8/3/2019 TOI Accounting Fundamentals
1/30
Accounting Fundamentals
Kamalesh Mandlik
8/3/2019 TOI Accounting Fundamentals
2/30
2
Agenda
Need for Accounting - Why to do accounting?
Understanding of Financial Statements
What is accounting? Accounting Concepts
Rules of Accounting
Detailed accounting entries
8/3/2019 TOI Accounting Fundamentals
3/30
3
Need for Accounting Why to do Accounting ?
Stakeholders need to know financialstatus
Is business making or losing money?
How much is business worth?
Statutory requirements
8/3/2019 TOI Accounting Fundamentals
4/30
4
Users of Financial Statements
Financial Analysts
Investment Bankers
Creditors Stock Exchanges
Individual Investors
Credit Rating Agencies
8/3/2019 TOI Accounting Fundamentals
5/30
5
Understanding FinancialStatements
8/3/2019 TOI Accounting Fundamentals
6/30
6
Financial Statements
Profit & Loss A/c (OR Income
Statement)
Balance Sheet
8/3/2019 TOI Accounting Fundamentals
7/30
7
Profit & Loss A/c (OR IncomeStatement)
Contents
Revenues generated
Expenses Incurred Operating Profit before Interest, Tax
and Depreciation
Net Profit / Loss before tax
Profit after tax
8/3/2019 TOI Accounting Fundamentals
8/30
8
Balance Sheet
Contents
Assets (Fixed & Current)
Liabilities (Long-Term & Current)Owners Equity
8/3/2019 TOI Accounting Fundamentals
9/30
9
Ratio Analysis
Balance Sheet ratiosCurrent ratio, Debt- Equity ratio etc.
Profitability Ratios
Operating Profit ratio, Net Profit ratio, EPS
Ratios including elements of bothStatements
Return on Capital Employed (ROCE)
Return on Net worthTurnover ratios
8/3/2019 TOI Accounting Fundamentals
10/30
10
Balance Sheet ratios
Current Ratio
= Current Assets / Current Liabilities
Higher the better
NetWorking Capital (NWC)
= Current Assets less Current Liabilities
Debt-Equity Ratio
= Long term Debt / Equity capital
Lower the better
8/3/2019 TOI Accounting Fundamentals
11/30
11
Profitability Ratios
Operating Profit ratio
= Operating Profit / Sales
Net Profit ratio = Net Profit / Sales
Earnings per Share (EPS)
= Profit after tax / No. of shares outstanding
8/3/2019 TOI Accounting Fundamentals
12/30
12
Combination Ratios
Return on Capital Employed (ROCE)= Operating Profit /(Fixed Assets + NWC)
Return on Net worth= Profit after tax / Equity (Net worth)
8/3/2019 TOI Accounting Fundamentals
13/30
13
Turnover ratios
Asset Turnover Ratio= Sales / Average Total Assets
Higher the better
Inventory Turnover= COGS / Average Inventory
Should be optimal
8/3/2019 TOI Accounting Fundamentals
14/30
14
Valuation of Shares
FCFE - Free cash flow to equity
= PAT + Depreciation
WACC Weighted Avg Cost of capital
= Cost of equity + Cost of debt
Terminal value
= Present value of Net assets
(i.e.Assets Less Liabilities)
8/3/2019 TOI Accounting Fundamentals
15/30
Question & Answers
8/3/2019 TOI Accounting Fundamentals
16/30
16
What is accounting?Involves
recording, classifying, and summarizing
of transactions having financial character
8/3/2019 TOI Accounting Fundamentals
17/30
17
Double Entry System ofAccountingAn Italian monk Fra Luca Paciolicreated this
great & scientific system over 500 years ago.
Every time a transaction takes place
two accounts will be affected i.e. one is debited
and other is credited.
8/3/2019 TOI Accounting Fundamentals
18/30
18
Accounting systems
Involves
Journals Book of original entry
Sub ledgers General Ledger (Trial Balance )
Financial Statements
8/3/2019 TOI Accounting Fundamentals
19/30
19
Ledgers in ERP
General Ledger Sub ledgers
Inventory
Accounts Receivable Accounts Payable
Payroll
Fixed Assets Projects
8/3/2019 TOI Accounting Fundamentals
20/30
20
The Accounting Equation
Assets = Liabilities + Owners Equity
This is the basic equation of Accounting,which is satisfied by all transactions.
8/3/2019 TOI Accounting Fundamentals
21/30
21
ACCOUNTING CONCEPTS
Accruals - Revenue and expenses for a given periodconsidered whether received / paid or not.
Matching - Revenue earned in a period is matchedagainst expenses incurred.
Business Entity - Entity separate and distinct from itsowners & others.
Consistency
Dual Aspects - There are two sides to each transactionrecorded.
8/3/2019 TOI Accounting Fundamentals
22/30
22
ACCOUNTING CONCEPTS
continued Going Concern - Enterprise will continue in operation
for the foreseeable future. Needs disclosure if not so.
MaterialitySignificance compared to firms size
Money Measurement Items assessable in terms ofmoney
Prudence - Do not anticipate profit but do provide forlosses
Realization Profits considered on Accrual basis
8/3/2019 TOI Accounting Fundamentals
23/30
Detail Accounting Entries
Tomorrows session
8/3/2019 TOI Accounting Fundamentals
24/30
Question & Answers
8/3/2019 TOI Accounting Fundamentals
25/30
25
Thank you
8/3/2019 TOI Accounting Fundamentals
26/30
26
Session 2
Detailed Accounting Entries
8/3/2019 TOI Accounting Fundamentals
27/30
27
Covered in 2 Sections
General Accounting (Various transactions)
Inventory Accounting with strong ERP focus
8/3/2019 TOI Accounting Fundamentals
28/30
28
Steps
1 Decide if it is a event OR transaction ?
2 Determine 2 sided effect
3 Determine accounts affected4 Whether they Increase/Decrease ?
5 Debited / Credited
8/3/2019 TOI Accounting Fundamentals
29/30
Question & Answers
8/3/2019 TOI Accounting Fundamentals
30/30
30
Thank you
Top Related