Business Economics and Financial Analysis

Financial accounting
Presenter’s Name – Mr. L Sainath yadav
Presenter’s ID –
Department Name – Master of Business Administration
Lecture Number - 40
Presentation Date – 28.05.2025

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 Course Objectives
I The concepts of business economics and demand analysis helps in
optimal decision making in business environment.
II The functional relationship between Production and factors of
production and able to compute breakeven point to illustrate the
various uses of breakeven analysis.
III The features, merits and demerits of different forms of business
organizations existing in the modern business environment and market
structures.
IV The concept of capital budgeting and allocations of the resources
through capital budgeting methods and compute simple problems for
project management.
V Various accounting concepts and different types of financial ratios for
knowing financial positions of business concern.
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 Course Outcomes
COURSE OUTCOMES: After successful completion of the course,
students should be able to:
CO 1 List the basic concepts of managerial economics and analysis,
measurement of demand and its forecasting to know the current
status of goods and services.
CO 2 Examine to know the current status of goods and services. To
know the economies and diseconomies of scale in manufacturing
sector.
CO 3 Summarize the four basic market models like perfect
competition, monopoly, monopolistic competition, and oligopoly to
know the price and quantity are determined in each model.
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 Course Outcomes
COURSE OUTCOMES: After successful completion of the course,
students should be able to:
CO 4 Compare various types of business organizations and discuss
their implications for resource allocation to strengthen the
market environment.
CO 5 Analyze different project proposals by applying capital budgeting
techniques to interpret the solutions for real time problems in
various business projects.
CO 6 Develop the ability to use a basic accounting system along with
the application of ratios to create (record, classify, and
summarize) the data needed to know the financial position of
the organization.
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 Course Outcomes
At the end of the course, students should be able to
CO Course Outcomes Blooms
Taxonomy
CO 6 Develop the ability to use a basic accounting Remember
system along with the application of ratios to
create (record, classify, and summarize) the
data needed to know the financial position of
the organization.

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 Financial accounting
Accounting is the recording of financial transactions along with storing, sorting, retrieving,
summarizing, and presenting the results in various reports and analyses. Accounting is also
a field of study and profession dedicated to carrying out those tasks.

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 The accounting cycle
Accounting starts with recording transactions. Business transactions—any activity or event that
involves your business’s money—need to be put into your company’s general ledger. Recording
business transactions this way is part of bookkeeping.
Bookkeeping is the first step of what accountants call the “accounting cycle”: a process designed
to take in transaction data and spit out accurate and consistent financial reports.

The accounting cycle has six major steps:

2.Post journal entries to the ledger It’s time to take those documents and start making journal
entries for your transactions. Journal entries have three components of a transaction: when it
happened, what it was for, and how much it was. Some businesses use single-entry accounting
where only the expense or revenue is entered. But more common is double-entry accounting,
which records each transaction in two accounts: where money is coming from and where it’s
going.
.

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 The accounting cycle
 3.Prepare an unadjusted trial balance At the end of a reporting period, list all of your business’s
accounts and figure out their balances.

 4.Prepare adjusting entries at the end of the period When you need to update entries you’ve
already made, you prepare adjusting entries. For example, if a client is late on paying an invoice
and you offer a 5% discount to help them pay, you would enter the discount as an adjusting entry
as opposed to changing the entry you’ve already made.

 5.Prepare an adjusted trial balance After entering in adjusting entries, you’re left with an adjusted
trial balance. This information is now ready to be turned into financial statements.

 6.Prepare financial statements Finally, all the information you’ve collected is converted into your
financial statements. These reports are succinct summaries of all your business’s financial activity.

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 Objectives of Accounting
To maintain a systematic record of business transactions
Accounting is used to maintain a systematic record of all the financial transactions in a book of
accounts.
For this, all the transactions are recorded in chronological order in Journal and then posted to
principle book i.e. Ledger.
To ascertain profit and loss
Every businessman is keen to know the net results of business operations periodically.
To check whether the business has earned profits or incurred losses, we prepare a “Profit & Loss
Account”.
To determine the financial position
Another important objective is to determine the financial position of the business to check the value
of assets and liabilities.
For this purpose, we prepare a “Balance Sheet”.
To provide information to various users
Providing information to the various interested parties or stakeholders is one of the most important
objectives of accounting.
It helps them in making good financial decisions.
To assist the management
By analyzing financial data and providing interpretations in the form of reports, accounting assists
management in handling business operations effectively.
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Characteristics of Accounting:
 (1) Identifying financial transactions and events

 Accounting records only those transactions and events which are of financial nature.

 So, first of all, such transactions and events are identified.

 (2) Measuring the transactions

 Accounting measures the transactions and events in terms of money which are considered as a
common unit.
 (3) Recording of transactions

 Accounting involves recording the financial transactions inappropriate book of accounts such as
Journal or Subsidiary Books.
 (4) Classifying the transactions

 Transactions recorded in the books of original entry – Journal or Subsidiary books are classified and
grouped according to nature and posted in separate accounts known as ‘Ledger Accounts’.

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Characteristics of Accounting:
 (5) Summarizing the transactions

 It involves presenting the classified data in a manner and in the form of statements, which are understandable
by the users.

 It includes Trial balance, Trading Account, Profit and Loss Account and Balance Sheet.

 (6) Analyzing and interpreting financial data

 Results of the business are analyzed and interpreted so that users of financial statements can make a
meaningful and sound judgment.

 (7) Communicating the financial data or reports to the users

 Communicating the financial data to the users on time is the final step of Accounting so that they can make
appropriate decisions.

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Accounting Concepts and Conventions
 Accounting Concepts refer to the basic assumptions, rules and principles which work as the basis of recording of business
transactions and preparing accounts.

 1.Business Entity : This concept assumes that business has distinct and separate entity from its owners. Thus, for the purpose of
accounting, business and its owners are to be treated as two separate entities. So for example, if the owner brings in additional capital
into the business, we will treat this as a liability on the balance sheet of the business.

 2. Money Measurement : The concept of money measurement states that only those transactions and happenings in an organization,
which can be expressed in terms of money are to be recorded in the book of accounts. Also, the records of the transactions are to be
kept not in the physical units but in the monetary units. So for example, if the company underwent a major management overhaul this
would have no effect on the accounting records. This concept is actually one of the major drawbacks of accounting.

 3.Going Concern : 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 near future. So it justifies the financial statements as a part of a
continuous series of statements. The current statements are tentative and only reflect the financial position of that particular period of
time.

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 Accounting Concepts and Conventions
 4.Accounting Period : Accounting period refers to the span of time at the end of which
the financial statements of an enterprise are prepared to know whether it has earned
profits or incurred losses during that period and what exactly is the position of its assets
and liabilities, at the end of that period.

 5. Cost Concept : The cost concept requires that all assets are recorded in the book of
accounts at their cost price, which includes cost of acquisition, transportation, installation
and making the asset ready for the use.

 6.Dual Aspect : This concept states that every transaction has a dual or two- fold effect
on various accounts and should therefore be recorded at two places. The duality principle
is commonly expressed in terms of fundamental accounting equation, which is : Assets =
Liabilities + Capital
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 Accounting Concepts and Conventions
 7.Realisation Concept: According to the realization accounting concept, revenue is only recognized
when it is realized. Now revenue is the cash inflow for a business arising from the sale of goods or
services. And we assume this revenue as realized only when it legally arises to be received. So in
simpler terms, the profit earned will be recorded when it is actually earned.

 8. Matching Concept: This concept states that the revenue and the expenses of a transaction should
be included in the same accounting period. So to determine the income of a period all the revenues
and expenses (whether paid or not) must be included. The matching accounting concept follows the
realization concept. First, the revenue is recognized and then we match the costs associated with the
revenue. So costs are matched with revenue, the reverse would be an incorrect system.

 9. Full Disclosure : This concept requires that all material and relevant facts concerning financial
performance of an enterprise must be fully and completely disclosed in the financial statements and
their accompanying footnotes.

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 Accounting Conventions
 Accounting conventions refer to common practices which are universally followed in recording and
presenting accounting information of the business entity.

 10] Consistency Concept: Once the company decides on a certain accounting policy it should not be
frequently changed. Unless there is a statutory requirement or it allows better representation of the
accounts accounting policies should be consistent for long periods of time. This allows users to make
inter-firm and inter-period comparisons. Also, frequent changes in policies may be to manipulate the
accounts and this must be prevented.

 11] Conservatism Concept: This accounting concept promotes prudence in accounting. It states that
profit should not be included until it is realized. However, losses even those not realized but with the
remote possibility of occurring should be included in the financial statements. So all losses are
recognized – those that have occurred or are even likely to occur. But only realized profits are
recognized.

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 Accounting Conventions
 12] Materiality Concept: Materiality states that all material facts must be a part of the accounting
process. But immaterial facts, i.e. insignificant information should be left out. The materiality of a
transaction will depend on its nature, value and its significance to the external user. If the information
can affect a person’s investing decision then it is definitely a material fact.

 13] Objectivity Concept: Finally, we come to the last accounting concept – objectivity. This concept
states the obvious assumption that the accounting transaction recorded should be objective, i.e. free
from any bias of the person recording it. So each transaction should be verifiable by supporting
documents like vouchers, bills, letters, challans, certificates, invoices etc.

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Thank You

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