Intro to giuyt

Giyut

1. `
Dr. Prashant Gupta
[email protected]
1

2. 2
Describe the primary forms of business organization.
Identify the users and uses of accounting information.
Explain the three principal types of business activity.
Describe the content and purpose of each of the
financial statements.
After studying this you should be
able to:

3. 3
Explain the meaning of assets, liabilities, and
stockholders’ equity and state the basic accounting
equation.
Describe the components that supplement the
financial statements in an annual report.
Explain the basic assumptions and principles
underlying financial statements.

4. 4
Forms of Business
Organizations
Sole Proprietorship -owned by
one person
Partnership -owned by more than
one person
Corporation -organized as a
separate legal entity and owned by
stockholders

5. 5
Forms of Business
Organizations

6. 6
BRANCHES OF
ACCOUNTING
FINANCIAL
ACCOUNTING
Mainly confined to the
preparation of
Financial statements
i.e. P&L Account,
Balance sheet etc.
Original form of
accounting
MANAGEMENT
ACCOUNTING
Provides necessary
information to the
management for
discharging it’s
function
Helpful in decision
making

7. Financial Accounting vs. Management Accounting
External Users
To communicate
results/ financial
health
Standard Formats
Accounting Rules –
rigid
Aggregated
Information
Historical
Less frequent
More precise
Internal Users
To help in decision
making/ internal
controls
Flexible formats
Flexible rules
Product-wise/
Region Wise
Forward Looking
More Frequent
More use of
approximation
7

8. 8
DEFINITION OF FINANCIAL
ACCOUNTING
By American Institute of Certified Public
Accountant ( AICPA ) –“Accounting is an art of
recording, classifying and summarizingin
significant manner and in terms of money
(transactions and events which are in part at
least of a financial character)and interpreting the
results thereof”.
In general –“Accounting is the process of
recording , classifying, summarising, analysing
and interpreting the results thereof to the
persons interested in such information”.

9. 9
FUNCTIONS OF
ACCOUNTING
RECORDING
CLASSIFYING
SUMMARISING
DEALING WITH FINACIAL INFORMATION
ANALYSING AND INTERPRETING
COMMUNICATING RESULTS

10. 10
BOOK KEEPING AND
ACCOUNTING
BOOK KEEPING :
Concerned with
recording of financial
data related to
business operations
only
ACCOUNTING :
Concerned with
designing system of
recording, classfying,
and summarising the
recorded data and
interpreting them.

11. 11
ACCOUNTING
SCIENCE OR ART…..?
SCIENCE:
Systematic Study
Based on principles
Relation between
variables
Preparation of
financial statements is
Science
ART:
Expression of
innovative and
creative ideas/
thoughts
Varies from person to
person
Application (analysis
and Interpretation) of
accounting
informationis an Art

12. 12
Users of Financial
Information
Internal Users-managers plan, organize
and run a business.
External Users-
Investors
Creditors
Others
Taxing authorities
Regulatory agencies
Customers
Labor unions
Economic planners

13. External Users
To communicate
results/ financial health
Standard Formats
Accounting Rules –
rigid
Aggregated
Information
Historical
Less frequent
More precise
Internal Users
To help in decision
making/ internal
controls
Flexible formats
Flexible rules
Product-wise/ Region
Wise
Forward Looking
More Frequent
More use of
approximation
13

14. Financial Accounting
Information
Predominately used by external stakeholders
though managers also use it for decision making
To ensure that the accounting information is `true &
fair’
Generally Accepted Accounting Principles (GAAP)
Accounting Standards
Unification of Accounting Standards (IFRS)
Accounting principles are not `exact’
Some latitude with the management
14

15. GAAP
GAAP
Good accounting practices evolved by the profession
over a period of time
Most of these practices have been adopted explicitly in
the Accounting Standards
Accounting Standards
Mandatory accounting/ disclosure principles prescribed
by an authority
In India Accounting Standards are prescribed by the
Institute of Chartered Accountants of India
So far 32 accounting standards have been issued by the
ICAI
15

16. Basic Financial
Statements
To answer the three basic questions
How much profitwas generated by the business
over a particular period?
What are the assets and liabilitiesof the business
at the end of a particular period?
What were the sources and uses of cashover a
particular period?
Financial Statements
Profit & Loss Account
Balance Sheet
Cash Flow Statement
16

17. Accounting Environment
Ministry of Corporate Affairs /
Companies Act, 1956
Books to be maintained
Format of Financial Statements
Audit of accounts
Reserve Bank of India
Books of accounts to be maintained by
banking companies
17

18. Accounting Environment
Insurance Regulatory and Development
Authority (IRDA)
Books of accounts to be maintained by
Life Insurance / General Insurance
companies
Securities and Exchange Board of India
(SEBI)
Additional disclosure requirements in
case of companies listed on stock
exchanges
18

19. Accounting Environment
Income Tax Act, 1961
Books to be maintained for income tax
purposes
19

20. GAAP
GAAP
Good accounting practices evolved by the
profession over a period of time
Most of these practices have been adopted
explicitly in the Accounting Standards
Accounting Standards
Mandatory accounting/ disclosure principles
prescribed by an authority
In India Accounting Standards are prescribed
by the Institute of Chartered Accountants of
India

21. 21
ACCOUNTING PRINCIPLES
(Rules of action or conduct which are
adopted by the accountants universally and
are associated with theory and procedure)
ACCOUNTING
CONCEPTS :
Conceptsarethebasic
assumptions or
conditionsuponwhich
theaccounting is
based
ACCOUNTING
CONVENTIONS :
Conventions arethe
customsandtraditions
which guide the
accountants while
preparing the
accountingstatements

22. 22
ACCOUNTING CONCEPTS
Going concern Concept
Accounting Period Concept
Money Measurement Concept
Separate Entity Concept
Accrual Concept/Realization Concept
Matching Concept
Historical Cost Concept
Dual Aspect Concept

23. 23
ACCOUNTING
CONVENTIONS
Convention of Conservatism
Convention of Consistency
Convention of Materiality
Convention of Full Disclosure

24. The Going Concern Concept
The business will continue to operate
indefinitely
Unless there are reasons to believe
otherwise
The business neither has the intention nor
the necessity to discontinue operations

25. Accounting Period Concept
Income is measured for a specified
interval of time–accounting period
A period of 12 months
Financial Year
Calendar Year
Diwali Year
Makes comparison easier
Takes seasonal fluctuations in consideration

26. Money Measurement Concept
Only those transactions that can be
expressed in terms of money are the
subject matter of accounting
Money is the common unit of measurement
Each accounting transaction must be
converted into the `reporting currency’ of the
entity

27. Saparate Entity Concept
Business is a separate accounting entity
for which accounts are kept
Business and the businessman are separate
entities
Transactions recording depends upon the
`accounting entity’chosen.

28. Accrual/Realization Concept
Cash basis of accounting vs. Accrual basis
of accounting
Timing when income or expenses should
be recorded
Income and expenses are recorded when
`accrued’and not when received or paid
Income recorded when earned
Expenses recorded when incurred

29. The Matching Concept
Expenses should be matched against the
revenue generated to ascertain profit
Profit = Sales/ Income minus Cost of Goods
Sold
Cost of Goods sold = Opening Stock +
Purchases + Expenses incurred –Closing Stock

30. Operating vs. Capital
Expenditure
Revenue Expenses /Operating Expenses
(OPEX)
OPEX for day to day operations
OPEX is charged to P&L accountwhen incurred
Capital Expenditure (CAPEX)
CAPEX for long term benefits
CAPEX is appropriated over the useful lifeof
the asset by way of depreciation

31. Historical Cost Concept
Assets are recorded in the accounts at its
historical cost
Subsequent changes in the value are
normally not recorded in the accounts
Cost is however systematically apportioned
over the useful life of the asset

32. Dual Aspect Concept
Each accounting transaction effects at-
least two accounts in such a way that
Assets = Liabilities + Owner’s Equity
This system of accounting is called
double-entry book-keeping system

33. Accounting
Conventions

34. The Conservatism
Anticipate no profit but anticipate all
losses
Recognise gains only when they are reasonably
certain
Recognise losses even if they are reasonably
probable
It is prudent to `understate profits’ rather
than `overstate’

35. The Materiality
Insignificant details should be avoided but
all important information must be
disclosed
Any information that may influence the
decision of the user of the financial statement
The level of details to be maintained

36. The Consistency
Accounting methods once chosen must be
applied consistently period after period
unless there is strong reasons to change
Makes inter-period comparison possible
If there is a change the same must be
disclosed separately
The impact of the change in accounting policy
must be quantified and reported separately

37. Full Disclosure
(Substance over form)
The accounting treatment and
presentation in financial statements
of transactions and events should be
governed by their substance and not
merely by the legal form

38. Example
X Limited sold some investments to
Y Limited for Rs.100 lakhs with an
agreement to repurchase them after
one month at Rs.101 lakhs.
How should this transaction be
recorded in the books of X Limited?
How to treat the gain of Rs.1 lakh?

39. Accounting Standard
All significant accounting policiesadopted in
the preparation and presentation of financial
statements should be disclosed.
The disclosure of the significant accounting
policies as such should form part of the
financial statements and the significant
accounting policies should normally be
disclosed in one place.

40. Accounting Standard
Any change in the accounting policieswhich has a
material effect in the current period or which is
reasonably expected to have a material effect in later
periods should be disclosed.
In the case of a change in accounting policies which has
a material effect in the current period, the amountby
which any item in the financial statements is affected by
such change should also be disclosedto the extent
ascertainable.
Where such amount is not ascertainable, wholly or in
part, the fact should be indicated.

41. Accounting Standard
If the fundamental accounting assumptions,
viz. Going Concern, Consistency and Accrual
are followed in financial statements, specific
disclosure is not required. If a fundamental
accounting assumption is not followed, the
fact should be disclosed.
the major considerations governing the
selection and application of accounting
policies are prudence, materiality and
substance over form

42. Accounting Standards
Accounting Standard Board (ASB) of
ICAI is responsible for preparation of
accounting standards
So far 32 accounting standards have
been issued
Initially AS are recommendatory in
nature

43. Globalization of
accounting standards
Ministry of Corporate Affairs (MCA)
decided to converge Indian AS with
International Financial Reporting
Standards (IFRS)
Convergence involved modifying Indian
AS with IFRS rather than adopting the
later
MCA has issued a new series of accounting
standards (Ind AS)

44. Globalization of
accounting standards
Ind AS are substantially in line with IFRS
Ind AS are expected to be implemented in
a phased manner once certain operational
issues involving Income Tax Act and
Companies Act are resolved

45. 45
SYSTEMS OF
ACCOUNTING
Mercantile Or
Accrual System
Of Accounting:
Entries are made
on the basis of
amounts having
become due for
payments or
receipts
Cash System of
Accounting:
Entries are made
only when cash is
received or paid

46. 46
3 Types of Business Activity
Financing
Investing
Operating

47. 47
Financing Activities
It
Takes
MONEY
to
Make
MONEY!

48. 48
Two Ways of Outside
Financing of a Corporation
Borrowing money
(liabilities)
Issuing shares of
stock in exchange
for cash

49. 49
Basic Terms
Assets -resources owned by a
business
Liabilities -debts and obligations of
the business -represents claims of
creditors on the assets of the business
Common stock -stock representing
the primary ownership interest in a
corporation

50. Concept of Risk of
investors
Go to the Balance Sheet of RIL page
Go to Equity and Liabilities
What is it?
This represent the current value? Of
the money that has come into the
business from various broad sources

51. Equity and Liabilities
Equity and Liabilities are also known
as “sources of funds” for the
business
It is simply, other people’s money in
the business
Different people give money
business with different conditions

52. Who will give money and
why?
SOURCE RISK LEVEL RETURN
GRANT/ GOVT. FULLLOSS OR
DONATION
NIL
LENDERS INCL.
BANKERS
MEDIUM, RISK OF
DEFAULTAND DELAY
INTEREST (fixed rate)
SHAREHOLDERS LOSS OF CAPITAL NO CAP ON RETURN
AS DIVIDENDS,
CAPITAL GAINS,
CONTROL
COMPANY’S OWN
GENERATION OR
RETAINEDPROFITS
ALL MONEY CAN BE
LOST
GOESTO
SHAREHOLDERS IN
THE FORM OF
GROWING DIVIDENDS,
BONUS SHARES ETC.

53. 53
Investing Activities
Obtaining the
Resourcesor Assets
needed to operate the business
Examples of assets...
Cash
Accounts Receivable
Inventory
Buildings, Equipment, Furniture

54. 54
Investing Activities -
Examples
Purchase or sale of computers,
delivery trucks, furniture,
buildings
Purchase or sale of investments

55. 55
Operating activities are the main activities
for which the organization is in business.
Candy

56. 56
What Are Revenues?
Revenuesare the assets that result
from sale of a product or service.

57. 57
Examples of Revenues
Taxi Company -sells services
Theatre -sells services & products
Retail Store -sells products

58. 58
Expensesare the costs of assets
consumed or services used to
generate revenues. Examples...
What Are Expenses?
Cost of sales
Store operating expenses
General and administrative expenses
Interest expense

59. 59
Examples of Expenses
Taxi Company –Petrol, maintenance,
insurance, driver’s salary
Theatre -salaries, supplies, film
rental, concessions to resale
Retail Store -utilities, taxes, rent,
supplies, salaries

60. 60
Net Income
Net Income is the excess of revenues
over expenses.
Revenue Rs.10,000
Expenses 3,000
Net income Rs. 7,000

61. 61
Financial Accounting
Statements
Income Statement -reports the results of
operations for a specific period of time
Retained Earnings Statement -reports the
changes in retained earnings for a specific
period of time
Balance Sheet -reports the assets, liabilities,
and stockholders’ equity at a specific date
Statement of Cash Flows -reports the cash
receipts and payments for a specific period of
time

62. 62
Remember...
Remaining
Liquid and Solvent
is as important as
making a profit
because...

63. 63
A Company Can Survive a Long
Time Without Profits...
but It Can’t
Survive
Very Long
Without
CASH!

64. 64
Financial Statements
Income Statement
Statement of Retained Earnings
Balance Sheet
Statement of Cash Flows
Management Discussion and Analysis
Notes to Financial Statements
Auditor's Report
Elements of an

65. 65
Management Discussion
and Analysis
Covers three aspects of a company:
liquidity-ability to pay near-term
obligations
capital resources-ability to fund
operations and expansions
results of operations

66. 66
Notes to Financial Statements
Provide additional information not
included in body of statements
Does not have to be numeric
Examples:
Description of accounting policies or
explanation of uncertainties and
contingencies
Statistics and voluminous details

67. 67
Auditor's Report
Auditor, a professional accountant who
conducts an independent examination of the
financial accounting data presented by a
company.
Auditor gives an unqualified opinion if the
financial statements present the financial
position, results of operations, and cash flows
in accordance with GAAP.

68. 68
CSU CORPORATION
Income Statement
For the Year Ended December 31, 2004
1st-head up the statement
•name of company
•name of statement
•period of time covered

69. 69
Revenues
Service revenue Rs.17,000
CSU CORPORATION
Income Statement
For the Year Ended December 31, 2004
2nd -List the revenues

70. 70
Revenues
Service revenue Rs.17,000
Expenses
Rent expense Rs. 9,000
Insurance expense 1,000
Supplies expense 200
Total expenses 10,200
CSU CORPORATION
Income Statement
For the Year Ended December 31, 2004
3rd -List and total the expenses

71. 71
Revenues
Service revenue Rs.17,000
Expenses
Rent expense Rs.9,000
Insurance expense 1,000
Supplies expense 200
Total expenses 10,200
Net Income Rs. 6,800
CSU CORPORATION
Income Statement
For the Year Ended December 31, 2004
4th -Subtract expenses from
revenues to obtain net income.

72. 72
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2004
1st-head up the statement
•name of company
•name of statement
•period of time covered

73. 73
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2004
Retained earnings, January 1 Rs 0
2nd -Start with beginning
retained earnings

74. 74
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2004
Retained earnings, January 1 Rs 0
Add: Net Income 6,800
6,800
3rd -Add net income from the
current year -subtotal

75. 75
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2004
Retained earnings, January 1 Rs 0
Add: Net Income 6,800
6,800
Less: Dividends 600
Retained earnings, December 31 Rs 6,200
4th -Subtract current year’s
dividends and total

76. 76
CSU CORPORATION
Balance Sheet
December 31, 2004
1st -head up the statement
•name of company
•name of statement
•date

77. 77
CSU CORPORATION
Balance Sheet
December 31, 2004
Assets
Cash Rs 1,400
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets Rs 23,200
2nd -list the assets and total

78. 78
CSU CORPORATION
Balance Sheet
December 31, 2004
Assets
Cash Rs 1,400
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets Rs 23,200
Liabilities and Stockholders’ Equity
Liabilities
Notes payable Rs 5,000
Accounts payable 2,000
Total liabilities 7,000
3rd -list the liabilities and
sub-total

79. 79
CSU CORPORATION
Balance Sheet
December 31, 2004
4th -list stockholders’ equity
subtotal. Add to liabilities,
Total

80. 80
CSU CORPORATION
Balance Sheet
December 31, 2004
Assets
Cash Rs 1,400
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets Rs 23,200
Liabilities and Stockholders’ Equity
Liabilities
Notes payable Rs 5,000
Accounts payable 2`,000
Total liabilities 7,000
Stockholders’ equity
Common stock 10,000
Retained earnings 6,200
Total Stockholders’ equity 16,200
Total liabilities and stockholders’ equityRs23,200

81. 81
If total assets and total
liabilities and stockholders’
equity equal…
double underline.

82. 82
CSU CORPORATION
Balance Sheet
December 31, 2004
Assets
Cash Rs 1,400
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets Rs 23,200
Liabilities and Stockholders’ Equity
Liabilities
Notes payable Rs 5,000
Accounts payable 2,000
Total liabilities 7,000
Stockholders’ equity
Common stock 10,000
Retained earnings 6,200
Total Stockholders’ equity 16,200
Total liabilities and stockholders’ equityRs 23,200

83. 83
In what order are financial
statements prepared?
WHY?

84. 84
Revenues
Service revenue Rs 17,000
Expenses
Rent expense Rs9,000
Insurance expense 1,000
Supplies expense 200
Total expenses 10,200
Net Income Rs 6,800
CSU CORPORATION
Income Statement
For the Year Ended December 31, 2004
Net Income is needed for the
Statement of Retained Earnings.

85. 85
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2004
Retained earnings, January 1 Rs 0
Add: Net Income 6,800
6,800
Less: Dividends 600
Retained earnings, December 31 Rs 6,200
Ending Retained Earnings is needed
for the balance sheet.

86. 86
CSU CORPORATION
Balance Sheet
December 31, 2004
Assets
Cash Rs 1,400
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets Rs 23,200
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable Rs 2,000
Notes payable 5,000
Total liabilities 7,000
Stockholders’ equity
Common stock 10,000
Retained earnings 6,200
Total Stockholders’ equity 16,200
Total liabilities and stockholders’ equityRs 23,200

87. Financial Statements
Balance Sheet Profit & Loss A/c
Sources of Funds
Shareholders’ Funds
Share Capital
Reserve and Surplus
Securities Premium Account
Reserves
Borrowed Funds
Secured Loan
Unsecured Loan
Deferred Tax Liabilities
Application of Fund
Fixed Assets
Gross Block
Less: Accumulated Depreciation
Net Block
Add: Capital WIP
Investments
Current Assets, Loans and Advances
Cash & Bank
Inventories
Sundry Debtors
Less Current Liabilities & Provisions
Net Current Assets
Sale and Contract Revenue
Other Income
Less:
Material/COGS
Operating/Administrative/ Selling &
Mketing Expenses
Depreciation and Amortization
EBIT
Less: Finance Charges
Profit Before Tax
Less: Taxes
Profit After Tax
Less : Appropriations
Dividend
Retained Earnings

88. 88
Accounting Equation
Assets = Liabilities + Stockholders’ Equity