Financial Accounting

  • Accounting and Financial Statements – Introduction

    Brief Summary

    • Accounting requires the systematic record keeping of all that happens on a day to day basis and business and analyzing this information to aid business decision making. Accounting is broader in scope than book keeping. Book keeping is all about orderly record keeping whereas accounting involves analysis and judgement at different stages such as recording of transactions, classifications, summarization and interpretation.
    • Financial accounting consists of creation of financial information and the use of such information. Creation of information involves analysis and judgement at different stages such as recording of transactions, classification, summarizing transactions and past events and thus are historical in nature.
    • The primary intention of financial accounting is the preparation of statement revealing the income and the financial position of the business on the basis of the events. The major financial statements that result from the process of accounting are profit and loss account, Balance sheet, Cash flow Statement.
    • The Balance Sheet shows the financial status of a business ( of a company or an individual) at a point of time. The form and content of the balance sheet for a company have been laid out in the schedule III of the companies Act 2013.
    • The Income Statement reflects the performance of the entity over a period of time. A suggested format can be found in Schedule III for the income statement also called the Profit and Loss account.
    • In a company form of organization the managers are ultimately responsible for the financial performance; they are also responsible for the periodical compilation and interpretation of financial statements.
    • The major users of statements are the shareholders, security analyst, investors, lenders, suppliers/creditors, customers, government and regulatory agencies, etc. It is necessary for the management to ensure that the financial statements show a true and fair view of the affairs of business.
    • Accounts are invariably maintained in the double entry system which recognizes both cash and credit transactions.
    • The double entry system of accounting is based on a set of principles which are called generally accepted accounting principles. These principles enable, to a certain extent, standardization in recording and reporting of information so that the users, once they are aware of the principles, can read and understand financial statements prepared by diverse organizations.
    • The generally accepted accounting principles followed by many countries are:
    • Materiality Concept:  the concept of materiality by its very nature is relative. It requires the separate disclosure of , prior period items, the items which are considered necessary for the determination of net profit, gains and losses which are distinct from the ordinary activities of the business, significant and substantial changes occasioned by the changes effected in the accounting policies, etc.
    • Money Measurement concept: This concept requires the recording of information that can be expressed only in monetary terms.
    • Cost Concept: This concept implies that generally all transactions are recorded at cost and not market value.
    • Time period concept: Income or loss is measured for a specified interval of time, called the accounting period.
    • Business entity Concept: This concept requires the treating of business as a distinct accounting entity from its owners.
    • Owners equity + outside liability = Assets
    • Realization Concept: This concept deals with the point in time at which revenue may be deemed to be realized or when sale can be said to have taken place.
    • Matching Concept: This concept requires that in order to determine the profits or losses accrued in an accounting period, the expenses must relate to the goods or services sold during the period.
    • Going Concern concept: This concept assumes that the business entity is assumed to carryout its operations for ever.
    • Duality or Accounting Equivalence Concept: Implies liquidity or solvency and managements stewardship as well as management’s explanations and interpretations of information provided for users who need not necessarily have a finance background.