Financial Accounting Management Accounting Financial Management Cost Accounting
Financial Accountingand its role in business decisions Capital maintenance Productive capital Profitable operations Accounting as a measurement and valuation system
A manager may be required to take the following decisions : • Buy, sell , hold an investment • Purchase or hire an asset • Determine the performance of management • Impact of taxation policies • Determine dividend to be paid • Regulate the activities of the business • Decide expansion, takeover, amalgamation
Users of Accounting information • investors ( Institutional and retail ) • lenders • financial analysts • managers • employees • customers • suppliers • government and regulatory bodies • public
Financial Statements Balance Sheet Profit and Loss Account Notes to Account Cash Flow Statement
Accounting framework Components of Financial Statements Objectives of Financial statements Users and their information needs Underlying assumptions Qualitative characteristics of financial statements
Concepts and Conventions • Business entity • Going concern • Money Measurement • Periodicity • Consistency • Accrual • Conservatism • Materiality • Matching
Forms of business organization • Proprietary concerns • Partnership firms • Companies – pvt /public/govt/listed/unlisted • Statutory corporation
Regulatory bodies :Though Accounting is not governed by any Act , there are bodies which influence and regulate accounting and financial reporting. Government ( Company Law Board ). Companies Act regulates the form and contents of financial reports , books of accounts to be maintained, audit etc. ICAI : ICAI has issued various standards known as Accounting Standards which deals with accounting and reporting practices on various matters. It gives professional opinion on various accounting matters which has an influence on accounting practices. SEBI : SEBI regulates companies whose stocks are listed in the stock exchanges. Its main function is to protect the interests of investors and promote a healthy securities market. SEBI has also involved itself in ensuring that financial statements give a true and fair view of state of affairs of the company. The requirements as to preparation of cash flow statement , submission of quarterly results etc. is a step towards that direction. CBDT : Income Tax authorities also influence the preparation of financial statements through various provisions for computing tax on income. Such provisions ensure that accounting practices are not misused to avoid or evade taxes. RBI : RBI has also from time to time prescribed accounting and reporting requirements for financial institutions International Accounting Standards Board : With a view to bring about uniformity in accounting practices and reporting IASB has developed International Financial Reporting Standards. With globalization and listing of shares in foreign markets , it is necessary that a uniform set of Accounting practices be followed across .
Accounting Standards International Financial Reporting Standards (IFRS)
Accounting terms : Assets Liabilities Capital Creditors Debtors Reserves Incomes • Sales • Other incomes • Profit on sale of assets Expenses • Cost of goods sold • Direct expenses • Administrative expenses • Financial expenses • Selling expenses Profit – Gross /Net Dividend Taxes Provisions Bad debts
A company purchases shares of a limited co. as investment. The company has vanished after the IPO. Can the shares be called as asset ? • A case is pending before the consumer court for damages of Rs.1.00 lac as at the end of the accounting year. Is there a liability ? • A company is engaged in giving consultancy services to its clients. As at the end of the year , the company has completed project worth Rs.2.5 lac? How should it treat that amount • ABC Ltd. purchases goods worth 5.00 lacs on credit . Is there an expense involved ? • ABC Ltd. pays Rs.2.00 to a supplier for materials purchased last year. Is there an expense ?
Accounting equation Accounting equation shows the relationship between assets and liabilities of a company. It is the relationship between what a company owns and what it owes to others. It is given as : Assets = Owners capital +Liabilities The effect of every business transaction can be analysed from the above equation. Any change in one component will have a balancing change in another. • If Assets increases : Another asset will decrease / Liability will increase • If Assets decreases : Another asset will increase / liability will decrease • If liability increases : Asset will increase /Another liability will decrease • If liability decreases Asset will decrease / Another liability will increase
A Ltd. issues equity shares of Rs.50.00 lacs A Ltd. purchases Building for Rs.20.00 lacs A ltd. purchases Plant & machinery for Rs.15 lacs A Ltd. takes a loan of Rs.5.00 lacs from Bank A Ltd.purchases raw materials for Rs.5.00 lacs A Ltd.pays salaries Rs.1.00 lac A ltd. sells goods for Rs. 2.00 lacs in cash A ltd. sells goods for Rs. 10.00 lacs on credit A Ltd. purchases equipments for Rs.5.00 lacs on credit A Ltd. repays bank loan Rs.2.00 lacs Arrive at the final results of the above transactions on the accounting equation.
Jai Services had the following balancesas at the end of Mar 2010 Cash – Rs.29000, Debtors – Rs.40000, Office Supplies – Rs.12000, Office equipment –Rs.15000, Creditors – Rs.18000, Capital –Rs.78000 The following transactions took place: • Collected payments from customers Rs.18000 • Billed clients for professional services Rs. 35000 • Purchased supplies on credit Rs. 4000 • Purchased computer Rs.25000 • Received commission Rs.3000 • Paid office rent :Rs.4000 • Withdrew cash for personal use Rs.1500 • Paid staff salary Rs.9000 • Paid creditors Rs.6000 • Took a bank loan Rs.32000. Help Jai to find his business results.
Alpha , Beta and Gamma – three friends decided to start a business of dealing in spare parts. Each one of them contributed Rs. 50000 for the business and started ABC & Co. In the month of April 2010, they took a place on rent @ Rs. 5000 p.m . They purchased some furniture for Rs. 50000 , Office equipment for Rs.50000 and some tools for Rs10000. They also hired two assistants on a monthly salary of Rs.7000 each. In May 2010, they entered into a purchase contract with Delta Ltd. for spares worth Rs.300000. Half of the amount will be paid in cash and remaining will be paid after a period of 30 days. They immediately sent quotations ( margin 20% ) for getting orders from customers . Kapoor & Co. placed an order with them for spares worth Rs.240000 on 30 days credit terms. During the period the following expenses were incurred : Printing and stationery :Rs.1200 , Travelling Rs.600 , Entertainment expenses : Rs.800. ABC & Co. made the following sales and purchases during the quarter Apr- Jun on the same terms June : Purchases Rs. 300000 Sales Rs. 360000 In the month of June they also took a loan of Rs.50000 from Money Bank and purchased a computer for Rs.25000. At the end of the quarter, they wanted to assess the results of their business . Help them .
Venus Music corner provides is in the business of providing audio CDs to customers. During March the accounts were maintained by a professional accountant On March 31, the records showed a balance of Rs.21140 in his capital account. Since he could not afford an accountant , he starts maintaining the accounting records himself. He prepared the statements for the month of April 2010 and was shocked to find that his business had not fared well. He wants you to review his statements. Profit & Loss A/c for the month ended April’10 ExpensesRevenues Salaries 5600 Investments by owner 3000 Electricity 410 Unearned service revenue 600 Advertisement 130 Rent 300 Drawings 4000 Loss for the month 6840 10440 10440 Balance Sheet as on April 30 , 2010 LiabilitiesAssets Creditors 2510 Recording equipment 25500 Service revenue Supplies 2190 earned 12660 Debtors 1210 Capital 14300 Cash 570 29470 29470