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    Understanding Financial Accounting

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    Sparsh Shrivastava
    This document provides an introduction to basic financial accounting concepts. It discusses the types of business structures, the accounting equation, accounting conventions, trial balances, and general accepted accounting principles. It also uses several hypothetical situations about a company called Infotech to illustrate accounting concepts like determining net worth, profitability, sustainable growth, and recording asset purchases. The key topics covered are the basics of financial accounting, the accounting equation, types of businesses, and analyzing financial statements.

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    Understanding Financial Accounting

    Uploaded by

    Sparsh Shrivastava
    47 views25 pages
    This document provides an introduction to basic financial accounting concepts. It discusses the types of business structures, the accounting equation, accounting conventions, trial balances, and general accepted accounting principles. It also uses several hypothetical situations about a company called Infotech to illustrate accounting concepts like determining net worth, profitability, sustainable growth, and recording asset purchases. The key topics covered are the basics of financial accounting, the accounting equation, types of businesses, and analyzing financial statements.

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    18-06-2013 - FA

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    This document provides an introduction to basic financial accounting concepts. It discusses the types of business structures, the accounting equation, accounting conventions, trial balances, and general accepted accounting principles. It also uses several hypothetical situations about a company called Infotech to illustrate accounting concepts like determining net worth, profitability, sustainable growth, and recording asset purchases. The key topics covered are the basics of financial accounting, the accounting equation, types of businesses, and analyzing financial statements.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    47 views25 pages

    Understanding Financial Accounting

    Uploaded by

    Sparsh Shrivastava
    This document provides an introduction to basic financial accounting concepts. It discusses the types of business structures, the accounting equation, accounting conventions, trial balances, and general accepted accounting principles. It also uses several hypothetical situations about a company called Infotech to illustrate accounting concepts like determining net worth, profitability, sustainable growth, and recording asset purchases. The key topics covered are the basics of financial accounting, the accounting equation, types of businesses, and analyzing financial statements.

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    Understanding Financial Accounting

    Ashok Kumar Malhotra, FCA Professor of Finance & Chairperson of Center for Business Management June 2013

    Basics of Financial Accounting


    Introduction Types of business/Structure of business Accounting equation GAAP Conventions Sample Transactions Trial Balance

    Situation - 1

    Infotech was incorporated long back with help of four friends of Mr. Sahil Gandotra. Infotech has bank balance of Rs. 200 crores as of 18th June 2010.

    1.

    Is Infotech a wealthy company?


    What is the net-worth of an organisation at a point of time?

    2.

    Situation - 2

    Infotech has a plant & machinery worth of Rs. 50 lakhs. Infotech is unable to make payment of electricity bills for the last so many months. What is the main problem?

    Situation - 3

    Infotech is managed by five software professionals including Mr. Sahil Gandotra and able to generate revenue of Rs. 45000 every month consistently for the so many years but without significant bank balance.
    Is it a good company to work with?

    Situation - 4

    Infotech has sales of $25/- lakhs and expenses of Rs. 10/- lakhs and Capital of 50 lakhs, liabilities 25 lakhs and assets 150 lakhs. The data is for the period 201112.

    What do understand by about profitability of Infotech for the period?

    Situation 5

    Infotech is a consistently profitable company. 100% of each years profit is withdrawn in the form of profit by owner including Mr. Sahil Gandotra. Can the company achieve sustainable growth in future?

    Situation - 7

    Car purchased by Infotech should be recorded in accounts at:


    Market Price Value Cost

    While analyzing a fin. St. one must consider


    Take now & pay later
    i. ii. iii.

    iv. v.

    Cash versus Credit Cost, Price, Value Capital Expenditure versus Revenue Expenditure Tangible & Intangible Assets Real accounts, Personal accounts & Nominal accounts

    Pay now & take later

    Financial Statements
    vi.

    vii.
    viii. ix. x. xi.

    Accrual vs. Cash Basis Long-term vs. short term Current versus non-current Debt and owners capital Debit means Expense, Assets or Recoverable Credit means Revenue/Gain, Liabilities or Reserve

    Types of Businesses
    Manufacturing Business
    Product

    Maruti Suzuki HCL Infosys Bata Coca-Cola Philips

    Cars, trucks, vans Computer chips Athletic shoes and apparel Beverages Stereos and television

    Types of Businesses
    Merchandising Business
    Product

    Big Bazar Land Mark Reliance Digital Amazon.com

    General merchandise Toys books etc. Consumer electronics Internet books, music, video retailer

    Types of Businesses
    Service Business
    Product

    Appu Ghar Jaipur Golden Taj Hotels PVR Karvy Consultants Bharti Airtel

    Entertainment Transportation Hospitality and lodging Entertainment Financial advice Telecommunication

    There are three types of business organizations


    Proprietorship Partnership Company

    A partnership is owned by two or more individuals.

    Advantages More financial resources than a proprietorship. Additional management skills.


    Disadvantage Unlimited liability.

    JM & Co

    A company is organized under state or federal statutes as a separate legal entity.

    Advantage The ability to obtain large amounts of resources by issuing stocks. Disadvantage Double taxation.

    JM & Co

    Cash cycle of a firm

    The Accounting Equation

    Revenue
    Sales

    Expenses = Profit
    R>E Profit else loss

    Material Consumption + Expenses incurred

    Who has to enjoy profit? Who has to bear loss?

    The Accounting Equation


    Assets = Liabilities + Owners Capital The rights of the creditors, which represent debts of the business

    The resources owned by a business

    The rights of the owners

    Stock Equation (Quantity & Cost)


    Opening Stock + Purchases = Consumption + Closing Stock

    Inventory at the beginning

    Consumption, Wastages etc. of inventory

    Inventory Purchased during the period

    Closing based on physical inventory at the end of period

    Vouchers & Supporting Documents Verification/ approval Enter the Primary Books Filed in Voucher file

    Enter into Secondary Books


    Compile Trial Balance Final Accounts Audited Statements of Account

    Chart of Accounts

    Income accounts Expense accounts Asset accounts Liability accounts Capital accounts

    Generally Accepted Accounting Principles

    Matching principle Period Cost Entity There are four more GAAPs, we cover as we progress

    Economic Transaction Vouchers


    1. 2. 3.

    4. 5. 6.

    Date Amount Nature Capital (Exp. Or gain) Revenue (Exp. Or gain) Head of account Nominal, personal, real Cash / bank / otherwise Increase / decrease

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