ASSIGNMENT

Financial and Cost Accounting

Assignment No. 1.

Introduction to Financial

Accounting:
All business organisations have a large number of transactions on a daily basis
which needs to be recorded and kept safely and they should be handled
effectively and safely. We should have a clear understanding of the finances and
we should be quick in our calculations, if we want to excel in our business. As a
manager, if we are allotted the task of managing the daily activities in an
organisation, then we will have to deal with the accounting staff, bookkeepers,
owners and subordinates on a daily basis. Accounting helps us to understand the
day to day financial activities. It also helps us to analyse and take appropriate or
right decisions.
Financial accounting is a very important branch or part of accounting that deals
with recording, classifying and summarizing of financial transactions.

The meaning and definition of Accounting:

Accounting is an efficient system that expresses the various monetary
transactions of a business organisation in a clear and crisp manner. It is generally
referred to as the language of business.

The Definition of accounting:

According to the American Institute of Certified Public Accountants (AICPA),
Accounting is the art of recording, classifying and summarizing is a significant
manner and in terms of money, transactions, and events which are, in part at
least, of financial character, and interpreting the results thereof.

The functions of Accounting:

Recording and Classifying Data:

Recording and maintenance of proper accounts is the fundamental function of

any accounting system. Business transactions that are maintained properly and
correctly can be used any time by the desired parties taking business related
decisions.
Classifying data in accounts refers to systematic arrangement of recorded
transactions under various categories. For example, all cash transactions are
posted in the cash account. Similarly, all the sales transactions are classified and
posted in the sales account. The work of classification is done in the books
known as ledger. This makes the further tasks of summarizing and
interpretation of data easy and quick.

Summarizing

This function is concerned with making a summary of the classified data in such
a way that it is understandable and useful to the users. It is performed by

preparing the trial balance, income statement, and balance sheet. The data is
segregated properly and can be explained very easily. Elements of similar nature
are arranged in a proper format and can be traced easily.

Analysing and Interpreting:

The financial statements data is presented in such a way, that it is suitable for
analysing and drawing inferences. This function helps the users in making
decisions. Different types of financial ratios are calculated to explain the financial
statements.

Communicating:

It is a way of conveying relevant data from a companys financial statement to

various stakeholders for making decisions. This data can be in the form of a
balance sheet, profit and loss account, cash flow statement, fund flow statement,
trial balance, etc. This data is then shared externally with the stakeholders with
the help of annual reports. This data is also shared internally to the managers to
make decisions.

Controlling:

Accounting helps in finding or spotting the weak areas of an enterprise and it

suggests the remedial actions to be taken. It helps in controlling the functional
areas of an enterprise. It also helps in creating different budgets every year for
different departments. These budgets are compared with the actual accounting
data of the previous year or years to find out the difference. These differences
are analysed in detail to overcome them. Similarly, historical accounting data
can be compared with the current data to analyse the performance. Therefore,
the managers can take proper decisions and control the expenses.

Evaluating:

Accounting helps in evaluating the profit and loss of every department and the
business organisation. This evaluation is done on a regular basis. Because of the
evaluation, the organisation gets a continuous feedback on the improvement
process. These evaluations in turn help in assigning the responsibilities of each
department.

Decision-Making:

Accounting helps the people internally and externally to make certain important
decisions. For example, it helps the banks to decide the liquidity position and the
profitability position, which can be used to decide whether to give the loan to the
company or not. Another example is of the stakeholders. It helps them to decide
whether to continue investing, or to get back the funds and invest in any other
company that will give them higher returns.

Forecasting:

Accounting data helps in proper forecasting, which enables the organization to

take effective future decisions.

Three Main Branches of Accounting:

1. Financial Accounting
2. Cost Accounting
3. Management Accounting
Financial Accounting: It is a process of identifying, measuring,
recording, classifying, summarizing, analysing, interpreting, and
communicating the financial transactions and events to an entity or the
outsider. The prime objective of financial accounting is to communicate
the results of business operations for a given period.
Cost accounting: It records the cost elements in details and prepares
statements and reports for ascertaining and controlling costs. The main
objectives of cost accounting are as follows:

To
To
To
To
To
To

ascertain the cost of each activity, product or process.

control and reduce costs.
fix appropriate selling price for products.
ascertain profit from each product, unit, activity or process.
measure the efficiency of each department or profit center.
assist in various decision-making needs of managers.

Management Accounting:
Chartered Institute of Management
Accountants (CIMA), ``Management accounting is the application
of appropriate techniques and concepts in processing historical
and projected economic data of an entity to assist management in
establishing plans for reasonable economic objectives in the
making of rational decision with a view towards achieving these
objectives. ``
Management Accounting helps in preparing the reports on a regular basis
to help the department managers and the top management in decisionmaking. These reports usually determine the level of sales generated,
accounts payable, accounts receivables, raw materials, etc.
Two more branches of Accounting have emerged i.e. Social
Responsibility Accounting and Human Resource Accounting.
OBJECTIVES OF FINANCIAL ACCOUNTING
To have systematic record of financial transactions, To ascertain
the results of economic activities, To aid in rational decisionmaking
BOOKKEEPING VS. ACCOUNTING

Bookkeeping is the art of recording business transaction in a systematic

manner. Bookkeeping is the primary stage, which involves the recording
of business transactions and its objective is to record monetary
transactions. Task of BOOKKEEPING is performed by lower-level
employees and RULES of Accountancy are followed while recording the
transactions.
Accounting is the art of recording as well as classifying and analysing of
financial transactions. Accounting starts when bookkeeping ends and its
basic objective of accountancy is to calculate net results of the financial
statement and communicate it to the decision makers. Middle-level
employees perform the task of accountancy and along with the
accountancy rules, concepts and conventions are also followed.
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION

Understandability
Relevance
Reliability
Comparability
Consistency

Question 02: Accounting information is very useful to

different people. Comment on this statement and also
provide examples.
BOARD OF DIRECTORS, MANAGERS AND SUPERVISORS
The board of directors, managers, and supervisors study the financial
statements of the organisation to identify its strengths, weakness,
opportunities and threats. The financial statements and other accounting
information help these users in analysing and evaluating the performance
of the organisation. This in turn, helps them make appropriate decisions.
These people are within the organisation and are involved in various
management functions like planning, co-ordinating, supervising and
controlling. Users require information to perform the management
functions effectively, to lead the organisation towards growth, to achieve
higher profitability, and to create goodwill and brand name for the
organisation.
EMPLOYEES
Employees work hard in an organisation and believe that their hard work
will be rewarded in the form of incentives and promotions. This will
happen only when the organisation grows and earns higher profits. The
employees growth directly related to the growth of the organisation.
Thus, employees look at the financial statements to see how they will
benefit from the organisations performance. Moreover, the bonus paid to
employees is related to the profitability of the organisation. Employees are
one of the stakeholders of the firm.
PRESENT AND POTENTIAL INVESTORS
The present investors or shareholders are the individuals or institutions
who invest in the organization in the form of shares, debentures, etc. and
have a stake in the profits of the organization. Potential investors are
those who are planning to invest in the organization, and both these
groups study the financial statements to measure the profitability and
these present investors are entitled to dividends from profits of the
organization.
LENDERS & FINANCIAL INSTITUTIONS
Lenders and financial institutions like banks and others lend short-term
and long-term loans to organization or individuals and they study the
financial statements to know the liquidity and solvency positon of the
organization.
SUPPLIERS & CREDITORS

Accounting information enables them to know the liquidity and

profitability position of the organization and to decide the credit limit and
credit policy for each organization.
GOVERNMENT & REGULATORY AUTHORITIES
There are various regulatory authorities in India like the Securities
Exchange Board of India(SEBI), tax departments, etc. that are interested
in financial statements. The Securities Exchange Board of India
(SEBI), tax departments, etc have made it mandatory for all listed
companies to submit their financial statements and annual reports at
regular intervals. Various tax departments of the government levy
different types of taxes like sales tax, import duty, export duty, excise
duty, octroi, income tax, etc.
CUSTOMERS & GENERAL PUBLIC
Customer are end user or intermediate users who purchase for further
processing or resale. They are concerned with the regular supply of
products, which is dependent on the survival & performance of the
organization. Many small organizations are directly or indirectly connected
on large organizations. Growth of large organizations will bring prosperity
& development to smaller organizations working as ancillary units. Thus,
the small organizations and the public take the help of accounting
information to take major decisions regarding their purchases.
***********