Unit 1 Fin System

8/3/2019 Unit 1 Fin System

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Financial Systems

Unit 1



Financial Statements



Parties Interested in FinancialStatements

Shareholders

Investors

Creditors Labour

Government

Researchers



Accounting Concepts

Business entity concept

Money measurement concept

Going concern concept

Accounting period concept Accounting cost concept

Duality aspect concept

Realisation concept

Accrual concept

Matching concept



Business entity concept

Business enterprise and its ownersare two separate independententities.

Business and personal transactions of its owner are separate





Money measurement concept

All business transactions must be interms of money, that is in thecurrency of a country.



Significance

This concept guides accountants what torecord and what not to record.

It helps in recording business transactionsuniformly.

If all the business transactions areexpressed in monetary terms, it will beeasy to understand the accounts preparedby the business enterprise.

It facilitates comparison of businessperformance of two different periods of thesame firm or of the two different firms forthe same period.



Going concern concept

Business firm will continue to carry onits activities for an indefinite period of time.



Significance

This concept facilitates preparation of financial statements.

On the basis of this concept, depreciationis charged on the fixed asset.

It is of great help to the investors, because,it assures them that they will continue toget income on their investments.

In the absence of this concept, the cost of

a fixed asset will be treated as an expensein the year of its purchase. A business is judged for its capacity to earn

profits in future.



Accounting period concept

All the transactions are recorded inthe books of accounts for a specifiedperiod of time.



Significance

It helps in predicting the future prospectsof the business.

It helps in calculating tax on businessincome calculated for a particular time

period. It also helps banks, financial institutions,

creditors, etc to assess and analyse theperformance of business for a particularperiod.

It also helps the business firms to distributetheir income at regular intervals asdividends.



Accounting cost concept

All assets are recorded in the booksof accounts at their purchase price,which includes cost of acquisition,transportation and installation andnot at its market price.



Significance

This concept requires asset to be shown atthe price it has been acquired, which canbe verified from the supporting documents.

It helps in calculating depreciation on fixedassets.

The effect of cost concept is that if thebusiness entity does not pay anything for

an asset, this item will not be shown in thebooks of accounts.



Duality aspect concept

Assumes that every transaction has adual effect, i.e. it affects two accountsin their respective opposite sides.Therefore, the transaction should berecorded at two places.

Assets = Liabilities + Capital



Significance

This concept helps accountant indetecting error.

It encourages the accountant to posteach entry in opposite sides of twoaffected accounts.



Realisation concept

This concept states that revenue fromany business transaction should beincluded in the accounting recordsonly when it is realised. The termrealisation means creation of legalright to receive money.

Selling goods is realisation, receivingorder is not.



Significance

It helps in making the accountinginformation more objective.

It provides that the transactionsshould be recorded only when goodsare delivered to the buyer.



Accrual concept

Accrual concept requires that revenueis recognised when realised andexpenses are recognised when theybecome due and payable withoutregard to the time of cash receipt orcash payment.



Significance

It helps in knowing actual expensesand actual income during a particulartime period.

It helps in calculating the net profit of the business.



Matching concept

The matching concept states that therevenue and the expenses incurred toearn the revenues must belong to thesame accounting period.



Significance

It guides how the expenses should bematched with revenue fordetermining exact profit or loss for aparticular period.

It is very helpful for theinvestors/shareholders to know the

exact amount of profit or loss of thebusiness.



Accounting Conventions

Consistency

Disclosure

Conservation Materiality



Consistency

The convention of consistency means thatsame accounting principles should be usedfor preparing financial statements yearafter year.

Significance It facilitates comparative analysis of the

financial statements.

It ensures uniformity in chargingdepreciation on fixed assets and valuationof closing stock.



Disclosure

All material and relevant facts concerning financialstatements should be fully disclosed.

Significance It helps in meaningful comparison of financial

statements of the different business units.

This convention is of great help to investor andshareholder for making investment decisions.

The convention of full disclosure presents reliableinformation.



Conservation

This convention is based on theprinciple that “Anticipate no profit,but provide for all possible

losses” Profit should not be recorded until it

is realised. But if the businessanticipates any loss in the near

future, provision should be made inthe books of accounts for the same.



Significance

It helps in ascertaining actual profit.

It is useful in the situation of uncertainties and doubts.

It helps in maintaining the capital of the enterprise



Materiality

Only material fact i.e. important andrelevant information should be supplied tothe users of accounting information.

Significance It helps in minimizing errors in calculation.

It helps in making financial statementsmore meaningful.

It saves time and resources.



Branches of Accounting

Financial Accounting

Cost Accounting

Management Accounting orManagerial Accounting



Financial Accounting

Mainly confined to the preparation of financial statements for the use of outsiders like creditors, banks and

financial institutions etc.

Purpose is to calculate profit or lossmade by the business during the year

and exhibit financial position of thebusiness as on a particular date.



Cost Accounting

Function of cost accounting is toascertain the cost of the product andto help the management in the

control of cost.



Management Accounting

It is accounting for management. i.e.,accounting which provides necessaryinformation to the management for

discharging its functions. It is the reproduction of financial

accounts in such a way as will enablethe management to take decisions

and to control various businessactivities.



Systems of Record Keeping

Double Entry

Cash System

Mercantile System( Accrual Concept)





Accounting Standard

Accounting standard provides uniformpractices and common techniques of accounting.

Accounting standards are applicableto all corporate enterprises.



Accounting Standard Board

The Institute of CharteredAccountants of India (ICAI)constituted the Accounting Standards

Board (ASB) on 21 st April, 1977.

Obj i



Objectivesand Functions of the Accounting StandardsBoard

To conceive of and suggest areas in which AccountingStandards need to be developed.

To formulate Accounting Standards with a view to assistingthe Council of the ICAI in evolving and establishingAccounting Standards in India.

To examine how far the relevant International AccountingStandard/International Financial Reporting Standard can beadapted while formulating the Accounting Standard and toadapt the same.

To review, at regular intervals, the Accounting Standardsfrom the point of view of acceptance or changed conditions,and, if necessary, revise the same.

To provide, from time to time, interpretations and guidanceon Accounting Standards.

To carry out such other functions relating to AccountingStandards.

Documents

Unit 1 Fin System