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1Amity Business SchoolBBA, I semesterFinancial Accounting -INupur Agarwal

Amity Business School

Amity Business School1

Accounting: IntroductionAccording to American Institute of Certified Public Accountants (AICPA) accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions, and events, which are, in part at least, of a financial character, and interpreting the results thereof.The language of business through which financial information is communicated to users.Franciscan Monk Fra Luca Pacioli (1445-1515) as the father of modern accountingHis Summa de Arithmetica, Geometria, Proportioni et Proportionalita, is considered as the first text on accounting

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Accounting has two main divisions:

Financial accountingPrimarily prepared for users external to the company.Management accountingPrimarily for internal purposes

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Amity Business School

Accounting is:Product of economic environmentGradually evolved as a profession with the development of economic activityespecially Industrial RevolutionScope and nature of accounting is closely associated with the gradual changes in the field of organization and management of organizationsIn the modern IT era, accounting is getting integrated into software packages and constantly adapting itself

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Accounting processAccounting is an information system which communicates the accounting information to its users (internal or external) to enable them to make reasoned decisions.

5InputProcessOutputEconomic events measured in financial termsRecordingClassifyingSummarizingAnalyzingInterpretingCommunicating information to users

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Users of Accounting InformationStakeholders are the ones who have an interest in what happens as a result of the entities activitiesStakeholders classified as Internal users viz., managers External users viz., creditors, equity investors, government, and society

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Accounting and Book keepingAccounting is the academic discipline through which knowledge of accountancy is put into practice.Book keeping is a part of Accounting and is concerned with record keeping or maintenance of books of accounting.

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AccountancyAccountingBook Keeping

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Identifying transactions and eventsMeasuring the identified transactions and events in common measuring unitsRecording the identified transactions and events in Books of accountsClassifying the recorded transactions and events in ledgerSummarizing the classified transactions and events in the form of income and position statementsAnalyzing the summarized resultsInterpreting the analyzed resultsCommunicating the interpreted information to the interested parties

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Book KeepingAccounting

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Accounting as a Measurement & Valuation System Basic orientation of financial accounting is income determinationOriented towards an entity- a business unitTries to prescribe a series of concepts, standards, postulates and principlesAccounting theory as a doctrine is explanatory in nature and the underlying reasoning and justifications are related to practice

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Accounting cycleThe accounting cycle begins when accounting personnel analyze a transaction from a source document. A source document is a piece of paper or electronic form that records a business activity such as the purchase or sale of goods. Eg. Bills, Vouchers etc.Accounting personnel record transactions in a journal.The journal is a chronological record of business events by account.

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Accounting cycleJournal entries recorded are then transferred to Ledger Accounts.The process of transferring entries from Journal to Ledger is called Ledger posting.Ledger accounts are balanced and the balances are transferred to Trail balance to check the arithmetical accuracy of postings.Income statements are prepared to ascertain the profits and losses for the accounting period.Position statement is prepared to ascertain the financial position at the end of accounting period.

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Financial StatementsTransactions are summarized into Accounts.Accounts are summarized into Financial statements.Financial Statements report on the financial performance of the organizationFinancial Statements are the primary means of financial communication. Producing the statements follows a definite cycle called the Accounting Cycle.A complete set of financial statements usually consists of the Balance Sheet, Income Statement and Cash Flow Statement13

Amity Business School

Objective of AccountingKeeping systematic record: It is very difficult to remember all the business transactions that take place. Accounting serves this purpose of record keeping by promptly recording all the business transactions in the books of account.To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit earned or loss suffered in business during a particular period. To ascertain the financial position of the business: In addition to profit, a businessman must know his financial position i.e., availability of cash, position of assets and liabilities etc. This helps the businessman to know his financial strength. 14

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To portray the liquidity position: Financial reporting should provide information about firms current assets and liabilities so that liquidity could be ascertained.To protect business properties: This helps in deciding about the value of a firm.To facilitate rational decision making: Accounting records and financial statements provide financial information which help the business in making rational decisions about the steps to be taken in respect of various aspects of business.15

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To satisfy the requirements of law: Entities such as companies, societies, public trusts are compulsorily required to maintain accounts as per the law governing their operations such as the Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also compulsory under the Sales Tax Act and Income Tax Act.

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Functions of AccountingRecord Keeping Function: The primary function of accounting relates to recording, classification and summary of financial transactions-journalization, posting, and preparation of final statements. These facilitate to know operating results and financial positions. The purpose of this function is to report regularly to the interested parties by means of financial statements. Thus accounting performs historical function i.e., attention on the past performance of a business; and this facilitates decision making programme for future activities.17

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Managerial Function:Decision making programme is greatly assisted by accounting. The managerial function and decision making programmes, without accounting, may mislead. The day-to-day operations are compared with some predetermined standard. The variations of actual operations with pre-determined standards and their analysis is possible only with the help of accounting.18

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Legal Requirement function: Auditing is compulsory in ca s e o f registered firms. Auditing is not possible without accounting. Thus accounting becomes compulsory to comply with legal requirements. Accounting is a base and with its help various returns, documents, statements etc., are prepared.Language of Business: Accounting is the language of business. Various transactions are communicated through accounting. There are many parties-owners, creditors, government, employees etc., who are interested in knowing the results of the firm and this can be communicated only through accounting. The accounting shows a real and true position of the firm or the business.19

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Summarising function : The next important function of accounting is summarising diverse economic data into homogeneous group or unit called account. It is most important function of accounting since just like our language system, accounting communicates economic information to its users through these accounts.20

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Branches of AccountingFinancial Accounting : The terms Accounting and Financial Accounting are very often used interchangeably. Financial accounting is the oldest and the forerunner of the other branches of accounting. It is also the purveyor of raw materials for other branches of accounting. The emphasis of financial accounting is on the historical records of by-gone transactions with a view to fulfilling stewardship obligation by the management to the owners, creditors and other interested parties21

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Cost accounting : After the Industrial Revolution which created factory system systematic cost accounting emerged in England. The emphasis of cost accounting is on cost ascertainment, cost analysis and cost control and in contrast to financial accounting, it is prospective looking. Cost accounting embodies the analysis and synthesis of cost in such a manner that it is possible to disclose the total cost of production of a commodity or a service, vis-a-vis the analysis of the cost elements in terms of material, labour and overhead costs.22

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Management accounting : This branch of accounting is mainly concerned with supplying both quantitative and qualitative information to the internal management of an organisation for the purpose of day to day de

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