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LThe lingua franca or the language of
the business
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Monk Fra Luca Pacioli (1445-1515) is considered the
father of modern accounting.Post industrial revolution (in the later part of the 18thcentury) accounting as a profession came into vogue.
Managers realized the importance of accountinginformation for enhancing the quality and timelinessof decision making process.
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According to AICPA
(American Institute of Certified Public Accountants)
Accounting is the art of recording, classifying andsummarizing in a significant manner and in terms ofmoney, transactions and events of a financial character,and interpreting the results thereof.
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Financial Accounting - Historical records
Cost Accounting - Cost computationManagement
Accounting - Managerial decision making
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1. How good or bad is the financial condition of the business?2. Has the business activity resulted in a profit or loss?3. How well the different departments of the business have performed in the past?4. Which activities or products have been profitable?
5. Out of the existing products which should be discontinued and the production ofwhich commodities should be increased.
6. Whether to buy a component from the market or to manufacture the same?7. Whether the cost of production is reasonable or excessive?8. What has been the impact of existing policies on the profitability of the business?9. What are the likely results of new policy decisions on future earning capacity of
the business?10. In the light of past performance of the business how it should plan for future to
ensure desired results ?
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Profit & Loss A/c - throws light onfinancial performance
during the year
The Balance Sheet - throws light onfinancial position of a
company as on a particular date
Cash Flow Statement -shows the sources and uses of cash
Annual Report -consists of directors report, chairmans
report
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1. Managers
2. Owners
3. Investors
4. Government
5. Banks and Financial Institutions
6. Employees
7. Suppliers8. Academicians, Researchers and Consultants
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Forms Of Business Organization
1. Sole Proprietorship
2. Partnership Firm
3. Corporations or Companies
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Accounting Standards
Accounting Standards are written documents containing the
Generally Accepted Accounting Principles ( GAAP )
These standards are issued by Institute Of Chartered Accountants Of
India ( ICAI ).
The ICAI constituted an Accounting Standards Board ( ASB) in1977.
The main function of ASB is to prepare Accounting Standards.
The main objective of AS is to standardize the different accounting
policies and practices followed by different business concerns. Example :
AS1Disclosure of accounting policies
AS2Valuation of inventories
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Concepts
1. Business Entity2. Going Concern3. Monetary Expression4. Matching Revenues with Expenditure of that Period
5. Realization or Accrual6. Duality / Double Entry7. Cost8. Accounting Period
Conventions
1. Consistency2. Conservatism / Prudence3. Materiality4. Disclosure
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AccrualAll expenses/income must be provided for in the books
of accounts if they relate to that period whether actually
spent/received or not.
Cash - Revenues and expenditure are to be recognized as and
when they happen . GAAP (Generally Accepted Accounting
Principles) does not permit this basis
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Double-Entry Book Keeping System
Duality concept : Recording both aspects of a transaction
with twofold affect -
Total Liabilities = Total Assets
Assets are the resources owned by the business entity. They
are the uses of funds.
Total Assets = Owners equity + Outside liabilities
Liabilities are what the business owes to outsiders
(including the owners). They are the sources of funds.
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Geetha Iyer
Capital V Revenue Exp
Capital Expenditure is investment in long term assets
fruit of which shall be enjoyed in the future.
Revenue Expenditure is the result of day-to-day
operations of the business.
WorldCom scam..- case study
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Geetha Iyer
WorldCom, Inc. - US largest telecom company.
In June 2002, WorldCom was charged by SEC with a massive
accounting fraud totaling more than $3.8 billion. WorldCom
capitalized (and so deferred) rather than expensed approximately
$3.8 billion of its costs.
There was even found one accounting entry for $500 million,
increasing computer assets and decreasing cash. No supporting
documents for these entries were found. In total, in accounting
ledgers there were found unusual accounting entries for $2 billion.
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Geetha Iyer
WorldCom Inc. Fraud
Income Statement
Revenues..xxx (no change)
Cost of Sales....xxx (no change)
Operating expenses:Fees paid to other
phone networks...xxx
Computer expenses.xxx
______________________
NET INCOME....xxx
Balance sheet
Equipmentxxxx
Inventory..xxxx
Cash..xxxx
.Total assets.xxxx
Liabilities..xxxx
Equityxxxx
Total liabilities
and equityxxx
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Thank You
Geetha Iyer
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