Welingkar’s Distance Learning Division

Financial Accounting

CHAPTER-1. Introduction to Financial Accounting

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Financial Accounting Introduction to Financial Accounting Chapter 01

ImportanceImportance Accounting all incomes, expenses, assets & liabilities in

monetary terms

is the sole determinant of all economic activities

of all businesses, industry, trade ,commerce as well as software giants, media

and even NGOs like CRY or Lijjat Papad.

Financial Accounting Introduction to Financial Accounting Chapter 01

ImportanceImportance

Accounting helps recording all financial transactions thus enabling preparation of these principal financial

statements:

- Trial Balance- Profit & Loss Account- Balance Sheet- Cash Flow Statement

Financial Accounting Introduction to Financial Accounting Chapter 01

ImportanceImportanceSeveral segments of the Society called

Stakeholders need to use Financial Statements.

Shareholders Investment Advisors Creditors Investment AnalystsSuppliers, Vendors Workers, EmployeesLocal, State, Central ResearchersGovernments Students of Finance

Financial Accounting Introduction to Financial Accounting Chapter 01

LimitationsLimitations

£ Reflects and records only monetary values of all transactions and hence quantitative measurements; hence qualitative aspects are ignored.

£ On account of inflation value of rupee fluctuates and decreases; but no adjustments made in the accounts.

Financial Accounting Introduction to Financial Accounting Chapter 01

ScopeScope

A financial accounting system provides

summarized and categorized information

about the company’s performance and state of affairs

mainly for external decision makers.

Financial Accounting Introduction to Financial Accounting Chapter 01

ScopeScope A financial accounting system provides summarized and

categorized information about the company’s performance and state of affairs mainly for external decision makers, allowing them to answer questions: $ Is the company earning satisfactory

income? $ How does the company compare in size

and profitability with competitors?$ Will the company be able to pay its debts when they become due?

Financial Accounting Introduction to Financial Accounting Chapter 01

GAAPGAAP

Financial accounting is governed by rules or guidelines collectively called

Generally Accepted Accounting Principles (GAAP).

Financial Accounting Introduction to Financial Accounting Chapter 01

GAAPGAAP

Financial accounting is governed by rules or guidelines collectively called Generally Accepted Accounting Principles (GAAP).

- many of these are mandatory by law of the country.

Financial Accounting Introduction to Financial Accounting Chapter 01

GAAPGAAP

Financial accounting is governed by rules or guidelines collectively called Generally Accepted Accounting Principles (GAAP).

- many of these are mandatory by law of the country.- those that are not mandatory, have considerable

persuasive force.

Financial Accounting Introduction to Financial Accounting Chapter 01

GAAPGAAP

Financial accounting is governed by rules or guidelines collectively called Generally Accepted Accounting Principles (GAAP).

- many of these are mandatory by law of the country.- those that are not mandatory, have considerable

persuasive force. - primary agency responsible for GAAP in India, is the

Standards Board of the Institute of Chartered Accountants of India.

Financial Accounting Introduction to Financial Accounting Chapter 01

ConceptsConcepts Є Entity Concept

“ An accounting entity is a separate

and distinct unit, standing apart from its

owners & shareholders”.

Financial Accounting Introduction to Financial Accounting Chapter 01

ConceptsConcepts Є Entity Concept “ An accounting entity is a separate and distinct unit, standing

apart from its owners & shareholders”.

Hence :

$ Share Capital and reserves of the company ( really belonging to owners) are shown under liabilities.

Financial Accounting Introduction to Financial Accounting Chapter 01

ConceptsConcepts Є Entity Concept “ An accounting entity is a separate and distinct unit, standing

apart from its owners & shareholders”. Hence :

$ Share Capital and reserves of the company ( really belonging to owners) are shown under liabilities. $ Losses are shown under assets ( because they represent what owners owe the business).

Financial Accounting Introduction to Financial Accounting Chapter 01

ConceptsConcepts Є Entity Concept Є Reliability Principle

“ accounting records and statements must be based on the most objective data available”

- hence importance of bills, invoices, vouchers during audit.

Financial Accounting Introduction to Financial Accounting Chapter 01

ConceptsConcepts Є Entity Concept Є Reliability Principle Є Historical Cost Concept

“ acquired assets, inventories and services are recorded at their actual costs.”

- Hence current market value not considered.

Financial Accounting Introduction to Financial Accounting Chapter 01

ConceptsConcepts Є Entity Concept Є Reliability Principle Є Historical Cost ConceptЄ Going Concern Concept

“assumes that the accounting entity will continue in the foreseeable future”

- hence fixed assets held by the business are always shown at actual cost less accumulated depreciation.

Financial Accounting Introduction to Financial Accounting Chapter 01

ConceptsConcepts Є Entity Concept Є Reliability Principle

Є Historical Cost Concept Є Going Concern Concept

Є Stable Monetary Unit Concept

“ business transactions are recorded in terms of single currency (rupees in India) , and no adjustment is made for inflation”

Financial Accounting Introduction to Financial Accounting Chapter 01

ConceptsConcepts Є Entity Concept Є Reliability Principle

Є Historical Cost Concept Є Going Concern Concept Є Stable Monetary Unit Concept

Є Full Disclosure Principle

“ all circumstances and events that are likely to make a difference to users of the financial statements must be disclosed”.

Financial Accounting Introduction to Financial Accounting Chapter 01

ConceptsConcepts Є Entity Concept Є Reliability Principle Є Historical Cost Concept Є Going Concern Concept

Є Stable Monetary Unit Concept Є Full Disclosure PrincipleЄ Materiality

“ The constraint of determining whether an item is large enough to likely influence a decision”.

Financial Accounting Introduction to Financial Accounting Chapter 01

ConceptsConcepts Є Entity Concept Є Reliability Principle Є Historical Cost Concept Є Going Concern Concept

Є Stable Monetary Unit Concept Є Full Disclosure Principle Є Materiality

Є Conservatism“ The constraint of determining whether an item is large enough to likely influence a decision”.

“ In addition to these principles, the Institute of Chartered Accountants of India has issued 28 accounting standards for compliance with varying degrees of legal compulsion”

Financial Accounting Introduction to Financial Accounting Chapter 01

“ The importance of accounting is that it is the universal language of business, and a basic understanding of it is necessary for almost any job in the business world!”