Financial Accounting [FA] 1:

Introduction

S Krishnamoorthy: krisna_om@[Link], Cell:9821461488

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Introduction XIMR FA1 2010
Financial Accounting: Course Content*
Financial Accounting: Proposed* Course Content
Sr No T opic
1 Introduction to Financial Accounting
Accounting Standards
Accounting Concepts
Accounting Convention
2 Accounting Period
3 Double Entry System of Accounting
Books of Account
Posting of Entries
4 Preparation of Trial Balance
Preparation of:
Balance Sheet
Profit & Loss Account
5 Cash [Fund] Flow Statement
6 Inventory Valuation
7 Depreciation Accounting
Difference between:
Capital & Revenue Expenses
Deferred Tax Asset and Deferred Tax Liability
8 Actual and Contingent Liability/Assets
9 Notes and Schedules to Accounts

10 Reading and Comparision of Financial Statements

* Proposed course content subject to change based

on Prescribed Syllabus & Lecture Schedule
Assesment Pattern will be indicated in due
course

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Financial Accounting: Reference Books
 Basic Reference:
 Financial Accounting for Management by Dinesh Harsolekar
 Financial Accounting- Text and Cases: Deardon & Bhattacharya
 Financial Accounting for Managers: T P Gosh
 Financial Accounting- Reporting & Analysis: Stice and Diamond
Accounting
 Financial Accounting: Ramaier Narayanaswamy
 Full Text on Indian Accounting Standards: Taxman Publication

 Additional Reference:
 Financial Accounting for Business Managers: Bhattacharya Ashish K
 Fundamental of Financial Accounting: Phillips, Libby & Libby
 Financial Accounting for Non-finance Managers: Droms Williams G
 The McGraw Hill 36 hour course in Financial Management for Non-
finance Managers-2nd Edition: Cook Robert A
 Accounting for Fixed Assets: Peterson Raymond R
 Understanding Balance Sheets: Friedlob George Thomas
 The Analysis & Uses of Financial Statements: White Gerald I
 Accounting the Easy Way: Eisen, Peter J.

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 Terms and Definition

Finance
Financial Management
Financial Accounting
Accounting
Book Keeping
Cost Accounting
Management Accounting
Accounting Concepts and Conventions
Accounting Criteria
Accounting Policies
Accounting Standards

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Terms and Definitions

Accounting Concepts and Conventions

Concept
True & Fair View
Going Concern
Consistency
Prudence
Matching / Accrual

Conventions
Historical Cost
Money Measurement
Separate Entity
Realization
Materiality

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Terms and Definitions
Accounting Criteria
Understandability
Relevance
Consistency
Comparability
Reliability
Objectivity
Accounting Policies/Regulations
Indian Companies Act
Indian Income Tax Act
SEBI Regulations
ICAI
FASB
Accounting Standards
US GAAP
Indian GAPP
IAS
IFRS

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Finance
 It is about money, markets and also people

 It is the life blood of corporate activity

 The commercial activity of providing funds and capital

 The management of money, investments and other assets

 The science that describes the management of money, banking, credit,

investments, and assets

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 Financial Management
Concern the acquisition, financing & management of assets with some
overall goal in mind

Operational activity for judicious selection and use of capital

Encompasses to core concepts of resource management and finance

operations

Is a major department and an activity that handles financial resources in

an organization

Application of planning and control functions to the finance function

Financial decision making for harmonizing stakeholders and Firm’s goals

Effective Financial Management is key to corporate success

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 Book Keeping and Accounting
Book-keeping:
Is the recording of all financial transactions undertaken by an individual
or organization
Bookkeeping is the actual recording of the company's transactions,
without any analysis of the information

Accounting:
The process of systematically recording, classifying, verifying and
summarizing business transactions, and presenting this information in
periodic
Is the process of measuring economic information and communicating it
to the decision-makers and stakeholders in an organization
Accounting information is used by an organizations managers, investors,
employees, and creditors
Accounting statements provide financial details concerning the operation
of a business or other form of organization

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 Financial Accounting
A field of accounting that focuses primarily on reporting a company's
financial information to meet the needs of the company's external users

The process of collecting, summarizing and reporting financial information

of an entity according to established standards and principles

The preparation and presentation of financial reports showing business

cash flow, profit/financial performance and financial position

The objective of financial accounting is to provide the information that is

needed for sound economic decision making

The main purpose of financial accounting is to prepare financial reports

that provide information about a firm's performance to external parties
such as investors, creditors, and tax authorities

The analysis and interpretation of financial statements to help business

owners and managers make informed decisions about their business

Financial accounting is performed according to Generally Accepted

Accounting Principles (GAAP) guidelines
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 Cost Accounting
A type of accounting that focuses on recording, defining, and reporting
costs associated with specific operating functions

A managerial accounting activity designed to help managers identify,

measure and control operating costs

Procedures used for rationally classifying, recording, and allocating

current or predicted costs that relate to a certain product or production

The discipline of estimating, tracking and controlling product and service

costs

Process of calculating the costs of production for a manufacturing

business and prepared cost budgets, production planning and reports

The process of identifying and evaluating costs, frequently used as a

managerial accounting activity to facilitate internal decision making

Accurate cost analysis helps provides the basis for make/buy decisions,
market entry and exit, product and process changes, and many other
measures and factors involved in organizational success
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 Management [Managerial] Accounting
Reporting designed to assist management in decision-making, planning,
and control

It is the preparation of financial statements and other data for managers
to support them in the decision-making process

It includes the analysis and manipulation of information summarized in

the accounting systems to help plan and make business decisions

Provides information about particular activities within a business,

including budgets, costing and evaluating business activities

Management accounts are internal documents and simply used for

information purposes within the firm

In contrast with financial accounting, managerial accounting is for

internal decision making and does not have to follow any rules issued by
standard-setting bodies

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 Accounting Concepts & Conventions
In drawing up accounting statements whether they are external “Financial
Accounts" or internally-focused “Management Accounts", a
clear objective has to be that the accounts fairly reflect the true
"substance" of the business and the results of its operation

The theory of accounting has therefore developed the concept of a “True and
Fair View“

 The true and fair view is applied in ensuring and assessing whether
accounts do indeed portray accurately the business' activities

To support the application of the "true and fair view", accounting has
adopted certain concepts and conventions which help to ensure that
accounting information is presented accurately and consistently

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 Accounting Concepts
 Four important accounting concepts underpin the preparation of any set of
accounts:
1. Going Concern
2. Consistency
3. Prudence
4. Matching or Accruals

[Link] Concern:
 Accountants assume, unless there is evidence to the contrary, that a company
is not going broke
 This has important implications for the valuation of assets and liabilities

[Link]:
 Transactions and valuation methods are treated the same way from year to
year, or period to period
 Users of accounts can, therefore, make more meaningful comparisons of
financial performance from year to year
 Where accounting policies are changed, companies are required to
disclose this fact and explain the impact of any change

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 Accounting Concepts
[Link]:
Profits are not recognized until a sale has been completed

In addition, a cautious view is taken for future problems and costs of the
business

Costs/losses are "provided for" in the accounts" as soon as their is a

reasonable chance that such costs/losses will be incurred in the future

[Link] or Accruals:
Income should be properly "matched" with the expenses of a given
accounting period

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 Accounting Conventions
Historical Cost:
The most commonly encountered convention is the “Historical cost
convention“

This requires transactions to be recorded at the price ruling at the time,

of transaction and for assets to be valued at their original cost

Under the historical cost convention no account is taken of changing

prices in the economy

Monetary Measurement:
Accountants do not account for items unless they can be quantified in
monetary terms

Items that are not accounted for (unless someone is prepared to pay
something for them) include things like workforce skill, morale, market
leadership, brand recognition, quality of management etc

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 Accounting Conventions
Separate Entity:
This convention seeks to ensure that private transactions and matters relating
to the owners of a business are segregated from transactions that relate to the
business

Realization:
With this convention, accounts recognize transactions (and any profits arising
from them) at the point of sale or transfer of legal ownership rather than just
when cash actually changes hands

 For example, a company that makes a sale to a customer can recognize that
sale when the transaction is legal - at the point of contract. The actual payment
due from the customer may not arise until several days later if the customer
has been granted some credit terms

Materiality:
An important convention as the preparation of accounts involves a high degree
of judgments

The "materiality" convention suggests that this should only be an issue if the
judgment is "significant" or "material" to a user of the accounts

The concept of "materiality" is an important issue for auditors of financial

accounts
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Accounting Criteria
There is general agreement that, before it can be regarded as useful in
satisfying the needs of various user groups, accounting information should
satisfy the following Key Criteria:

Understandability:
This implies the expression, with clarity, of accounting information in such a
way that it will be understandable to users - who are generally assumed to
have a reasonable knowledge of business and economic activities

Relevance:
This implies that, to be useful, accounting information must assist a user to
form, confirm or maybe revise a view - usually in the context of making a
decision (e.g. should I invest, should I lend money to this business? Should I
work for this business?)

Consistency:
This implies consistent treatment of similar items and application of
accounting policies

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 Accounting Criteria
Comparability:
This implies the ability for users to be able to compare similar companies in
the same industry group and to make comparisons of performance over time.
Much of the work that goes into setting accounting standards is based
around the need for comparability

Reliability:
This implies that the accounting information that is presented is truthful,
accurate, complete (nothing significant missed out) and capable of being
verified (e.g. by a potential investor)

Objectivity:
This implies that accounting information is prepared and reported in a
"neutral" way. In other words, it is not biased towards a particular user group
or vested interest

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 Accounting Principles
Rules and guidelines of accounting

They determine such matters as the measurement of assets, the

timing of revenue recognition and the accrual of expenses

The Ground Rules for financial reporting are referred to as

Generally Accepted Accounting Principles [GAAP]

GAAP consist of four components: the requirements of law;

judgments of various courts of law; pronouncements of the
governing body from time to time; and requirements of regulatory
Authority (Example: SEBI)

An accounting principle must have substantial authoritative

support such as promulgation of a Financial Accounting Standards
Board [FASB] or Institute of Chartered Accountants of India [ICAI]

An example of accounting principle is Materiality Concept

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 Accounting Standards
Accounts which are intended to show a true and fair view must conform to certain
standards issued by the Accounting Standards Board

Conduct to be followed by Accountants as formulated by an authoritative body or by

law [ Example: Institute of Chartered Accountants of India (ICAI), Securities Exchange
Board Of India (SEBI), Indian Companies Act]

In the era of globalization and integration there is a strong need for legislation to bring
about uniformity, rationalization, comparability, transparency and adaptability in
financial statements and this purpose is sought to be achieved thru the stringent
norms for preparation and presentation of financial statements as prescribed by
accounting standards

Authorities and Types of Accounting Standards

US Financial Accounting Standards Board [FASB]: US GAAP
The Institute of Chartered Accountants of India [ICAI]: Indian GAAP
International Accounting Standards Board: [IASB]
 International Accounting Standards: [IAS]
International Financial Reporting Standards [IFRS]

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Role of Accounting Standards
Accounting standards are necessary to promote high quality financial
reporting

Accounting standards came to be developed from the mid sixties

onwards to promote the integrity of the accounting profession by way of
ensuring uniformity in the way accountants report transactions in their
books and also in their preparation of the final accounts of businesses

Accounting standards is aimed at boosting the confidence of

stakeholders, particularly shareholders and potential investors in the
accounting profession

Accounting standards serve to promote the understandability ,

comparability, relevance and reliability of financial reports

Accounting standards bring value to the company

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