fin accounts 25 aug 1

8/7/2019 fin accounts 25 Aug 1

1/23

Cont.

Accounting

Accounting Policy

Accounting Postulates Accounting Principles

Accounting Theory


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Users of Accounting Information

1. The equity investor group, including existing andpotential shareholders.

2. The loan creditor group, including existing andpotential holders of debentures and loan stock, and

providers of short-term secured and unsecuredloans and finance.

3. The employee group, including existing, potentialand past employees.

4. The analyst-adviser group, including financialanalysts and journalists, economists, statisticians,researchers, trade unions, stockbrokers and otherproviders of advisory services such as credit ratingagencies.


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Cont.

5. The business contact group, including customers,trade creditors and suppliers and, in a different sense,competitors, business rivals and those interested inmergers, amalgamations and takeover.

6. The government, including tax authorities,departments and agencies concerned with thesupervision of commerce and industry, and localauthorities.

7. The public, including taxpayers, ratepayers, consumersand other community and special interest groups such

as political parties, consumer and environmentalprotection societies and regional pressure groups.


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Cont.

Cost Accountancy: the application of costing

and cost accounting principles, methods and

techniques

Cost Accounting: It is the process of

accounting for ascertaining and controlling of

cost.

Costing: It is the technique and process of

ascertaining costs.


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Generally Accepted Accounting

Principles (GAAP)Basic Objectives: Provides information to potential investors

regarding:

1. Economic Resources, their claim and changes in them

2. Assessment of amount, timing and uncertainty of prospective cash

receipts3. rationality of investment and financial decisions

4. Assure that financial statements are Relevant, Reliable,Comparable and Consistent.

Organisations:

1. Securities and Exchange Commission (SEC)

2. American Institute of Certified Public Accountants (AICPA)

3. Financial Accounting Standards Board (FASB)

4. Government Accounting Standards Board (GASB)


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Difference Between Financial Accounting

and Cost and Management Accounting

Basis Financial Accounting Cost and Management

Accounting

Purpose External Internal

Information Records Information based

on Past data

Provides Information for

future decisionsEmphasis Emphasis on the types of

accounts

Emphasis on the products,

processes and

departments

Accounting Aspect Stewardship aspect of

accounting

Controlling aspect of

accounting

View of Enterprise Overall View of Enterprise Analytical View of

Enterprise

Legal Obligations Legally Obligatory Relatively Free

FollowUp Should Compulsorily

comply GAAP

Tailored to suit the needs

of company


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Trial Balance

Characteristics:Lists balances of all Ledger

Not a Part of Accounting

Ensures Arithmetical Accuracy

Can be prepared at any point of time.

Errors Disclosed by a Trial Balance:

Wrong Totaling of Subsidiary Books

Wrong Posting of an amount in one sideError in the Computation of Balances

Omission of One Account Balance

Errors in the Extraction of Trial Balance


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Cont.

Errors Disclosed by a Trial Balance:

Error of Omission

Error of Principle

Compensating Error

Recording ofWrong Amount in the Books

Recording inWrong Account


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Difference Between Trial Balance and

Balance Sheet

Trial Balance is the 'means' of a accounting process of which Balance sheetis the 'end' because a balance sheet is always prepared from the figurestaken out of trial balance.

The purpose of preparing a trial balance is to check the arithmeticalaccuracy of account books; but balance sheet is drafted to reveal the

financial position of the business. The two sides of balance sheet are called 'liabilities' and 'assets' sides

respectively but in case of trial balance the columns are 'debit' and 'credit'columns.

For completing the accounting cycle, the preparation of balance sheet isnecessary; but the preparation of trial balance is not always necessary.

Trial balance contains in it all the three types of account viz. personal, realand nominal, but balance sheet contains only personal and real accounts.

Generally, trial balance does not contain closing stock but balance sheetdoes.


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Management Accounting

Management Accounting is concerned with theaccounting information that is useful tomanagement

R.N.AnthonyNature:

1. Selective Nature

2. Provides Data and not Decisions

3. Futuristic4. Analysis of Different Variables

5. No set Format


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Scope of Management Accounting

Financial Accounting

Cost Accounting

Budgeting and Forecasting

Cost Control Procedures

Reporting

Methods and Procedures Tax Accounting

Internal Financial Control

Interpretation


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Objectives of Management Accounting

1. Management Accounting is helpful in

2. Planning and Formulation of Policies

3. Interpretation of Financial Information

4. Controlling5. Organising

6. Coordinating Operations

7. Solution of Strategic Problems

8.M

otivating Employees9. Communicate up-to-date Information

10. Performance Assessment


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Tools and Techniques of Management

Accounting

Financial Planning

Analysis of Financial Statements

Historical Cost Accounting

Standard Costing

Budgetary Control Marginal Costing

Fund Flow Statement

Cash Flow Statement

DecisionMaking Revaluation Accounting Statistical and Graphical Techniques

Reporting


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Limitations of Management Accounting

Based on Records

Lack of Objectivity

Intuitive Decisions

Management Accountant's Inefficiency Lack of Continuity and Coordination

Costly

Psychological Resistance

Unquantifiable Variables

No substitute of Administration


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Financial Statement

Financial Statements are the organised summaries of detailedinformation about operating results and financial position of theconcern.

Contents:

1. Board Report

2. Directors Responsibility Statement

3. Management Discussion and Analysis

4. Report on Corporate Governance

5. Auditors Report

6. Balance Sheet

7. Profit and Loss A/C

8. Cash Flow Statement

9. Notes and Annexure


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Importance of Financial Statement

Owners

Creditors

InvestorsEmployees

Government

Research Scholars

Consumers

Managers


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Limitations of Financial Statement

Interim and not Final Report

Lack of Precision and Definiteness

Lack of Objective Judgment Record onlyMonetary Facts

Historical Nature

Artificial

Scope ofManipulation

Inadequate Information


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Financial Statement Analysis

The analysis and interpretation of FinancialStatements are an attempt to determine thesignificance and meaning of the financial

statements data so that a forecast may bemade of the prospects for future earnings,ability to pay interest and debt maturities (both current and long term), and probability

of a sound dividend policy.

Kennedy andMemullar


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Types of Financial Statement Analysis

On the Basis of Analyst: External Analysis and

Internal Analysis

On the Basis of Objective: Long tern Analysisand Short Term Analysis

On the Basis ofMode: Horizontal or Dynamic

Analysis and Vertical or Static Analysis


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Techniques of Financial Statement

Analysis

Comparative Statements

Common Size Statements

Trend %Method

Fund Flow Analysis

Cash Flow Analysis

NetWorking Capital Analysis Ratio Analysis


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Ratio Analysis

It is a process of identifying the financial

strengths and weaknesses of the firm by

logically establishing relationships among

various financial items and interpreting the

results thereof in order to derive meaningful

conclusions.


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Importance of Ratio Analysis

Ratio Analysis is useful in:

Financial Position Analysis

Summarising and Systematising Accountingfigures

Assessing Operational Efficiency

Identifying Strengths andWeakness ofOrganisation

Comparative Analysis of Organisation


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Limitations of Ratio Analysis

Variation in AccountingMethods

Incorrect Accounting Statements

No Idea of Probable Happenings Not Consider Inflationary Effects

No Common Standards

Ambiguity

Ignores Qualitative Factors

No use of Ratio Calculated for Unrelated Figures

fin accounts 25 aug 1

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