INTRODUCTION TO FINANCIAL ACCOUNTING
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INTRODUCTION TO FINANCIAL ACCOUNTING
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INTRODUCTION TO FINANCIAL ACCOUNTING. HISTORY AND ORIGIN OF ACCOUNTING. The earliest accounting records were found amongst the ruins of ancient Babylon, Assyria and Sumeria, which date back more than 7,000 years. - PowerPoint PPT Presentation
Transcript of INTRODUCTION TO FINANCIAL ACCOUNTING
INTRODUCTION TO FINANCIAL ACCOUNTING
HISTORY AND ORIGIN OF ACCOUNTING
The earliest accounting records were found amongst the ruins of ancient Babylon, Assyria and Sumeria, which date back more than 7,000 years.
The people of that time relied on primitive accounting methods to record the growth of crops and herds.
Because there is a natural season to farming and herding, it is easy to count and determine if a surplus had been gained after the crops had been harvested or the young animals weaned.
EARLY ACCOUNTING IN INDIA
Early references to accounting concepts are found in the Vedas: Vikraya is found in the Atharvaveda and the Nirukta denoting ‘sale’. Sulka in the Rig veda clearly means ‘price’. In the Dharma Sutras it denotes a ‘tax’.
What is Financial Accounting?
A method to communicate financial information to interested external parties.Users include capital providers, regulators, customers, suppliers, employees, etc
Capital suppliers include debt and equity providers
Financial accounting is used for both prediction and control
ACCOUNTING & BOOKKEEPING ESSENTIALS
Accounting is a more complex concept that means reflection of the results of transactions according to the principles, standards, and statutory requirements in the financial statements and other business reports.
DEFINITION OF ACCOUNTING
Accounting refers to the process of
•Recording
•Classifying
•Summarizing
•And analyzing the information gathered or collected in monetary terms,
And thereof interpreting the results to the users who are interested in such information.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Generally Accepted Accounting Principles (GAAP) refer to the standard framework of guidelines for
financial accounting used in any given jurisdiction;
generally known as Accounting Standards. GAAP includes the standards, conventions, and rules accountants follow in
recording and summarizing , and in the preparation of financial statements.
IS ACCOUNTING A SCIENCE OR AN ART ?Definition of Science :
1. a branch of knowledge or study dealing with a body of facts or truths systematically arranged and showing the operation of general laws: the mathematical sciences.
2. systematic knowledge of the physical or material world gained through observation and experimentation.
3. any of the branches of natural or physical science.
4. systematized knowledge in general.
5. knowledge, as of facts or principles; knowledge gained by systematic study.
Definition of Art:
1. The expression or application of human creative skill and imagination, typically in a visual form such as painting or sculpture, producing works to be appreciated primarily for their beauty or emotional power.
2. Works produced by such skill and imagination
3. Skill, dexterity, or the power of performing certain actions, acquired by experience, study, or observation
Accounting is both an art and science.
An art because it can be learnt by practice and not by mere listening to it like scientific rules. Every accountant is not same. Many are good and other make mistakes, like every person is not a great artist.
It is science because it is based on many rules, concepts, conventions and assumptions. If everything goes accordingly, your balance sheets match, trial balances match and profits can be calculated correctly.
But even if a single accounting concept is mishandled and transaction is entered incorrectly, it brings propagation errors. We need to go back every step to trace it, which is very exhausting. So its a science.
BOOK KEEPING
Bookkeeping is the recording of financial transactions. Transactions include sales, purchases, income, and payments by an individual or organization. Bookkeeping is usually performed by a bookkeeper. Bookkeeping should not be confused with accounting.
How is bookkeeping different from accounting?
BASIS ACCOUNTING BOOK KEEPING
Performed by An accountant A bookkeeper
Purpose Interpret, prepare Financial statements, etc.
Record, classify and summarize transactions
Results used by Internal (management, employees) and external users (owners, creditor, banks, etc.)
Accountants
Methods used / principals applied
GAAP, IFRS, etc. Single-entry bookkeeping system, Double-entry bookkeeping system
DIFFERENCE ACCOUNTING VIS-À-VIS BOOK KEEPING
OBJECTIVES OF ACCOUNTING
ACCOUNTING
PROFITABILITYASCERTAINMENT
FINANCIAL POSITION
FORECASTING
GENERATE INFORMATION
•Profitability Ascertainment: Shows true figures of profits earned my the business or losses incurred by the business enterprise, as the case may be.
•Financial Position: Shows true financial position of the business, position of assets and liabilities and helps the administrators to decide for future well being
•Generates Information: Accounting generates information about the financiability of the business enterprise. It provide true benchmarks for the business to survive in the long run by providing with good sources of accurate data
•Forecasting: Accounting helps the business enterprises to predict the position of the business in the future and decide about the future in the present.
Systematic record of business transactions.
Protecting the property of the business.
Communication of results and compliance of legal requirements
FUNCTIONS OF ACCOUNTING
USERS OF ACCOUNTING INFORMATION
BRANCHES OF ACCOUNTING
FINANCIAL ACCOUNTING
COST ACCOUNTING
MANAGEMENT ACCOUNTING
SYSTEM OF ACCOUNTING
Single Entry System: Under this system only personal accounts with or without subsidiary books are maintained.
This system has no complete record of business transactions done during a specified period.
Hence neither trial balance nor final accounts can be prepared.
This system is less costly.
A double-entry system
is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different ledger accounts.
When each financial transaction is closely analyzed, it reveals two aspects. One aspect will be “receiving aspect” or “incoming aspect” or “expenses/loss aspect”. This is termed as the “Debit aspect”. The other aspect will be “giving aspect” or “outgoing aspect” or “income/gain aspect”. This is termed as the “Credit aspect”
the basic principle of this system is, for every debit, there must be a corresponding credit of equal amount and for every credit, there must be a corresponding debit of equal amount.
ADVANTAGES OF ACCOUNTING
•ACCOUNTING REPLACES HUMAN MEMORY
•ACCOUNTING HELPS IN KNOWING PROFIT
•ACCOUNTING HELPS IN KNOWING FINANCIAL POSITION OF ORGANISATION
•ACCOUNTING HELPS IN KNOWING LIST OF CREDITORS AND DEBTORS •ACCOUNTING HELPS IN PAYING TAXES
•ACCOUNTING HELPS IN RAISING MORE FUNDS BY SUPPLYING INFORMATION TO INVESTORS AND CREDITORS
•ACCOUNTING HELPS IN PLANNING FOR EXPANSION
•ACCOUNTING HELPS IN GETTING BANK LOANS
LIMITATIONS OF ACCOUNTING
1. Records only monetary transactions.2. Effects of price level changes not considered3. Personal bias of accountant affects the accounting
statements.4. Permits alternative treatments.5. Profit no real test of managerial position
Accounting & Economics
Accounting & Mathematics and
Statistics
Accounting with law and Management
Accounting & Sociology
Accounting & Engineering
ACCOUNTING AND OTHER FIELDS OF SPECIALIZATION
Accounting and economics: Budget planning, true economy position, greater debt security analysis, fewer risk economic trends
Accounting & Business Mathematics and Statistics: Analysis of stastical information and mathematical relations through true fair accounting without window dressing
Accounting & Engineering: Used in true measurement of costs of each labor and works element for better quality product , infrastructure and costing.
Accounting & Sociology : Study of human wants and needs through true accounting concepts, finding out benchmarks like purchasing worth of a rupee , human development index, etc.
Accounting with Law & Management: Maintaining proper law, order , and management, through and fair accounting of each necessary item whether human or financial.
What Does Cash Basis Mean?A major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out.
This contrasts to the other major accounting method, accrual accounting, which requires income to be recognized in a company's books at the time the revenue is earned (but not necessarily received) and records expenses when liabilities are incurred (but not necessarily paid for).
B. Advantages of cash basis accounting1. It is easy to do.
2. It is objective, with few choices to make. Cash either comes in or goes out, period!
C. Disadvantages of cash basis accounting1. No attempt is made to match an expense with the revenue it generates.This means that the income statement and balance sheet may not be goodpictures of recent business activity and present business conditions.
2. For example, the cash purchase of an expensive computer will all becharged in the year of purchase, even though it will last a number of years.This means that income in the year of purchase would be understated andincome would be overstated in the following years.
3. When business activity involves inventory assets, cash basis accounting is not.allowed for income tax purposes by the Internal Revenue Service.
The most commonly used accounting method, which reports income when earned and expenses when incurred, as opposed to cash basis accounting which reports income when received and expenses when paid.
Under the accrual method, companies do have some discretion as to when income and expenses are recognized, but there are rules governing the recognition.
In addition, companies are required to make prudent estimates against revenues that are recorded but may not be received, called a bad debt expense.
ACCRUAL BASIS OF ACCOUNTING...
The advantages and disadvantages of accrual basis accounting1. Accrual accounting measures current income more accurately than the cash method.a. This means that the balance sheet is a more accurate estimate of financial position (value).b. Accurate, current information makes it easier to predict future income and financial position.2. Accrual accounting is difficult to understand.a. Confusion exists because net income does not equal the period's change in cash.b. The cash balance of a company with high income may even decrease during the year.c. For example, a rapidly growing, profitable retailer may face a shortage of cash formany reasons.1) Rapid growth often requires large inventories. New retailers often findthat suppliers will not grant credit. This combination increases cash outflows.2) Gaining market share may require a retailer to grant easy credit terms.This decreases cash inflows.3) As a result, a very successful business may not have adequate cash.
Hybrid Basis of Accounting
Mixture of Cash and Accrual Basis of Accounting.
•Incomes recorded on cash basis and expense on accrual basis.•Used by professionals like Charted Accountants, Lawyers ,
Doctors etc., to reduce net taxable income.
BASIC ACCOUNTING TERMS
•Debtor: Person who owes money to the business
•Creditor: A person to whom money is payable
•Capital: Owner’s Funds.
•Goods: Articles in which the business deals in.
•Assets: A physical thing or right owned by business.
•Equity: A claim which can be enforced against the assts of a firm.
•Income: Inflows of fund.
•Expenditure: Acquisition cost of asset or expenditure.
•Expense: Expenditure whose benefit is enjoyed immediately.
Role in Capital Market
• True Information in prospectus.• Furnishing Financial Results on quarterly basis.
Role in Corporate Governance.
• Auditor’s Report.
OTHER ROLES OF ACCOUNTING
Corporate governance is a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations.
