Accounting & Financial Analysis Ii

Accounting & Financial Analysis

An Introduction

Prof. Raman Chawla

What is accounting Accounting is a system in which all the

financial transaction are recorded in a proper and system way. Accounting is the art of identifying, recording, classifying and summarizing in a significant manner and in terms of money transactions and events which are, in part at least of a financial character and interpreting the result thereof.

Characteristics of financial accounting Accounting is an art- Art is that part of knowledge which helps us in attaining our aim. Accounting helps us in attaining our aim of ascertaining the financial results by showing the best way of recording, classifying and summarizing the business transaction. Recording, Classifying and summarizing- It provides information about all the transactions of financial in nature, recorded in journal, classifying in forms of ledgers, preparation of trial balance for checking the accuracy of accounts. In terms of money-Only those transaction are recorded which are in terms of money. Interpreting the results- It provide the tools for their analysis, through which various parties of business obtain information related to them.

Objectives or functions of accounting Knowledge of sales and purchase Providing information of closing stock Knowledge of financial position Information related for working capital Knowledge of profit & loss of the business Provide information to various parties Provide Information about embezzlement & frauds Evidence in court.

Accounting Process Recording of transaction (Journal entry) Classification (Ledger Posting) Summarizing (Trial balance) Interpreting (Income &position statement) Analysis of transactions

Branches of Accounting Financial Accounting:- It is concerned with recording and processing the financial transactions which affect the financial position of the business. It leads to the preparation of income statement & position statement of the business.

Cost accounting Cost accounting is concerned with the recording, classifying and appropriate allocation of expenditure for the determination of the cost of products or services and for the presentation of suitably arranged data for purposes of control and guidance pf the management.

Management accounting It is concerned with the collecting systematically and regularly all such information as will help management in discharging its functions of planning, control, decision making, etc. this is also named as accounting for management.

Users of accounting information Owners Management Creditors Government Investors Employees Researches Lenders

Generally Accepted Accounting principles (GAAP) Business Entity Concept Going Concern concept Dual Aspect Concept Cost concept Money measurement Concept Accounting period Concept Matching Concept Accrual concept

Business entity concept Business is treated as a unit or entity apart from its owner. The owner of an organization is always considered to be separate and distinct from the business which he controls. that is why, the capital of the owner is always entered in liability side of balance sheet. It is considered as the creditor of the business.

Going concern concept It is assumed that the business will exist for the foreseeable future and transactions are recorded from this point of view. It should continue to operate at its present scale in the foreseeable future.

Dual Aspect Concept Financial accounting has dual aspect of recording. Every debit has its corresponding credit & every credit has its corresponding debit. The modern accounting system basically based on dual aspect of accounting.

Cost concept The underlying idea of cost concept is thatAssets is recorded at the price paid to acquire it, that is, at cost, and.. This cost is the basis for all subsequent accounting for the asset. The change in the real worth of an asset with the passage of time is not ordinarily recorded in the account books.

Money measurement concept The money concept underlines the fact that in accounting every worth recording event, happening or transaction is recorded in terms of money. In other words, a fact or a happening which cannot be expressed in terms of money is not recorded in the accounting books.

Accounting period concept Accounts choose some shorter and convenient time for the measurement of income. Twelve- month period is normally adopted for this purpose. this time interval is called accounting period.

Matching concept It is based on the determination of the profit & loss of a particular accounting period is the process of matching the revenue earned during the period and the expenses incurred during the period to obtain such revenue.

Accrual concept Under this method revenue recognition depends on its realization and not actual receipt. Likewise costs are recognized when they are incurred and not when paid.

Accounting conventions Consistency Full disclosure Conservatism

Consistency The convention of consistency aims at making the financial statements more comparable and useful. The convention holds that in accounting processes, all concepts, principles and measurement approaches should be applied in a similar or consistent way from one period to another period.

Full disclosure This convention specifies that there should be complete and understandable reporting in the financial statements of all significant information relating to the economic affairs of the entity. All information which is of material interest to the users of the accounting information should be disclosed in accounting statements.

Conservatism This is the policy of playing safe. Accounting permits for making reserves to face the uncertainty situations of the business.

Double entry system It is a common system of book-keeping whereby the two aspects of every transaction i.e., It is based on the dual aspect concept. This method of writing every transaction in two different accounts on opposite sides for equal value is known as the double entry system of book keeping. This is the most accurate, complete and scientific system of accounting.

Advantages of double entry system It keeps a complete record of business transactions. It provides complete information concerning the business. It provides a check on the arithmetical accuracy of books of accounts. It discloses the operating results . It makes possible a meaning full comparison of operating and financial performance over a period of time and enable the businessman to evaluate the progress of his business. It also enables a business man to plan and control his operations. It reduces the chances of committing fraud. Past details with regard to any account are easily and accurately obtainable in this system.

Some common terms in accountancy Book-Keeping:-It means recording of business transactions in the books of accounts in accordance with the principles of accounting. Account:- It is a statement of various dealings that occur between a customer and the firm.

Classification of accounts In order to understand the rules of double entry system, it is essential to know which classes of accounts are affected by a particular transaction. For this purpose, all accounts are classified into two classes: 1) personal accounts 2) Impersonal accounts A) real account B) nominal account

Journal The journal records all daily transactions of a business in the order in which they occur. It is the book in which the transactions are recorded first of all under the double entry system. Thus, Journal is a book of original record. A journal does not replace but precedes the Ledger. The process of recording transactions in a journal is termed as journalizing Performa of journal is given below. DATE

PARTICULARS

L.F

AMOUNT

AMOUNT

Explanation 1. Date: The date on which the transaction was entered is recorded here. 2. Particulars: The two aspect of transaction are recorded in this column,i.e, the details regarding accounts which have to be debited and credited. L.F: It means ledger folio. The transactions entered in the journal are later on posted to the ledger. Procedure regarding posting the transactions in the ledger has been explained in the succeeding chapter. Debit. In this column, the amount to be debited is entered Credit. In this column, The amount to be credited is shown

Golden rules of accounting Real account- Debit what comes in, Credit what goes out. Personal accountDebit the receivers, Credit the givers. Nominal account- Debit the expenses & losses, Credit the incomes & gains.

ACCOUNTING STANDARDS Accounting bodies all over the world have tried to achieve some uniformity in the accounting policies by prescribing certain accounting standards in order to narrow the range of alternatives available to an organization in respect of collection and presentation of accounting information.

International accounting standard Accounting bodies throughout the world are striving to achieve a reasonable degree of uniformity in the accounting policies by prescribing certain accounting standards with respect to the collection and presentation of accounting information. To formulate the accounting standards, they have established a committee called the International Accounting standards committee (IASC) in 1973.Accounting bodies of most of the countries, including the institute of chartered accountants of India, are the members of this bodies.

Objectives of committee i) formulating, publishing and promoting the use of the accounting standards worldwide, ii) To work for improvement. The IASC has so far issued forty one accounting standard

Indian accounting standards Recognizing the need to harmonized the diverse accounting policies and practices prevalent in India. The institute of chartered accountants of India constituted an accounting standard board (ASB) on 21st april,1977.The main function of ASB is to frame accounting standards which would be formally issued under the authority of the council of the institute of chartered accountants.

Importance of accounting standards

The role of mandatory accounting standards in presenting clear-cut account on a uniform basis can not overemphasized. The standards represent the ideal practice of accounting and ensure comparability of accounts because of uniformity in the presentation. Hence, such accounts are bound to show the clear position of the state of affairs.

Accounting standards issued by ASB of ICAI The ASB of the institute of chartered accountants of India, has in line with the international standards, issued twenty nine standards to be followed by its members while auditing the accounts of companies. These are –

IAS (AS 1) Disclosure of accounting policies (AS 2) Valuation of Inventories (AS 3) Cash flow statements (AS 4) Contingencies and events occurring after the balance sheet date (AS 5) Net profit or loss for the period, prior period and extraordinary items and changes in accounting policies (AS 6)