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Accounting - The Language Of Business

Published in: Accountancy
  • Soumendra R

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    • Qualification: ICWA
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Introduction to Basics of Accounting

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    TWIN ASPECTS OF ACCOUNTING Accounting Financial Accounting Used for Reporting Audience: Outside World (Government bodies, societies, etc.) Accounting Analysis Providing Information for Planning and Control Audience: Internal (Managers and Investors) 2
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    BOOK KEEPING Book-keeping is an activity concerned with the recording of financial data relating to business operations in a significant and orderly manner.
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    OBJECTS OF BOOK KEEPING To have a permanent record of each transaction of the business and to show its financial effect to the business. To ascertain the combined effect of all the transactions made during an accounting period upon the financial position of the business as a whole.
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    What is accounting? Accounting is the process of identifying, measuring and communicating financial information about an entity to permit informed judgments and decisions by users of the information.
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    What is Accounting? Identifying Measuring Communicating to financial various Information users
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    ISTINCTION BETWEEN BOOK KEEPING AND ACCOUNTING Book-keeping is the systematic recording 0 of financial and economic transactions Accounting is the analysis and O interpretation of book-keeping records.
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    ecisions Made wit Financial Information Invest?? Borrow $$?? Extend credit $$?? Start new business?? Add new product line?? Build new plant?? Loan $$?? Sell stocks or bonds??
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    BUSINESS ACTIVITIES FORMS OF BUSINESS Sole Proprietorship O Partnership O 0 Company e Private Limited Company e Public Limited Company NGOs
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    What isa usi ess transaction? A business transaction is an economic event or condition that directly changes an entity's financial condition or directly affects its results of operations. 10
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    COMPONENTS OF FINANCIAL STATEMENT Balance Sheet o Income Statement Cash Flow Statement Notes to Accounts and Accounting Policies 11
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    Qualitative characteristics of Financial Statements Understandability Relevance O Reliability Comparability 12
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    OBJECTIVE OF FINANCIAL STATEMENTS provide information about the financial position, To performance and cash flow of an enterprise However they do not provide all the information because 1.They largely portray the financial effects of past events 2.They do not provide information of non-financial nature Financial Position Economic Resources Financial Structure Liquidity and solvency Performance Cash Flows 13
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    Elements of Financial Statements Financial Position -- Assets -- Liabilities --Equity Performance O -- Income -- Expenses Cash Flows O
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    Financial Position Assets --- Assets are the resources controlled by an enterprise as a result of past events, from which future economic benefits are expected to flow to the enterprise. Liabilities - Liabilities are the present obligations of the enterprise ,arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits. Equity - Equity is the residual interest in the assets of the enterprise after deducting all its liabilities. 15
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    Characteristics Assets 1. They represent potential to contribute , directly or indirectly, to the flow of cash or cash equivalents to the enterprise. 2. Physical form not essential to the existence of the asset. 3. Legal right of ownership not essential in establishing the existence of asset. 4. Purchasing or producing not always essential to obtain asset. 5. Expenditure incurred for seeking future economic benefits may not result in asset. 16
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    Characteristics Liabilities 1. It's a present obligation to be settled in future 2. Obligations may be due to a binding contract or statutory requirement 3. A present obligation and a future commitment differ from each other 4. Careful estimates are required to measure provisions.
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    Characteristics O 1. 2. Equity It is dependent on the measurement of assets and liabilities A change in net assets results in a change in the equity 18
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    Owner's Equity This represents the owner's interest in the business. An example. You started a business with a capital of Rs 150,000 of which you borrowed Rs 120,000 on a mortgage payable. Your asset is Rs150,ooo your liabilities are Rs 120,000 and your owner's equity is Rs 30,000 the amount you paid down. 19
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    Let's look at the Change in Equity Equity at the beginning of the period XXX Add: Additional Investments Add: Net Income (Revenues-Expenses) XXX Less: Owners withdrawals (Dividends) (XXX) Equals Equity at the end of the period XXX Obviously if the owners expenses exceed his revenues he incurs a net loss which reduces equity. 20
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    RFORMANCE: Through Income Statement 1. 2. Elements: Income :- It represents the increase in economic benefits in the form of increase in assets or decrease in liabilities Expenses:- It represents decrease in economic benefits in the form of outflows or depletion of assets or increase in liabilities ( Expense vs. Expenditure )
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    Characteristics o Income; 1. Both revenue and gains 2. Revenue arises in the ordinary course of business 3. Gains may or may not arise in the ordinary course of business 22
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    Characteristics Expenses 1. It includes both expenses and losses. 2. It arises in the ordinary course of business. 3. Losses may or may not arise in the ordinary course of business. 23
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    The Accounting Equation Assets = Liabilities + Owner's Equity The resources owned by a business 24
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    The Accounting Equation Assets = Liabilities + Owner's Equity The rights of the creditors, which represent debts of the business 25
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    The Accounting Equation Assets = Liabilities + Owner's Equity The rights of the owners 26
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    ects of Transaction on Accounting Equation Transaction 1: Initial Investment of Rs 400,000 Assets Cash + Rs.400,000 Liabilities Owners' Equity Ram, Capital +Rs.400,000 (Owner Investment) 27
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    fects of Transaction on Accounting Equation Transaction 2: Loan taken Rs 100,000 from Bank (2) Bal. Assets Cash + Rs 400,000 + Rs 100,000 Rs 500,000 Liabilities Note payable + Rs 100,000 Rs 100,000 Owners' Equity Lopez, Capital +Rs 400,000 Rs 400,000 Rs 500,000 Rs 500,000 28
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    Effects of Transaction on Accounting Equation Transaction 3: Purchased Plant for Rs 50,000 Assets Cash Bal. 500,000 (3) -50,000 Bal. Plant +50,000 50,000 Liabilities Note payable I OO,OOO I OO,OOO 500,000 Owners' Equity Lopez, Capital 400,000 400,000 500,000 29
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    Preparing the Balance Sheet Assets Cash Store equipment Total assets Liabilities and Owners' Equity Liabilities (note payable) I OO,OOO 50,000 500,000 Ram capital Total liabilities and owners' equity 400,000 500,000 30
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    Inter ternal Users of Accounting Information Banks Current and Potential Owners Suppliers u atil Internal Users - Management A Creditors Financial Analysts Trade Government Organizations Agencies 31
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    OBJECTIVE OF FS USERS' INFORMATION NEEDS 0 1) Liquidity 0 2) Profitability 3) Solvency 1 32
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    Users of Financial Statements Owners as investors Evaluating the performance of the entity. Evaluating managerial performance, efficiency and objectives, including investment and dividend distribution plans. Assessing the liquidity of the entity, its present or future requirements for additional fixed capital or working capital, and its ability to raise long-term and short-term finance. Estimating the future prospects of the entity, including its capacity to pay dividends, and predicting future levels of investment. 33
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    Users of Financial Statements Lenders Lenders are interested in information that enables them to determine whether their loans, and related interest, will be paid when due, 34


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