Faa Unit 1 Theory N

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1/26/202

1 FINANCIAL ACCOUNTING AND ANALYSIS


BY
MR. ASHOK KUMAR
2 ACCOUNTING

• ACCOUNTING IS THE ART OF RECORDING, CLASSIFYING AND SUMMARIZING IN SIGNIFICANT


MANNER AND IN TERMS OF MONEY, TRANSACTIONS AND EVENTS WHICH ARE, IN PART, AT
LEAST OF A FINANCIAL CHARACTER AND INTERPRETING THE RESULT THEREOF.

3 NATURE OF ACCOUNTING
• ACCOUNTING IS A PROCESS
PROCESS REFERS TO METHOD OF PERFORMING ANY SPECIFIC JOB STEP BY STEP SO
ACCOUNTING ALSO FOLLOWS DEFINITE STEPS.
• ACCOUNTING IS AN ART
IT IS AN ART OF RECORDING, CLASSIFYING, SUMMARIZING AND ANALYZING THE FINANCIAL
DATA.
• ACCOUNTING DEALS WITH FINANCIAL INFORMATION AND TRANSACTIONS
IT RECORDS THE FINANCIAL TRANSACTIONS ACCORDING TO DATE AND CLASSIFYING THOSE
TRANSACTIONS.
• ACCOUNTING IS AN INFORMATION SYSTEM
IT RECOGNIZED AND CHARACTERIZED AS A STOREHOUSE OF INFORMATION.

4 FUNCTIONS OF ACCOUNTING
• RECORDING
THIS IS THE BASIC FUNCTION OF ACCOUNTING. IT IS ESSENTIALLY CONCERNED WITH NOT ONLY
ENSURING ALL BUSINESS TRANSACTIONS OF FINANCIAL CHARACTER ARE, IN FACT, RECORDED
BUT ALSO THAT THEY ARE RECORDED IN ORDERLY MANNER.
• CLASSIFYING
IT IS CONCERNED WITH SYSTEMATIC ANALYSIS OF RECORDED DATA, WITH A VIEW TO GROUP
TRANSACTIONS OR ENTRIES OF ONE NATURE AT ONE PLACE.
• SUMMARIZING
THIS INVOLVES PRESENTING THE CLASSIFIED DATA IN A MANNER WHICH IS UNDERSTANDABLE
AND USEFUL TO THE INTERNAL AS WELL AS EXTERNAL USERS.

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• DEALING WITH FINANCIAL TRANSACTIONS
ACCOUNTING RECORDS ONLY THOSE TRANSACTIONS AND EVENTS IN TERMS OF MONEY WHICH
ARE OF A FINANCIAL CHARACTER.
• ANALYSING AND INTERPRETING
THE RECORDED FINANCIAL DATA IS ANALYSED AND INTERPRETED IN A MANNER THAT THE END
USERS CAN MAKE A MEANINGFULL JUDGEMENT ABOUT THE FINANCIAL CONDITION AND
PROFITABILITY OF THE BUSINESS OPERATIONS.
• COMMUNICATING
THE ACCOUNTING INFORMATION AFTER BEING MEANINGFULLY ANALYSED AND INTERPRETED
HAS TO BE COMMUNICATED IN A PROPER FORM AND MANNER TO THE PROPER PERSON.

6 OBJECTIVE OF ACCOUNTING
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• TO KEEP SYSTEMATIC RECORDS


ACCOUNTING IS DONE TO KEEP A SYSTEMAIC RECORD OF FINANCIAL TRANSACTIONS. IN THE
ABSENCE OF ACCOUNTING THERE WOULD HAVE BEEN TERRIFIC BURDEN ON HUMAN MEMORY.
• TO PROTECT BUSINESS PROPERTIES
ACCOUNTING PROVIDES PROTECTION TO BUSINESS PROPERTIES FRO UNJUSTIFIED AND
UNWARRANTED USE.
• TO ASCERTAIN THE OPERATIONAL PROFIT AND LOSS
ACCOUNTING HELPS IN ASCERTAINING THE NET PROFIT EARNED OR LOSS SUFFERED ON
ACCOUNT OF CARRYING THE BUSINESS.
• TO ASCERTAIN THE FINANCAL POSITION
THE PROFIT AND LOSS ACCOUNT GIVES US THE AMOUNT OF PROFIT AND LOSS MADE BY THE
BUSINESS DURING A PARTICULAR PERIOD. HOWEVER IT IS NOT ENOUGH. BUSINESS NEED TO
KNOW THW FINANCIAL POSITION OF THE BUSINESS.
• TO FACILITATE RATIONAL DECISION MAKING
ACCOUNTNG THESE DAYS HAS TAKEN UPON ITSELF THE TASK OF COLLECTION, ANALYSIS AND
REPORTING OF INFORMATION AT THE REQUIRED LEVELS OF AUTHORITY IN ORDER TO FACILITATE
RATIONAL DECISION MAKING.

7 ACCOUNTING PRINCIPLE
• ACCOUNTING CONCEPT
IT INCLUDES THOSE BASIC ASSUMPTION OR CONDITION UPON WHICH THE SCIENCE OF
ACCOUNTING IS BASED.
• ACCOUNTING CONVENTION
IT INCLUDES THOSE CUSTOMS AND TRADITION WHICH GUIDE THE ACCOUNTING WHILE
PREPARING THE STATEMENT.

8 ACCOUNTING CONCEPTS
• SEPARATE ENTITY CONCEPT
IN ACCOUNTING BUSINESS IS CONSIDERED TO BE A SEPARATE ENTITY FROM THE OWNER. IT
MEANS BUSINESS AND OWNER IS SEPARATE FROM EACH OTHER.
• GOING CONCERN CONCEPT
ACCORDING TO THIS CONCEPT IT IS ASSUMED THAT THE BUSINESS WILL CONTINUE FOR A
FAIRLY LONG TIME. THERE IS NEITHER THE INTENTION NOR THE NECESSITY TO LIQUIDATE THE
PARTICULAR BUSINESS VENTURE IN NEAR FUTURE.
• MONEY MEASUREMENT CONCEPT
ACCOUNTING RECORDS ONLY MONETARY TRANSACTIONS. EVENTS OR TRANSACTION WHICH
CANNOT BE EXPRESSED IN MONEY DO NOT FIND PLACE IN THE BOOKS OF CCOUNTS.

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• HISTORICAL COST CONCEPT
UNDER THIS CONCEPT, AN ASSET IS ORDINARILY ENTERED IN THE ACCOUNTING RECORDS AT
THE PRICE PAID TO ACQUIRE IT AND NOT ON THE MARKET PRICE.
• DUAL ASPECT CONCEPT
ACCORDING TO THIS CONCEPT, EVERY BUSINESS TRANSACTION HAS A DUAL EFFECT THAT IS
ONE SIDE WILL BE DEBITED AND OTHER WILL BE CREDITED.
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ONE SIDE WILL BE DEBITED AND OTHER WILL BE CREDITED.


• ACCOUNTING PERIOD CONCEPT
ACCORDING TO THIS CONCEPT THE LIFE OF THE BUSINESS IS DIVIDED INTO APPROPRIATE
SEGMENT FOR STUDYING THE RESULT SHOWN BY THE BUSINESS AFTER EACH SEGMENT.
GENERALLY THE ACCOUNTING PERIOD OF A COMPANY IS ONE YEAR.
• MATCHING CONCEPT
IN ORDER TO ASCERTAIN THE PROFIT MADE BY THE BUSINESS DURING A PERIOD, IT IS
NECESSARY THAT REVENUES OF THE PERIOD SHOULD BE MATCHED WITH THE EXPENSES OF THAT
PERIOD.

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• REALIZATION CONCEPT
ACCORDING TO THIS CONCEPT REVENUE IS RECOGNIZED WHEN A SALE IS MADE. SALE IS
CONSIDERED TO BE MADE AT THE POINT WHEN THE PROPERTY IN GOODS PASSES TO THE
BUYERS AND HE BECOMES LEGALLY LIABLE TO PAY.
11 ACCOUNTING CONVENTION
• CONSERVATISM
IN INITIAL STAGES OF ACCOUNTING, CERTAIN ANTICIPATED PROFITS WHICH WERE RECORDED,
WERE NOT MATERIALIZE. ON ACCOUNT OF THIS REASON, THE ACCOUNTANTS FOLLOW THE RULE
“ ANTICIPATE NO PROFIT BUT PROVIDE PROVISION FOR ALL POSSIBLE LOSSES”.
• FULL DISCLOSURE
ACCORDING TO THIS CONVENTION ACCOUNTING REPORTS SHOULD DISCLOSE FULLY AND
FAIRLY THE INFORMATION THEY WILL REPRESENT. THEY SHOULD BE HONESTLY PREPARED AND
SUFFICIENTLY DISCLOSE INFORMATION WHICH IS OF MATERIAL INTEREST OF OWNER AND
INVESTORS.
• CONSISTENCY
ACCORDING TO THIS CONVENTION, ACCOUNTING PRACTICES SHOULD REMAIN UNCHANGED
FROM ONE PERIOD TO ANOTHER. EX. IF DEPRECIATION IS CHARGED ON FIXED ASSETS
ACCORDING TO DIMINISHING BALANCE METHOD, IT SHOULD BE DONE YEAR AFTER YEAR.
• MATERIALITY
ACCORDING TO THIS CONVENTION THE ACCOUNTANT SHOULD ATTACH IMPORTANCE TO
MATERIAL DETAILS AND IGNORE INSIGNIFICANTLY DETAILS. THIS IS BECAUSE OTHERWISE
ACCOUNTING WILL BE UNNECESSARILY OVERBURDENED WITH MINUTE DETAILS.

12 BRANCHES OF ACCOUNTING

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• FINANCIAL ACCOUNTING
IT IS THE ORIGINAL FORM OF ACCOUNTING. IT IS MAINLY CONFINED TO THE PREPARATION OF
FINANCIAL STATEMENT FOR THE USE OF OUTSIDERS LIKE SHAREHOLDERS, DEBENTUREHOLDER,
BANKS ETC. FINANCIAL ACCOUNTING HELPS TO ASCERTAIN THE PROFITS AND LOSS OF THE
COMPANY. THE FINANCIAL STATEMENT LIKE PROFIT AND LOSS ACCOUNT AND THE BALANCE
SHEET, SHOW THEM THE MANNER IN WHICH OPERATION OF THE BUSINESS HAVE BEEN
CONDUCTED DURING A SPECIFIC PERIOD.
• MANAGEMENT ACCOUNTING
IT IS ACCOUNTING FOR THE MANAGEMENT I.E. ACCOUNTING WHICH PROVIDES NECESSARY
INFORMATION TO THE MANAGEMENT FOR DISCHARGING ITS FUNCTIONS. MANAGEMENT
ACCOUNTING IS THE APPLICATION OF PROFESSIONAL INFORMATION IN SUCH A WAY AS TO
ASSIST THE MANAGEMENT IN THE FORMATION OF POLICIES AND IN THE PLANNING AND
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CONTROL OF THE OPERATIONS OF THE UNDERTAKING


• COST ACCOUNTING
IT ASCERTAINED THE COST OF THE PRODUCT MANUFACTURED OR SERVICES RENDERED AND
HELPS THE MANAGEMENT IN DECISION MAKING. COST ACCOUNTING HELPS IN FINDING THE
COST OF PRODUCT SO THAT COMPANY CAN DETERMINE THE PRICE OF THE PRODUCT
ACCORDING TO THE COST OF PRODUCT.

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15 LIMITATION OF ACCOUNTING
• FINANCIAL ACCOUNTING IS NOT ABSOLUTELY EXACT
ACCOUNTING INFORMATION IS NOT FULLY CORRECT AS IT CONTAINS A LOT OF INFORMATION
BASED ON THE PERSONAL JUDGEMENT. THERE CANNOT BE THE ABSOLUTE GUARANTEE OF
ACCURACY WHEN ASSUMPTIONS ARE BASED ON PERSONAL OPINION.
• FINANCIAL INFORMATION IS MAINLY BASED ON HISTORICAL COST
AS THE FINANCIAL STATEMENTS ARE COMPILED ON THE BASIS OF HISTORICAL COST, THEY FAIL
TO TAKE ACCOUNT SUCH FACTORS AS THE DECREASE IN MONEY VALUE OR INCREASE IN THE
PRICE LEVEL CHANGES.
• WINDOW DRESSING
FINANCIAL STATEMENTS ARE OFTEN MODIFIED TO MAKE IT LOOK BETTER. THIS PROCESS HIDES
MANY WEAKNESS OF THE BUSINESS. THUS THE ACCOUNTING INFORMATION BECOMES
UNRELIABLE FOR ACCURATE JUDGEMENT.

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• ERRORS AND FRAUDS
ACCOUNTING IS COMPLETED BY HUMAN BEINGS SO THERE IS ALWAYS A POSSIBILITY OF HAVING
ERRORS IN IT. SOMETIMES, THERE IS ALSO A SCOPE OF MANIPULATION OF ACCOUNTS TO HIDE
FRAUD. SINCE FRAUD IS A DELIBERATE ACTIVITY. IT IS VERY DIFFICULT TO SPOT IT. IT IS ONE OF
THE MOST DREADED LIMITATIONS OF ACCOUNTING SYSTEM.
• INFLUENCED BY PERSONAL JUDGEMENTS
• AN ACCOUNTANT CAN NOT DETERMINE THE EXACT AMOUNT OF AN ASSET. THAT’S SOMETIMES
ESTIMATION IS REQUIRED IN ACCOUNTING ALSO. BUT THE PROBLEM IS THAT THESE
ESTIMATIONS ARE BASED ON THE PERSONAL JUDGEMENT OF THE ACCOUNTANT AND ALSO
THESE VERY SUBJECTIVE.

1/26/202

1 FINANCIAL ACCOUNTING
AND ANALYSIS
BY
MR. ASHOK KUMAR
2 INTER-RELATIONSHIP OF ACCOUNTING
AND OTHER DISCIPLINES
• ACCOUNTING AND ECONOMICS
ECONOMICS IS CONCERNED WITH RATIONAL DECISION MAKING REGARDING EFFICIENT USE OF
RESOURCES FOR SATISFYING HUMAN WANTS. THE EFFICIENT UTILIZATION OF RESOURCES
SPECIALLY WHEN THEY ARE SCARCE.
ACCOUNTING IS CONSIDERED TO BE A SYSTEM WHICH PROVIDES APPROPRIATE INFORMATION TO
THE MANAGEMENT FOR TAKING RATIONAL DECISIONS. OF COURSE SOME NON ACCOUNTING
INFORMATION IS USEFUL FOR DECISION MAKING.
THE COMMON OBJECTIVE OF BOTH THE DISCIPLINE IS TO MAXIMIZING THE WEALTH OF ITS
OWNER.

3 ACCOUNTING AND STATISTICS


• STATISTICS IS THE SCIENCE OF NUMBERS. IT IS CONCERNED WITH NUMERICAL DATA AS WELL AS
VARIOUS STATISTICAL TECHNIQUES WHICH ARE USED FOR COLLECTION, CLASSIFICATION,
ANALYSIS AND INTERPRETATION OF SUCH DATA. AND THEY ARE USED FOR MANAGERIAL
DECISION MAKING.
ACCOUNTING PROVIDES SIGNIFICANT INFORMATION ABOUT THE WORKING OF A BUSINESS FIRM
TO THE OUTSIDERS WHICH ARE SHAREHOLDERS, CREDITORS, FINANCIAL INSTITUTIONS ETC. AND
INSIDERS LIKE MANAGEMENT.
COMPUTATION OF ACCOUNTING RATIOS IS BASED ON STATISTICAL METHOD SPECIALLY AVERAGE.
SIMILARLY REGRESSION IS USED FOR FORECASTING, BUDGETING AND COST CONTROL. STANDARD
DEVIATION ARE USED FOR CAPITAL BUDGETING DECISION.

4 ACCOUNTING AND MATHEMATICS


• IN DUAL ASPECT CONCEPT WE HAVE STUDIED ACCOUNTING EQUATION WHICH IS RELATED TO
THE MATHEMATICS TECHNIQUE.
• KNOWLEDGE OF MATHEMATICS IS ALSO USED FOR COMPUTATION OF DEPRECIATION
DETERMINATION OF LOAN INSTALLMENTS, SETTLING OF LEASE RENTALS ETC.
• INTRODUCTION OF COMPUTER IN ACCOUNTING HAS FURTHER INCREASED THE IMPORTANCE OF
MATHEMATICS FOR THE ACCOUNTANTS AND THEY ARE USING SO MANY MATHEMATICAL
TECHNIQUE TO MAKE ACCOUNTING MORE EASY TO UNDERSTAND.

5 ACCOUNTING AND LAW


• A BUSINESS OPERATES WITHIN A LEGAL FRAMEWORK. ALL THE TRANSACTIONS HAVE TO BE IN
ACCORDANCE WITH THE RULES AND REGULATIONS.
• THERE ARE LAWS WHICH ARE APPLICABLE IN GENERAL TO ALL BUSINESS TRANSACTIONS LIKE
INDIAN CONTRACT ACT, SALE OF GOODS ACT, THE NEGOTIABLE INSTRUMENTS ACT ETC.
• THERE ARE LAWS GOVERNING BUSINESS ENTITY LIKE COMPANIES ACT IS APPLICABLE TO JOINT
STOCK COMPANY, BANKING REGULATION ACT IS APPLICABLE FOR BANKING COMPANY,
INSURANCE ACT IS APPLICABLE FOR INSURANCE COMPANIES.
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1 FINANCIAL ACCOUNTING AND ANALYSIS


BY
MR. ASHOK KUMAR

2 ACCOUNTING STANDARDS
• ACCOUNTING STANDARDS ARE A SET OF GUIDELINES ISSUED BY ACCOUNTING BODY OF THE
COUNTRY SUCH AS THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA THAT ARE
FOLLOWED FOR PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS.
• THEY ARE ACCOUNTING RULES AND REGULATIONS AND PROCEDURES RELATING TO
MEASUREMENT, VALUATION, AND DISCLOSURE ISSUED BY THE COUNCIL OF THE CHARTERED
ACCOUNTANTS OF INDIA.
• THEY PROVIDE NORM
• ENSURE UNIFORMITY
• CREATE SENSE OF CONFIDENCE IN USERS
• AND HELP AUDITORS IN ACCOUNTING
3 INTERNATIONAL FINANCIAL REPORTING STANDARDS
(IFRS)
• FOR GLOBALIZATION, THERE IS NEED OF SINGLE SET OF ACCOUNTING STANDARDS THAT CAN
UNIFY THE ACCOUNTING PRACTICE WORLDWIDE.
• IT FACILITATE THE INVESTMENT AND OTHER ECONOMIC DECISIONS ACROSS BORDERS.
• THE INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE WAS ESTABLISHED IN 1973 AND
THE OBJECTIVE BEHIND THIS WAS TO DEVELOP ACCOUNTING STANDARDS THAT WOULD BE
ACCEPTABLE WORLDWIDE TO PRODUCE AND MAKE AVAILABLE FINANCIAL INFORMATION
PREPARED BY SIMILAR ACCOUNTING STANDARDS.
• IASC WAS REPLACED BY IFRS IN 2001.
4 INDIAN ACCOUNTING STANDARDS
( IND- AS)
• INIDA HAD TWO OPTIONS EITHR TO ADOPT IFRS AS THEY ARE PR CONVERGE THE INDIAN
ACCOUNTING STANDARDS IN LINE WITH IFRS.
• IT DECIDED TO CONVERGE ITS EXISTING ACCOUNTING STANDARD WITH IFRS.
• IT IS ADOPTED BY INDIAN COMPANIES AND ISSUED UNDER SUPERVISION OF ACCOUNTING
STANDARD BOARD WHICH WAS CONSTITUTED AS A BODY IN THE YEAR 1977.
5 INTERNATIONAL ACCOUNTING STANDARDS
( IAS )
• IAS WERE THE FIRST INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE FORMED IN 1973.
• THE GOAL THEN AND IT REMAINS TODAY WAS TO MAKE IT-
• EASIER TO COMPARE BUSINESS AROUND THE WORLD
• INCREASE TRANSPARENCY
• TRUST IN FINANCIAL REPORTING
• FASTER GLOBAL TRADE AND INVESTMENTS

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