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Learning Objectives
Meaning of accounting
Evolution of accounting
Difference between accounting & book-keeping
Accounting as an information system Identifying the different users of accounting
information
Process of Accounting
Limitations of financial accounting
Elaboration of the three principal financialstatements
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Evolution of Accounting
Originated in the fourteenth century by aFranciscan Luca Pacioli.
Accounting earlier used in trade and
commerce faced its first challenge in the eraof industrial revolution.
Accounting easily adapted andaccommodated the demands of modern
manufacturing industry.
The adaptability and versatility of theaccounting methodology has been itsinherent strength.
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Difference Between
Accounting & Book-Keeping
Book-keeping is a small part of accounting process
Book-keeping is onlyconcerned with recording
transactions and keeping records
Accounting aims at designing an informationsystem
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Accounting as an information
System
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Accounting
Recording ofData
Processing ofData
Communicationof Data
InformationNeeds
InformationDecision
Makers
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Users of Accounting
Information
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Management
UsersWith
IndirectFinancialInterest
Users WithDirect
FinancialInterest
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Users of Accounting
Information (Elaborated)
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Management
Directors, Managers, Officers, Dept. Heads,
To Assess Profitability, Liquidity & Solvency, Controlling Function
Users WithDirect Fin.Interest
Shareholders, Creditors, Employees, Suppliers
For Investment & Credit Decisions, Pay-Off and Supply ContinuityDecisions
Users WithIndirect Fin.
Interest
Customers, Taxation Authorities, Financial Analysts, Brokers,Underwriters, Labour Unions, General Public, Press, NGOs
Assessing Taxes, Protecting Investors & Public, Measuring Socialand Environmental Responsibility, Negotiating Labor Agreements
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Process of Accounting
Interpreting
Evaluating
Reporting & Securing(P/L Account,
Balance Sheet,
Cash Flow Statement)
Processing & Classifying (Ledger)
Recording/Book-Keeping (Journalizing)
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Limitations of Financial
Accounting
Financial accounting does not provide detailed cost information
Financial accounting does not set up a proper system of
controlling materials and supplies
Recording & accounting for wages & labour is not carried out for
different jobs, processes, products & departments
In financial accounting it is difficult to analyze costs according to
controllability
Financial accounting does not possess an adequate system of
standards to evaluate the performance ofdepartments & theiremployees
Financial accounting contains historical cost whereas for bettermanagement current cost accounting is also needed
Financial accounting does not provide information to analyze the
losses due to various vital factors like idle plant capacity
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The Three Principal Financial
Statements
The EndProducts Of Finl. Accounting
Profit & Loss Account
Balance Sheet
Cash Flow Statement
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Profit & Loss Account
Also known as Income Statement
P/Lpresents results ofoperationsof a business
enterprise over a period of time
It presents the sources and amounts of revenues
earned & streams & amounts ofdifferent
expenses
If the revenues are more and expenses are less
there is a net income or net profit If the revenues are less and the expenses are
more the enterprise has incurred net loss
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Balance Sheet
Also known as Statement of Financial Position
It shows the financial position of a business
enterprise on a certain date
B/S indicates the investing & financing activities
of a business enterprise at a point of time &
shows a firms assets, liabilities andshareholders equity usually at the last day of
the year
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Cash Flow Statement
It summarizes the flow of cash inflows and
outflows of the firm over a period of time
It focuses on the items which bring about
change in the cash balance of a business
enterprise between two balance sheet dates
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