FINANCIAL ACCOUNTING

FOR MANAGERS
 Understanding Business
Organisations
Business organisations bring together
materials, technology, people and money in
order to satisfy their customers’ needs and
thereby seek to earn profit.
 Merchandising (or trading) organisations
 Manufacturing organisations
 Service organisations
 Amazon…………… Internet retail
 Amul………………. Dairy Products
 Appollo Hospitals… Health care
 Apple computers…. Computing,
communication, entertainment
 Boeing…………….. Civilian and Military
aircraft
 Cipla………………. Medicines
 Facebook………… Internet social
networking
 Google…………… Internet search and
advertising
 HDFC Bank……... Banking and Financial
services
 Hindustan Unilever….. Toothpaste, soaps
and detergents
 Infosys……………. Software products and
services
 Larsen & Toubro… Designing and building
roads and flyovers
 Mahindra & Mahindra
 ONGC
 WhatsApp Inc.
 eBay
 Nike
 Samsung
 Hitachi
 Vodafone
The Business Organisation as a
Cash Machine
 Business Organisations are cash
generating-cum-dispensing machines,
often with leads and lags in receiving and
paying cash.
 What is Accounting
 Accounting is a language of business
 Accounting is used in business and
economic decision making
 People interested in business would
like to know

 What happened to our capital?

 What are the results of the business?
 How much amount is due to and due
from others ?
 What are the cash inflows and
outflows?
 The Accounting Information
System
The accounting information system
produces financial statements and reports
for investors, lenders, managers and others
by processing transactions and events
applying accounting principles and
standards and legal requirements.
 Accounting
American Institute of Certified Public Accountants -

“ The art of recording, classifying and summarizing in

a significant manner and in terms of money,
transactions and events which are in part, at least
of financial character, and interpreting the results
thereof”

American Accounting Association-

“Accounting is the process of identifying, measuring

and communicating economic information to permit
informed judgments and decisions by the users of
information”
 Essential aspects of Accounting

 Recording

 Classifying

 Summarizing

 Analysis and interpretation

 Communicating
 Objective of Accounting

To keep systematic records

To provide information for decision making

To ascertain the operational profit or loss

Ascertain the financial position

To protect the assets of the business

Users of Accounting Information
 Shareholders
 Prospective investors
 Lenders
 Security Analysts
 Management
 Employees and Trade Unions
 Suppliers and Creditors
 Customers
 Government & Regulatory Authorities
 The Public
Forms of Business Organisation
 Sole Proprietorship
 A single individual carries on a business
 He keeps all the profits of the business earns
 His liability is unlimited
 Most appropriate when the business is very
small and not expected to grow much
 There is no specific law to regulate
Forms of Business Organisation
(Cont…)
 Partnership
 Has a minimum of 2 and a maximum of 100
persons trading together as one firm
 The partners share the firm’s profits and losses
equally, unless they agree otherwise
 Each partner has unlimited liability
 Indian Partnership Act regulates partnership
business
 Professional practices, such as those of
architects, lawyers & accountants, are usually
partnership firms
Forms of Business Organisation
(Cont…)
 Limited Company
A Limited Company, or commonly Company, is a
legal entity unlike a sole proprietorship or
partnership. Under the law it has most of the rights
of a natural person.
A. Private Limited Company
 Shares are not for sale to the public
 Min. 2 shareholders, Max.200
 Small to medium business
 Largely flexible but directors may disagree
Forms of Business Organisation
(Cont…)
 Companies Act applies but mildly
 Auditing of financial statements by CAs

B. Public Limited Company

i. Not Listed
 Min. 7 Shareholders; No max.
 Very rigid, because shareholders’ approval
needed for major decisions
 Directors may disagree
 Companies Act applies rigorously
Forms of Business Organisation
(Cont…)
 Extensive filing of documents, public disclosure
of financial information
 Auditing of financial statements by Cas
 Medium, Large business
ii. Listed
 Min. 7 Shareholders; No max.
 Very rigid, because shareholders’ approval
needed for major decisions
 Directors may disagree
 Independent directors may question some
transactions
Forms of Business Organisation
(Cont…)
 Companies Act and SEBI Act apply rigorously
 Extensive filing of documents, public disclosure
of financial information
 Quarterly reporting of financial performance
 Auditing of financial statements by CAs
 Large, Very Large business that requires huge
public capital
 Financial and Management
Accounting
 Financial Accounting is the preparation
and communication of financial information
for use primarily by those outside the
enterprise.
 Management Accounting is the
preparation and communication of
financial and other information to the
management, which helps it to carry out its
responsibilities in planning and controlling
operations.
 GAAP
Generally accepted accounting principles
are the set of concepts, conventions and
rules generally accepted and practiced at a
point of time.

The general rules or principles adopted in

accounting are called accounting
principles.

Accounting principles may be in the form of

 Accounting concepts /Assumptions &
 Accounting Concepts or
Accounting Measurement
Assumptions

These are the basic assumptions or conditions

upon which accounting is based.

1. Reporting Entity
2. Going Concern
3. Periodicity
4. Money measurement concept
 Accounting Conventions
(Customs and traditions)

 Conservatism

 Consistency

 Materiality

 Full disclosure
 Accounting concepts

 Reporting entity/ Business entity

concept
 Business is considered as a separate entity from the proprietors.
 This concept helps to keep the transactions of business separate
from the personal transactions of owners.
 Profit and loss of the business and financial position of the
business can be easily determined.
 Going concern concept
 Business is assumed to continue for a very long time.
 We make distinction between revenue expenditure and capital
expenditure.
 Fixed assets are valued at cost price and not market values.
 Depreciation is charged on fixed assets during the working life of the
asset.
 Outstanding and prepaid (expenses and income) is taken in to
consideration
 Accounting period /Periodicity concept
 Life of the business is divided in to appropriate segments for studying the
results of the business.

 Periodical preparation of financial statements helps in taking corrective

actions.

 The results of the business and financial position must be ascertained for
each year for legal and tax requirements.
 Money measurement concept
 Records made of only those transactions or events which can be
expressed in terms of money.
 Non-monetary transactions are not recorded.
 This concept helps the firm to express the items of diverse nature in
terms of a common denominator.

 Cost concept
 Asset acquired by a business is recorded at cost price. Market value
is ignored.
 If the concern has not paid anything ,it is not recorded
 This concepts helps to prevent the assets from recording at arbitrary
figures.
 Matching concept
 Revenue of the period should be matched with the cost of the period.
 Profit earned by the business can be measured only when the revenue
earned for the period is compared with the expenses incurred for earning
that revenue.
 When the actual payment is made is irrelevant according to this concept.

 Realization concept
 Revenue is recognized or is considered as being earned on the date on
which it is realized.
 Sale is considered to be made when the property in the goods is
transferred to the buyer.
 Dual aspect concept
 Every business transaction involves dual aspect

 Accrual Concept
 Recognition of revenue and costs as they are earned or incurred
and not as money is received or paid

 Objective evidence concept

 Every business record must be based and supported by
documentary evidence
 Accounting conventions
 Conservatism
 This means playing safe, caution, prudence etc.
 Provide for all the losses but anticipate no profits.
 Stock is valued at cost or market value whichever is lower
 Provision for doubtful debts and provision for discount for debtors are
made

 Consistency
 Accounting practices and methods should remain consistent from one
year to another.
 Depreciation method, valuation of inventory etc.
 It does not mean that the accounting practices and methods should
never be changed
 Materiality
 Accountant should attach importance to material details and ignore
insignificant details.
 Paisa can be ignored as per Companies Act.
 As per tax rules income can be rounded off to the nearest Rs. 10
 Small items are not considered as assets

 Full disclosure
 Accounting is used by many interested parties. So material facts
must be disclosed in the financial statements
 Companies Act prescribes the form of financial statements to be
presented.
 Accounting,Capital Market and
Corporate Governance
The operation of the lemons principle makes
it difficult to access markets. High-quality
financial reporting reduces information
asymmetry and thus enables entrepreneurs
to raise funds at reasonable rates and
investors to earn fair returns.
Accounting addresses the twin agency
problems of adverse selection and moral
hazard.
 Fraud and Ethical issues in
accounting
Accountants should recognize ethical dilemmas
and select the most ethical alternative after
considering all consequences.
 Definitions of some terms
 Business transaction: It refers to any
activity, dealing or event which has value
measurable in terms of money and which
involves exchange between the business
and any other person including the
proprietor.

 Business transactions may be cash, credit

or non-cash transactions/paper
transactions.
 It may involve monetary exchanges such
as buying a computer for cash; non-
monetary exchanges such as swapping a
building for a piece of land; also, there
may be one-way transfers, e.g. donation
and thefts; external events do not involve
transfer or exchange, e.g. a flood or and
earthquake; internal events such as
consumption of materials and use of
equipment.
 Accounting measures events only if they
affect the financial position of the
enterprise. (launching of new brand by its
competitor will not find place in accounting
records)
 Qualitative information can not be
recorded (appointing talented managers,
launching new products, identifying
profitable business opportunities)
 Goods
 Goods refers to the commodities or things
meant for resale.

 Goods may be in the form of purchases,

sales, purchases returns, sales returns,
opening stock and closing stock.
 Assets
 Assets refers to things or rights of value owned
by the business and also the debts due to the
business from others.

 They may be tangible assets or intangible

assets.

 Goods are meant for resale and assets are not

meant for resale.

 Goods are tangible but assets may be tangible

or intangible.
 Types of assets

 Fixed asset: Land and building,plant,vehicles

 Current assets: stock, debtors

 Liquid assets: cash, bank balance, debtors

 Intangible assets: goodwill, patent, copy rights

 Fictitious assets: Preliminary expenses

 Liabilities
 Claims of others against business which
binds the business to others.

 Debts, creditors, loans, out standing

expenses etc.

 Assets account show debit balance and

liabilities account show credit balance.
 Capital
 Money or money's worth introduced or
invested by the owner in the business.

 Drawings refers to the cash, goods or any

other asset withdrawn by the owner for his
personal use.