Unit-I

Understanding Fundamentals of
Financial Accounting

By Ghanendra Fago
(MBA, M Phil)
Unit -I:
Understanding fundamentals of Financial Accounting
Forms of business organization
Types of Business
Business and Accounting
Accounting information,
Book Keeping Vs. Accounting,
Users of Accounting Information
Means of Accounting information
Functions of accounting
Branches of Accounting
Career in accounting
Assignment and Project Work
Group Assignment I:
Understanding Annual Reports and its Contents of a
Listed Company

Individual assignment I
What is Business?
A continuous economic activity carried out to earn
profit through:
Production and sales of goods and services to
customers
Generating and rendering services
Types of Business
Manufacturing
Merchanding/Trading Companies
Services
Hybrid companies
Forms of Business Organization
Sole Proprietorship/ Trading ,
Partnership Firm,
Joint Stock Company and
Others like cooperative, non-profit
making etc.
Users of Accounting Information
 Ultimately, all accounting information is accumulated to help
someone make decisions Like company president, a production
manager, a hospital or school administrator, a sales manager, a
shareholder, a small-business owner, a politician–the list is almost
infinite.
 Almost all managers in every organization are better equipped to
perform their duties when they have a reasonable grasp of
accounting data.
 For example, a knowledge of accounting is crucial for decisions by
government agencies regarding research contracts, defense
contracts, and loan guarantees.
 In fact, a survey of managers ranked accounting as the most
important business course for future managers.
Users of Accounting Information
External users
Creditors and Suppliers
Tax authorities
Regulatory bodies
Economics Planners
Government
Customers
Shareholders and Investors
Employees and Workers

Internal users – Managers, CEO, BODS, Supervisors

Means of Accounting Information
Income Statement,
Balance Sheet,
Statement Of Changes In Equity
Statement Of Changes In Retained Earnings,
Statement Of Cash Flow,
Management Disclosure and Analysis
Notes
Characteristics of Information
Relevance: Timely, Neutral, prediction,
Feedback
Reliable : Faithful, Verifiable and Neutral
Comparability: Different companies with
same accounting principles
Consistency: Follows same accounting
methods from year to year
Constraints of Accounting
Materiality – GAAPs does not have to follow small
values
Conservatism – When Doubt choose the solution that
will be least likely to overstate assets and incomes
Assumptions in Accounting
Monetary assumption: Things than can be expressed be
recorded in accounting.
Separate entity: Every economics activities can be
separately identified and accounted for –creditors,
shareholders, customers
Time period assumption: Life of a business can be
divided into artificial time period that will be normally for
year. Monthly, quarterly, reports to shareholders and
monthly statements for internal purpose.
Going concern assumption: will remain in operations
for the foreseeable future.
 Principles
Cost principle: indicates that assets are recorded at their
cost price not only at the time of purchase but also over
the time assets are held.
Full disclose principle: Events and circumstances that
make differences in financial statements should be
disclosed.
Revenue principle: Under this principle, all revenue
and incomes that are realized in cash or in some valuable
consideration or resulted in some legal obligation
assured to pay by customers are accounted for.
Dual Aspect Principle: Every transaction has two
fold effects. This is also foundation of double entry
system
Matching principle: Cost and expenses of a particular
period mush be matched with the revenues generated
for the period to determine net income and loss.
Accrual accounting principle: It assumes that all
revenues are recorded as revenues of the period
whether they are received or not. Similarly, Cost are
recorded as cost whether they are paid or not.
 Introduction to Accounting

Process of identifying, measurement, classifying,

recording, summarizing and interpretation of the
transactions of a business in terms of money to ascertain
the result and financial position of business activities of
particular period.
 Ultimately, all accounting information is accumulated to
help someone make decisions. That someone may be a
company president, a production manager, a hospital or
school administrator, a sales manager, a shareholder, a
small-business owner, a politician–the list is almost
infinite.
 increased scope of accounting with increase in the
competition and business complexities.
• Almost all managers in every organization are
better equipped to perform their duties when they
have a reasonable grasp of accounting data.
• For example, a knowledge of accounting is crucial
for decisions by government agencies regarding
research contracts, defense contracts, and loan
guarantees.
• In fact, a survey of managers ranked accounting as
the most important business course for future
managers.
Accounting Process/Function

Identification Select economic events

Recording Record Classify and Summa

Communication Prepare reports and anal

Book Keeping and Accounting
Major misconception is that accounting and book
keeping are same.
Accounting includes identification, recording, and
communication
Book keeping is a part of accounting process
It is a function performed by a person with limited
skill in accounting
Branch of Accounting
Financial Accounting
Cost Accounting
Management Accounting
 Cost Accounting
Accumulates, classifies and interprets costs to use in
performance evaluation and decision-making
Deals primarily with the accumulating cost data
needed by the management to control the current
operations and plan for future.
Provides accurate and timely information needed to
help the business and control costs.
Generally, both financial accounting and
management accounting use costs accumulated and
classified by the cost accounting for external and
internal purposes.
Traditionally, cost accounting focused in
manufacturing cost only but at present it is also used
in non-manufacturing concerns for cost control.
Objectives of Cost Accounting
 To ascertain cost per unit of different types of products
 To ascertain the element of costs
 To disclose sources of wastages and prepare report for control
 To provide requisite data for fixation of price
 To exercise effective control of inventory
 To provide useful data for financial decision
 To organize cost reduction programs
 To advise management for future policies and projects
Financial Accounting

Concerns with the preparation of financial statements

and reports like income statement and balance sheets of
specific periods for external users to show the financial
position of the company.
A summarized form of the overall financial position of
company. It provides information for external users like
shareholders, creditors, suppliers, government etc.
Develops information for external decision makers like
shareholders, creditors, government, suppliers etc.
Objectives of financial accounting
 To keep systematic records of financial transactions
 To ascertain the results of operations
 To reveal the overall financial positions of organization
 To report past performance and future prospects
 Management Accounting
 Branch of accounting, which is concerned with supplying
relevant information to managers at appropriate time to
enable them to take decisions in organization.
 Process of accounting, which generates accounting
information from both financial accounting and cost
accounting and provides essential accounting information to
all departments concerned.
 Process of identifying, measuring, analyzing, interpreting
and communicating accounting information to department
concerns to meet organizational goals and objectives.
Objectives of Management Accounting
 Providing information to the managers the for decision making and
planning in revenue and cost projection of organization
 Assisting managers in interpretation of financial data that are not
understand by internal users
 Assisting managers in directing and controlling operations through its
attention in their function
 Motivating managers toward the achievement of organization's goals
 Measuring the performance of managers, subunits and employees
within organization
 Assessing the organizations competitive position, and working with
the other managers to ensure organization's long term
competitiveness
Career in Accounting
 Financial accountant,
 Cost accountant,
 Management accountant,
 Internal auditor,
 Account system designer,
 Tax accountant,
 Statutory auditors,
 Tax consultants etc..
Accounting bodies
ACCA, CA, CPA
ICWA, CIMA, IMA, ICA