FINANCIAL ACCOUNTING FOR BEGINNERS

FINANCIAL
ACCOUNTING FOR
BEGINNERS
© 2023 Dr. Meera Sharma

TABLEOF
CONTENTS
DEFINITIONOF
ACCOUNTING
THE BALANCE SHEET
STANDARD SETTING FORMAT OFTHE BALANCE
SHEET
ACCOUNTING
INFORMATION
THE INCOME STATEMENT
OPERATING INFORMATION COMPONENTSOFTHE
INCOME STATEMENT
FINANCIALACCOUNTING
INFORMATION
RETAINED EARNINGSAND
DIVIDENDS
MANAGEMENT
ACCOUNTING
INFORMATION
FORMAT OFTHE INCOME
STATEMENT
FINANCIAL STATEMENTS THE CASH FLOW STATEMENT

DEFINITION
OF
ACCOUNTING
 PROCESS OF IDENTIFYING,
MEASURING AND
COMMUNICATING ECONOMIC
INFORMATIONTO PERMIT
INFORMED JUDGMENTS AND
DECISIONS BY USERS OFTHE
INFORMATION
 SOURCE : AMERICAN
ACCOUNTING ASSOCIATION

DEFINITION
OF
ACCOUNTING
 Accounting is a process of:
 Identifying
 Measuring
 Communicating
 Economic information
 To enable informed decision making
by users.

STANDARD
SETTING
 Accounting involves the
measurement and valuation of
economic events
 The process of accounting is
GOVERNED BY STANDARD
SETTING ORGANIZATIONS

STANDARD
SETTING
 IN INDIA THE ACCOUNTING
STANDARDS BOARD OF THE
INSTITUTE OF CHARTERED
ACCOUNTANTS OF INDIA (ICAI) IS
THE STANDARD SETTING
ORGANIZATION
 http://www.icai.org

ACCOUNTING
INFORMATION
 THE ACCOUNTING PROCESS
 RECORDS INFORMATION ABOUT
BUSINESS ACTIVITIES AND
EVENTS
 GENERATES REPORTS DESIGNED
TO MEETTHE NEEDS OF
STAKEHOLDERS

ACCOUNTING
INFORMATION
 STAKEHOLDERS INCLUDE
 OWNERS, INVESTORS
 MANAGERS, EMPLOYEES
 CUSTOMERS
 SUPPLIERS
 GOVERNMENT, REGULATORS

ACCOUNTING
INFORMATION
OPERATING INFORMATION
relates to day to day activities
of the organization and is used
by the accounting process to
generate
FINANCIALACCOUNTING
INFORMATION
and
MANAGEMENT ACCOUNTING
INFORMATION

ACCOUNTING
INFORMATION
FINANCIAL
ACCOUNTING
INFORMATION is used
by INVESTORS
MANAGEMENT
ACCOUNTING
INFORMATION is
used by MANAGERS

OPERATING
INFORMATION
 Operating Information captures
the day-to-day activities of the
organization
 Examples:
 Hours worked by employees for
payroll purposes
 Finished goods available for sale
 Amounts owed by customers
 Parts and accessories on hand

FINANCIAL
ACCOUNTING
INFORMATION
 Financial accounting information is
generated by the accounting
process and used by investors to
make buy, sell or hold decisions
 For example FINANCIAL
STATEMENTS:
 Income statement
 Balance sheet
 Statement of cash flows

MANAGEMENT
ACCOUNTING
INFORMATION
 Management accounting
information is meant for internal
users, i.e. managers for
 Planning
 Implementation
 Control
 For example BUDGETS

FINANCIAL
STATEMENTS
 Income statement—A summary of the
revenue and expenses for a specific
period of time.
 Balance sheet—A list of the assets,
liabilities, and owners’ equity as of a
specific date.
 Statement of cash flows—A summary
of the cash receipts and disbursements
for a specific period of time.

FINANCIAL
STATEMENTS
 PREPARATION OF FINANCIAL
STATEMENTS IS AN IMPORTANT
ACCOUNTING ACTIVITY
 PREPARATION OF FINANCIAL
STATEMENTS IS REQUIRED BY
LAW

FINANCIAL
STATEMENTS
 PERIODIC REPORTS OF THE
FINANCIAL CONDITION OF A
COMPANY
 NORMALLY PACKAGED AS AN
ANNUAL REPORT

FINANCIAL
STATEMENTS
 QUALITATIVE CHARACTERISTICS
OF FINANCIAL STATEMENTS –
GOVERNED BY ACCOUNTING
PRINCIPLES
 UNDERSTANDABILITY
 RELEVANCE
 MATERIALITY
 RELIABILITY

FINANCIAL
STATEMENTS
OF FINANCIAL STATEMENTS
 UNDERSTANDABILITY
 INFORMATION PROVIDED SHOULD
BE READILY UNDERSTANDABLE

FINANCIAL
STATEMENTS
 RELEVANCE
 EVALUATE PAST AND PRESENT
 CONFIRM OR CORRECT PAST
EVALUATIONS
 PREDICT FUTURE OUTCOMES

FINANCI
AL
STATEM
ENTS
 MATERIALITY
 INFORMATION IS MATERIAL IF
MISSTATEMENT CAN INFLUENCE THE
DECISIONOF USERS

FINANCIAL
STATEMENTS
 RELIABILITY
 FAITHFUL REPRESENTATION
 SUBSTANCEOVER FORM
 NEUTRALITY/OBJECTIVITY
 PRUDENCE (OF ESTIMATES)
 COMPLETENESS
 COMPARABILITY

FINANCIAL
STATEMENTS
 CONSTRAINTS ON QUALITATIVE CHARACTERISTICS
 BALANCE BETWEENTIMELINESSAND RELIABILITY
 BALANCE BETWEEN COSTAND BENEFIT
 BALANCEAMONGTHE QUALITATIVE CHARACTERISTICS

FINANCIAL
STATEMENTS
 BALANCE SHEET
 INCOME STATEMENT
 CASH FLOW STATEMENT
 NOTES TO ACCOUNTS AND
ACCOUNTING POLICIES

FINANCIAL
STATEMENTS
 BALANCE SHEET
 STATEMENT OF FINANCIAL
POSITION OF ORGANIZATION
 DETAILSTHE RESOURCES OWED
AND RESOURCES OWNED

FINANCIAL
STATEMENTS
 INCOME STATEMENT
 ANNUAL PERFORMANCE
SUMMARY
 DETAILS THE REVENUES,
EXPENSES AND NET INCOME

FINANCIAL
STATEMENTS
 CASH FLOW STATEMENT
 DETAILS THE CASH GENERATED
AND CASH CONSUMED

THE
BALANCE
SHEET
 ASSETS
 RESOURCES FROM WHICH FUTURE ECONOMIC
BENEFITSARE LIKELYTO FLOW IN
 Eg.Cash, machinery, investments, inventory
 LIABILITIES
 OBLIGATIONS WHOSE SETTLEMENT IS LIKELY TO
RESULT INAN OUTFLOWOF RESOURCES
 Eg. Long term and short term loans
 EQUITY
 RESIDUAL INTEREST OF OWNERS IN ASSETS AFTER
DEDUCTINGALL LIABILITIES
 Includes paid in capital and retained earnings

THE
BALANCE
SHEET
 EQUITY
 CONSISTS OF PAID IN CAPITAL
AND RETAINED EARNINGS
 VALUE OF EQUITY IS
DEPENDANT ON THE
MEASUREMENT OF ASSETS
AND LIABILITIES
 ASSETS - LIABILITIES = OWNERS’
EQUITY

FORMAT
OFTHE
BALANCE
SHEET
VERTICAL FORMAT
SOURCES OF
FUNDS
APPLICATION OF
FUNDS
USED MORE
OFTEN IN
INDIA
EXCEPT
SPECIFIC
INDUSTRIES
LIKE
BANKING

FORMAT
OFTHE
BALANCE
SHEET
 HORIZONTAL FORMAT
SHARE CAPITAL
AND
LIABILITIES
ASSETS
USED IN
INDIAN
BANKING

THE INCOME
STATEMENT
REVENUE
EXPENSES
REVENUE

THE INCOME
STATEMENT
 REVENUES are increases in
owner’s equity as a result of selling
services or products
 For eg. Value of goods or
services sold, fees, commission
 EXPENSES are the resources
consumed to generate revenue
 For eg. Cost of goods or services
sold, rent expense, interest on
debt

COMPONENTS
OFTHE
INCOME
STATEMENT
 STATEMENT OF NET INCOME
(REVENUE LESS EXPENSES)
 STATEMENT OF CHANGES IN
RETAINED EARNINGS

RETAINED
EARNINGS
AND
DIVIDENDS
 NET INCOME CAN BE
DISTRIBUTED TO OWNERS AS
DIVIDENDS
 OR IT CAN BE RETAINED AND
REINVESTED INTHE BUSINESS
 OFTEN COMPANIES DO BOTH,
SPLITTING NET INCOME INTO
DIVIDENDS AND RETAINED
EARNINGS

RETAINED
EARNINGS
AND
DIVIDENDS
PROFIT AFTER TAX
OR NET INCOME
RETAINED
EARNINGS
DIVIDEND
REINVESTED IN THE
COMPANY, ADDS TO THE
OWNERS’ EQUITY IN
COMPANY
PAID TO
OWNERS
SPLITS INTO

FORMATOF
THE INCOME
STATEMENT
Sales Revenue
Less Cost of Sales
Gross Margin
Less Operating Expenses
Income before taxes
Provision for income taxes
Net Income
 VERTICAL FORMAT

FORMATOF
THE INCOME
STATEMENT
Income
Sales
Other Income
Expenditure
Raw Materials
Selling Expenses
Interest Charges
Profit for the Year
Provision for Tax
Profit After tax
 ALTERNATIVEVERTICAL FORMAT

THECASH
FLOW
STATEMENT
THE CASH FLOW STATEMENT
REPORTS CASH FLOWS FROM
THREE TYPES OF ACTIVITIES
 Cash flows from operating activities
 Cash flows from investing activities
 Cash flows from financing activities

THECASH
FLOW
statement
 Cash flows from operating
activities – cash transactions that
affect the income statement
 Examples of INFLOWS are sale
of goods, fees or commission
earned
 Examples of OUTFLOWS are
purchases of goods, payments of
rent, utilities, and wages

THECASH
FLOW
STATEMENT
 Cash flows from investing activities –
cash transactions that affect long term
assets
 Examples of INFLOWS are sale of
plant, machinery, sale of investments
purchases of plant, machinery, fixed
assets, long term investments

THECASH
FLOW
STATEMENT
 Cash flows from financing
activities – cash transactions that
affect debt and equity
 Examples of INFLOWS are
availing loans and issuing equity
repayments of loans, dividend
payments

SUMMARY
 The process of accounting uses principles laid
down by standard setting organizations to convert
operating information to financial accounting
information and management accounting
information
 Financial accounting information is disseminated
in the form of reports like the Balance Sheet, the
Income Statement and the Cash Flow Statement
 The Balance Sheet is a summary of assets,
liabilities and equity while the Income Statement
is an annual summary of earning performance.
The Cash Flow Statement is a summary of annual
cash inflows and outflows.

FINANCIAL ACCOUNTING FOR BEGINNERS

Empfohlen

Empfohlen

Weitere ähnliche Inhalte

Was ist angesagt?

Was ist angesagt? (20)

Ähnlich wie FINANCIAL ACCOUNTING FOR BEGINNERS

Ähnlich wie FINANCIAL ACCOUNTING FOR BEGINNERS (20)

Kürzlich hochgeladen

Kürzlich hochgeladen (20)

FINANCIAL ACCOUNTING FOR BEGINNERS