KIIT SCHOOL OF LAW
PRINCIPLES OF FINANCIAL ACCOUNTING
SUBMITTED BY:
NAME: ASTHA RANJAN
CLASS: BBA LLB
SECTION: A
ROLL NO.: 1982026
SESSION: 2019-2020
MARKS OBTAINED:
SIGNATURE:
GUIDED BY: Prof. (Dr.) R.K. NANDA
1. ACCOUNTING
Accounting is the process of recording financial transactions pertaining to a business. The
accounting process includes summarizing, analyzing, and reporting these transactions to
oversight agencies, regulators, and tax collection entities. The financial statements used in
accounting are a concise summary of financial transactions over an accounting period,
summarizing a company's operations, financial position, and cash flows. 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 or we may also say in other words that
Accounting is the language of finance. It conveys the financial position of the firm or
business to anyone who wants to know. It helps to translate the workings of a firm into
tangible reports that can be compared. So it is essential that we know the meaning of
accounting. Accounting is all about the process that helps to record, summarize, analyze, and
report data that concerns accounting equations.
Types of Accounting:
Financial accounting :
Financial accounting is what you might traditionally expect an accountant to do – keeping
track of a company's financial transactions. It’s the book-keeping side of accountancy, which
used to involve ledgers with black and red ink. Financial accountants follow specific
procedures to produce financial reports for shareholders and regulators. Financial accountants
track the company’s current financial position based on incomings, outgoings, liabilities and
how money is moving through the company. They monitor the company’s share value and
make statements of stockholders’ equity. Their reports are used externally – by people
outside the company, such as shareholders and potential investors. Financial accounting is
very much about process – each company has its own processes and software for keeping the
accounts accurate. In larger companies, this is like a production line, with many people
contributing. In smaller companies, a financial accountant might have a lot of say in
streamlining and improving the company’s accounting processes.
Management accounting :
In some ways, management accounting is similar to financial accounting – it’s about tracking
the company’s financial position and making reports. However, where financial accountants
provide reports to be used externally, management accountants create reports to be used
internally. Management accountants provide the financial information that managers need to
make business decisions – for example, reports on which business areas have been profitable.
They often use charts and statistical techniques to present the data in a way that supports
decision-making. At the higher levels, management accountants can make business
recommendations or even be part of a company’s senior management team. Management
accounting is more than just stating the figures – it’s about interpreting trends, making
predictions and considering the non-financial, qualitative aspects of business too.
OBJECTIVES OF ACCOUNTING
1. Identification and recording of transactions: The primary object of
accounting is to identify the financial transactions and to record these systematically
in the books of accounts. As a result, the true nature of each and every transaction is
known without much exercise of brain.
2. Ascertainment of results: Every business concern is interested to know its
operating results at the end of a particular period. The amount of profit or loss for a
particular period of a business concern can be ascertained by preparing an income
statement with the help of ledger account balances of revenue nature.
3. Ascertainment of financial affairs: Ascertainment of debts-liabilities,
property, and assets i.e. total financial affairs of an organization at a particular date
is another important object of Accounting. Financial affairs of concern at a
particular date can be ascertained by preparing a balance sheet.
4. Keeping accounts of cash: Cash book is a prominent book of the books of
accounts. Cash receipts and cash payments are accounted for in this book. A
number of daily cash receipts, payments, cash in hand and cash at the bank can be
known from this book.
5. Control over assets and liabilities: For running a business successfully a
businessman is to acquire various assets like land, building, machinery, etc. He is to
face various debts and liabilities like accounts payable, notes payable, loan, bank
overdraft, etc. side by side with die acquisition of assets.
Advantages of Accounting:
Accounting helps to maintain the business records in a systematic manner.
It helps in the preparation of financial statements.
Accounting information is also used to compare the result of current year with
the previous year to analyze the changes.
It helps the managers in the decision making process.
It provides information to other interested parties such as shareholders,
creditors, investors, customers, government, employees, regulatory bodies etc.
It helps in taxation matter
Accounting information can be produced as evidence in the legal matter.
It helps in valuation of business.
Accounting helps to maintain the business records in a systematic manner. It
helps in the preparation of financial statements. Accounting information is
also used to compare the result of current year with the previous year to
analyze the changes. It helps the managers in the decision making process.
Limitations of Accounting
The items expressed in monetary terms are recorded in the accountings where
as the items which are nonmonetary nature not recorded.
Sometimes accounting data are recorded on the basis of estimates and which
could be inaccurate.
Fixed assets are recorded as the original cost.
Value of money does not remain stable so accounting value does not show
true financial results.
Accounting can be manipulated and biased.
One of the biggest limitations of accounting is that it cannot measure things/events
that do not have a monetary value. If a certain factor, no matter how important, cannot be
expressed in money it finds no place in accounting.
USERS OF ACCOUNTING INFORMATION:
Internal Users:
1. OWNERS: They contribute capital in the business and thus are at the maximum risk.
They are interested in knowing the financial statements of the enterprise.
2. MANAGEMENT: They make extensive use of accounting information to arrive at the
desired result.
3. EMPLOYEES AND WORKERS: They are entitled to get bonus which is linked to
the profit, therefore, they are interested in the accounting information.
External Users:
1. BANKS AND FINANCIAL INSTIUTIONS: They are an essential part of any
business as they provide loans to the businesses. Therefore, they are interested in
accounting information.
2. INVESTORS: Investment involves risk and therefore, the investors rely on accounting
information.
3. CREDITORS: Before granting credits, the creditors inorder to know about their
repayment gurantee wants to know the financial information.
4. GOVERNMENT: Inorder to compile and generate national income, the government is
interested in knowing the financial information of a business.
ACCOUNTING CONCEPTS AND CONVENTIONS:
Accounting Conventions
The most commonly encountered convention is the "historical cost convention". This
requires transactions to be recorded at the price ruling at the time, and for assets to be
valued at their original cost. Under the "historical cost convention", therefore, no
account is taken of changing prices in the economy.
The other conventions you will encounter in a set of accounts can be summarised as
follows:
Monetary measurement
Accountants do not account for items unless they can be quantified in monetary terms.
Items that are not accounted for (unless someone is prepared to pay something for
them) include things like workforce skill, morale, market leadership, brand
recognition, quality of management etc.
Separate Entity
This convention seeks to ensure that private transactions and matters relating to the
owners of a business are segregated from transactions that relate to the business.
Realisation
With this convention, accounts recognise transactions (and any profits arising from
them) at the point of sale or transfer of legal ownership - rather than just when cash
actually changes hands. For example, a company that makes a sale to a customer can
recognise that sale when the transaction is legal - at the point of contract. The actual
payment due from the customer may not arise until several weeks (or months) later - if
the customer has been granted some credit terms.
Materiality
An important convention. As we can see from the application of accounting standards
and accounting policies, the preparation of accounts involves a high degree of
judgement. Where decisions are required about the appropriateness of a particular
accounting judgement, the "materiality" convention suggests that this should only be
an issue if the judgement is "significant" or "material" to a user of the accounts. The
concept of "materiality" is an important issue for auditors of financial accounts.
Accounting Concepts:
Four important accounting concepts underpin the preparation of any set of accounts:
Going Concern
Accountants assume, unless there is evidence to the contrary, that a company is not
going broke. This has important implications for the valuation of assets and liabilities.
Consistency
Transactions and valuation methods are treated the same way from year to year, or
period to period. Users of accounts can, therefore, make more meaningful comparisons
of financial performance from year to year. Where accounting policies are changed,
companies are required to disclose this fact and explain the impact of any change.
Prudence
Profits are not recognised until a sale has been completed. In addition, a cautious view
is taken for future problems and costs of the business (the are "provided for" in the
accounts" as soon as their is a reasonable chance that such costs will be incurred in the
future.
Matching (or "Accruals")
Income should be properly "matched" with the expenses of a given accounting period.
Key Characteristics of Accounting Information
There is general agreement that, before it can be regarded as useful in satisfying the
needs of various user groups, accounting information should be correct and genuine.
