Financial

Accounting
S-1
Accounting
 Language of “Business”
 Means of communication
 Grammar
 Basic accounting concepts
 Conventions  Words used in accounting
 Asset/Liability
Accounting

Accounting is the art of recording, classifying and

summarizing in a significant manner and in terms of money,
transactions and events which are, in part at least of
financial character and interpreting the results thereof.
Recording
 Putting in writing the transaction of financial character
 Cash book, day books, journals etc
 Examples
 Sales entry in Sales Day Book
 Purchases entry in Purchase Day Book
 Cash received entry in Cash Book
Classifying
 Systematic analysis of Recorded Data
 Like nature items are classified under appropriate heads
 “Ledgers” with individual accounting heads
 Examples
 Revenue Account
 Travel Advances account
 Fixed Asset account
Summarizing
 Presenting the classified data in a manner useful to the
internal and external end-users
 Done after „stipulated periods of time‟
 Check the accuracy  try  Trial Balance of Ledger
accounts
 Results in preparation of financial statements
 Balance Sheet
 Profit & Loss Account
Interpretation
 Interpretation of the summarized data
 Help end-user
 Assess financial Condition
 Profitability of business operations
 Prepare future plans
 Analysis presented to Board  Directors Report
What do you expect to know about the
Company‟s financials??

What does it depend on?

External Users
 Economic Transactions with the Company
 Suppliers of goods
 Services on credits
 Banks, financial institutions
 Regulatory Agencies
 Tax Department
 Registrar of Companies etc
 Constituents the company represent
 Export agencies, trade associations
 Other: Auditors, Analysts, Financial Press
Internal Users
 Owners of the Business
 Managers
 Analysis and Planning
 Employees
Kinds of Accounting
Activities
 Financial Accounting
 Recording, summarizing, preparing financial statements
 Income-tax Accounting
 Records for filing tax returns
 Cost Accounting
 Determination of costs of goods manufactured and services offered
 Management Accounting
 Fin + Cost  Evaluate Financial Performance
 No set procedures, depends on management requirements
 Management reporting: periodic reports for management
External User: Financial, Tax and Cost
Internal User: Cost & Management
Types of Organizations
Types of Organizations
Based on

“Profit”
For Profit Not for
Profit

Sole
Trader
Businesses

s
Partnerships

Limited
Companies
Forms of Business Organizations
 Sole Proprietorship
 Business owned by Single person
 Simplest form of business, subject to minimal regulation -> License
(no specific law)
 Liability -> Unlimited personal liability
 Tax -> No distinction between business and personal income
 Proprietor to make good business losses
 Partnership
 Business owned by „Two or more‟ persons
 Partnership Deed
 Regulation  Indian Partnership Act
 Partners to make good business losses
 No separate legal entity BUT for purpose of Income Tax treated
different from their partners. Separate PAN required. IT at
30%
Forms of Business Organizations
 Company
 Owned by the Shareholders
 Distinct legal „person‟, separate from the owners
 Perpetual existence
 Two requirements a) Name registered with ROC and b) MOA and AOA
approved by ROC
 Regulation  The Companies Act 2013
 Liability is Limited
 Company is run by „Managers‟
 Tax Rate  25% till 400 Cr and 30% thereafter for 3% cess
 Limited Liability Partnership
 Perpetual existence
 Regulation  Limited Liability Partnership Act 2008
 Distinct legal and tax entity -> Taxed at 30%
 LLP -> liability is limited
Forms of Business Organisations
 One Person Company
 One Person Company is a private company incorporated by one person
 Limited Liability
 paid up share capital exceeds 50lakh rupees or its average annual
turnover of immediately preceding three consecutive financial years
exceeds two crore rupees, then the OPC has to mandatorily convert
itself into private or public company
 Co-operative Society
 Members of the co-operative society are it owners
 Advantages
 Can be formed easily
 Liability of the members is limited
 Disadvantages
 Cannot employ outside talent
 One Member One Vote
Company : Private vs Public
Key Differences
 Shareholders
 Minimum
 Private  Two
 Public  Seven
 Maximum
 Private  Two Hundred
 Public  No restriction
 Public limited company invites members of the public to subscribe to its
shares. Private limited cannot do so.
 Private limited has greater flexibility as compared to public limited
company.

Identification of a Company: Inc./Corp. in US; PLC for public ltd in UK; LTD
for private ltd in UK; GmbH for a private company in Germany; AG for a
public limited company in Germany; SpA in Italy
Decision Making  How to select
Assets, Equity & Liabilities
Always be in the shoes of the Company.
 Accounting Equation

ASSETS = EQUITY + LIABILITIES

Balance
Sheet
Fixed Assets Current Assets Share Capital Retained Long Term Current
Liabilities
Earnings Liabilities

Income - Expenses

Profit & Loss Account

Assets
 Resources or Things of Value that are owned by the
Company
 Assets are those that help company to generate
Income
 Assets are
 Tangible : Land, Plant & Machinery, Stock
 Intangible : Patents, Brands, Goodwill
 Assets are
 Non Current Assets: Land, Plant & Machinery, Stock
 Current Assets: Cash, Stock/Inventory, Debtors
 Cash is an Asset
Test for an Asset: You have paid cash to buy them and they are
Some
Assets
 Bank Balance

 Land, Road, Building, Furniture

 Investments
 Inventory or Stock
 Raw Material, Work in Progress, Finished goods
 Sundry Debtors, Debtors, Bill Receivable, Accounts
Receivable
 Loans & Advances, Deposits
 Prepaid Expenses
 Advance Rent, Advance Insurance etc
 Goodwill, Patents, Brand, Trademark, Copyright
Equity
 Funds infused by the owners of the business or
shareholders
 Retained Earnings (profits that are accumulated and have
been re-invested in the business)
 Reserves: Part of the profits kept aside for specific
purpose
 General Reserve, Debenture Redemption Reserve,
Bonus
Reserve
Liabilities
 Things the Company owes to somebody.
 Somebody can be
 Banks/Financial Institutions
 Suppliers
 Government
 Customers
 Incurring a liability is mostly an option with the Company
 Liabilities are
 Current: Have to be settled within a year
 Long Term: > one year

Test for a Liability: Payment is to be made or goods/service has

to be delivered
Some Liabilities
 Bank Loan
 Debentures, Bonds
 Accounts Payable, Trade Payables & Sundry Creditors
 Interest Payable
 Tax Payable
 Salaries & Wages Payable
 Advances from Customers
Revenues
 Income from sale of goods or services
 Income from interest on FDs
 Rent Income
 Dividend Income

Test for a Revenue: Money flows to the Company without

creating a liability. Earned
Expenses
 Money spent or cost incurred in an effort to generate the
revenues
 Supplies expense, utilities expense, salaries expense
 Depreciation expense, amortization expense
 Insurance expense, Advertising expense, selling expense,
packing expense, rent expense
 Interest expense, Tax expense

Test for a Expense: Money flows out of the Company

without
creating a Asset. Incurred
Expenses

EXPENSES

Before Time After Due Date

Pre-paid Expenses To be paid.

[Asset] [Liability]
Some Thumb Rules
Money when goes out of the Company it will create either an
Asset or become an Expense

Assets can be resold – Expenses cannot.

Money when comes into the Company it will be either a

Revenue or create a Liability

Liabilities are to be paid back – revenues are not

 Accounting Equation

ASSETS = EQUITY + LIABILITIES

Fixed Assets Current Assets Share Capital Retained Long Term Current
Liabilities
Earnings Liabilities

Income - Expenses

Profit & Loss Account

Example

a) Mr A provides Rs 500,000 in cash as a capital to start a business.

ASSETS = EQUITY + LIABILITIES

Cash: 5,00,000 A‟s Eqty: 5,00,000 0

b) Goods worth Rs 400,000 are purchased with this money.

ASSETS = EQUITY + LIABILITIES

Cash: 1,00,000 A‟s Eqty: 5,00,000 0
Goods: 4,00,000

c) Business Entity borrows Rs 300,000 from bank to finance its purchases.

ASSETS = EQUITY + LIABILITIES

Cash: 4,00,000 A‟s Eqty: 5,00,000 Loan: 300,000
Goods: 4,00,000
Example

d) Goods worth Rs 350,000 are purchased.

ASSETS = EQUITY + LIABILITIES

Cash: 50,000 A‟s Eqty: 5,00,000 Loan: 300,000
Goods: 7,50,000

e) Goods worth Rs 700,000 are sold for Rs 9,00,000.

ASSETS = EQUITY + LIABILITIES

Cash: 9,50,000 A‟s Eqty: 7,00,000 Loan: 300,000
Goods: 50,000

f) A broker claims Rs 50,000 as his commission to bringing the business.

ASSETS = EQUITY + LIABILITIES

Cash: 9,00,000 A‟s Eqty: 6,50,000 Loan: 300,000
Goods: 50,000
Questions