company:

•Minimum paid up capital of one lakh or such higher paid-up capital as may be prescribed.

•Restricts the right to transfer its shares

•Limits the number of its members to fifty (50)

•Prohibits any invitation to the public to subscribe for any shares in, or debentures of the company.

Public company:

•Is not a private company

•Has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed.

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Government Company:Any company in which not less than fifty-one percent of the paid-up share capital is held by the central government, or by any state government or governments, or partly by the central government and partly by one or more state governments

Foreign Company:•Is incorporated outside India•Has established a place of business with in India

Companies with license under section 25Where it is proved to the satisfaction of the central government that an associationIs about to be formed as a limited company for promoting commerce, art, science, religion, charity or any other useful object .

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Microsoft Office Excel Worksheet

Microsoft Office Word Document

Adobe Acrobat Document

Companies under Section 25

US companies in India

Government companies


Limited Liability Partnership (LLP)Partner formed and registered under the limited liability partnership act, 2008.Only individuals can be partners in a partnership, but an LLP can have individuals or corporate bodies as partners.

In Class Activity:

List out companies under various categories mentioned above

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Adobe Acrobat Document Microsoft Office

Word DocumentMicrosoft Office Word Document

Annual Report

MNCs in India

Regulators


FIRST LLP Microsoft Office Word DocumentLLP

FAQ


Comparison between LLP, Partnership and Company.


What is Accounting:

Book-keeping:Recording of transactions in a systematic manner.

Accounting:

•Accounting often called the language of business

•The main purpose of accounting is to ascertain profit or loss during a specified period, to show financial position of the business on a particular date and to have control over the firm’s property.

“the art of recording, classifying and summarizing in a significant manner in terms of money transactions and events which in part, at least of a financial character and interpreting the results thereof”.

American Institute of Certified Public Accountants7


Accounting Information and Economic Decisions:

•The accounting system process business transactions to provide information to various interested parties.

•there are external and internal users of the information thus produced

•Accounting information is useful in making number of decisions that affect the income or wealth of individuals and organization.

Decisions that are based on accounting information

•Decide when to buy, hold or sell an equity investment•Assess the stewardship or accountability of management•Assess the ability of the enterprise to pay and provide other benefits to its employees•Determine tax policies•Determine distributable profits and dividends•Regulate the activities of enterprises8


The Accounting Information System

INPUTS•Business transactions•External events(change in tax laws etc.)

PROCESSING•Accounting principles•Accounting standards•Management estimates•Laws and regulations•Companies act and income tax act•Accounting records

OUTPUTS•Profit and loss account•Balance sheet•Cash flow statement•Explanatory notes•Management commentary•Tax returns•Regulatory filings

USERS•Shareholders•Security analysts•Banks ,Rating agencies•Managers, Employees •Suppliers, Customers•Government, Regulators•Media

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Users of Accounting InformationInvestors•Enables the investors to identify promising investment opportunities•Financial reports

Lenders• Banks

• Debenture holders• Credit evaluation benchmarks

Security Analysts, Rating Agencies and other Information Specialists•Equity Analysts•Bond Analysts•Stock brokers•Credit rating agencies

Managers• Planning and controlling operations• Monitor the key financial indicators

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CustomersSuppliers for their future purchases and after sale support

Government and Regulatory Authorities• SEBI• IRDA• TRAI• RBI

The PublicFinancial statements assist the public by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities•Political parties•Public affair groups•Consumer groups•Newspapers•Television channels•Environment protection groups•Anti-business activities etc.

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Basis of Accounting:

•Cash Basis•Accrual Basis

Cash Basis

•Actual cash receipts and Actual cash payments are recorded

•Credit transactions are not recorded at all until the cash is actually received or paid•The receipts and payments account prepared in case of non-trading concerns such as a charitable institution, a club, a school, a college etc.

•Professional men like a lawyer, a doctor, a chartered accountant etc. can be cited as the best example of cash system

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Accrual Basis:

•On the accrual basis of accounting, the income whether received or not but has been earned or accrued during the period forms part of the total income of that period.

Similarly

•If the firm has taken benefit of a particular service, but has not paid within that period, the expense will relate to the period in which the service has been utilized and not to the period in which payment for it is made.

•Thus net income for a period is the result of matching of revenue realized in the period and costs expired during the period.

•This basis of accounting gives complete picture of the financial transactions of the business and makes a record of all transactions relating to a period.

•All the companies require to maintain their accounts on accrual basis of accounting. 13


Business transaction

Debtor Creditor

Capital Goods Assets

liabilities Equity Income

Expenditure Drawings Loss

Profit Turnover Capital expenditure

Revenue expenditure Deferred revenue expenditure

Bad debts

Inventory Reserve Provision

Basic Terminology

SO MANY TERMS………… REFER MATERIAL 14

Accounting Primer Session 1

Documents

Transcript of Accounting Primer Session 1