Introduction to Financial Accounting PDF

Accounting Suhas M Avabruth Accounting As old as human civilization Language of the business Information for decision making to various stakeholders Accounting is an information system  Accounting information system Processes Users E...

Accounting Suhas M Avabruth Accounting As old as human civilization Language of the business Information for decision making to various stakeholders Accounting is an information system  Accounting information system Processes Users Events Financial Transactions Accounting Statements Investors Principles Reports Lenders etc. Procedures Inputs Output Accounting Trail Identify a transaction Record in Accounting Books Recording Prepare a Trial balance Prepare Financial Reporting Statements True and Fair view in Accounting True Financial statements are factually correct Prepared according to a reporting framework. Fair Financial statements presents the information faithfully. Substance over the form Accounting Conventions Convention of Disclosure All significant information should be disclosed therein. Convention of Consistency Rules and practices of accounting should be consistently applied. Convention of Conservatism “Provide for all possible losses and anticipate no profit” Convention of materiality All information required for decision making by the investors should be disclosed. Accounting Principles Entity Concept A business entity is an economic unit separate from its owners It owns its assets and has its own obligations Only those transactions which affects the financial positions of the business entity will be recorded Entity Concept A grocery store purchased goods for selling to its customers Tata steel ltd. purchased a furnace. A sole proprietor purchased jewellery for his wife Infosys ltd. Invested in fixed deposit from its free cash A partner in a partnership firm sold his property  Going Concern Accounting assumes business is a continuing enterprise (unless there is substantial evidence). When the entity does not prepare the financial statements on going concern it should be Accounting disclosed. Persistent losses, continuous default on loans Principles etc. call for questioning going concern assumption Historical Cost Asset not meant for sale should be recorded at historical cost. It is an extension of the going concern concept Accounting Principles Money Measurement Only transactions which are measurable in monitory terms should be recorded. Matching Expenses should be matched with the revenues. Dual Aspect Every transaction has two aspects. Both the aspects of the transaction needs to be recorded. Accounting Principles Periodicity Periodicity breaks the infinite life into shorter time periods for reporting. Usually the reporting is done every year. Accrual Concept Income and expenses should be recognized as and when they are earned and incurred, irrespective of receipt of money Cash basis of accounting Transactions are recorded when cash is received or paid Assets What is an Asset Economic Resource Future Benefits Owned by the Organization due to past events Types of Asset Various Classifications like Tangible and intangible Current and Non Current  What is Liability Present Obligation of the entity Arises from past events Liability Settlement results in outflow of resources Types of Liability Outsider and Insider Current and Non Current etc. Income What is income?? Increase in economic benefit Inflows or enhancement of assets or decrease in liabilities It results in increase of equity (other than those contribution from equity holders (owners) What is Revenue ?? Revenue is the gross inflow of economic benefit During a period From the ordinary course of business activity Expenses Decrease in economic benefits Outflows or depletion of assets or increase in liability Decrease in equity (other than those relating to distribution to equity holders (owners)  Furnitures owned by the company Machinery owned by the company Bank loan Creditors A Small Quiz Sale of steel rods by Tata Steel Purchase of coal by Tata Steel Sale of a Furnace by Tata Steel Sale of an Apartment by Sobha Developers Ltd. Sale of an Apartment by TCS Ltd. Balance Sheet It’s a stock and gives a snap shot There are three sections Equity, Liabilities and Assets Order of Permanency Assets Non current and Current Equity Equity Share capital and other equity Liability Non current and the current Income Statement It’s a flow and gives an Idea of what happened in a particular period. Three Parts Income, Expenses and Profit Profit Income - Expenses How to record a transaction Every transaction has two aspects A purchase of furniture for cash A sale of a pen by a grocery shop etc. Both the aspects of the transaction needs to be recorded. Since both the aspects are recorded, the Balance Sheet matches (Assets and the Liabilities) at the end of every transaction. B/S equation or the Accounting equation Assets = Liabilities + Equity  Step 1 Identify the two aspects involved in the transaction. Transaction Step 2 Find out how each of the aspect is affected. Analysis Step 3 Update each of the aspect. At the end of each transaction the asset and the liability+equity should match. Example Asset Equity + Liability Example Purchased machinery worth 50,000 for One asset Increases and other decreases - Purchase of machinery for cash cash. Asset increases Liability increases Purchase of supplies on Two aspects involved are machinery credit and cash - One liability increases Un paid expenses such as and other liability Out standing salary, Value of the machinery is going up decreases telephone bill etc. and value of the cash is coming down. Therefore machinery gets added by 50,000 and the cash gets subtracted by 50,000. Transactions can have the following effect Thank you