Financial Accounting &

Analysis
Before we begin !
Syllabus
• Unit I : Introduction to
Accounting, Journal, Ledger, Trial
Balance
• Unit II : Financial Statements of
Sole Proprietor & Joint Stock
Company
• Unit III : IFRS/IND-AS
• Unit IV : Financial Statement
Analysis
References
• Maheshwari : Introduction to
Accountancy
• B.K GOYAL : Financial Accounting
• J.R MONGA
• R. Narayanaswamy, Financial
Accounting: A Managerial
Perspective
 Before we begin….
• Our focus will be on
understanding the new
accounting standards i.e IND-AS
applicable w.e.f. from FY 2016-17
not just theoretically but
practically…
What is Accounting?
• Accounting is the language by
which economic activities are
translated and communicated to
those who have interest about
such activities and results
thereof..
 Definition of Accounting
• Accounting is the systematic and comprehensive
recording of financial transactions pertaining to a
business, and it also refers to the process of
summarizing, analyzing and reporting these
transactions.
• The art of recording, classifying, and summarizing in 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 process of identifying, measuring and
communicating economic information to
permit informed judgements and decisions
by users of the information.”
What it means ….
• Professors of Accounting may call it “The language of business.”
• Corporate managers may define it as a set of timely gauges that
helps them actually manage the organization.
• Labor unions may see it as a monitor of an organisation activities
and performance, particularly in relation to the benefits secured by
employees Vs owners.
• A Board of Directors or a Chief Executive Officer (CEO) may
see accounting as a data process and reporting system that provide
the information needed for sound financial or economic decision
making for their organisation.
• Banks and other providers of loan funds may see it as a process of
providing reports showing the financial position of an organisation in
relation to the assets owned, amounts owed to others and monies
invested as well as the profitability of the organisation’s operations
in relation to repaying the loan with interest.
• Governments may see it as a way of making organisations
accountable to the general community by way of taxation
contributions and transparency in the outcomes from their decision
making.
• Investors may see it as a method of evaluating an organisation’s
effectiveness in relation to industry benchmarks and the investor’s
required returns.
 Summary
• An information system that identifies,
classifies and summarises the financial
events that take place within an organisation
and
• a reporting system that communicates
relevant financial information to interested
persons which allows them to assess
performance, make decisions and/or control
the economic resources in the organisation
 Book-Keeping
• Bookkeeping is all about the routine
and systematic recording of the
organization's financial transactions,
both incoming and outgoing, on a day-
to-day basis.
• Mechanical and repetitive
 Summary
• The bookkeeper function generally performs the first
element of the accounting process being the
identification, classifying and recording of the financial
transactions for an organization. It is a daily task
orientated role that generally ends at the point of the
‘trial balance’.
• The accountant function on the other hand is result
oriented, in that it is more focused on the
interpretation of the financial information which
results in reports to governments and government
agencies as well as to the organisation’s
management.
Accounting – Information System

• The system of collecting and

processing transaction data and
disseminating information to
interested parties is known as
Accounting Information System.
 Accounting Information
System

INPUT PROCESSING OUTPUT USERS

• Business • Recording, • Financial • Internal

Transaction Classifying, Statements, • External
s of Summarizin tax Returns,
financial g Internal
character transaction reports
s based on
AS,
Companies
Act,
Income tax
Act
Users of Accounting Information
• Investors
• Lenders
• Suppliers
• Managers
• Employees & Trade Unions
• Customers
• Government & Regulatory
authorities
• Public
• Analysts, Credit Rating Agencies
Activity
• Matching users with their need fo
r Accounting numbers
 Functions of Accounting
• Maintaining systematic records
• Financial Performance & Position
• Communicating accounting
information to users
• Meeting Legal requirements
• Cash flows
• Preparation of Internal reports for
decision making
• Forecasting
• Tax Assessment
• Comparision
Advantages of Accounting
• Assistance to management
• Systematic record
• Facilitates Comparision
• Assistance in Legal and taxation
matters
• Ascertainment of value of
business
 Limitations of Accounting
• Historical
• Based on estimates and
assumptions
• Prone to manipulation
• Qualitative aspect ignored
Branches of Accounting
• Financial Accounting
• Cost Accounting
• Management Accounting
 Financial Accounting Principles
• Generally accepted accounting
principles (GAAP) are the standard
framework of guidelines for financial
accounting used in any given jurisdiction at a
particular point in time.
• These include the standards, conventions,
and rules that accountants follow in
preparation and presentation of financial
statements.
• GAAP is a combination of authoritative
standards set by policy boards and the
accepted ways of doing accounting that
differ from country to country.
• Aim to bring about uniformity and
transparency in financial reporting
Key Accounting Terms
Assets
An asset is a present economic resource
controlled by the entity as a result of
past events.
An economic resource is a right that has
the potential to produce economic
benefits.
Eg : Buildings, Cash, Inventories
Types of Assets
• Current Asset : An entity shall classify an
asset as current when: (a) it expects to
realise the asset, or intends to sell or
consume it, in its normal operating cycle; (b)
it holds the asset primarily for the purpose of
trading; (c) it expects to realise the asset
within twelve months after the reporting
period; or (d) the asset is cash or a cash
equivalent (as defined in Ind AS 7)
• Eg : Cash & Cash equivalents, Trade
Receivables , Short term investments,
Inventory, Prepaid expenses
• All other assets are classified as Non-current
 Types of Assets
• Tangible Assets
• A tangible asset is an asset that has a
physical form.
• Tangible assets are machinery, buildings and
land, and current assets, such as inventory.
• An intangible asset is an identifiable asset
without physical substance
• Nonphysical assets, such as patents,
trademarks, Softwares, copyrights, goodwill
are all examples of intangible assets
Types of Assets
Investments

• Can be Current & Non current

• Current Investments are readily realizable
and the intention is not to hold them for a
period exceeding one year from the date of
making investment.
• Held with the anticipation of generating
income and/or appreciation in the future.
• Eg : Investments in securities such as shares &
bonds , Fixed deposits.
Investments in assets not used in operations (e.g.,
land held for sale)
Types of Assets
Financial Assets : A financial asset is any
asset that is:
(a) cash;
(b) an equity instrument of another entity;
(c) a contractual right: to receive cash or
another financial asset from another entity;

Financial Assets may be current or non-

current
Extract of Balance Sheet of
TATA Steel for 2021-22
Liabilities
• A liability is a present obligation of
the entity to transfer an economic
resource as a result of past events.
• Liabilities are claims against the
entity’s assets.
• Amount owed by business to people
who have lent money or provided
goods and services on credit
• Eg: Loan from Banks, Creditors, Short
term Borrowings, Outstanding
expenses
Current Liability
• An entity shall classify a liability as current
when: (a) it expects to settle the liability in
its normal operating cycle;
• (b) the liability is due to be settled within
twelve months after the reporting period; or
• Eg: Accounts payable, Outstanding
expenses, Short term borrowing, ( Bank
Overdraft)
All other liabilities are classified as non
current
 Non Current Liability
• Noncurrent liabilities are long-
term financial obligations that are
not due within twelve months
from the balance sheet date, such
as long-term borrowing,
debentures etc.
Financial Liability
• A financial liability is any liability that
is:
(a) a contractual obligation to deliver
cash or another financial asset to
another entity; or
(b) a contract that will or may be settled
in the entity’s own equity instruments
 Equity Instrument
• An equity instrument is any
contract that evidences a residual
interest in the assets of an entity
after deducting all of its liabilities.
Extract of Balance Sheet of
TATA Steel for 2021-22
Capital/ Owner’s Equity
• Refers to the amount invested in
an enterprise by its owners e.g.
paid-up share capital in a
corporate enterprise. It is also
used to refer to the interest of
owners in the assets of an
enterprise.
• Owners' equity represents the
owners' residual interest in the
assets of the business
•
 Income and expenses
• Income is increases in assets, or
decreases in liabilities, that result in
increases in equity, other than those
relating to contributions from holders
of equity claims.
• Expenses are decreases in assets, or
increases in liabilities, that result in
decreases in equity, other than those
relating to distributions to holders of
equity claims.
Capital Expenditure(Capex)
• Money spent by an entity to buy
or upgrade long term assets such
as land, machinery
• Have useful life of more than a
year
• Recognised on the balance sheet
as assets
 Revenue Expenditure
• Revenue expenditure is referred
to as the expenditure incurred by
an organisation to manage the
day-to-day functions of a
business such as wages,
electricity, insurance
• Recurring in nature and
recognized in Income Statement
 Accounting Concepts
• The Entity Concept
• Money Measurement Concept
• Going Concern Concept
• Dual Aspect Concept
• Cost Concept
• Accounting Period Concept
• Realization
• Matching
• Accrual
 The Entity Concept
• Accounts are kept for entities as
distinguished from the persons who
are associated with the entities.
• Entities include corporates,
partnerships, governments,
Universities
• Entity is separate and distinct from the
owners and entity is liable to the
owner.
Money Measurement
Concept
• In financial accounting, a record
is made only of information that
can be expressed in monetary
terms.
• The advantage is that money
provides a common denominator
by means of which
heterogeneous facts about an
entity can be expressed as
Going Concern
• Accounting assumes that an
entity is a going concern- that it
will continue to operate in the
foreseeable future
• An entity shall prepare financial
statements on a going concern
basis unless management either
intends to liquidate the entity or
to cease trading, or has no
realistic alternative but to do so.
 Dual Aspect
• There are two types of claims against
the assets of the business. Liabilities
are claims of the creditors or outsiders
against the assets and capital is the
claim of the owners.
• Assets= Liabilities + Capital
• Every transaction has a two fold
impact. Accounting system is designed
in such a way that both aspects of a
transaction are recorded.
• This is known as double entry system
of Accounting.
Example
• X sold goods for cash to Y. The
dual aspects of this transaction
for is :
• X : Receipt of cash / Foregoing of
goods
 Cost Concept
• According to this principle, an asset is
normally recorded at the price paid for
it i.e at historical cost and all
subsequent accounting for the asset is
also based upon this cost.
• Cost of the asset is systematically
reduced over its useful life by charging
depreciation.
Accounting Period Concept
• Accounting measures activities
for a specified interval of time,
called the accounting period,
which is usually a year.
• This principle postulates that
financial statements be prepared
at regular intervals to provide
information about financial
position and performance of of an
organization.
 Revenue Realisation
• Revenue is the gross inflow of cash,
receivables or other consideration arising in
the course of the ordinary activities of an
enterprise from the sale of goods and from
the rendering of services
• Realisation deals with the timing of
realisation of revenue.
• An entity shall recognise revenue when (or
as) the entity satisfies a performance
obligation by transferring a promised good or
service (ie an asset) to a customer. An asset
is transferred when (or as) the customer
obtains control of that asset.
•
 Matching Concept
• An expense is incurred when
goods and services are consumed
in the process of generating
revenue.
• E.g : Wages & salaries paid to the
employees, rent of the premises
etc.
• Expenses should be recognized in
the period in which associated
revenue is recognized.
•
 Matching Concept
• Costs which can be directly associated
with the revenues earned.
• Costs which cannot be directly
associated with the revenues, but can
be associated with the accounting
period.
• Costs which are neither directly
associated with revenue nor with
operations of a period and cannot be
associated with the revenue of some
future period.
 Accrual Concept
• Fundamental assumption as per IND-AS
• Revenues are recorded in `the period in
which they are earned and expenses are
charged to the period which they relate to
irrespective of whether cash has been
received/paid
• Difference between total revenue earned and
total expenses incurred is the profit/loss for
the period.
• Outstanding & prepaid expenses, accrued
income & income received in advance are
adjusted.
Accounting Conventions
• Full Disclosure
• Materiality
• Consistency
• Conservatism
 Full Disclosure
• Full, fair and adequate disclosure
• Financial Statements should give a
true and fair view of operations of the
business and financial position.
• Should contain sufficient information
to facilitate informed decision making
• Significant in case of Companies.
• Companies Act provides the format of
Balance sheet and Income Statement
to facilitate full disclosure.
 Materiality
• Those events are not reported if they
are so insignificant that the work of
reporting them does not justify their
usefulness.
• According to AICPA,” a statement or
fact is material, if it is of such nature
that its disclosure or the method of
treating it, would make a difference in
the conduct and judgement of a
reasonable person “
 Consistency
• Once an entity has decided on
one accounting method, it should
use the same method for all
subsequent events of the same
character, unless it has a sound
reason to do otherwise.
• Facilitates comparison over time.
 Conservatism/Prudence

• Preference for understatement rather than

overstatement of net income and net assets
when dealing with measurement
uncertainties.
• Anticipate no profits but provide for all
possible losses.
• Inventory is recorded at lower of cost or Net
Realisable Value, provision is made for
doubtful debts
Fundamental Accounting
Assumptions
• As per IND-AS 1, following are the
fundamental accounting
assumptions :
• Going Concern
• Consistency
• Accrual