A Brief Introduction to Mechanics & p f g g Principles of Recording Accounting Transactions

Prof. Santosh Sangem

XLRI, Finance A XLRI Fi Area

Management Accounting Sessions 1-2, GMP 2012-13. Prof. Santosh Sangem (XLRI)

What is accounting all about?

A coherent set of principles for recording transactions of business & non-business entities
Focus on business entities

A business entity is an organization that manages productive resources to provide products and services to customers with the id d d i ih h objective of earning profit Types of business entities
Sole proprietorship Partnership Corporation C i Limited Liability Corporation/Partnership

Management Accounting Sessions 1-2, GMP 2012-13. Prof. Santosh Sangem (XLRI)

Business Stakeholders

Management Accounting Sessions 1-2, GMP 2012-13. Prof. Santosh Sangem (XLRI)

Accounting & Information

Provides information to stakeholders
Decision making by management g y g Investment decisions of investors Government & regulatory agencies Customers & providers of resources p

Information relating to financing, investing, & operating activities of the business entity Two branches of accounting Financial Accounting Managerial Accounting

Management Accounting Sessions 1-2, GMP 2012-13. Prof. Santosh Sangem (XLRI)

Financial Accounting
A structured representation of the financial position and financial p performance of an entity (Ind AS 1) y( ) Principles for recording business transactions that affect financial position Ensuring comparability over time and across firms Categorization of business transactions Operating Investing Financing

Management Accounting Sessions 1-2, GMP 2012-13. Prof. Santosh Sangem (XLRI)

Issues in recording business transactions

Economic Transactions Business transactions that affect financial p position & p performance

Economic Transactions Recognition

Valuation

Classification
Management Accounting Sessions 1-2, GMP 2012-13. Prof. Santosh Sangem (XLRI)

Basic assumptions/concepts underlying accounting principles

Entity Going Concern Accounting Period

Unit of Measure

Adequate Ad t Disclosure

Objectivity

Prudence

Historical Cost

Materiality

Matching g

Fair Value

Management Accounting Sessions 1-2, GMP 2012-13. Prof. Santosh Sangem (XLRI)

Entity
The most basic of the basic concepts Only transactions related to the activities of the entity are to be recorded That is, the entity is viewed as separate from its owners, creditors, customers, customers or other entities Boundaries on transactions to be recorded Defines the nature of the transaction Example: A computer purchased by a sole proprietor and used for both business and personal purposes (largely the latter) cannot be treated as an asset of the business. A sale made to a customer cannot be recorded in the books of the entity as a purchase made by the customer. tit h d b th t
Management Accounting Sessions 1-2, GMP 2012-13. Prof. Santosh Sangem (XLRI)

Going Concern
The assumption that the entity will continue in business forever Violation of assumption requires that all assets and liabilities be recorded at current market value Examples At l telecom company has been stripped of all operating licenses it h b t i d f ll ti li owned on the grounds of fraudulent conduct during the spectrum auction process. The company has also been barred from participating in spectrum auctions for the next 10 years. i i i i i f h A company has a large portion of its long-term debt falling due in the p y p y next 3 months. The company is in no position to raise the money required to repay the debt nor are the lenders willing to refinance/restructure the debt. A company has failed to maintain the financial covenants set by its bankers leading them to request the court for its liquidation
Management Accounting Sessions 1-2, GMP 2012-13. Prof. Santosh Sangem (XLRI)

Accounting Period
Financial statements are to be prepared periodically to help external stakeholders to continuously evaluate the financial y position of the entity A typical accounting period is one year Different accounting periods make it difficult to compare financial performance. Disclose reasons if statements prepared for a period different than one year Examples: 1990s, During the late 1990 s, many companies in India presented their annual accounts for a period of either 9 months or 15 months on account of transition to the statutory requirement of presenting financial statements for April March each year. April-March
Management Accounting Sessions 1-2, GMP 2012-13. Prof. Santosh Sangem (XLRI)

Adequate Disclosure
Requires that all relevant information needed by shareholders to understand the financial statements and to evaluate financial performance be disclosed Minimum disclosure requirements specified by the accounting standards in force Central feature of corporate governance standards and regulatory principles E Examples: l RG garments did not disclose the fact that during the year it was q p y p y g required to pay Rs. 20 crores as penalty for violating the customs duty and forex laws. A large number of companies in the US have at some time or the other not disclosed the true extent of their pension liabilities and obligations under derivative contracts.
Management Accounting Sessions 1-2, GMP 2012-13. Prof. Santosh Sangem (XLRI)

Objectivity
Entries in accounting records & information presented in financial statements must be based on objective or verifiable evidence j Reduces the chance of fraudulent behavior Necessary to avoid subsequent legal liabilities E Examples: l At the beginning of the year, ABD Garments Ltd. recorded the purchase of a second hand delivery vehicle for Rs.25 lakhs from DBA Garments Co., an entity owned by its managing director. At the end of the year, a physical inspection showed that the vehicle p g was not in the premises of ABD Garments and that the registration papers had also not been transferred.

Management Accounting Sessions 1-2, GMP 2012-13. Prof. Santosh Sangem (XLRI)