NOIDA INTERNATIONAL UNIVERSITY

School of Law and Legal Affairs (SLLA)

SUBJECT:

FINANCIAL ACCOUNTING - I

TOPIC

BASICS OF FINANCIAL ACCOUNTING

SUBMITTED TO: SUBMITTED BY:

ASSI.PROF HARSHIMA SHARMA RITU RAJ SINGH

_________________________________________________________
 ACKNOWLEDEMENT

I would like to express my special thanks of gratitude to my teacher Asst. Prof HARSHIMA
SHARMA as well as who gave me the golden opportunity to do this wonderful project on the
topic Act Of God which also helped me in doing a lot of Research and i came to know about so
many new things I am Ritu Raj singh Secondly i would also like to thank my parents and friends
who helped me a lot in finalizing this project within the limited time frame.

RITURAJSINGH
BBA-LLB
INTRODUCTION

Financial accounting is focused on providing accounting reports and analysis to other areas of

the business. Financial accountants are responsible for the creation and issuing of the company’s
financial statements, providing accurate and timely information to management and ensuring that
all regulatory reporting requirements are met. In financial accounting, the goal is to consistently
provide the valuable, accurate and reliable information.

Financial accounting is focused on providing accounting reports and analysis to other areas of

the business. Financial accountants are responsible for the creation and issuing of the company’s
financial statements, providing accurate and timely information to management and ensuring that
all regulatory reporting requirements are met. In financial accounting, the goal is to consistently
provide the valuable, accurate and reliable information.

The issuing of the financial statements is the responsibility of the financial accounting
department. These statements summarize the business’s activities for the year and are used by
shareholders, banks, employee bargaining units, and the general public to evaluate the financial
worth of the company. The statements are audited by independent accountants to validate the
information and provide assurance to readers.

It is the field of accountancy concerned with the preparation of financial statements for decision
makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and
other stakeholders. Financial capital maintenance can be measured in either nominal monetary
units or units of constant purchasing power. The fundamental need for financial accounting is to
reduce principal-agent problem by measuring and monitoring agents’ performance and reporting
the results to interested users.

Financial accountancy is used to prepare accounting information for people outside the
organization or not involved in the day to day running of the company. Management accounting
provides accounting information to help managers make decisions to manage the business.
In short, Financial Accounting is the process of summarizing financial data taken from an
organization’s accounting records and publishing in the form of annual (or more frequent)
reports for the benefit of people outside the organization.

It is a specialized branch of accounting that keeps track of a company’s financial transactions.
Using standardized guidelines, the transactions are recorded, summarized, and presented in a
financial report or financial statement such as an income statement or a balance sheet.

 Companies issue financial statements on a routine schedule. The statements are

considered external because they are given to people outside of the company, with the primary
recipients being owners/stockholders, as well as certain lenders. If a corporation’s stock is
publicly traded, however, its financial statements (and other financial reporting) tend to be
widely circulated, and information will likely reach secondary recipients such as competitors,
customers, employees, labour organizations, and investment analysts.

It’s important to point out that the purpose of financial accounting is not to report the value of a
company. Rather, its purpose is to provide enough information for others to assess the value of a
company for themselves.

Because external financial statements are used by a variety of people in a variety of ways,
financial accounting has common rules known as accounting standards and as generally
accepted accounting principles (GAAP). In the U.S., the Financial Accounting Standards
Board (FASB) is the organization that develops the accounting standards and principles.
Corporations whose stock is publicly traded must also comply with the reporting requirements of
the Securities and Exchange Commission (SEC), an agency of the U.S. government.

Accounting principles are general guidelines and rules that should be followed by all
organizations during the time of making financial statements. These are generally accepted rules
that are developed for showing the actual financial image of the particular company (Braun and
et.al. 2015). This report shows different financial issues and their proper solutions with usages of
all core financial principles, techniques and methods. It also covers regulations related to the
financial accounting and various accounting principles. Further, it includes concept of
depreciation and its core methods. Lastly, it covers the information about several accounts such
as suspense and clearing accounts.

Accounting principles and rules that are used in the preparation of all types of financial
statements- For all companies, accounting principles plays a significant role in making its
financial statements. Such general rules and concepts must control or govern the accounting
sector. In this context, there is a commonly used theory provided by the Generally Accepted
Accounting Principle (GAPP). These rules are described as follows:

 Going Concern - To follow this accounting concept, it must assume that an organisation
will exist continuously throughout the period and carry out its business activities to
achieve all desired goals and objectives (Khan, 2015). In this context, every company
should make its all financial statements assuming that an entity is a going concern and
operates its entire business for the long time. So for this reason, it is compulsory to make
financial statements with using better accounting policies.
 Accrual Concept - It refers as all the expenses and incomes should only be recorded
when it occurs in an organisation (Louwers and et.al. 2015). It is not applied in the case
of cash payments and receivables. This concept shows the actual image of a company.
 Consistency - It is described that the organisation follows certain particular accounting
principles that are not changed if the overall policy will not change. These concepts are
widely used method applied appropriately and it is needed in every business for showing
effective financial statements to its potential stake holders. This idea is generated in
accounting for utilizing the particular policy or technique from one period to next.
 Accounting Period - In these accounting principles, it assumes that the organisation
operates its business activities for a certain period (Macve, 2015). In general, this period
in approx. one year that starts from 1 April of current year to 31 march of next year. So
for this reason all financial records pertain only for specific period.
 Prudence Concept - According to this concept, every business should consider only
expected expenditures and never make any assumption about income or revenue. It
should be conducted compulsorily because of accounting transaction are often uncertain
 so for this reason never make any assumption about its revenue or income so that
management will able to show its financial statements.
 Conservatism - This is an important concept that refers the critical situation, that if there
are two or more acceptable options for reporting an item then management of a company
should choose best option (Maskell, Baggaley and Grasso, 2016). It also describes that
organisation should choose the alternative that will result in less net earnings or asset
amount. It leads to the managers to disclose or anticipate losses and it never allows for
profits.
 Full Discloser - By following this accounting principle, all companies should show the
actual image of its financial position in its target market. Every important information
related to the business should be provided in its final statements.
 Realization - It states that if any change in organisational asset or liability should not
measure as profit or loss until that asset is sold or liability amount is paid. It is useful in
Estimating the original value of an asset or liability.
 Matching- This concept is systematically derived to use the accrual basis of accounting. It
needs that all revenues will be matched with all expenses (Mullinova, 2016). No business
can measure future economic profit so that it would apply for gaining uncertain revenue
in the upcoming.
 Materiality - It refers that management should record only those transactions that are
important for the company. An organisation can ignore minor events but it should
consider that major events should be fully recorded and disclosed. All these core
principles are useful in making the financial statements for a particular period of a
company. Consistency- It derives that organisation should operate its business activities
throughout the period and never end it until all legal formalities are fulfilled. Every
business should assume that it operates for a long period. Materiality– This principle
should apply for all companies and it describes all major transactions and gives up all
immaterial or small transactions (Nobes, 2014). In this context, management team of an
organisation should record only those transactions that are useful in providing appropriate
image of the entity and it is not essential to record any minor events.
Two Reasons for and objectives of accounting

The main purpose of accounting is to provide financial information to managers and owners of
businesses (as we have already seen) and a variety of other interested parties. This financial
information fulfills different objectives, namely stewardship, accountability, planning and
decision making and control, as discussed in the next sections.

Stewardship

Persons who run or manage businesses are not always those who have invested money and/or
resources in the business. They manage money and/or resources which are owned by others, and
act as stewards (or agents) on behalf of owners (sometimes called principals). The concept of
stewardship places an obligation on stewards to provide financial information relating to the
resources which they control, but do not own.
Arrows denote flow of resources, information and directions of responsibility.

Accountability
Accountability is connected to the idea of stewardship (though it is a wider concept as it may
extend to other stakeholders or society in general). Stewards are obliged to give to owners of
businesses an account of how they have managed resources. This may be discharged in part by
the provision of financial information, such as an income statement and balance sheet. However,
the idea of ‘accountability’ also carries with it the notion of acting responsibly and being able to
justify one’s actions and, therefore, prepared to suffer the consequences of irresponsible and
unjustifiable actions.
Planning and decision making

Business managers need to have financial information to enable them to make plans for future
business activities and operations. For example, if a business plans to sell 120,000 units of a
good it manufactures in the next year, it will need to know the quantity and price of raw
materials required to make 120,000 units, the number of staff required and the hours each staff
member can work and their rate of pay, the type and number of machines required, etc. There
will, of course, be other costs associated with production. Such information is typically derived
from on-going business activities and experience and reported financial information, combined
with knowledge of future price increases for raw materials, wages and other known costs.
Planning of this kind can be very difficult in practice if a business is aiming to increase or
decrease production of an existing good, and becomes even more difficult in the case of
producing any good which the business has not produced before.

Control

Accounting information can also be used for the purposes of control. Business managers need to
monitor activities and operations to see whether they are proceeding according to plan. In the
example in Section of planning to manufacture and sell 120,000 units of a good, a business may
have planned to sell the units evenly over a year, that is, 10,000 units per calendar month.
Therefore, the business will need accounting information on a monthly basis to see whether this
target is being achieved. If it is not, then the business will need to find out why, and take
corrective action if possible. The type of corrective action will depend on the problem that has
been identified. Different problems can have the same overall effect. For example, if sales were
‘down’ in any given month, it might be the case that trade was more seasonal than anticipated
and there might be compensating higher sales in other months. It might also have been the case
that a sales representative for a particular area had been away on sick leave, which would also
result in lower sales. Equally, a production problem could have prevented sufficient goods being
manufactured for sale – perhaps being caused by machines breaking down or suppliers’ inability
to deliver raw materials when needed. It is also possible that sales in a given month might be
‘up’ on what was forecast – which could also cause problems if it continued in the longer term,
as the business may have resources that are inadequate to meet an unanticipated higher demand.
Regular provision of accounting information (in this example, for sales and production) is
essential for control purposes.

Conclusion

Financial accounting information is generally used by external users of the company. These users
have limited or no knowledge about companies. The general idea is that these users are better
able to comprehend the financial position of companies.
As mentioned before, public companies or companies that raise money by issuing shares need to
disclose financial data. The general idea is that shareholders should know where they are putting
their money into and be able to view the internal information of a company to be able to make
better decisions.