FINANCIAL ACCOUNTING

LThe lingua franca or the language of the business

Geetha Iyer

Evolution of Accounting
Monk Fra Luca Pacioli (1445-1515) is considered the father of modern accounting.

Post industrial revolution (in the later part of the 18th century) accounting as a profession came into vogue.
Managers realized the importance of accounting information for enhancing the quality and timeliness of decision making process.
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Accounting definition
According to AICPA (American Institute of Certified Public Accountants) Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events of a financial character, and interpreting the results thereof.

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Disciplines of Accounting
Financial Accounting - Historical records Cost Accounting - Cost computation - Managerial decision making

Management Accounting

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Uses of Accounting
1. 2. 3. 4. 5. How good or bad is the financial condition of the business? Has the business activity resulted in a profit or loss? How well the different departments of the business have performed in the past? Which activities or products have been profitable? Out of the existing products which should be discontinued and the production of which commodities should be increased. 6. Whether to buy a component from the market or to manufacture the same? 7. Whether the cost of production is reasonable or excessive? 8. What has been the impact of existing policies on the profitability of the business? 9. What are the likely results of new policy decisions on future earning capacity of the business? 10. In the light of past performance of the business how it should plan for future to ensure desired results ?

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Financial Statements
Profit & Loss A/c - throws light on financial performance during the year The Balance Sheet - throws light on financial position of a company as on a particular date Cash Flow Statement - shows the sources and uses of cash Annual Report - consists of directors report, chairmans report
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Users of financial statements

1. 2. 3. 4. 5. 6. 7. 8. Managers Owners Investors Government Banks and Financial Institutions Employees Suppliers Academicians, Researchers and Consultants

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Forms Of Business Organization

1. Sole Proprietorship
2. Partnership Firm 3. Corporations or Companies

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Accounting Standards
Accounting Standards are written documents containing the

Generally Accepted Accounting Principles ( GAAP ) These standards are issued by Institute Of Chartered Accountants Of India ( ICAI ). The ICAI constituted an Accounting Standards Board ( ASB) in 1977. The main function of ASB is to prepare Accounting Standards. The main objective of AS is to standardize the different accounting policies and practices followed by different business concerns. Example : AS1 Disclosure of accounting policies AS2 Valuation of inventories
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Concepts & Conventions

(Ideas)
Concepts
1. 2. 3. 4. 5. 6. 7. 8. Business Entity Going Concern Monetary Expression Matching Revenues with Expenditure of that Period Realization or Accrual Duality / Double Entry Cost Accounting Period

(Traditions)

Conventions
1. 2. 3. 4. Consistency Conservatism / Prudence Materiality Disclosure

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Basis of Accounting
Accrual All expenses/income must be provided for in the books of accounts if they relate to that period whether actually spent/received or not. Cash - Revenues and expenditure are to be recognized as and when they happen . GAAP (Generally Accepted Accounting Principles) does not permit this basis

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Basic Accounting Mechanism Double-Entry Book Keeping System Duality concept : Recording both aspects of a transaction with twofold affect Total Liabilities = Total Assets Assets are the resources owned by the business entity. They are the uses of funds. Total Assets = Owners equity + Outside liabilities
Liabilities are what the business owes to outsiders (including the owners). They are the sources of funds.
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Capital V Revenue Exp

Capital Expenditure is investment in long term assets

fruit of which shall be enjoyed in the future.

Revenue Expenditure is the result of day-to-day

operations of the business. WorldCom scam..- case study

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WorldCom, Inc. - US largest telecom company. In June 2002, WorldCom was charged by SEC with a massive accounting fraud totaling more than $3.8 billion. WorldCom capitalized (and so deferred) rather than expensed approximately $3.8 billion of its costs.

There was even found one accounting entry for $500 million, increasing computer assets and decreasing cash. No supporting documents for these entries were found. In total, in accounting ledgers there were found unusual accounting entries for $2 billion.

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WorldCom Inc. Fraud

Income Statement Revenues..xxx (no change) Cost of Sales....xxx (no change) Operating expenses: Fees paid to other phone networks...xxx Computer expenses.xxx ______________________ NET INCOME....xxx Balance sheet

Equipmentxxxx Inventory..xxxx Cash..xxxx . Total assets.xxxx

Liabilities..xxxx Equityxxxx Total liabilities and equityxxx

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Thank You

Geetha Iyer