Class 1 PGP

Financial Accounting
Module I
Prof. Padmini Srinivasan
1-1
Padmini Srinivasan – iimb ©
Preliminaries
• 1. Course outline on Moodle
• 2. HUL Annual Report will form part of class
discussion. Please get that to every class.
• 3. Text Book – Financial Accounting (RNS)
• 4. Practice will make you perfect. Students must
solve the assignments and other problems as given
• 5. Tutorials
• 6. Contact
1-2
Preliminaries (Important !)
Until Mid term

• Quiz 1 10 %
• Monopoly Game 15%
• Mid Term 20%
Post Mid Term
• End Term 30 %
• Financial analysis project 25 %
•
1-3
Last but not the leaset
•Please be on time to the class

•Keep your videos switched on as this brings
enthusiasm to bot the class and the faculty
•To get the best of class discussion, come prepared
for the cases and readings when specified
•Only one person should be speaking in the class at a
time
•Learning accounting can be fun too !
•Have Fun !!
1-4
Welcome to
World of Financial
Accounting
1-5
Users of Accounting Information
Stakeholders
Lenders Management
Suppliers Investors
Employees Customers
Analysts Government
1-6
Financial information in Business
FINANCIAL INFORMATION IS
NEEDED BY USERS FOR MAKING
ECONOMIC DECISION
1-7
Users of accounting information
External Users
Internal Users
1-8
Supply of Information
• The supply of information will depend on the

- Forms of business organization
- Internal Processes that generate information
- Corporate Governance Practices
1-9
Forms of Business Organisation
•Proprietorship
•Partnership Public Ltd

Private Ltd
•Limited Company
•Limited Liability Partnership
1 - 10
Proprietorships
• One Proprietor / Owner

–total undivided authority
–no restrictions on type of business : must
be legal
• What are some disadvantages?
–unlimited personal liability
–limitation on size – fund raising power
1 - 11
Partnership Firms
• “A partnership is a type of business entity in which partners
share with each other the profits or losses of the business
undertaking with or without investment”
• What are some advantages?
–better credit standing – possibly
–more ‘people”, consultation with partners
–unlimited personal liability for general partners
–Liability Joint and Several
• Now Limited Liability Partnerships
1 - 12
Corporations/ Company
• “A group of persons united to pursue a

common interest and has a separate legal
existence”
• What are some advantages?
–separate legal existence
–limited liability of shareholders
–transferability of ownership relatively easy
• - extensive governmental regulation
1 - 13
Company
• Private Limited Company
- Limits the number of members or shareholders
- Restricts the right to transfer its shares
- Prohibits invitation to raise funds from public
• Public Limited Company
- Not a Private Company
- Or a private company subsidiary of a public
company
- The above is not an exhaustive list of characteristics
1 - 14
Supply of Information
•Internal Process
• Sophistication of the Accounting System including
the use of technology, size of the firm, cost for
generating the reports etc
•Governance Practices
• Good Governance practices including the need for
giving transparent information.
1 - 15
Types of business decisions or
activities
1 - 16
Business Decisions
Investment Financing Operating

Activities Activities Activities
Accounting System Captures these activities

1 - 17
Investing Activities
•Purchase or sale of property,

Machinery and equipment
•Investments or sale of
investments in the shares of other
companies
1 - 18
Financing Activities
•Borrowing money
•Repaying borrowings
•Issuing shares
•Repurchasing shares
•Paying dividends on shares
1 - 19
Operating Activities
•Sales to customers
•Collection of amounts
•Payment of amounts
owed by customers
owed to suppliers
•Purchase of inventory
•Payment of expenses
•Payment of taxes
Accounting process captures the

result of these activities
1 - 20
What is Accounting
1 - 21
Accounting –
The Language of Business
Accounting
Accounting isis an
an information
information system
system that...
that...
measures
measures business
business activities,
activities,
processes
processes data
data into
into reports,
reports, and
and
communicates
communicates results
results to
to decision
decision makers.
makers.
1 - 22
Summarizing Accounting
Measurement
Measurement
Reporting
Reporting
1 - 23
ACCOUNTING SYSTEM
Input Process Output

Communication
Accounting
Reports
Identification Recording
FILTERS
Accounting
reports
SOFTBYTE
Annual Report
Select economic events FILTERS Record, classify
Business transactions and summarize
Monetary
Analyze and interpret

Audit for users
Accounting Principles
•Monetary transactions and Events enter the system
•Process Using an Accounting Mechanism
•Follow certain rules or principles of Accounting called
as ‘GAAP’ (Generally Accepted Accounting Principles)
or Accounting standards
1 - 25
The Audit Report
Statutory Auditors
CA firms have economic incentives to
perform credible audits.
External Auditors report on “true

and fair view” . They also report
on other matters as defined in
law.
1 - 26
Reporting Function of Accounting
Accounting
Accounting system
system generates
generates reports
reports
called
called as
as Financial
Financial Statements
Statements
for
for the
the external
external users
users
1 - 27
Primary Financial Statements
The financial statements reports on status &
performance of the company in financial terms
Balance Sheet Statement of

Profit and Loss
(Income Cash Flow
Statement) Statement
1 - 28
The Balance sheet
Resources
owned and
amounts owed
The Balance sheet is a status report

giving the Financial Position
of the Company at a particular
point of time
1 - 29
The Profit and Loss Account
Measures Operating Performance
The
The profit
profit and
and loss
loss account
account oror the
the
Income
Income statement,
statement, reports
reports the
the company’s
company’s
revenues,
revenues, expenses,
expenses, and and net
net income
income
or
or net
net loss
loss for
for the
the period.
period.
Revenues
Revenues oror Incomes
Incomes arise
arise from
from selling
selling of
of
goods
goods or
or services
services toto customers
customers
Expenses
Expenses related
related to
to earnings
earnings are
are deducted
deducted
from
from revenues
revenues
1 - 30
The Statement of Cash Flows
The statement of cash flows reports

the company’s cash inflows and
Outflows from its various activities.
1 - 31
Balance Sheet
1 - 32
Balance Sheet
•Gives the resources owned and their funding
•The “assets” owned and the claimants against the assets
Assets.
Liabilities
Owners’ equity
1 - 33
Balance Sheet
Assets and Liabilities and Equity
Assets are the economic resources

Owned by a business that are
expected to produce a benefit .
Liabilities are Obligations (debts)
Owners’ equity represents the

“liability to owners” of a business.
1 - 34
Accounting
Accounting Concepts
Concepts
1 - 35
The Entity Concept
A reporting entity is an
organization that stands apart
as a separate economic unit.
1 - 36
The Going-Concern Concept
The entity will continue

to operate in the future.
1 - 37
Money Measurement Concept
Only those transactions which

can be expressed in terms of
Money are recorded
1 - 38
1 - 39
The Accounting Equation
Assets Liabilities
Owners’
Equity
Assets = Liabilities + Owners’ Equity

1 - 40
Accounting for business transactions
Mick started Fly by Night Service on

November 1, 2015 by depositing
Rs.80,000 into the business.
1 - 41
Fly by Night Service
Balance Sheet as on
November 1, 2015
Assets Liabilities
Cash
Cash Rs.
Rs.80,000
80,000 Total
TotalLiabilities
Liabilities Rs.
Rs. 00
Owner’s Equity
M.
M.Mick,
Mick,capital
capital Rs.
Rs.80,000
80,000
Total
TotalLiabilities
Liabilities
Total
TotalAssets
Assets Rs.80,000
Rs.80,000 &&Owner’s
Owner’sEquity
Equity Rs.80,000
Rs.80,000
1 - 42
On
On November
November 3, 3, the
the company
company purchased
purchased
land
land from
from BMC
BMC for
for Rs.52,000
Rs.52,000
by
by paying
paying cash.
cash.
1 - 43
Balance Sheet
November 3, 2015
Assets Liabilities
Cash
Cash Rs.
Rs.28,000
28,000 Total
TotalLiabilities
Liabilities Rs.
Rs. 00
Land
Land 52,000
52,000
Owner’s Equity
M.
M.Mick,
Mick,capital
capital Rs.
Rs.80,000
80,000
Total
TotalLiabilities
Liabilities
Total
TotalAssets
Assets Rs.80,000
Rs.80,000 &&Owner’s
Owner’sEquity
Equity Rs.80,000
Rs.80,000
1 - 44
The accounting Equation
Transaction: On November 5,Purchased an

old building from M/s. MTC for the company
costing Rs. 36000. A Cash of Rs.6,000 was
given and for the balance a promissory note
for Rs.30,000.
1 - 45
Balance Sheet
November 5, 2015
Assets Liabilities
Cash
Cash Rs.
Rs.22,000
22,000 Notes
NotesPayable
Payable Rs.30,000
Rs.30,000
Land
Land 52,000
52,000 Total
TotalLiabilities
Liabilities
Building
Building 36,000
36,000 Rs.30,000
Rs.30,000
Owner’s Equity
M.
M.Mick,
Mick,capital
capital 80,000
80,000
Total
TotalLiabilities
Liabilities
&&Owner’s
Owner’sEquity
Equity
Total
TotalAssets
Assets Rs.110,000
Rs.110,000 Rs.110,000
Rs.110,000
1 - 46
On November 17, Fly by night

purchased Equipment from TI Tools
Ltd for Rs.13,800. The amount is due
in 60 days.
1 - 47
Balance Sheet as on
November 17, 2015
Assets Liabilities
Cash
Cash Rs.
Rs.22,000
22,000 Notes
Notespayable
payable Rs.30,000
Rs.30,000
Land 52,000 Accounts
Accountspayable
payable 13,800
13,800
Land 52,000 Total
Building 36,000 Totalliabilities
liabilities Rs.43,800
Rs.43,800
Building 36,000
Equipment
Equipment 13,800
13,800 Owner’s Equity
M
M. .Mick,
Mick,capital
capital 80,000
80,000
Total
TotalLiabilities
Liabilities
&&Owner’s
Owner’sEquity
EquityRs.123,800
Rs.123,800
Total
TotalAssets
AssetsRs.123,800
Rs.123,800
1 - 48
On November 20, FBN sold part of its

new Equipment to Acer Company for
Rs.1,800. Ace agreed to pay this
amount in 45 days.
1 - 49
Balance Sheet
November 20, 2015
Assets Liabilities
Cash
Cash Rs.
Rs.22,000
22,000 Notes
Notespayable
payable Rs.30,000
Rs.30,000
Accts
Acctsreceivable
receivable 1,800
1,800 Accounts
Accountspayable
payable 13,800
13,800
Land
Land 52,000
52,000 Total
Totalliabilities
Rs.43,800
Building
Building 36,000
Eqpt
Eqpt 12,000
12,000
M..Mick,
M Mick,capital
capitalRs.
Rs.80,000
80,000
Total
TotalLiabilities
Liabilities
&&Owner’s
Owner’sEquity
Equity
Total
TotalAssets
Assets Rs.123,800
Rs.123,800 Rs.123,800
Rs.123,800
1 - 50
On November 25, FBN received Rs.600

from Acer as partial settlement of its
accounts receivable.
1 - 51
Balance Sheet
November 30, 2015
Assets Liabilities
Cash
Cash Rs.22600
Rs.22600 Notes
Notespayable
payable Rs.30,000
Rs.30,000
Acct. Accounts
Accountspayable 13800
Acct.Receivable
Receivable 1200
1200 Total
payable 13800
Land 52,000 Totalliabilities
Rs.37,000
Land 52,000
Building
Building 36,000
Tools
Tools 12,000
12,000
M.
M.Mick,
Mick,capital
capital Rs.
Rs.80,000
80,000
Total
TotalLiabilities
Liabilities
&&Owner’s
Owner’sEquity
Equity
Rs.117,000
Rs.117,000
Total
TotalAssets
AssetsRs.117,000
Rs.117,000
1 - 52
On November 30, FBN made a partial

payment of Rs.6,800 on its accounts
payable to TI Tools.
1 - 53
Balance Sheet
November 30, 2015
Assets Liabilities
Cash
Cash Rs.15,800
Rs.15,800 Notes
Notespayable
payable Rs.30,000
Rs.30,000
Acct. Accounts
Accountspayable 7,000
Acct.Receivable
Receivable 1200
1200 Total
payable 7,000
Rs.37,000
Land 52,000
Building
Building 36,000
Tools
Tools 12,000
12,000
M.
M.Mick,
Mick,capital
capital Rs.
Rs.80,000
80,000
Total
TotalLiabilities
Liabilities
&&Owner’s
Owner’sEquity
Equity
Rs.117,000
Rs.117,000
Total
TotalAssets
AssetsRs.117,000
Rs.117,000
1 - 54
On the Same Day FBN rendered services to

M/s. ANT for which it received Rs. 10000 by
Cash
1 - 55
Fly by Night Service Ltd
Balance Sheet
November 30, 2015
Assets Liabilities
Cash
Cash Rs.25,800
Rs.25,800 Notes
Notespayable
payable Rs.30,000
Rs.30,000
Acct. Accounts
Acct.Receivable
Receivable 1200
1200 Total
payable 7,000
Rs.37,000
Land 52,000
Building
Building 36,000
Tools
Tools 12,000
12,000 M.
M.Mick,
Mick,capital
capital Rs.
Rs.80,000
80,000
Income
Income 10,000
10,000
Total
TotalAssets
AssetsRs.127,000
Rs.127,000 Total
TotalLL+E
+E Rs.127,000
Rs.127,000
1 - 56
On November 30, FBN paid salary to its

employee Rs.1000 by Cash
1 - 57
Fly by Night Service Ltd
Balance Sheet
November 30, 2015
Assets Liabilities
Cash
Cash Rs.24,800
Rs.24,800 Notes
Notespayable
payable Rs.30,000
Rs.30,000
Acct. Accounts
Acct.Receivable
Receivable 1200
1200 Total
payable 7,000
Rs.37,000
Land 52,000
Building
Building 36,000
Tools
Tools 12,000
12,000 M.
M.Mick,
Mick,capital
capital Rs.
Rs.80,000
80,000
Income
Income ++10,000
10,000
Expenses
Expenses --1,000
1,000
Total
TotalAssets
AssetsRs.125,000
Rs.125,000 Total
TotalLiabilities
Liabilities
&& Equity
Equity Rs.125,000
Rs.125,000
1 - 58
Balance Sheet
Operating Financing
Investment
Activity Activity
Activity Liabilities
Notes
Notespayable
payable Rs.30,000
Rs.30,000
Assets Accounts
Accountspayable
payable 7,000
7,000
Cash
Total
Totalliabilities
Rs.37,000
Cash
Rs.24,800
Owner’s Equity
Rs.24,800
Acct.
Acct.Receivable 1200 M.
Land
Receivable 1200
52,000 M.Mick,
Mick,capital
capital Rs.
Rs.80,000
80,000
Land 52,000 Profits(
Building 36,000 Profits(Retained
RetainedEarnings)
Earnings)
Building 36,000 Income 10,000
Tools
Tools 12,000
12,000
Income 10,000
Expenses
Expenses ((1,000)
1,000)
1 - 59
Total
TotalAssets
Assets Total
Padmini Srinivasan – iimb ©TotalLL&& Rs.125,000
Rs.125,000
Income Statement
• Fly
FlyBy
ByNight
Night
Income
IncomeStatement
Statementfor
forthe
theperiod
period
Income
Income 10,000
10,000
Expenses
Expenses --1,000
1,000
Profits
Profits 9,000
9,000
1 - 60
Cash Flow Statement
Cash
CashFrom
FromOperating
OperatingActivity
Activity
Services
Services 10,000
10,000
Expenses
Expenses -1000
-1000
Net
NetInflow
Inflow 9000
9000
Cash
Cashflow
flowfrom
frominvesting
investingactivity
activity
Tools
Tools(Payment)
(Payment) 6,800 6,800
Receipts
Receiptsfrom
fromsale
sale -- 600
600
Land
Land 52,000
52,000
Building
Building 6,000
6,000
Net
NetCash
Cashoutflow
outflow 664,200
4,200
Cash
Cashfrom
fromFinancing
FinancingActivity
Activity
Owners
OwnersFunds
Funds 79,000
79,000
Net
NetCash
Cashinflow
inflow==9000-64200+79000
9000-64200+79000
Cash
CashBalance
Balance Rs.23,800
Rs.23,800 1 - 61
Information in the Financial Statements
1. How well did the Revenues Profit and

company perform – Expenses Loss
during the year? Net income (Net loss) Statement
2. What is the company’s Assets

Balance
financial position at the = Liabilities
sheet
end of the period? + Owners’ equity
3. How much cash did Operating cash flows Statement

the company generate ± Investing cash flows of
and spend during ± Financing cash flows cash
1 - 62
the period? Increase
Padmini Srinivasanor decrease
– iimb © in cash flows

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Financial Accounting

Until Mid term

•Please be on time to the class

• The supply of information will depend on the

•Partnership Public Ltd

•Limited Liability Partnership

• One Proprietor / Owner

• “A group of persons united to pursue a

Investment Financing Operating

Accounting System Captures these activities

•Purchase or sale of property,

Accounting process captures the

Input Process Output

Analyze and interpret

External Auditors report on “true

Balance Sheet Statement of

The Balance sheet is a status report

The statement of cash flows reports

Assets and Liabilities and Equity

Assets are the economic resources

Owners’ equity represents the

The entity will continue

Only those transactions which

Assets = Liabilities + Owners’ Equity

Mick started Fly by Night Service on

Transaction: On November 5,Purchased an

On November 17, Fly by night

On November 20, FBN sold part of its

On November 25, FBN received Rs.600

On November 30, FBN made a partial

On the Same Day FBN rendered services to

On November 30, FBN paid salary to its

1. How well did the Revenues Profit and

2. What is the company’s Assets

3. How much cash did Operating cash flows Statement

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