ACCOUNTING & FINANCIAL ANALYSIS (MBA 013)

What Accounting is & Does?

MEANING AND DEFINITION

Accounting may be define as The language of business that can provide a partial history of activities of a particular enterprise in terms of monetary units. Accounting involves the collection, recording, classification and presentation of financial data for the benefit of management and outside agencies such as shareholders, creditors, bankers and government.

ACCORDING TO American Institute of certified public accountantsAccounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events in part at least of a financial character and interpreting the results. So we can find out the following points in Accounting

(1)Art of recording and classifying business transactions and events in a systematic manner. (2)Transactions to be recorded in Monetary terms. (3)Summarizing, Analyzing and Interpreting the result of accounting information. (4)Communicating and explaining the

Functions of Accounting
(1)It sets up procedure for systematic recording of the daily transactions of business. (2)It takes the record information and classifies it so that data may be more easily understood by the interested persons. (3)It gathers the recorded and classified information and summaries it.

TYPES OF ACCOUNTING WORKS (1) CONSTRUCTING- This operation involves

the formulating of fundamental principles and procedure, designing and revising the different systems of accounting.

(2)RECORDING-It involves the recording of various business transactions and events on original documents according to the principles and policies established.

(3)CLASSIFYING-It refers to the process of sorting of grouping like things together from a number of business transactions recorded during a particular accounting period. (4)SUMMARISING-It attempts to bring together the various items of accounting information to determine a result.

(5)REPORTING- It implies the preparation of analytical reports and statements for decision-makers and some others having the right to have such information. (6)INTERPRETING-For this purpose the firms make use of number of managerial techniques e.g. comparative statements, common size statements, ratio analysis, trend analysis, fund flow analysis etc.

(7)AUDITING-It is concern with the verification of the accuracy and correctness of the book-keeping records and statements and reports drawn from those accounting records.

SYSTEM OF ACCOUNTING
(1)Cash system- It gives importance to only cash transactions i.e. cash receipts and payments and credit transactions are not recorded until cash is actually received or paid. this is useful basically for professional men like doctors, lawyers, management consultant etc. (2)Single entry system- It is incomplete system of accounting which recognizes cash and personal aspects of transactions and ignores impersonal aspects of transactions.

(3)Double entry system- This is the most scientific system because it is based on the principle of Duel aspects of accounting. every business transactions has two aspects, when we give something, we receive something in return. so both the aspects includes in this system.

End Users of Accounting Information

(1)Proprietors- The proprietors who have invested their money in business have the right to get the information relating with the business. (2)Managers- Managers have right to get the information relating with the accounting. managers have different forms as with the business forms like-(3)Sole proprietary business- proprietary is the manager.

(4)Creditors- These are the persons who have extended credit to the company. They ascertaining the company that they are in the position to meet the commitment towards them both regarding payment of interest and principle. (5)Investors- A person who is investing in a business will like to know about its profitability and financial position.

(6) Government- Government interested in financial statements of business on account of taxation,labour and corporate laws. it also examine the accounting records of a business. (7) Employees- They are interested on account of various profit sharing and bonus schemes.

BRANCHES OF ACCOUNTING Accounting

Financial Accounting Management Accounting

Cost Accounting

(1)FINANCIAL ACCOUNTING
It may be define as the Science and art of recording business transactions. It is the original form of accounting. It is mainly concerned with the Preparation of financial statements for the use of outsiders like shareholders,debenture holders, creditors, banks and financial institutions. the financial statements e.g. Profit and Loss A/c and Balance sheet show them the manner in which operation of the business have been conducted during a specific period.

(2)MANAGEMENT ACCOUNTING
This Accounting is basically for the Management i.e. accounting which provide necessary information to the management for discharging its functions. Management accounting covers various areas such as Cost accounting, budgetary control, inventory control, etc.

(3) COST ACCOUNTING

Cost accountancy is an extension of general accounting system which gathering, classifying and analyzing cost data which is needed by the management to control the cost and and reducing expenses. Thus Cost Accounting is the branch of accounting designed to determine the costs of certain activities and to report cost information to management.

ACCOUNTING PRINCIPLES

ACCOUNTING PRINCIPLES
It can be classified into two category-

Accounting Concepts Accounting Conventions

(a) Accounting Concepts

(1) Business entity concept- This concept consider that a Business is separate and distinct from those individuals who are managing it and the business is capable to generate sales, expenses and income by itself. (2) Money measurement concept- Money is the medium of exchange and the standard of economic value, as we measuring units like Acre, kilometer, hours etc. same we have for the accounting i.e. money. All transactions are recorded in terms of money.

(3) Going concern concept- This concept believes that the business will remain exist indefinitely. it is not set up for few days monthly or yearly but for a indefinite time.

(4) Cost concept- This concept states that all goods and services purchased should be recorded at historical cost and should appear on the financial statement at such cost. Example- Purchasing price 1,00,000 & Market value 12,00,000 will recorded at Rs. 1,00,000 in the books.

(5) Periodicity concept- This concept makes it obligatory to divide the life of a business concern into specific time periods like 1 year, 6 months etc. The users of financial information like owners, creditors and managers require the periodic report of the firm's financial condition. (6) Dual aspect concept- This is the basis of accounting. According to this the debit aspect of a transaction has a corresponding credit aspect and the same must be reflected in the accounting records in ordered to maintain the equilibrium.

(7) Matching concept- This concept believes that most expenses are incurred with the objective to generate future benefits to the firm. it attempts to find out the satisfactory basis of association between expenses and revenue.

REVENUE- is a business transaction that

increase the financial resources of business e.g. sale of goods to customers. EXPENSE- is a business transaction that decreases the financial position e.g. decrease in inventory as a results of sales.

(8) Realization- This concept governs the recognition of revenue. The revenue is recognized in the period in which it is earned, rather than to the period it is collected in cash.

Accounting Conventions
(1) Full Disclosure-it means that all the financial events which occur during a particular financial period should fairly and completely be reported in the financial statements. (2) Consistency- It means that same accounting principles should be used for preparing financial statements for different periods. it allows a comparison in the performance of different periods.

(3)Conservatism- It means a policy of play safe'. it ensure that uncertainties and risks inherent in business so if there is any possibility of loss, it should be taken into account at the earliest. on the other hand, a prospect of profit should not take into account till it does not materialize. (4)Materiality- In it only those events should be recorded which have a significant and material in the financial reports. it should be noted that the efforts involved in recording the events should be worth the labor involved in it.

Objectives Of Accounting

(1) To keep a Systematic record

It is done to keep a systematic record of financial transactions. In the absence of accounting there would have been terrific burden on humane memory which is impossible in most cases.

(2) To Protect business propertiesIt protect the business properties in the form of

(a) Fixed assets, (b) Cash in hand, (c) Cash at bank etc.

(3) To find out the Financial Position

of the business-

The P/L a/c shoes the Profit and Loss made by the business during a particular period. the business must know about there financial position i.e. where they stand? This is shown by the Balance sheet of the company.

ACCOUNTING EQUATION
ASSETS = CAPITAL + LIABILITIES

The Accounting Equation

The accounting system is based on the idea of accounting equation that claims that the assets of a business are equal to its equities. Therefore it is essential to study the components of the accounting equation to understand the structure of accounting system.

To run a business every organization- large and small- needs economic resources like cash, land and building, furniture and fixtures, plants and machinery etc. At the same time these economic resources known as Assets in accounting terminology. Therefore the resources have a claim against the assets which in accounting terminology is known as Equities. Since every asset ere required by the business has its own derived sources. So it can be easily claimed thatAssets = Equities

There are two major deriving sources for acquiring the assets for a business -

1. Investment of Owners - known as Equity

of Owners, 2. Borrowings - known as Equity of Creditors,

Assets = Owners Equity + Creditors Equity

Capital

Liabilities

Generally Accepted Accounting Principles

Overview
(GAAP) is the term used to refer to the Standard framework of guidelines for Financial Accounting used in any given jurisdiction. GAAP includes the Standards,Conventions, and Rules which accountants follow in recording and summarizing transactions, and in the preparation of Financial statements.

Financial accounting is an information which must be assembled and reported objectively. For this reason, financial accounting relies on certain standards or guides that are called "Generally Accepted Accounting Principles" (GAAP). The various GAAP principles are given as-

1.Principle of Regularity- Regularity can be

defined as conformity to enforced rules and laws.

2.Principle of Consistency- The consistency

principle requires accountants to apply the same methods and procedures from period to period.

3.Principle of Sincerity- According to this

principle, the accounting unit should reflect in good faith and the reality of the company's financial status.

4.Principle of the Permanence of MethodsThis principle aims at allowing the comparison of the financial information published by the company. 5.Principle of Non-Compensation- One should show the full details of the financial information and not seek to compensate a debt with an asset, a revenue with an expense, etc.

6.Principle of prudence- This principle aims at showing the reality "as is. A revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable. 7.Principle of continuity- When stating financial information, one should assume that the business will not be interrupted. It should go on for a long period of time.

8.Principle of periodicity- Each accounting entry should be allocated to a given period of time. If a client pre-pays a subscription (or lease, etc.), the given revenue should be split to the entire time-span and not counted for entirely on the date of the transaction. 9.Principle of Full Disclosure/MaterialityAll information and values pertaining to the financial position of a business must be disclosed in the records.

The Indian Accounting Standards

1. In Indian financial system statements are

prepared in accordance with the presentation requirement of schedule VI to the Companies Act 1956.

2. Consolidation of accounts of holding and

subsidiary company is not required in India.

3. Tax payable method is used for providing for

taxation.

4. Disclosure of earning per share is not required

in India.

6. Investment in Own Shares is prohibited. 7. Assets and Liabilities have to be classified into current and fixed or long term. 8. Capitalization of a Lease is not required. 9. Exchange fluctuations on liabilities incurred for fixed assets can be capitalized. 10. Fair value disclosure.

Generally accepted accounting standards (GAAP)

1. No specific format is required to

2. 3. 4. 5.

prepared of a financial statements, as long as they comply with the disclosure requirement of US accounting standards. Consolidation of group company accounts is compulsory. Disclosure of earning per share is compulsory. Revaluation of assets is not permitted. Investment in own shares is permitted.

6. R & D costs are expenses as incurred. 7. Goodwill is treated as any other intangible asset, and is capitalized. 8. Current and long-term assets and liabilities should be disclosed separately. 9. Financial lease is to be capitalized. 10. Exchange gain and loss is taken to the income statement.

Indian Accounting Standards &

Matching/Difference between

International Accounting Principles (US GAAP)

Overview
The US GAAP is established by the financial accounting standard board (FASB) and the American institute of certified public accountants (AICPA). GAAP provides the principles for financial accounting, management accounting and for tax accounting purpose.

1. Reporting versus disclosure 2. Form versus substance 3. Accounting versus analysis 4. Globalization versus localization

1. Reporting versus disclosure

The accent of the Indian accounting standard is on reporting whereas the accent of the US GAAP is on discloser and transparency.

2. Form vs. Substance

The Indian accounting standards emphasizes on form whereas the US GAAP is on the substances of the transaction. Example- the accounting for lease in India the depreciation forfeit is available to the lessor because in a form lease deal is not a sale. In US GAAP a lease deal confers the depreciation benefit on the lessee since the benefits of the productive sue of the asset rest with the lessee.

3. Accounting versus analysis

The Indian accounting standards focuses on abiding by accounting principles where USGAAP emphasis on presenting a true and fair picture of the financial position of the company to the analysis.

4.Globalization versus localization

The accent of Indian accounting standards is on localization of business while US GAAP emphasis on globalization of business.