Financial Accounting And Analysis

01. Define Accounting

 Accounting is the process of recording financial transactions pertaining to a business.
The accounting process includes summarizing, analyzing, and reporting these
transactions to oversight agencies, regulators, and tax collection entities. The financial
statements used in accounting are a concise summary of financial transactions over an
accounting period, summarizing a company’s operations, financial position, and cash
flows.
 Key Takeaway
1. Regardless of the size of a business, accounting is a necessary function for decision
making, cost planning, and measurement of economic performance.
2. A bookkeeper can handle basic accounting needs, but a Certified Public Accounting
(CPA) should be utilized for larger or more advanced accounting tasks.
3. Two important types of accounting for businesses are managerial accounting and
cost accounting. Managerial accounting helps management teams make business
decisions, while cost accounting helps business owners decide how much a product
should cost.
4. Professional accountants follow a set of standards known as the Generally Accepted
Accounting Principles (GAAP) when preparing financial statements.
5. Accounting is an important function of strategic planning, external compliance,
fundraising, and operations management.

 Types of Accounting
Accountants may be tasked with recording specific transaction or working with specific
sets of information. For this reason, there are several broad groups that most
accountants can be grouped into.
Financial Accounting
Financial accounting refers to the processes used to generate interim and annual
financial statements. The results of all financial transactions that occur during an
accounting period are summarized in the balance sheet, income statement, and cash
flow statement. The financial statements of most companies are audited annually by an
external CPA firm.
For some, such as publically – traded companies, audits, are a legal requirement.
However, lenders also typically require the results of an external audit annually as part
of their debt covenants. Therefore, most companies will have annual audits for one
reason or another.
 Managerial Accounting
Managerial accounting uses much of the same data as financial accounting, but it
organizes and utilizes information in different ways. Namely, in managerial accounting,
an accountant generates monthly or quarterly reports that a business’s management
team can use to make decisions about how the business operates. Managerial
accounting also encompasses many other facets of accounting, including budgeting,
forecasting, and various financial analysis tools. Essentially, any information that may be
useful to management falls underneath this umbrella.
Cost Accounting
Just as managerial accounting helps businesses make decisions about management, cost
accounting helps businesses make decisions about costing. Essentially, cost accounting
considers all of the costs related to producing a product. Analysts, managers, business
owners, and accountants use this information to determine what their product should
cost. In cost accounting, money is cast as an economic factor in production, whereas in
financial accounting, money is considered to be a measure of a company’s economic
performance.
Tax Accounting
While financial accountants often use one set of rules to report the financial position of
a company, tax accountants often use a different set of rules. These rules are set at the
federal, state, or local level based on what return is being filed. Tax accounts balance
compliance with reporting rules while also attempting to minimize a company’s tax
liability through thoughtful strategic decision – making. A tax accountants often
oversees the entire tax process of a company: the strategic creation of the organization
chart, the operations, the compliance, the reporting, and the remittance of tax liability.

 Special Considerations
Accountants often leverage software to aid in their work. Some accounting software is
considered better for small businesses such as QuickBooks, Quicken, FreshBooks, Xero,
SlickPie or Sage 50. Larger companies often have much more complex solutions to
integrate with their specific reporting needs. This includes add – on modules or in –
home software solutions. Large accounting solutions include Oracle, NetSuite, or Sage
products.

02. Define Conventions

 Accounting conventions are guidelines used to help companies determine how to record
certain business transactions that have not yet been fully addressed by accounting
standards. These procedures and principles are not legally binding but are generally
accepted by accounting bodies.
 Basically, they are designed to promote consistency and help accountants overcome
practical problems that can arise when preparing financial statements.
 Key Takeaway
1. Accounting conventions are guidelines used to help companies determine how to
record business transactions not yet fully covered by accounting standards.
2. They are generally accepted by accounting bodies but are not legally binding.
3. If an oversight organization sets forth a guidelines that addresses the same topic as
the accounting convention is no longer applicable.
4. There are four widely recognized accounting conventions: conservatism,
consistency, full disclosure, and materiality.

 Accounting Convention Methods

There are four main accounting conventions designed to assist accountants.:
Conservatism
Playing it safe is both an accounting principle and convention. It tells accountants to err
on the side of caution when providing estimates for assets and liabilities. That means
that when two values of a transaction are available, the lower one should be favored.
The general concept is to factor in the worst – case scenario of a firm’s financial future.
Consistency
A company should apply the same accounting principles across different accounting
cycles. Once it chooses a method it is urged to stick with it in the future, unless it has a
good reason to do otherwise. Without this convention, investors’ ability to compare and
assess how the company performs from one period to the next is made much more
challenging.
Full Disclosure
Information considered potentially important and relevant must be revealed, regardless
of whether it is detrimental of the company.
Materiality
Like full disclosure, this convention urges companies to lay all their cards on the table. If
an item or event is material, in other words important, it should be disclosed. The idea
her e is that any information that could influence the decision of a person looking at the
financial statement must be included.

03.What is Management Accounting?

The process of creating organization goals by identifying, measuring, analyzing,
interpreting, and communicating information to managers is call management or
managerial accounting.
 Management accounting focuses on all accounting aimed at informing management
about operational business metrics. It uses information relating to costs of products or
services purchased by the company. Budgets are often used to decisions made in
operational planning, Management accountants use performance reports to note
variances between actual results from budgets.

The main difference between management accounting and financial accounting is the
accounting data to create financial statements, while management accounting is the
internal processing used to account for business transactions.

 Management Accounting and its Functions

Management accounting is the process of preparing reports about business operations
that help managers make short and long – term decisions. It helps a business pursue its
goals by identifying, measuring, analyzing, interpreting and communicating information
to managers. The main functions of management accounting include:
1. Helping Forecast the future

Forecasting helps decisions to made and answer questions like: Should a company
invest more in equipment? Should it diversify into different markets and regions?
Should it buy another company?

2. Helping in Make – or – Buy Decisions

Management accounting insights on cost and production availability are deciding factors
in purchasing choice. Data from managerial accounting empower decision – making at
both an operational and strategic level.

3. Forecasting Cash Flows

Estimating cash flows and the impact of cash flows on the business is essential.
Considering where the costs companies will incur in the future and where its revenue
will come from can help a business make its next moves. Management accounting
involves creating budgets and trends chars that manager use to decide how to allocate
money and resources to generate the projected revenue growth.

4. Helping Understand Performance Variance

Performance discrepancies in business are variance between what was predicted and
what was achieved. Using analytical techniques, management accounting help
management build on positive variance and manager the negative ones.
 5. Analyzing the Rate of Return

Knowing the rate of return (ROR) is essential to know before on a project that requires
a lot of investments. Vital questions that can be answered through management
accounting include. If presents with two opportunities, how does a business choose the
most profitable one? In how many years will a company break even on a project? What
are the cash flows estimated to be?

 What is a Management Accounting System?

Internal management accounting systems are used to provide critical information to
management to be used in operational business decision – making. A manufacturing
company might use these systems to help in the costing and managing of their process. A
hospital might use management accounting systems to assist them in insurance billing and
other in – house requirements.

These systems vary within the industries they are used within and allow for functionalities
and reports specific to that industry.

04.What is Revenue?
 Revenue is the money generated from normal business operations, calculated as the
average sales price times the number of units sold. It is the top line (or gross income)
figure from which costs are subtracted to determine net income. Revenue is also known
as sales on the income statement.

 Key Takeaways
1. Revenue, often referred to as sales, or the top line, is the money received from
normal business operations.
2. Operating income is revenue (from the sale of goods or services) less operating
expenses.
3. Non – operating income is infrequent or nonrecurring income derived from
secondary sources (e.g., lawsuit proceeds).
4. Non – business entities such as governments, nonprofits, or individuals also report
revenue, though calculations and sources for each differ.
5. Revenue is only sale proceeds, while income or profit incorporate the expenses to
generate revenue and report the net (net gross) earnings.

 Types of Revenue
A company’s revenue may be subdivided according to the divisions that generate it. For
example, Toyota Motor Corporation may classify revenue across each type of vehicle.
Alternatively, it can choose to group revenue by car type (i.e, compact vs. truck)

A company may also distinguish revenue between tangible and intangible product lines.
For example, Apple products include IPad, Apple Watch, and Apple TV Alternatively,
Apply may be interested in separately analyzing its Apple Music, Apple TV+, or iCloud
services.

Revenue can be divided into operating revenue – sales from a company’s core business
– and non – operating revenue which is derived from secondary sources. As these non –
operating revenue sources are often unpredictable or non – recurring, they can be
referred to as one – time events or gains. For example, proceeds from the sale of an
asset, a windfall from investments, or money awarded through litigation are non –
operating revenue.

Formula and Calculation of Revenue

Net Revenue = (Quantity Sold* Unit Price) – Discounts – Allowances – Returns

Revenue vs. Income/Profit

Many entities may report both revenue and income/profit. These two terms are used to
report different accumulations of numbers.

Revenue is often the gross proceeds collected by an entity. It is the measurement of

only income component of an entity’s operations. For a business, revenue is all of the
money it has earned.

Income/profit usually incorporates other facets of a business. For example, net income
or incorporate expenses such as cost of goods sold, operating expenses, taxes, and
interest expenses. While revenue is a gross amount focused just on the collection of
proceeds other aspects of a business that reports the net proceeds.

Special Considerations Recognizing Revenue: ASC606

In 2016, the Financial Accounting Standards Board released Revenue from Contracts
with Customers (Topic 606). The accounting standards update outlined new guidance on
how companies must report revenue. The guidance revenue in accordance with five
stpes:
1. Identify the contract with the customer.
2. Identify the performance obligation in the contract.
3. Determine the contract price.
4. Allocate the transaction price to the performance obligation(s) in the contract.
5. Recognize revenue when the entity satisfies a performance obligation.

Government Revenue

In the case of government, revenue is the money received from taxation, fees, fines,
inter – governmental grants or transfers, securities sales, mineral or resource rights, as
well as any sales made. Governments collect revenue from citizens within its district and
collections from other government entities.

Nonprofit Revenue

For nonprofits, revenues are its gross receipts, its components include donations from
individuals, foundations, and companies, grants from government entities, investments,
and/or membership fees. Nonprofit revenue may be earned via fundraising events or
unsolicited donations.

Real Estate Revenue

In terms of real estate investments, revenue refers to the income generated by a

property, such as rent or parking fees or rent. When the operating expenses incurred in
running the property are subtracted from property income, the resulting value is net
operating income (NOI). Vacant real estate technically does not earn any operating
revenue, though the owner of the property may be required to report fair market value
adjustments that results in gains when externally reporting their finances.

05.What is a sole trader?

A sole trader is a self – employed person who owns and runs their own business as an
individual. A sole trader business doesn’t have any legal identity separate to it owner,
leading many to say that as a sole trader you are the business. In this article, we look at
what a sole trader is, how to get started and your ongoing responsibilities.

As a sole trader, you have absolute control over your business, its assets and profits
after tax. Alongside this control, this business model offers comparative simplicity,
versatility and a number of other advantages. In another article, we look in detail at
sole trader advantages.
Unlike the owners of a limited company, however, a sole trader is personally liable for
their business’s debts and their personal assets may be at risk is creditors cannot be
paid. This unlimited liability and the pressure involved in having to shoulder all the
responsibility can be significant challenges.

Unlike many other types of business, for a sole trader:

1. There is no requirement to register the business with Companies House or make
ongoing fillings of information with them.
2. There are no directors to run the business, just the sole trader.
3. There are no shareholders to invest capital, instead, funding for the business is
limited to what the sole trader can raise personally.
4. There are not multiple partners like in a general partnership, so the sole trader
model is not usually suitable if you’re looking to go into business with someone
else, sharing the responsibility and rewards.

However, a sole trader shares many characteristics with other business form
including:
1. You still have to report and pay tax to HMRC. We look at the process of
registering as a sole trader with HRMC and your ongoing responsibilities below.
2. While it may be true that as a sole trader’ you are the business,’ it’s still prudent
to manage certain things separately, like having a separate bank account for the
business to your personal account.
3. If you choose to trade under a name other than your own name, you must still
follow certain rules around naming your business. For example, your business
name cannot be offensive, contain certain ‘sensitive words’ or copy that of
another existing business. You must include your own name, and, if different,
the name of the business on business documents like invoices, letters and
receipts.
4. You can employ staff. Being a sole trader means you bear all responsibility for
the business, not that you have to work on your own.

06.Define Tally Software?

Tally is an ERP accounting package used for recording day to day business date
of a company. The latest version of Tally is Tally ERP 9.
Tally ERP 9 software is one acclaimed financial accounting system and inventory
management system with power computer.
Tally ERP 9 is one best accounting software that can integrated with other
business applications such as sales, finance, Purchasing, Payroll, inventory, etc.
 Tally Software stores all the business transactions of each account in detail.
Tally ERP 9 follows double entry accounting system and hence eliminates and
rectifies possible errors.

Features of Tally
1. Tally ERP 9 supports multi languages, so it is called as multi – lingual tally
software. Accounts can be maintained in one language and reports can be
viewed in another language.
2. You can create and maintain accounts up to 99,999 companies.
3. Using payroll feature, you can automate employee records management.
4. Tally has feature of synchronization, the transactions maintained in multiple
locations offices can be automatically updated.
5. Generate consolidated financial statements as per requirements of
company.
6. Managing single and multiple groups are very important features of tally.
 Versions of Tally
1. The first version of Tally was Tally 4.5 and it was released in 1990’s. It is a MS – Dos
based software.
2. The second version of Tally was Tally 5.4 and it was released in 1996. It was a
graphic interface version.
3. The next version of Tally was Tally 6.3 and this tally version was released in 2001. It
is a window based version and supports in printing and implemented with VAT
(Value Added Tax)
4. The next version of Tally was 7.2 and it was released in 2005. This version was added
with a new features of statutory complimentary version and VAT rules as per state
wise.
5. The next version of Tally was 8.1 and it was developed with a new data structure.
This version was added with new features of POS (Point of Sale) and payroll.
6. Due to bugs and errors, a new version of Tally 9 was released in 2006. It has
maximum features like payroll, TDS, FBT, E – TDS filing, etc.
7. Tally ERP 9 is the latest version of Tally and released in 2009. This latest Tally ERP 9
package offering maximum features for small business industries to large business
industries. It also updated with new features of GST (Goods & Services Tax).

 Advantages of Tally ERP 9

1. Tally ERP 9 software is a low cost of ownership and it can be easily implement and
customize.
 2. Supports multi – operating systems such as Windows & Linux and can be installed on
multiple systems.
3. Tally software utilizes very low space for installation and the installation of tally is an
easy method.
4. It is built in back up and restore, so the user can easily back up all companies data in
a single directory, in a local system disk.
5. Supports all types of protocols such as HTTP, HTTPS, FTP,SMTP,ODBC, etc.
6. Supports multi language including 9 Indian language. The data can be entered in one
language and you can generate invoices, PO’s, delivery notes, etc in other language.

07.What are branches of Accounting

While having a strong handle on your business’s finances is important, the methods
you use to track your expenses and income may differ from how other small
businesses conduct their accounting. While you might be use different accounting
methods, it is important to be well versed in the particular types of accounting
should the need even arise. Here is more on the different branches of accounting
and how they can benefit your business.

 There are number of accounting methods – eight, to be precise – you can

use to track your business’s finances.

1. There are eight branches of accounting that allow businesses to track and measure
their company’s finances.
2. Each branch has its own specialized use that reveal s different insights into a
business’s financial status.
3. Understanding the different branches of accounting is important for business
owners, as it can have a significant impact on the long term success and viability of
your business.
4. This article is for business owners who want to familiarize themselves with the
various branches of accounting and what they entail.

 Eight branches of accounting

Not all forms of accounting are the same. Some focus on costs, others on audits, and
some focus on taxes. The eight branches of accounting include the following:
1. Financial accounting
2. Cost accounting
 3. Auditing
4. Managerial accounting
5. Accounting information systems
6. Tax accounting
7. Forensic accounting
8. Fiduciary accounting
1. Financial Accounting
Financial accounting records, summarize and reports a company’s business transactions
through financial statements. These include the Income statement, the balance sheet,
the cash flow statement and the statement of retained earnings. These financial reports
provide insight into a company’s performance to its creditors, investors and tax
authorities. There are two types of financial accounting cash accounting and accrual
accounting.

2. Cash accounting
Cash accounting focuses on business transactions involving cash, using the cash
accounting method, a company bookkeeper debits and credits the cash accounts in each
journal entry. Transactions with no monetary inputs are not included is the financial
statements. With this method, bookkeepers debit and credit the cash account in each
journal entry depending on the transaction. For example when recording customer
remittances, the bookkeeper debits the cash account and credits the sales revenue
account.

3. Accrual Accounting
Accrual accounting records transactional data. The cash accounting method is used , but
accrual accounting accounts for all transactions that make up a company’s operating
activities. Using the accrual method, revenue and expenses are recorded when a
transaction occurs, rather than when payment is received or made.

4. Cost Accounting
Cost accounting records, analyze and reports of a company’s costs (both variable and
fixed) related to the production of a product. There are four major types of cost
accounting.

(i) Standard cost accounting: Standard cost accounting identifies and analyzes the
difference between the cost of producing goods and all of the costs that should
have occurred to produce said goods. These total costs are known as standard
 costs. Product costs, direct material costs, direct labor costs and manufacturing
overhead costs all factor into the standard costs.
(ii) Activity – based cost accounting: Activity – based cost accounting (or ABC’s)
identifies activities in an organization and assigns the cost of each activity to all
products and services. The five steps of ABC’s are as follows:
 Identify costly activities needed to make the product(s)
 Assign overhead costs to the activities identified in step one.
 Identify the cost driver for each activity
 Calculate a predetermined overhead rate of each activity
 Assign overhead costs to products.
(iii) Lean accounting: Lean accounting identifies and eliminates waste from
operations. Whereas traditional accounting is designed to support mass
production, lean accounting focuses on helping managers improve the overall
efficiency of their operation. Lean accounting can help a business uncover ways
to eliminate waste, improve quality, speed production and improve productivity.
(iv) Marginal cost accounting: Marginal cost accounting refers to the increase or
decrease in the cost of producing one more unit or serving one more customer.
To calculate the marginal cost, a business determines the point of which
increasing production or service raises the average cost of the item being
produced. Understanding a product’s marginal cost can help a company assess
its profitability so that management can make informed decisions. It is an
important too use when setting pricing.
(v) Auditing accounting: Auditing accounting is an objective examination and
evaluation of a company’s financial statements done internally or by a
government entity, Such as the internal controls. The auditor’s opinion is
included in the audit report:
 Internal audit: These are used as managerial tools to improve processes
and internal control.
 External audit: This audit is commonly performed by an accounting firm.
It includes a review of both financial statements and the company’s
internal controls. The auditor’s opinion is included in the audit report.
 IRS audit: This is a review of an organization’s financial information and is
performed to ensure that the information has been correctly reported
according to tax laws.
(vi) Managerial accounting: The main objectives of managerial accounting is to
maximize profit and losses. It identifies, measures, analyzes, interprets and
communicates financial information to management. This information assists
business owners managers is making well – informed decisions. Some examples
of managerial accounting techniques include:
 Margin analysis: This techniques explores optimizing
production. It involves calculating the break – even point and
determining the optimal sales mix for the company’s products.
 Constraint analysis: This analysis helps to identify
inefficiencies and their impacts on the company’s ability to
generate profits.
 Capital budgeting: This techniques analyzes information
required to make necessary decisions related to expenditures.
Managerial accountants present their findings to owners and
managers to help with budgeting decisions.
 Trend analysis and forecasting: Trend analysis and forecasting
identifies patterns and trends of product costs and recognizes
unusual variances from the forecasting values.

08. What is Trial Balance?

A trial balance is a bookkeeping worksheet in which the balances
of all ledgers are complied into debit and credit account coloumn
totals that are equal. A company prepares a trial balance
periodically, usually at the end of every reporting period. The
general purpose of producing a trial balance is to ensure that the
entries in a company’s bookkeeping system are mathematically
correct.

A trial balance is so called because it provides a test of a

fundamental aspect of a set of books, but is not a full audit of
them. A trial balance is often the first step in an audit procedure,
because it allows auditors to make sure there are no
mathematical errors in the bookkeeping system before moving on
to more complex and detailed analyzes.

 Key Takeaways
1. A trial balance is a worksheet with two columns, one of
for debits and one for credits, that ensures a
company’s bookkeeping is mathematically correct.
2. The debits and credits includes all business
transactions for a company over a certain period,
 including the sum of such accounts as assets,
expenses, liabilities, and revenues.
3. Debits and credits of a trial balance must tally to
ensure that there are no mathematical errors, but
there could still be mistakes or errors in the accounting
systems.

Types of Trial Balance

There are three main types of trial balance:

1. The unadjusted trial balance.

2. The adjusted trial balance
3. The post – closing trial balance

All three of these types have exactly the same format but slightly different uses. The unadjusted
trial balance is prepared on the fly, before adjusting journal entries are completed. It is a record
of day – to – day transactions and can be used to balance a ledger by adjusting entries.

Once a book is balanced, an adjusted trial balance can be completed. This trial balance has the
final balances in all the accounts, and it is used to prepare the financial statements. The post –
closing trial balance shows the balances after the closing entries have been completed. This is
your starting trial balance for the next year.

Preparing a Trial Balance

To prepare a trial balance we need the closing balances of all the ledger accounts and the cash
book as well as the bank book. So firstly every ledger account must be balanced. Balancing is
the difference between the sum of all the debit entries and the sum of all the credit entries.

Steps to prepare a trial balance:

1. To prepare a trial balance, we need the closing balances of all the ledger accounts and
the cash book as well as the cash book. So firstly every ledger account must be
balanced. Balancing is the difference between the sum of all the debit entries and the
sum of all the credit entries.
2. Then prepare a three column worksheet. One column for the account name and the
corresponding columns for debit and credit balances.
3. Fill out the account name and the balance of such account in the appropriate debit or
credit column.
 4. Then we total both the debit column and the credit column. Ideally, in a balanced error
- freee

free Trial balance these totals should be the same.

5. Once you compare the totals and the totals are same you close the trial balance. If there
is a difference we try and find out rectify errors. Here are some cases that cause errors
in the trial balance.
6. A mistake in transferring the balances to the trial balance
7. Error in balancing an account.
8. The wrong amount posted in the ledger.
9. Made the entry in the wrong column, debit instead of credit or vice – versa.
10. Mistake made in the casting of the journal or subsidiary book

Rules for Preparing of Trial Balance

While preparation of Trial balances we must take care of the following rules/points

1.) The balances of the following accounts are always found on the debit column of the trial
balance
 Assets
 Expense Accounts
 Drawings Account
 Cash Balance
 Bank Balance
 Any losses
2.) And the following balances are placed on the credit column of the trial balance
 Liabilities
 Income Accounts
 Capital Accounts
 Profits

09. What are the different tools of Financial Analysis?

Tools of Financial Analysis
Financial statements are prepared to have complete information regarding assets, liabilities,
equity, reserves, expenses and profit and loss of an enterprise. To analyze & interpret the
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