Financial Accounting & Analysis: UNIT-1

FINANCIAL ACCOUNTING &
ANALYSIS
UNIT-1
UNIT 1
1.1 Objectives & Nature of Accounting
1.2 Definition & Functions of Accounting
1.3 Book keeping & Accounting
1.4 Interrelationship of accounting with other disciplines
1.5 Branches of Accounting
1.6 Limitations of Accounting
1.7 Accounting Principles
1.8 Accounting Concepts
1.9 Accounting Conventions
1.1o Meaning & Relevance of GAAP
1.11 Introduction to accounting standard issued by ICAI
Objectives and Nature of
Accounting
Unit 1.1
Suggested Readings
1. Author: S. N. Maheshwari
Title of the book: Financial Accounting
Chapter name: 1
Part of the chapter: 1.1, 1.2
Publication: Vikas Publishing House Pvt. Ltd
2. Author: P. C. Tulsian
Chapter name: 1
Part of the chapter: 1.1 & 1.6
Publication- Pearson Education
Accounting
American Institute of Certified Public Accountant (AICPA)
defined accounting as follows-
“ Accounting is the art of recording, classifying and
summarizing in significant manner and in terms of money,
transactions and events which are, in part, at least of a
financial character and interpreting the result thereof.”
-Identifying economic transactions of the business and not
the personal affairs of the owners or managers
- Measuring the economic transactions in monetary terms
- Recording them in the accounting system
- Communicating them to users by producing financial
statements that summarize the information.
Objectives of Accounting
• To keep systematic records
• To protect Business Properties
• To ascertain the operational profit or loss.
• To ascertain the financial position of business.
• To facilitate rational decision making.
Nature of Accounting
• Accounting as a service activity
• Accounting as a profession
• Accounting as a social force
• Accounting as a language
• Accounting as science or art
• Accounting as an information system
Definition & Functions of
Accounting
Unit 1.2
Suggested Readings
Chapter name: 1
Name of the chapter-1.2
Publication- Vikas Publishing house
Chapter name: 1
Part of the chapter- 1.1
3.http://www.ddegjust.ac.in/studymaterial/mba/cp-104.pdf
Definition of Accounting
The American Institute of Certified Public
Accountants has defined the Financial
Accounting as
"the art of recording, classifying and
summarizing in a significant manner and in
terms of money transactions and events
which in part, at least of a financial character,
and interpreting the results thereof".
Continue……..
American Accounting Association defines
accounting as -
"the process of identifying, measuring, and
communicating Economic information to
permit informed judgments and decisions by
users of the information.”
Functions of Accounting
• Recording
• Classifying
• Summarizing
• Analyzing and Interpreting
• Communicating
Book-keeping & Accounting
Unit 1.3
Suggested Readings
Chapter name: 1
Part of the chapter- 1.3, 1.4
Chapter name: 1
Publication- Vikas Publishing house
Book-keeping and Accounting
• Book-keeping is a part of accounting and is
concerned with the recording of transactions
which is often routine and clerical in nature.
• Accounting performs other functions as well,
viz., measurement and communication,
besides recording.
Difference between Book-keeping &
Accounting Accounting
Basic of Distinction Book-keeping
1. Scope Book-keeping involves Accounting in addition to

a) Identifying the transactions book-keeping involves –
b) Measuring the identified summarizing the classified
transactions transactions, analyzing the
c) Record the measured transactions summarized results,
d) Classifying the recorded transactions interpreting the analyzed
results and communicating
the interpreted information to
the interested parties.
2. Stage Book-keeping is primary stage Accounting is the secondary

stage
3. Basic Objectives The basic objectives of book-keeping is The basic objective of
to keep systematic records of financial accounting is to ascertain the
transactions net result of operations and
financial position and to
communicate information to
the interested parties.
Interrelationship of Accounting with
other disciplines
Unit 1.4
Suggested Readings
Chapter name: 1
Chapter name: 1
Part of the chapter: 1.5
Publication: Vikas publishing house
3. http://www.ddegjust.ac.in/studymaterial/mba/cp-104.pdf
Interrelationship of Accounting with
other disciplines
Accounting is a multifaceted discipline of
identifying, measuring and communicating of an
organization’s economic health. Let’s discuss in
brief the relationship of accounting with its
related disciplines.
• Relationship between Accounting & Economics
• Relationship between Accounting & Mathematics
• Relationship between Accounting & Statistics
• Relationship between Accounting & Law
• Relationship between Accounting & Management
Relationship between accounting and
economics
When considering the obviousness of their
interconnection what is understood is that
both accounting and economics are
concerned with the effective and efficient
utilization of resources, rather, when they are
scarce. Both accounting and economics are
meant to maximize the wealth and so the
economists and accountants are consistent
with the aspect that capital should be intact
when calculating the income.
Mathematics
Accounting deals with concrete numbers expressing
real sums and involving operations to create a good set
of numbers- going beyond the numbers- determining
financial position of a business house and ensuring
whether or not a business is making money. In doing
so, it involves basic computational mathematics.
Moreover, the basic system of accounting needs to be
changed into an accounting equation which shows Left
hand side- LHS equals Right Hand Side- RHS. In this
way, the knowledge of arithmetic and algebra are
prerequisite for accounting computations and
measurements.
statistics
Accounting is not just about the preparation of
accounting information, but it necessitates interpreting
and presenting the financial information which leads to
create tables and graphs. The knowledge of creating
tables and graphs is attained through the discipline of
statistics. There is another important factor to consider
how accounting is connected with statistics is that it
uses price indices which has to do with creating tables,
while the interpretation involves making absolute and
relative comparison by means of ratio analysis. Thus,
for doing all these, the knowledge of statistics is much
needed and so accounting is linked with statistics as
well.
Law
Accounting is connected with law, as it operates
within a legal environment and thus all the
transactions are governed on the basis of
different acts. Business organizations are
governed by their respective statues that provide
many aspects pertaining to the preparation of
accounts. However, it is likely that accounting
influences law and is also influenced by law. In
this way, accounting is also related to law
because of many legal aspects and procedures.
management
Management is administration of business. It involves
organizing and controlling of the affairs of a business or
a sector of a business. Management, in simple terms,
getting things done and the methodology which is put
into practice in order to get the things done or the
functions with their sequence undertaken by a
manager is what is said to be management process
which involves: Planning, organizing, directing and
controlling (PODC). Accounting professionals are better
off with what they study through their course to
understand and use the data for providing the required
accounting information to management for facilitating
in decision making process.
Branches of Accounting
Unit-1.5
Text
Chapter name: 1
Publication: Pearson Education
Chapter name: 1
Publication: Vikas Publishing House
Branches of Accounting
To meet the ever increasing demands made on
accounting by different interested parties such as
owners, management, creditors, taxation
authorities etc., the various branches have come
into existence. There are as follows :
1. Financial Accounting
2. Cost Accounting
3. Management Accounting
1. Financial accounting
The object of financial accounting is to ascertain
the results (profit or loss) of business operations
during the particular period and to state the
financial position (balance sheet) as on a date at
the end of the period.
2. Cost accounting
The object of cost accounting is to find out the
cost of goods produced or services rendered
by a business. It also helps the business in
controlling the costs by indicating avoidable
losses and wastes.
3. Management accounting
The object of management accounting is to
supply relevant information at appropriate
time to the management to enable it to take
decisions and effect control.
Difference between financial
Accounting & Management
Accounting
BASIS FOR COMPARISON FINANCIAL ACCOUNTING MANAGEMENT
ACCOUNTING
Meaning Financial Accounting is an The accounting system
accounting system that which provides relevant
focuses on the preparation information to the
of financial statement of managers to make policies,
an organization to provide plans and strategies for
the financial information running the business
to the interested parties. effectively is known as
Management Accounting.
Is it compulsory? Yes No
Information Monetary information Monetary and non-
only. monetary information
Objective To provide financial To assist the management
information to outsiders. in planning and decision
making process by
providing detailed
Limitations of Accounting
Unit 1.6
Suggested Readings
Chapter name: 1
Chapter name: 1
Limitations of Accounting
• Financial accounting permits alternative treatments.
• Financial accounting is Influenced by personal
judgments.
• Financial accounting ignores important non-monetary
information.
• Financial accounting does not provide timely
information.
• Financial accounting does not provide detailed
analysis.
• Financial accounting does not disclose the present
value of the business.
Accounting Principles
Unit 1.7
Text
• Author: S. N. Maheshwari
• Title of the book: Financial Accounting
• Chapter name: 2
• Part of the chapter: 1.16
• Publication: Vikas publishing house
References
Accounting Principles
• Accounting Principles are those rules of action or
conduct which are adopted by the accountants
universally while recording accounting transactions.
• Accounting principles are man-made. They are
accepted because they are believed to be useful.
• The general acceptance of an accounting principle
usually depends on how well it meets the following
three basic norms :
a) Usefulness
b) Objectiveness, and
c) Feasibility
Accounting Principles can be classified into two
categories:
1. Accounting Concepts
2. Accounting Conventions
Accounting Concepts
Unit 1.8
Suggested Readings
Chapter name: 2
Chapter name: 2
Accounting Concepts
It refers to assumptions and conditions on which
accounting system is based.
The important Accounting Concepts are as follows-
• Separate Business Entity Concept
• Money Measurement Concept
• Dual Aspect Concept
• Going Concern Concept
• Accounting Period Concept
• Cost Concept
• The Matching concept
• Realisation Concept
1. Separate Business Entity Concept
• In accounting we make a distinction between business

and the owner. All the books of accounts records day to
day financial transactions from the view point of the
business rather than from that of the owner. The
proprietor is considered as a creditor to the extent of
the capital brought in business by him.
• For instance, when a person invests Rs. 10 lakh into a
business, it will be treated that the business has
borrowed that much money from the owner and it will
be shown as a ‘liability’ in the books of accounts of
business.
2. Money Measurement Concept
• In accounting, only those business

transactions are recorded which can be
expressed in terms of money.
• As money is accepted not only as a medium of
exchange but also as a store of value, it has a
very important advantage since a number of
assets and equities, which are otherwise
different, can be measured and expressed in
terms of a common denominator.
3. Dual Aspect Concept
• According to this concept every business transactions has

dual effect.
• For example, if a firm sells goods of Rs. 10,000 this
transaction involves two aspects. One aspect is the delivery
of goods and the other aspect is immediate receipt of cash
(in the case of cash sales). Infact, the term ‘double entry’
book keeping has come into vogue because for every
transaction two entries are made.
• According to this system the total amount debited always
equals the total amount credited.
• This idea is fundamental to accounting and could be
expressed as the following equalities:
Assets = Liabilities + Owners Equity
4. Going Concern Concept
• Accounting assumes that the business entity will

continue to operate for a long time in the future unless
there is good evidence to the contrary.
• The enterprise is viewed as a going concern, that is, as
continuing in operations, at least in the foreseeable
future. In other words, there is neither the intention
nor the necessity to liquidate the particular business
venture in the predictable future.
• Because of this assumption, the accountant while
valuing the assets do not take into account forced sale
value of them.
5. Accounting Period Concept
• This concept requires that the life of the business should be
divided into appropriate segments for studying the financial
results shown by the enterprise after each segment.
• Thus, the accountant must report for the changes in the
wealth of a firm for short time periods. A year is the most
common interval on account of prevailing practice,
tradition and government requirements. Some firms adopt
financial year of the government, some other calendar
year.
• Although a twelve month period is adopted for external
reporting, a shorter span of interval, say one month or
three month is applied for internal reporting purposes.
6. Cost Concept
• The term ‘assets’ denotes the resources land building,

machinery etc. owned by a business. The money values
that are assigned to assets are derived from the cost
concept.
• According to this concept an asset is ordinarily entered on
the accounting records at the price paid to acquire it. For
example, if a business buys a plant for Rs. 5 lakh the asset
would be recorded in the books at Rs. 5 lakh, even if its
market value at that time happens to be Rs. 6 lakh.
• Thus, assets are recorded at their original purchase price
and this cost is the basis for all subsequent accounting for
the business.
7. The Matching concept
• This concept is based on the accounting

period concept.
• In reality we match revenues and expenses
during the accounting periods.
8. Realisation Concept
• According to realization concept revenue is
recognized when sale is made.
• Sale is considered to be made at the point
when the property in goods passes to the
buyer and he becomes legally liable to pay.
This implies that revenue is generally realized
when goods are delivered or services are
rendered.
Accounting Conventions
Unit 1.9
Suggested Readings
1. Author: S. N. maheshwari
Chapter name: 2
Publication: Vikas publishing House
2. Author: 1. P. C. Tulsian 2. Robert N. Anthony

Chapter name: 2
Accounting conventions
• Accounting convention refers to the customs and
traditions followed by accountants as guidelines
while preparing accounting statements.
• Followings are the accounting conventions-
1. Convention of Materiality
2. Convention of Conservatism
3. Convention of Consistency
4. Convention of Timeliness
1. Convention of Materiality
• Materiality concept states that items of small

significance need not be given strict theoretically
correct treatment.
• There are many events in business which are
insignificant in nature. The cost of recording and
showing in financial statement such events may not be
well justified by the utility derived from that
information.
• For example, an ordinary calculator costing Rs. 100
may last for ten years. However, the effort involved in
allocating its cost over the ten year period is not worth
the benefit that can be derived from this operation.
2. Convention of Conservatism
• This concept requires that the accountants
must follow the policy of ‘’playing safe” while
recording business transactions and events.
• That is why, the accountant follow the rule
anticipate no profit but provide for all possible
losses, while recording the business events.
3. Convention of Consistency
The convention of consistency requires that
once a firm decided on certain accounting
policies and methods and has used these for
some time, it should continue to follow the
same methods or procedures for all
subsequent similar events and transactions
unless it has a sound reason to do otherwise.
4. Convention of Timeliness
• According to this principle, timely information

should be made available to decision makers.
If quarterly reports are made available on half-
yearly basis, the information contained in the
quarterly report would not be very much
useful to the decision maker.
• If there is undue delay in reporting the
information, it may lose it relevance.
Meaning & Relevance of GAAP
Unit 1.10
Text
Chapter name: 2
Chapter name: 2
Meaning of GAAP
• The rules that govern how accountants
measure progress and communicate financial
information called Generally Accepted
accounting Principles.
• GAAP comprises of conventions , rules and
procedure that constitute accepted
accounting practice at any given time.
Relevance of GAAP
• Consistency
• Comparability
• Benchmarking
• External reporting
Introduction to Accounting Standards
issued by ICAI
Unit 1.11
Suggested Readings
Chapter name: 2
Chapter name: 3
Accounting Standards
• Accounting Standards are the statements of code
of practices of regulatory accounting bodies that
are to be observed in preparation and
presentation of financial statements.
• That Accounting Standards are rules according to
which accounts have to be drawn up.
• In layman terms, accounting standards are
written documents issued by experts, institutes
or other regulatory bodies covering various
aspects of measurement, treatment,
presentation and disclosure of accounting
transactions, whether it is based on single entry
cash basis or double entry accrual basis.
objectives of Accounting Standards
• The basic objective of Accounting Standards
is to remove variations in the treatment of
several accounting aspects and to bring about
standardization in accounting and its
presentation.
• They intent to harmonize the diverse
accounting policies followed in the
preparation and presentation of financial
statements by different reporting entities.
Accounting Standards issued by various authorities:
(A) Accounting Standards (Accrual basis) issued by the Institute of Chartered
Accountant of India (ICAI) are as follows:
Accounting Accounting Objectives of the Standards

Standards Standards on
(ASs) No.
AS 1 Disclosure of in preparation and presentation of the
Accounting Policies financial statements
AS2 Valuation of to formulate the method of computation of
Inventories cost of inventories / stock, determine the value
of closing stock / inventory at which the
inventory is to be shown in balance sheet till it
is not sold and recognized as revenue
AS3 Cash Flow This statement exhibits the flow of incoming
Statements and outgoing cash.
AS4 Contingencies and The Accounting Standard deals with
Events occurring Contingencies and Events occuring after the
after the Balance balance sheet date
Sheet Date
(ASs) No.
AS5 Net Profit or Loss to prescribe the criteria for certain items in the
for the period, profit and loss account so that comparability of
Prior Period the financial statement can be enhanced. Profit
items and changes and loss account being a period statement covers
in Accounting the items of the income and expenditure of the
Policies. particular period. This also deals with change in
accounting policy, accounting estimates and
extraordinary items.
AS7 Construction As the period of construction contract is long,
Contracts work of construction starts in one year and is
completed in another year or after 4-5 years or
so. There may be following two ways to
determine profit or loss: On year-to-year basis
based on percentage of completion or On
completion of the contract.
(ASs) No.
AS9 Revenue The standard explains as to when the revenue should be
Recognition recognized in profit and loss account and also states the
circumstances in which revenue recognition can be postponed.
AS10 Accounting for It is an asset, which is:- Held with intention of being used for
Fixed Assets the purpose of producing or providing goods and services.
AS11 The effects of This accounting Standard applicable to accounting for

Changes in transaction in Foreign currencies in translating in the
Foreign Financial Statement of foreign operation Integral as well as
Exchange Rates non- integral and also accounting for forward exchange. Effect
(Revised 2003) of Changes in Foreign Exchange Rate, an enterprises should
disclose following aspects:
•Amount Exchange Difference included in Net profit or Loss;
•Amount accumulated in foreign exchange translation reserve;
•Reconciliation of opening and closing balance of Foreign
Exchange translation reserve;
(ASs) No.
AS12 Accounting for Government Grants are assistance by the Govt. in the
Government form of cash or kind to an enterprise in return for past or
grants future compliance with certain conditions.
AS13 Accounting for It is the assets held for earning income by way of
investments dividend, interest and rentals, for capital appreciation or
for other benefits.
AS14 Accounting for It deals with accounting to be made in books of

Amalgamation Transferee company in case of amalgamation
AS15 Employees The scope of the accounting standard has been enlarged,
Benefit to include accounting for short-term employee benefits
(Revised 2005) and termination benefits
AS16 Borrowing It prescribe the treatment of borrowing cost (interest +

costs other cost) in accounting, whether the cost of borrowing
should be included in the cost of assets or not
(ASs) No.
AS17 Segment Disclosure of information regarding multiple
Reporting products/services and their operations is called segment
reporting
AS18 Related Party disclosure of related party transaction is essential for
Disclosures proper understanding of financial performance and
financial position of enterprise
AS19 Leases Lease is an arrangement by which the lesser gives the

right to use an asset for given period of time to the lessee
on rent. It involves two parties,
AS20 Earning Per The statement is applicable to the enterprise whose
share equity shares or potential equity shares are listed in
stock exchange.
AS21 Consolidated the consolidated balance sheet if prepared should be

Financial prepared in the manner prescribed by this statement.
Statements
(ASs) No.
AS22 Accounting This accounting standard prescribes the accounting
for taxes on treatment for taxes on income.
Income
AS23 Accounting It set out the principles and procedures for recognizing
for the investment in associates in the consolidated financial
Investments statements of the investor,
in Associates
in
Consolidated
financial
statements
AS24 Discontinuing The objective of this standard is to establish principles
operations for reporting information about discontinuing
operations.
AS25 Interim As per clause 41 of listing agreement the companies are
Financial required to publish the financial results on a quarterly
Reporting basis
(ASs) No.
AS26 Intangible An Intangible Asset is an Identifiable non-monetary
Assets Asset without physical substance held for use in the
production or supplying of goods or services for rentals
to others or for administrative purpose
AS27 Financial 'Joint control' is the contractually agreed sharing of
Reporting of control over economic activity.
Interests in
Joint
Ventures
AS28 Impairment As per AS-28 asset is said to be impaired when carrying
of Assets amount of asset is more than its recoverable amount.
AS29 Provisions, Objective of this standard is to prescribe the accounting

Contingent for Provisions, Contingent Liabilities, Contingent
Liabilities Assets, Provision for restructuring cost
and
Contingent
Assets

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FINANCIAL ACCOUNTING &

1. Scope Book-keeping involves Accounting in addition to

2. Stage Book-keeping is primary stage Accounting is the secondary

• In accounting we make a distinction between business

• In accounting, only those business

• According to this concept every business transactions has

• Accounting assumes that the business entity will

• The term ‘assets’ denotes the resources land building,

• This concept is based on the accounting

2. Author: 1. P. C. Tulsian 2. Robert N. Anthony

• Materiality concept states that items of small

• According to this principle, timely information

Accounting Accounting Objectives of the Standards

AS11 The effects of This accounting Standard applicable to accounting for

AS14 Accounting for It deals with accounting to be made in books of

AS16 Borrowing It prescribe the treatment of borrowing cost (interest +

AS19 Leases Lease is an arrangement by which the lesser gives the

AS21 Consolidated the consolidated balance sheet if prepared should be

AS29 Provisions, Objective of this standard is to prescribe the accounting

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