Why Study

Accounting
& Finance
Setting Expectations Right
• What are your Expectations
• ????

• What does course Offer

• ????

• Set the Right Expectations in Terms of Learning

• Look at the Course Outcomes.

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 Course Outcomes
CO1 Understand and analyze the annual report of a company.
Understand concepts, methods and techniques of management
CO2 accounting.
CO3 Develop competence in managerial decision making and control
Understand, analyze, evaluate and develop analytic capabilities in
CO4 financial management.
Apply the financial management knowledge and skills in decision-
CO5 making process in corporations.
Why do Business
• What is required to run a business-???
• From where funds will come
• Pillars of Business (Assets and Liabilities)
• Pillars of Business (Income or Revenue and Expenditure)
• Pillars of Business (The difference Income and Expenditure is Profit)

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Forms of doing business
• Forms of doing business
• Sole Proprietorship
• Partnership
• Company (Public Vs. Private)

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Sole Proprietorship
There is no government registration needed in order to start a sole
proprietorship business in India.
You don’t have to go to an online registration portal and fill up a form
or submit any documents.
As per Govt. Of India, is a “one-man organisation where a single
individual owns, manages and controls the business.”

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 Sole Proprietorship
• You don’t need to register your sole proprietorship in India. But in order to receive
payments in the name of the business, you need to open a current account in a bank. For
this, you will need proof of existence of the firm, and the address proof. Documents
needed include:
• 1. Pan card and ID for address proof of proprietor.
• 2. Business address proof (eg: electricity bill in your name, or electricity bill +
registered rental agreement, etc.)
• 3. Two government registration documents confirming name and address of business
(shop establishment license, service tax registration, VAT/CST, etc.)
• 4. CA Certificate – You can get this from any CA. They might charge you a nominal fee
for giving you a certificate.

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 Sole Proprietorship
• Before 1991, (LPG) Liberalization, Globalization and Privatization, we needed
permission for everything.
• Although sole proprietor doesn’t require any specific registrations, he is advised
to obtain a few registrations to make his business function smoothly.
• Registering as SME
• Shop and Establishment Act License
• GST Registration

• The income is taxed as “Individual Tax Payer”.

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Partnership
• Partnership firms in India are governed by the Partnership Act, 1932. Section 4 of
the Act defines Partnership as - "An agreement between persons who have agreed
to share profits of the business carried on by all or any one of them acting for all.“
• Registering a firm under the Partnership Act (hereinafter called the Act) is not
mandatory as in the case of setting up a company.
• The Central Government has prescribed maximum number of partners in a firm to
be 50 vide Rule 10 of the Companies (Miscellaneous) Rules,2014.Thus, in effect,
a partnership firm cannot have more than 50 members".

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Company (Public Vs. Private)

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CAPITAL
• The money contributed by owners in a business is called CAPITAL.
• In Sole Proprietorship, this contribution is made by individual, in partnership by
a few people, but in a company its made by a large group of people.
• So how does public contribute money and who collects it.

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 CAPITAL
• The Capital of a company is divided into shares and it is called “Equity”
• Initially the companies may be small and may not require money from
public. So they get seed finance, money from anchor investors etc.

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 CAPITAL
• But as it grows, it need money from public. At that time the promoters
raises funds from market in different ways.
• A corporate promoter is a firm or person who does the preliminary work
incidental to the formation of a company, including its promotion,
incorporation, and flotation, and solicits people to invest money in the
company, usually when it is being formed.

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 Fund Raising through IPO
• Initial Public Offering (IPO) – Fresh issue of shares or selling existing
securities by an unlisted company for the first time is known as IPO. Listing
and trading of securities of a company takes place in IPO.

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What happens post
Listing
• Trading of shares in Stock exchange
• For buy/sell, the prerequisites
• A DMAT Account (To keep shares in electronic form)
• A Bank Account (For Funds)
• A Trading Account with Broker (For orders)
• All three are connected.

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Accounting Issues
What Accounting Does
• Accounting (act as Input-Output System) is a system that provides
information on:
• Amounts of resources.
• How resources were financed.
• Results achieved by using resources.
• For either:
• Parties inside and outside of the organization.
• Profit and nonprofit organizations.

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Types of Information in
business/Types of
Accounting
• Financial accounting
• Management accounting
• Cost accounting

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Financial accounting

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What is Financial Accounting Information and for
whom (Also Called Financial Reporting)
• For external users (investors) and managers.
• Used by investors to make decisions to buy, sell or hold shares of
company.
• Primary financial statements:
• Balance sheet.
• Income statement.
• Statement of cash flows.
• Common rules used so investors can compare with other companies’
financial statements.
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Definition of Financial
Accounting
• Accounting is the Art of recording, Classifying, Summarizing and
interpretating day to day business transactions.
• Recording-Journal Entry
• Classify-Ledger Posting
• Summary- known as Financial Statements-Trial Balance and Final
Accounts (P&L account, Trading account and Balance Sheet)
• Interpretation-Analysis tools

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 True and Fair View
• Financial statements are frequently described as showing a true and fair
view of the financial position, performance and cash flows of an
enterprise.
• In reality does not really happen
• History is full of accounting scams?

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Financial Statements are
Verified
• Financial statements are verified by Internal Team known as Internal audit.
• They are mandatorily verified by an outsider, who is hired by company to
do the job. Known as external audit. This person has to be a CA by
qualification.
• In government audit is done by CAG department.

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Accounting Standard
• Accounting standard “ an accepted conceptual framework to arrive at an
authoritative statement of best accounting practice to be followed by the
accountants in dealing with any monetary transactions.
• When an standard becomes globally accepted, it is referred as GAAP

• Standards deal with specific issues.

• This is the domain of a chartered accountant.
• Global Scenario Later

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Various Acts
• Companies act 1956
• SEBI
• RBI
• Many more

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 Accounting Standards in
India
• The accounting standards have been granted legal recognition under the
Companies Act, 1956.
• Under the Act, the Central Government has the power to notify the
accounting standards.
Accounting Standards (ASs)
Issued by ICAI-Institute of chartered
accountants of India
Similar to IS code
AS-1: Disclosure of Accounting Policies
AS-2: Valuation of Inventories
AS-3: Cash Flow Statements
AS-4: Contingencies and Events Occurring after the Balance Sheet Date
AS-5: Net Profit or loss for the Period, Prior Period Items and Changes in Accounting
Policies
AS-6: Depreciation Accounting
AS-7: Accounting for Construction Contracts
AS-8: Accounting for Research and Development
AS-9: Revenue Recognition
AS-10: Accounting for Fixed Assets
AS-11: Accounting for the Effects of Changes in Foreign
Exchange Rates
AS-12: Accounting for Government Grants
AS-13: Accounting for Investments
AS-14: Accounting for Amalgamations
AS-15: Accounting for Retirement Benefits in the Financial Statement of Employers
AS-16: Borrowing Costs
AS-17: Segment Reporting
AS-18: Related Party Disclosures
AS-19: Leases
AS-20: Earnings per Share
AS-21: Consolidated Financial Statements
AS-22: Accounting for Taxes on Income
AS-23: Accounting for Investments in Associates in Consolidated Financial Statements
AS-24: Discontinuing Operations
AS-25: Interim Financial Reporting
AS-26: Intangible Assets
AS-27: Financial Reporting of Interests in Joint Ventures
AS-28: Impairment of Assets
AS-29:Provisions, Contingent Liabilities and Contingent Assets
Convergence to Global Accounting Standards
 Accounting and Trust
• To assure the reliability of accounting information, many mechanism are
devised and employed;
• Periodic and timely disclosure;
• Full disclosure;
• Accounting standards:
• Auditing:
• Additional tool to assure the reliability of accounting information.

But still there exist a GAP./Lack of trust because

Accounting Preliminaries
Basic Accounting Terms
Accounting Transaction
Accounting Head
Income
Expense
Assets
Liabilities
What is Income?
Income is an increase in economic benefits during an accounting period.
What is Expense?
Expenses are decrease in economic benefits during an accounting period.
What is Asset?
Assets refer to tangible objects or intangible rights of an enterprise which carry
probable future benefits.
What is Liability?
Liabilities refer to the financial obligations of an enterprise.
General Accounting Terms
Capital
Drawings
Stock
Debtors
Creditors
 Bad debts
 Depreciation
 Sales
 Purchases
 Accounting Assumptions
• Certain fundamental accounting assumptions (Concepts) underlie the
preparation and presentation of financial statements in general.
• They are usually not specifically stated because their acceptance and use are
assumed. Disclosure is necessary if they are not followed.
Accounting assumptions
Indispensable to accounting practice; May be treated as prerequisites;
• Money measurement.
• Entity.
• Going concern.
• Cost.
• Dual aspect.
• Accounting period.
• Conservatism.
• Realization.
• Matching.
• Consistency.
• Materiality.
• Accrual Vs. cash Basis

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Money Measurement
• Accounting records are recorded in monetary terms at the value at time
transaction is recorded.
• This is a severe limitation.
• If something can’t be valued it can’t be recorded; e.g., president’s
health, affect of strike.
• Price changes are ignored.

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Entity
• For whom accounts are kept.
• Distinguish from owner. (Does not apply on sole Proprietorship)
• May or may not be separate legal entity.
• One entity may be part of a larger entity.

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Going Concern
• Assumed to continue in operation for an indefinite period.

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Capital Vs. Revenue Expenditure
• Any expenditure which involve huge amount and non recurring in nature
is capital expenditure. Such expense are categorized as assets.

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Cost
• Assets defined:
• = economic resources.
• = cash or something that helps generate cash.
• Assets are recorded at cost, that is, price paid
• or Fair value = amount for which asset could be currently purchased or
sold
• Or Book value of asset = recorded cost - depreciation to date.

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Cost
• Land, buildings, machinery and similar are Non-monetary Assets.
• Generally, they are recorded at book value
• Depreciation is systematically allocated over life of asset.

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Cost : Monetary Assets
• Cash and Marketable securities are monetary assets
• They are Initially recorded at cost and Adjusted to fair value (=market
value, if available).

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Dual Aspect
• Transactions = events that affect accounting records.
• Every transaction has a dual impact on accounting records.
• Dual impact:
• Results in maintenance of fundamental accounting equation.
• Double-entry system.

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Accounting period and
Consistency
• Accounting period: Accounting measures activity for a specified
interval of time, usually one year.
• Consistency: Once an accounting method is selected, the same
method should be used for all subsequent events of the same
character unless there is a sound reason to change.

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Conservatism, Realization and Matching
• Conservatism: (being conservative about revenue and optimist about
expense)
• Revenues are recognized when reasonably certain, expenses are
recognized as soon as they are reasonably possible. These principles
recognize that increases in reported net income require stronger
proof than do increases in expenses.
• Therefore, when deciding which expenses and revenues to
acknowledge during a given accounting period, accountants are
supposed to apply the conservatism concept.
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Conservatism, Realization and Matching
• Realization: based on Conservatism, With this convention, accounts recognize
transactions (and any profits arising from them) at the point of sale or transfer of
legal ownership - rather than just when cash actually changes hands. For example, a
company that makes a sale to a customer can recognize that sale when the
transaction is legal - at the point of contract. The actual payment due from the
customer may not arise until several weeks (or months) later - if the customer has
been granted some credit terms.
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Matching Concept
• The matching assumption is an accounting principle that requires the
identification and recording of expenses associated with revenue
earned and recognized during the same accounting period.
• Accordingly, under the matching assumption the expenses of a
particular accounting period are the costs of the assets used to earn
the revenue that is recognized in that period.
Matching Concept
• It follows, therefore, that when expenses in a period are matched
with the revenues generated for the same period, the result is the
net income or loss for that period.
Matching Concept
• To illustrate, if a company produces an item costing Rs.100 that it later
sells for Rs.150, the company must decide the accounting period in which
it is reasonably certain to receive the Rs.150.
• When this is decided, the company must match the Rs.100 cost with the
Rs.150 revenue as an expense, resulting in Rs.50 income from sales.
Best Matching Under Accrual
System of Accounting
• The best matching of revenues and expenses occurs under the accrual
basis of accounting.
• Under the accrual basis, revenue (as well as expenses, and other changes
in assets, liabilities, and equity) is generally recognized in the period in
which the economic event takes place, usually at the point of sale—not
when the cash actually changes hands.
• Revenue recognition occurs at this time because the earnings process is
complete and there is evidence supporting the sale price.
Best Matching Under Accrual
System of Accounting
• Earnings, however, can be identified at other times, such as during an
item's production, at the end of an item's production but prior to its sale,
or when the money is collected, as with payments made on installments.
• Costs are recognized as expenses in a particular period if
• (1) there is a direct association between costs and revenues for the period or
• (2) the costs cannot be assigned to the generation of revenues of any period in the
future.
Relevance and Reliability
• Relevance: Accounting information must be based on information
directly related to the business being reported on .

• Reliability: The accounting repots should represent an effective and

faithful representation of financial events relating to business .

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Materiality and Comparability
• Materiality: This concept requires that all significant events be included in
financial reports . An event is regarded as material if it is likely to effect
financial decisions . Insignificant events may be disregarded, full
disclosure of all important info.
• Comparability: If accounting reports are to be compared from one period to
the next then the methods of accounting used must be consistent from one
period to the next .

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Understandability and Constraint
of timeliness
• Understandability : It is of no value to present accounting reports which
users are simply unable to understand .

• Constraint of timeliness: Acts as a constraint to achieving the above

qualities in reporting . timeliness indicates that reports are only of value if
available within a reasonable time period .

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 Financial Statements
Mandatory and Optional
Content of an Annual
Report
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Mandatory Financial Statements
• For Corporate as per schedule III, section 129, of
companies act 2013, (Amended) (vertical)
• Statement of Financial Position i.e. Balance Sheet
• Income Statement
• Statement of Cash Flows
• For Individual/Partnership
• Statement of Financial Position i.e. Balance Sheet
• Trading Account
• Profit and Loss Account

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Objectives of Financial
Statement
• Useful for investment decisions. (All financial statements)
• Comprehensible. (All financial statements)
• About economic resources and claims on resources (Balance Sheet).
• About financial performance during a
period (Income Statement).
• About cash flows (Statement of Cash Flows).

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Stock vs. Flow
• Stock/ resources and obligations at a point in time:
• Balance sheet.
• Flow/activity over a period of time:
• Income statement.
• Statement of cash flows.

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Balance Sheet
• Point in time or status report.
• More formally, Statement of Financial Position.
• Contains (and shows equality of amounts of):
• Assets.
• Liabilities and Owners’ equity.

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Income Statement
• Summary of All the incomes and expenditure during the financial year.
• The net difference is profit/loss
• Revenues – Expenses = Net Income
• Sales Revenue = amount of product sold to customers during accounting
period.
• Gross margin = Sales revenue – Cost of sales

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Major Balance Sheet
Items
• Assets-
• Classification used are fixed, current
• Tangible and intangible
• Placed as decreasing order of liquidity.

• Name some of major fixed and current assets

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Major Balance Sheet
Items
• Liabilities- Obligations to pay or provide services to outside parties.
• Arising from past transactions or events.
• Claims against entity’s assets.
• Classified as current liabilities and long term liabilities

• Some of the current liabilities are creditors, bank OD etc.

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Long term Liability
• Long-term debt i.e. a term loan
• Amount owners’ invested in entity.
• For a company: shareholders’ equity shares.
• For a proprietorship termed as Capital
• Also Retained earnings. (as explained earlier that profits are added in
capital as a reward to owner)

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Dual Aspect: Balance Sheet
(Fundamental Accounting Equation)
• Assets = Liabilities + Owners’ equity.
• LHS = RHS.
• First view:
• Resources = Obligations to creditors or claims on resources +
Residual claim.
• Second view:
• Amounts invested in resources = how these amounts were
financed.
• Resources = financed by creditors + financed by owners.

(Exercise). What purpose the liabilities and assets serve

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 The Double Entry
System
• Accounting information is based on the double entry system.
• An account is an arrangement of transactions affecting a given asset,
liability or other element.
• Under this system, the two-sided effect of a transaction is recorded in the
appropriate accounts.
• The recording is done by means of a “debit-credit” convention (set of
rules) applying to all accounts.

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The Double Entry
System
• Account is a Device used for calculating net change.
• Simplest form is T-account.
• Increases listed on one side; decreases listed on other side.
• Balanced periodically.

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Difference between financial
accounting and management
accounting

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Financial Accounting
· Focuses on preparation of financial statements required by GAAP.
· Prepared for use by external users.
· Provides an overall picture of an entity’s financial condition and results of
activities.

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Management accounting
• Process that provides info used by managers for:
• Planning, implementing, and controlling.
• Applies to all organizations.

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Cost Accounting
• the recording of all the costs incurred in a business in a way that can be
used to improve its management.

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Management vs. financial accounting
• Necessity
· Financial Accounting (FA): SEBI (or banks or suppliers) requires publicly
traded companies to publish financial statements according to GAAP.
· Management accounting (MA) is optional.
· Purpose.
· FA: Produce financial statements for outside users.
· MA: Help managers plan, implement and control.

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Management vs. financial accounting
· Users.
· FA: faceless group, external users, present or potential shareholders.
· MA: Known managers who influence what information is needed.
· Underlying structure.
· FA: built around: Assets = Liabilities + Stockholders’ Equity.
· MA:

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Management vs. financial accounting

· Source of principles.
· FA: GAAP.
· MA: whatever managers believe is useful.
· Time orientation.
· FA: historical, tell it like it was.
· MA: future/decision oriented, tell it like it will be. (However, the past is often
a good predictor of the future.)
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 Management vs. financial accounting

· Information content.
· FA: financial statements are the end product and include primarily financial info.
· MA: non-monetary as well as monetary info.
· Information precision.
· FA: Uses approximations but as a generalization is more precise than MA.
· MA: Management needs info rapidly to be useful in decision making and therefore
precision is sometimes sacrificed.

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Management vs. financial accounting
· Report frequency:
· FA: Publicly traded, quarterly, with more detailed info annually.
· MA: Up to management.
· Report timeliness.
· FA: Usually, several weeks to months after fiscal close of accounting period.
· MA: Quickly to be useful for decision making.

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Management vs. financial accounting

· Report entity.
· FA: Organization as a whole.
· MA: Relatively small parts (responsibilities centers such as departments, product
lines, divisions, subsidiaries as well as organization as a whole.)
· Liability potential.
· FA: May be sued by shareholders if believed to be misleading.
· MA: Used internally unlikely to give rise to legal liability.

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Point of Differences Financial Accounting Cost Accounting

Recoding of transactions is part of financial
accounting. We make financial statements
through these transactions. With the help of
financial statements, we analyze the profitability
Meaning and financial position of a company.
Cost accounting is used to calculate cost of the
product and also helpful in controlling cost. In
cost accounting, we study about variable costs,
fixed costs, semi-fixed costs, overheads and
capital cost.

Purpose of the financial statement is to show To calculate cost of each unit of product on the
Purpose correct financial position of the organization. basis of which we can take accurate decisions.

Estimation in recording of financial transactions is In cost accounting, we book actual transactions

not used. It is based on actual transactions only. and compare it with the estimation. Hence
costing is based on the estimation of cost as
Recording well as on the recording of actual transactions.

Correctness of transaction is important without Cost accounting done with the purpose of
taking care of cost control. control over cost with the help of costing tools
Controlling like standard costing and budgetary control.

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Point of Differences Financial Accounting Cost Accounting
Period of reporting of financial Reporting under cost accounting is done as per
accounting is at the end of financial year. the requirement of management or as-and-
Period when-required basis.

In financial accounting, costs are In cost accounting, minute reporting of cost is

Reporting recorded broadly. done per-unit wise.
Fixation of selling price is not an objective Cost accounting provides sufficient
Fixation of Selling Price of financial accounting. information, which is helpful in determining
selling price.
Relative Efficiency Relative efficiency of workers, plant, and Valuable information about efficiency is
machinery cannot be determined under provided by cost accountant.
it.
Valuation basis is ‘cost or market price Cost accounting always considers the cost
Valuation of Inventory whichever is less’ price of inventories.
Journal entries, ledger accounts, trial Cost of sale of product(s), addition of margin
Process balance, and financial statements and determination of selling price of the
product.

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