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This gives an introduction to accounting for begginers.
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Introduction to Financial Accounting
Dr. Mehul Raithatha
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ACCOUNTING
• Is the language of business
• Performance is reported and evaluated in
financial terms
• Knowledge is useful for personal
investment and tax planning as well
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IMPORTANCE OF ACCOUNTING
• It assists in management
• Helps in planning, organisation and
control of business
• Leads to increase in efficiency of
business
• Maximizes Profit
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Inputs Processing Outputs Users
Business Accounting Financial Investors,
transactions principles statements lenders etc.
and events and procedures and reports
Accounting as an Information System
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USERS OF FINANCIAL STATEMENTS
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STREAMS OF ACCOUNTING: FINANCIAL ACCOUNTING
• Recording of Financial Transactions
• Reporting of Financial Results
• Preparation of Financial Statements
• Targeted to External Users
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STREAMS OF ACCOUNTING: COST ACCOUNTING
• Recording of Costs
• Analysis of Costs
• Preparation of Cost Statements
• Targeted to Internal Users
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STREAMS OF ACCOUNTING: MANAGEMENT ACCOUNTING
• Recording of Financial and other data
• Analysis of Financial and other information
• Preparation of Statements for Managerial
Decisions
• Targeted at Internal Users - All levels of
Management
• As a broader concept encompasses Financial
and Cost Accounting
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FINANCE FUNCTION
• Accounting involves the creation of financial records of
business transactions, flows of finance, the process of
creating wealth in an organisation and the financial
position of a business at a particular moment in time.
• Finance is the lifeblood of economy without which business
cannot run successfully. Sufficient funds at the required time
are the key to success.
• In terms of Husband and Dockery, “Finance is the agent that
directs the flow of economic activity and facilitates its
smooth operation.”
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ACCOUNTING AS AN ACADEMIC DISCIPLINE
• An academic discipline, or field of study, is a branch of
knowledge that is taught and researched.
• Disciplines are defined and recognised by the academic
journals in which research is published, and the learned
societies and academic departments or faculties to which
their practitioners belong.
• Accounting has generally been oriented towards practical
knowledge as opposed to theoretical abstractions.
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MANAGERIAL vs . FINANCIAL ACCOUNTING
Internal
Users
External
Users
ACCOUNTING SYSTEM
(accumulates all accounting data)
Managerial Accounting
Information for decision
making, and control
of an organization’s
operations.
Financial Accounting
Published financial
statements and other
financial reports.
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AUDITING AND INTERNAL CONTROL
As per the Standards on Auditing (SA) 200
issued by the ICAI, “Auditing is the
independent examination of financial
information of any entity, whether profit
oriented or not, and irrespective of its size or
legal form, when such an examination is
conducted with a view to expressing an
opinion thereon.”
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BASIC PRINCIPLES WHICH GOVERN AUDITING
• Integrity
• Objectivity and Independence
• Confidentiality
• Skill and Competence
• Planning
• Audit evidence
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INTERNAL CONTROL
• Internal control is a process affected by an
organisation to provide reasonable assurance
regarding the effectiveness and efficiency of
operations, reliability of financial reporting and
compliance with related rules and regulations.
• Internal control system comprises accounting
controls as well as administrative controls.
FORMS OF BUSINESS ORGANIZATION
• Sole Proprietorship
• Hindu Undivided Family
• Partnership
• Company
• Co-operative Society
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SOLE PROPRIETORSHIP
• It is a business owned and
usually carried on by a
single person known as
proprietor.
• When the ownership and
management of business
are in control of one
individual, it is known as
sole proprietorship.
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SOLE PROPRIETORSHIP (ADVANTAGES vs. DISADVANTAGES)
• Ease of formation
• Better Control
• Prompt Decision Making
• Retention of Business Secrets
• Personal Attention to Consumer Needs
• Limited life
• Unlimited liability
• Limited Financial Resources
• Limited Capacity of Individual
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HINDU UNDIVIDED FAMILY • Hindu Undivided Family (HUF) business is a form of business
organisation found only in India. In this form of business, all
the members of a Hindu undivided family own the business
jointly. The affairs of business are managed by the head of the
family, who is known as the “KARTA” (can be male or
female).
• HUF business comes into existence as per the Hindu
Inheritance Laws of India. The membership is limited up to
three successive generations. Thus, an individual, his
child(ren) and his grandchild(ren) become the members of a
HUF by birth. They are called Co-parceners. A daughter can
also be a coparcener.
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PARTNERSHIP
• A partnership is a relationship between the persons
who have agreed to share the profits. It is a business
owned and carried on by a group of people.
• Each member of such a group is individually known as
partner and collectively the members are known as a
partnership firm.
• These firms are governed by the Indian Partnership
Act, 1932. Registration of partnership is not
compulsory. But since registration entitles the firm to
several benefits, it is considered desirable.
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PARTNERSHIP (ADVANTAGES vs. DISADVANTAGES)
• Ease of formation
• Less regulations
• Sharing of Risk
• No corporate income tax
• Unlimited liability
• Difficult to raise capital
• Lack of Harmony
LIMITED LIABILITY PARTNERSHIP
• Limited Liability Partnership (LLP) can be formed by any two
or more person, associated for carrying on a lawful business
with a view to profit, may by subscribing their names to an
incorporation document and filing the same with Registrar.
• Limited Liability Partnership (LLP) is a separate legal entity.
• Liability of the partners is limited to their agreed contribution
in the LLP.
• A firm, private company and unlisted public company is
allowed to be converted into LLP in accordance with
Provisions of the LLP Act 2008.
• The Indian Partnership Act 1932 is not applicable to LLPs.
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Company
Unlimited Limited
Private Public
Unlisted Listed
COMPANY / CORPORATION
Company form of business
organisation is a voluntary
association of persons to carry on
business. Normally, it is given a
legal status and is subject to certain
legal regulations. It is an
association of persons who
generally contribute money for
some common purpose. The money
so contributed is the capital of the
company.
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COMPANY / CORPORATION (Contd.)
• The persons who contribute capital are its members. The proportion of capital to which each member is entitled is called his share, therefore members of a joint stock company are known as shareholders and the capital of the company is known as share capital.
• The companies are governed by the Indian Companies Act, 1956. The Act defines a company as an artificial person created by law, having separate entity, with perpetual succession and a common seal.
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COMPANY (ADVANTAGES vs. DISADVANTAGES)
• Unlimited life
• Professional Management
• Limited liability
• Ease of raising capital
• High possibility of wealth maximization
• Dividend Tax burden
• High cost of set-up and report filing
• More regulation
CO-OPERATIVE SOCIETY
• Any ten persons can form a co-operative society. It functions
under the Co-operative Societies Act, 1912 and other State
Co-operative Societies Acts. A co-operative society is
entirely different from all other forms of organisation
discussed above in terms of its objective. The co-operatives
are formed primarily to render services to its members.
• Every member has a right to take part in the management of
the society. Each member has one vote. Generally the
members elect a committee known as the Executive
Committee to look after the day to day administration and the
said committee is responsible to the general body of
members.
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CO-OPERATIVE SOCIETY (Contd.)
• The liability of the members is limited to the
extent of capital contributed by them.
• Registration of a society under the Co-
operative Societies Act is a must. Once it is
registered, it becomes a body corporate and
enjoys certain privileges just like a joint stock
company.
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CO-OPERATIVE SOCIETY (Contd.)
Objectives
Rendering service rather than earning profit
Mutual help instead of competition
Self help in place of dependence
Privileges
Perpetual succession
Own common seal
Own property
Can enter into contracts
Can sue others
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VARIOUS TYPES OF CO-OPERATIVES
• Consumer Co-operatives
• Producers Co-operatives
• Producers Co-operatives
• Marketing Co-operatives
• Housing Co-operatives
• Credit Co-operatives
• Forming Co-operatives
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CO-OPERATIVE SOCIETY (ADVANTAGES vs. DISADVANTAGES)
• Democratic management
• Assistance from the government
• Elimination of middlemen’s profit
• Fairly stable life
• Limited capital
• Lack of managerial talent
• Lack of motivation
• Lack of secrecy
• Dependence on the government
31
Institutional Environment in India Ministry of Corporate Affairs
National Advisory Committee on Accounting Standards
Securities and Exchange Board of India
Institute of Chartered Accountants of India
Central Board of Direct Taxes
Reserve Bank of India
Insurance Regulatory and Development Authority
Comptroller and Auditor-General of India
International Organizations
International Accounting Standards Board
International Federation of Accountants
International Organization of Securities Commissions
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Accounting, Capital Market, and Corporate Governance
The capital market
Signalling and capital market
Corporate governance Accounting disciplines managerial actions
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The Accounting Equation
Economic Resources = Claims
Assets = Liabilities + Equity
Capital + Revenues – Expenses – Drawings – Dividends
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Assets
Probable future economic benefits
What a business owns
Examples
Cash
Financial investments
Land
Buildings
Plant and machinery
Patents and copyrights
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Liabilities Probable future sacrifices of economic
benefits
What a business owes
Contractual, statutory, or constructive
Examples Loans payable
Salaries payable
Warranty obligations
Pensions payable
Income tax payable
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Equity
Residual interest of owners
Examples Share capital
Share premium
Revenues
Expenses
Dividends
Retained profit
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Financial Statements
Profit and loss account
Statement of financial performance Revenues; Expenses
Balance sheet
Statement of financial position Assets; Liabilities; Equity
Cash flow statement
Statement of cash receipts and cash payments Activities: Operating; Investing; Financing
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Fields of Accounting Activity Public accounting
Auditing
Tax
Management advisory services
Small business services
Private accounting Management accounting
Internal auditing
Information systems
Government accounting Central
State
Local
Not-for-profit accounting
Accounting as an academic discipline
ETHICAL ISSUES IN ACCOUNTING
• Accounting involves the systems that gather and transform
the information, and involves decision-making about the
future based on that information.
• Different accountants, given a complex set of circumstances,
will probably arrive at several different income or valuable
figures.
• Considering fiduciary responsibility of an accountant
(particularly auditors), their behaviour should be driven by
ethical values.
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FRAUDS IN FINANCIAL STATEMENTS
• Recording fictitious revenue—revenues not actually
earned
• Concealment of liabilities and expenses
• Fraudulent asset valuation
• False statement of the inventory available
• Under provisioning for depreciation
• Showing day-to-day expenses as capital expenditure
• Paying salary to ghost employees
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