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Accounting & Financial Analysis
Unit 1
Confidential
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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
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Discussion Topics
Accounting Equation
International Accounting Principles and Standards & Matching of Indian
Accounting Standards with International
Accounting Concepts ,Conventions & Principles
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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.
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Characteristics of Accounting
Economic events
Identification, measuring, recording and communication
Organization
Interested users of information
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Accounting PrinciplesAccounting Principles can be divided between :-
1. Accounting Concepts
2. 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.
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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.
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Conti Dual Aspect Concept
Every transaction has two aspectsa 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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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 basisi.e. anticipated income
should not be recorded whereas likely losses should be provided for
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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.
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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.
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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.
Systems Of Accounting
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Discussion Topics
Accounting Concepts ,Conventions & Principles
International Accounting Principles and Standards & Matching of Indian
Accounting Standards with International
Accounting Equation
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The Accounting EquationAssets = Liabilities + Owners Equity
The resources
owned by a
business
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Conti..Assets = Liabilities + Owners Equity
The rights of thecreditors, which
represent debts of
the business
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Assets = Liabilities + Owners Equity
The rights of theowners
Conti..
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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.
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a. John deposits Rs.25,000 in a bank
account in the name of Soft Solutions.
John, Capital
25,000 Investment
by John
Cash
25,000a.
Assets Owners Equity=
=
On November 1, 2010, John begins a business that will be known as Soft Solutions.
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b. Soft Solutions exchanged Rs.20,000 for
land.
John, Capital
25,000
Cash + Land
25,000Bal.
Assets Owners Equity=
=b. 20,000 +20,000
Bal. 5,000 20,000 25,000
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Accounts John ,Cash + Supplies + Land Payable Capital
Assets
c. During the month, Soft Solutions purchasedsupplies for Rs.1,350 and agreed to pay the
supplier in the near future (on account).
Owners
Liabilities + Equity=
Bal. 5,000 20,000 25,000c. + 1,350 + 1,350
Bal. 5,000 1,350 20,000 1,350 25,000
=
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d. Soft Solutions provided services to
customers, earning fees of Rs.7,500
and received the amount in cash.
Bal. 12,500 1,350 20,000 1,350 32,500
d. + 7,500 + 7,500
Accounts John,Cash + Supplies + Land Payable Capital
AssetsOwners
Liabilities + Equity
Bal. 5,000 1,350 20,000 1,350 25,000Fees
earned
=
=
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e. 3,650 2,125
800
450
275
Wages
Rent
Util.
Misc.
Accounts John,Cash + Supplies + Land Payable Capital
Assets
e. Soft Solutions paid the following expenses:
wages, Rs.2,125; rent, Rs.800; utilities,
Rs.450; and miscellaneous, Rs.275.
Owners
Liabilities + Equity=
Bal. 12,500 1,350 20,000 1,350 32,500
=
Bal.8,850 1,350 20,000 1,350 28,850
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Accounts John,Cash + Supplies + Land Payable Capital
Assets
f. Soft Solutions paid Rs.950 to
creditors during the month.
Owners
Liabilities + Equity=
Bal. 8,850 1,350 20,000 1,350 28,850
f. 950 950
=
Bal. 7,900 1,350 20,000 400 28,850
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Accounts John,Cash + Supplies + Land Payable Capital
Assets
g. At the end of the month, the cost of
supplies on hand is Rs.550, so Rs.800 of
supplies were used.
Owners
Liabilities + Equity=
Bal. 7,900 1,350 20,000 400 28,850
g. 800 800
=
Bal. 7,900 550 20,000 400 28,050
Supplies
expense
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Accounts John,Cash + Supplies + Land Payable Capital
Assets
h. At the end of the month, John
withdrew Rs.2,000 in cash from
the business for personal use.
Owners
Liabilities + Equity
Bal. 7,900 550 20,000 400 28,050
h. 2,000 2,000
Bal. 5,900 550 20,000 400 26,050
With-
drawal
=
=
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Owners
withdrawals
Expenses
Decreased by
Owners Equity
Effects of Transactions on Owners Equity
Increased by
Owners
investments
Revenues
Net
income
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Discussion Topics Accounting Concepts ,Conventions & Principles
Accounting Equation
International Accounting Principles and Standards & Matching of Indian
Accounting Standards with International
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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 thedivergence in the methods and principles adopted by different enterprises.
In order to make these methods principles uniform and comparable to the
extent possiblestandards are evolved.
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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.
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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.
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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.
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Matching of Indian Standards with International StandardsINDIAN ACCOUTNING STANDARDS INTERNATIONAL ACCOUNTING
STANDARDSAS 1- Disclosure of Accounting Policies
IAS 1- Disclosure of Accounting PoliciesAS 2- Valuation of Inventories
IAS 2- Valuation of Inventories
AS 3- Cash Flow Statements
AS 4- Contingencies and Events Occurring after
the Balance Sheet Date IAS 4- Depreciation Accounting
AS 5- Net Profit or Loss for the period, PriorPeriod Items and Changes in Accounting Policies
IAS 5- Information to be Disclosed in Financial
AS 6- Depreciation Accounting..
AS 7- Construction Contracts (revised 2002)
IAS 7 -Cash Flow Statement
.
IAS 8- Net Profit or Loss for the period,Fundamental Errors and change in Accounting
Policies
AS 9 -Revenue RecognitionIAS 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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ContiAS 16 - Borrowing Costs
IAS 16- Property , Plant and Equipment
AS 17- Segment ReportingIAS 17- Accounting for leases
AS 18- Related Party Disclosures
IAS 18- Revenue
AS 19- LeasesIAS 19- Retirement Benefit Costs
AS 21- Consolidated Financial StatementsIAS 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
StatementsIAS 23- Borrowing Costs
AS 24-Discontinuing OperationsIAS 24 - Related Party Disclosures
AS 25- Interim Financial Reporting
IAS 25- Accounting for Investments
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ContiAS 26- Intangible Assets IAS 26- Accounting and Reporting by Retirement Benefit
Plans
AS 27- Financial Reporting of Interests in JointVentures
IAS 27- Consolidated Financial Statements andAccounting for Investments in subsidiaries
AS 28- Impairment of Assets IAS 28- Accounting for Investment in Associates
AS 29- Provisions, Contingent` Liabilities and
Contingent Assets
IAS 29- Financial Reporting in Hyperinflationary
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
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