FINANCIAL ACCOUNTING FOR MANAGERS

1. FINANCIAL ACCOUNTING FOR MANAGERS

2. WHAT IS ACCOUNTING ? • Accounting is the language of business • Accounting is an Information System a) For Insiders b) For Outsiders • Accounting provides reports to stakeholders about the economic activities and condition of a business

3. WHAT IS ACCOUNTING ? • Accounting refers to measurement of economic events and summarising and reporting them in the form of financial statements for use by the stakeholders i.e. bankers, creditors, shareholders, public and Govt. Reporting is thus the end function of accounting

4. BRANCHES OF ACCOUNTING • Financial accounting is the preparation and communication of financial information mainly for those outside the organisation • Management Accounting is the preparation and communication of financial and other information for the internal use of management • Cost Accounting is the collation of data for inventory valuation

5. CONCEPTUAL FRAMEWORK • Purpose The purpose is to create a base for financial statements and provide assistance to : • Preparers • Auditors • Users • The Accounting Standards Board of the ICAI

6. Balance Sheet Income Statement Cash Flow Statement Notes to Accounts and Accounting Policies COMPONENTS OF FINANCIAL STATEMENT

7. OBJECTIVE OF FINANCIAL STATEMENTS To provide information about the financial position, performance and cash flow of an enterprise However they do not provide all the information because 1.They largely portray the financial effects of past events 2.They do not provide information of non-financial nature Financial Position Economic Resources Financial Structure Liquidity and solvency Performance Cash Flows

8. USERS OF FINANCIAL STATEMENTS • Present and Potential Investors • Employees • Lenders • Security Analysts and Advisers • Suppliers and Creditors • Customers • Governments and Regulatory agencies • Public • Management

9. Assumptions Underlying Preparation of Financial Statements • Accrual Basis: The effects of transactions and other events are recognised when they occur and reported in the financial statements of the period to which they relate • Going Concern: The enterprise will continue for a forseeable future and has no intention to liquidate or curtail its operation materially. • Consistency: The accounting policies are followed consistently from year to year.

10. Qualitative characteristics of Financial Statements • Understandability • Relevance • Materiality • Reliability -- Faithful representation -- Substance over form -- Neutrality -- Prudence -- Completeness -- Comparability

11. Financial Position • Assets --- Assets are the resources controlled by an enterprise as a result of past events, from which future economic benefits are expected to flow to the enterprise. • Liabilities – Liabilities are the present obligations of the enterprise ,arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits. • Equity – Equity is the residual interest in the assets of the enterprise after deducting all its liabilities.

12. ACCOUNTING EQUATION The relationship among asset , liability and equity can be expressed by the following equation Assets = Liabilities + Owner’s Equity The effect of all business transactions is reflected in this equation.

13. Elements of Financial Statements • Financial Position -- Assets -- Liabilities --Equity . Performance -- Income -- Expenses . Cash Flows

14. Characteristics • Assets 1. They represent potential to contribute , directly or indirectly, to the flow of cash or cash equivalents to the enterprise. 2. Physical form not essential to the existence of the asset. 3. Legal right of ownership not essential in establishing the existence of asset. 4. Purchasing or producing not always essential to obtain asset. 5. Expenditure incurred for seeking future economic benefits may not result in asset.

15. Characteristics • Liabilities 1. It’s a present obligation to be settled in future 2. Obligations may be due to a binding contract or statutory requirement 3. A present obligation and a future commitment differ from each other 4. Careful estimates are required to measure provisions.

16. Characteristics • Equity • It is dependent on the measurement of assets and liabilities • A change in net assets results in a change in the equity

17. PERFORMANCE • Elements: • Income :- It represents the increase in economic benefits in the form of increase in assets or decrease in liabilities • Expenses:- It represents decrease in economic benefits in the form of outflows or depletion of assets or increase in liabilities ( Expense vs. Expenditure )

18. Characteristics • Income; 1.Both revenue and gains 2. Revenue arises in the ordinary course of business 3.Gains may or may not arise in the ordinary course of business

19. Characteristics • Expenses 1. It includes both expenses and losses. 2. It arises in the ordinary course of business. 3. Losses may or may not arise in the ordinary course of business.

20. RECOGNITION • Condition for Recognition • It is probable that future economic benefits will flow to or from the enterprise. • The item can be measured reliably.

21. MEASUREMENT • Historical Cost • Current Cost • Realisable Value • Present Value

22. Accounting Concepts • Dual Aspect Concept • Business Entity Concept • Accrual Concept • Cost Concept • Money Measurement Concept • Realisation Concept

23. GAAP • Conceptual Framework of Financial Statements • Accounting Concepts • Requirements of Companies’ Act • Accounting Standards • Requirements of Income Tax Act

24. Requirements of Companies Act • Books of Accounts ( Sec.209 ) • All sums of money received and expended by the company • All Sales and Purchases of goods by the company • All assets and liabilities of the company • Cost records in case of companies engaged in production, manufacturing , processing, mining activities

25. Requirements of Companies Act • Annual Accounts ( Sec.210 ) • A balance sheet and • A profit and loss account at every AGM Form and Contents • Balance sheet to exhibit true and fair view of the state of affairs of the company and to comply with part I of schedule VI • Profit and loss account to give a true and fair view of the profit and loss of the company and to comply with part II of schedule VI • Every balance sheet and Profit and loss account to comply with accounting standards

26. Requirements of Companies Act • Company not complying with AS to disclose • Deviation from AS • Reasons for such deviation • Financial effect

27. ACCOUNTING STANDARDS • Accounting Standards Board • Applicability of AS • Scope of AS • Details of AS • Authority attached to AS

28. Requirements of Income Tax Act • I.T. Act allows both cash as well as mercantile system of accounting • Companies Act allows only mercantile system of accounting

29. ACCOUNTING PROCESS • Documentation • Recording • Classifying • Summarising

30. ACCOUNTING PROCESS • Account :- An account is an individual record of increases or decreases in an item that is likely to be of interest or importance. • Ledger :- It is a book which contains accounts. • Journal :- The journal is a chronological record of transactions entered into by a business.

31. CLASSIFICATION OF ACCOUNTS ACCORDING TO NATURE • Personal account :- Accounts of persons or firms with whom the firm enters into transactions. It includes both natural persons’ accounts and artificial persons’ accounts. • Real account :- Accounts of properties under the control of the firm. • Nominal account :- Accounts of revenue , gains, expenses and losses.

32. PRINCIPLES OF DEBIT AND CREDIT • Personal account:-Debit the receiver credit the giver • Real account:-Debit what comes in credit what goes out • Nominal account:-Debit all expenses and losses credit all incomes and gains

33. THE ACCOUNTING CYCLE To record opening entries in the general ledger To record transactions and events in the journal To post journal entries in appropriate accounts in the general ledger To balance the accounts in the general ledger To prepare the trial balance To pass adjustment entries To prepare the revised trial balance To pass closing entries to prepare financial statements

34. TYPES OF JOURNALS • Purchase Day Book • Sales Day Book • Purchase Return Book • Sales Return Book • Cash Book • Journal Proper

35. MATCHING PRINCIPLE • Revenues have to be matched and correlated with all the expenses of a particular year • In other words , profit is determined after charging the expenses of a period with the revenues earned in the same period

36. PRINCIPLE OF CONSERVATISM • This principle requires the accountants not to anticipate gains but to provide for all possible losses • Example : “Lower of cost or market price” policy is adopted while valuing inventory.

37. MATERIALITY • Information is material if its misstatement could influence the decisions of users taken on the basis of financial statements • Materiality depends on the size and nature of the item or error • It is necessitated by practicability and feasibility

38. ADJUSTMENT PROCESS • Why Adjustment Is Necessary ? It ensures that revenues and expenses are recorded or recognised in the period to which they relate to. • It affects both Balance Sheet and Income Statement . • It never affects the cash account. • Adjustments are required when transactions affect revenue and expense of more than one accounting year.

39. ADJUSTMENT PROCESS • Adjusting Entries Result In: • Deferral : A deferral is a delay in the recognition of an expenditure or of a revenue already received • Accrual : An accrual is the recognition of an expense that has not been paid or of a revenue that has not been received

40. Trial Balance Features • Closing balances of accounts in the ledger as well as cash balance are taken • It tests the arithmetical accuracy of ledger balances • It can be prepared monthly, quarterly and yearly • It is a source document for preparing financial statement

41. CLOSING ENTRIES • STEPS • Transfer balances in revenue accounts to the Profit & Loss account • Transfer balances in the expense account to the Profit & Loss account • Transfer balances in the Profit & Loss account to Profit & Loss Appropriation account

42. Balance Sheet • Asset side Items under Fixed Asset • Land • Building • Plant and Machinery • Furniture and Fixture • Vehicles

43. Balance Sheet • Investment • Investment in govt. securities • Investment in shares ,debentures and bonds • Investment in immovable properties • Investment in the capital of partnership firms

44. Balance Sheet • Current Assets, Loans, and Advances Current Assets --- Inventories --- Sundry debtors --- Cash and bank balances Loans and Advances --- Advances recoverable in cash or in kind or for value to be received ---Advance income tax --- Advance deposit of sales tax and excise --- Inter-corporate deposits

45. BALANCE SHEET • Miscellaneous Expenditure • Debit balance in Profit and Los account

46. Balance Sheet • Liabilities side Share Capital --- Equity Share Capital --- Preference Share Capital Reserves and Surplus --- Capital reserves --- General reserve --- Capital redemption reserve --- Debenture redemption reserve

47. Balance Sheet • Loan Funds Secured Loans -- Term Loans -- Debentures --Working capital loans Unsecured Loans -- Fixed deposits --Debentures --Security deposits

48. Balance Sheet • Current Liabilities and Provisions Current Liabilities --- Sundry Creditors --- Expenses Payable --- Advances from customers --- Unclaimed dividends --- Interest accrued but not due Provisions --- Provision for taxation --- proposed dividend --- provision for contingencies

49. PROFIT & LOSS ACCOUNT • Domestic Sales • Exports • others

50. PROFIT AND LOSS ACCOUNT • Expenditure --- Materials Consumed ---Salaries, wages, bonus ---Staff welfare expenses ---Power and fuel ---Repairs and maintenance ---Rent, rates and taxes ---Freight, transportation ---Travelling exp. ---Interest ---Excise duty ---Depreciation ---Provision for taxation ---Extraordinary items