Financial Accounting BCOM SEM- I LUCKNOW UNIVERSITY

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                                                Financial Accounting

                            (Unit- I)

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

In Other Words:

Accounting is the quantitative procedure of any business which gives an accurate record of the financial statement of any type of trade field/business. In other words, we can say that accounting is a trade language. Where ACCOUNTANT/CA maintains a financial record of any Business/Company with accuracy.

NEED OF ACCOUNTING:

Accounting plays a vital role in running a business because it helps you track income and expenditure, ensure statutory compliance, and provide investors, management, and government with quantitative financial information which can be used in making business decisions.

 

Objectives of Accounting

ü To keep systematic record of business transactions

ü To calculate profit or loss

ü To know the exact reasons leading to net profit or net loss

ü To ascertain the financial positions of the business

ü To ascertain the progress of the business

ü from year to year

ü To prevent and detect errors and frauds

ü To provide information to various parties

 

 

 

 

 

Characteristics of Accounting

ü  Accounting is an Art as well as Science

ü  Recording of Financial Transactions only

ü  Recording in terms of money (Journal)

ü  Classifying (Posting in Ledger)

ü  Summarizing (Balancing of Ledger Accounts, Trail Balance, final Accounts)

ü  Interpretation of the results

ü  Communication

 

Advantages of Accounting

ü  Helpful in Management of Business (Planning, Decision Making and Controlling)

ü  Provide Complete and Systematic Records

ü  Information Regarding Profit or Loss

ü  Information Regarding Financial Position

ü  Enables Comparative Study

ü  Helpful Assessment of Tax Liability

ü  Evidence in Legal Matters

ü  Facilitates Sale of Business

ü  Helpful in Raising Loans

ü  Helpful in Prevention and Detection of Errors and Fraud

 

Limitations of Accounting

ü  Influenced by Personal Judgements

ü  Based on Accounting Concepts and Conventions

ü  Incomplete Information

ü  Omission of Qualitative Information

ü  Based on Historical Costs

ü  Affected by Window Dressing

ü  Unsuitable of Forecasting

 

ACCOUNTING PRINCIPLES

It is defined as those rules of action or conduct which are adopted by the accountants universally while recording accounting transaction.

These principles can be classified into two categories:

1) Accounting Concepts.

2) Accounting Conventions

 

The term ‘concepts’ includes those basic assumptions or

conditions upon which the science of accounting is based

.The following are the important accounting concepts:

1) SEPARATE ENTITY CONCEPT.

2) GOING CONCERN CONCEPT.

3) MONEY MEASUREMENT CONCEPT.

4) COST CONCEPT.

5) DUAL ASPECT CONCEPT.

6) ACCOUNTING PERIOD CONCEPT.

7) PERIODIC MATCHING OF COST AND REVENUE CONCEPT

8) REALISATION CONCEPT

 

Separate Entity Concept

In accounting business is considered to be a separate and distinct entity from its owners.

 

Going Concern Concept:-

The Concept Of Going Concern assumes that a business firm would continue to carry out its operations indefinitely . for a fairly long period of time and would not be liquidated in the foreseeable future

 

Money Measurement Concept:-

As per this concept accounting involves and records only monetary transactions. I . E transactions measurable in terms of money

 

Cost Concept

The cost concept requires that all assets are recorded in the book of accounts at their purchase price.

 

Dual Aspect Concept:-

Every business transaction has a dual effect. The duality concept is commonly expressed in terms of fundamental accounting equation, which is as follows:-

 Assets=Liabilities + Capital

 

Accounting Period Concept:-

According to this concept, the life of the business is divided into appropriate segments for studying the results shown by the business after each segment.

 

Periodic Matching Of Cost And Revenues Concept:-

It states that expenses incurred in an accounting period should be matched with revenues during that period.

 

 Revenue Recognition(realization) Concept:-

The concept of revenue recognition requires that the revenue for a business transaction should beincluded in the accounting records only when it is realized

 

Accounting Convention

 

The term ‘conventions’ includes those customs or traditions which guide the accountant while preparing the accounting statements.

 The following are the important accounting conventions:

1) Convention of Conservatism.

2) Convention of Full Disclosure.

3) Convention of Consistency.

4) Convention of Materiality.

 

 

1.Conservatism

According to this convention, the accountants follows the rule ‘anticipate no profit but provide for all possible losses' while recording business transactions.

2. Full Disclosure:-

According to this convention accounting reports should disclose fully and fairly the information they purport to represent.

 

3. Consistency:-

According to this convention accounting practices should remain unchanged from one period to another.

4. Materiality:-

According to this convention the accountant should attach importance to material details and ignore insignificant details

 

Financial statements are the statements that present an actual view of the financial performance of an organization at the end of a financial year.  It represents a formal record of financial transactions taking place in an organization. These statements  help the users of the information in determining the financial position, liquidity and performance of the organization.

 

Capital Expenditure

 

Capital expenditure are the expenditure which incurred for accruing a fixed assets which can be sold after some time for cash or acquiring a fixed assets to increase the efficiency and earning capacity of the business.

For example- expenditure related to increase the quantity of fixed assets , expenses related to increase the quality of fixed assets, expenditure related to the substitution of new assets for an old assets, expenditure related to the purchase, installation and erection of fixed assets and expenditure related to the accruing the right of caring on a business.

 

Revenue Expenditure

Expenditure related to the regular business transaction is called revenue expenditure.

For example- expenditure related to the normal course of business, expenditure related to the maintenance of regular business, cost of goods purchased for resale, interest on loan take by business, depreciation on fixed assets etc.

 

Difference between capital expenditure and revenue expenditure

 

Capital expenditure related to the accruing of fixed assets for the business while revenue expenditure is related to the expenditure for day to day operation of business.

 

Capital expenditure incurred for increasing the earning capacity of the business while revenue expenditure is incurred for maintaining the earning capacity of the business.

 

Capital expenditure is non- recurring in nature while revenue expenditure is recurring nature.

Advantages of capital expenditure are received over number of year while benefits of revenue expenditure expire in the year.

 

Accounting Standards: Accounting standards are the policy documents issued by the recognized expert accounting body relating to various aspects of measurements, treatment and disclosure of accounting transactions and events.

 

Indian Accounting Standards

Issued by Accounting Standards Board stabilized by Indian Chartered Accountants of India.

Old Accounting Standards are known in brief AS. Now new Accounting Standards has issued by ICAI are known as Ind AS in brief are based on IFRS. At Present both AS and Ind AS are apply in India.

Total 32 AS had been issued but AS-8 (Intangible Assets) had taken back. At present 31 AS are effectively apply.

International Financial Reporting Standards (IFRS)

 

 

International Financial Reporting Standards (IFRS)

 

IFRS stands for International Financial Reporting Standards. IFRS are set of accounting policies and rules developed by International Accounting Standard Board (IASB). In general, IFRS deals with the following: Recognition of items as assets, liabilities, income and expenses; How to measure items recognised and its presentation in financial statements; Disclosures related to such items.

 

❖IFRS was introduced with an object to bring consistency in the accounting practices and principles followed by companies of various nations while preparing financial statements. Another object was to provide framework for nations across the globe on how companies and entities should prepare and present their financial statements.

 

LIST OF IFRS STANDARDS

 

Conceptual Framework for Financial Reporting

IFRS 1 First-time Adoption of International Financial Reporting Standards

IFRS 2 Share-based Payment

IFRS 3 Business Combinations

IFRS 4 Insurance Contracts

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

IFRS 6 Exploration for and Evaluation of Mineral Resources

IFRS 7 Financial Instruments: Disclosures

IFRS 8 Operating Segments

IFRS 9 Financial Instruments

IFRS 10 Consolidated Financial Statements

IFRS 11 Joint Arrangements

IFRS 12 Disclosure of Interests in Other Entities

IFRS 13 Fair Value Measurement

IFRS 14 Regulatory Deferral Accounts

 

BENEFITS OF IFRS

 

IFRS is a unique, high quality, easily understandable global accounting standards. It is also known as “principle based” set of standards which are easy to understand and apply.

Reporting in IFRS could make it easier to raise capital in global market.

This would eliminate cost of restatement into local standards.

It would make the consolidation process easier.

IFRS are being used increasingly worldwide, so it will make the appraisal of potential acquisition targets straighter forward