tutorial 1-conceptual framework of accounting-uploaded

8/18/2019 Tutorial 1-Conceptual Framework of Accounting-uploaded

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Conceptual Framework of Accounting

Session One

Understanding Financial Statements


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1–2

SESSION !AN


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#ritannia Industries

• The company’s consolidated net sales for theyear ended March 2008 increased by 23% toRs 2776. crore. !"M of the companyincreased to 8.#$%. The increased in

operatin profit marin is d&e to decline inra' material cost( p&rchased of finishedoods and con)ersion * other chares. +s ares&lt( the ",T before e-tra ordinary itemsincreased by 8% to Rs 22.30 crore.


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NII% net profit rises 1&"'()* in t+e ,arc+ 2(()-uarter. Sales rise ""')/* to 0s 1$"'& crore

• /n spite of dip of $8% in re)en&es fromcorporate b&siness contrib&tin #% of theconsolidated net income( //T reported 6%ro'th in consolidated top line at Rs 272.#0

crore. The operatin marins impro)ed at$$.2% on the bac1 of impro)ement in marinsof indi)id&al b&siness and school learninb&siness and ne' b&sinesses t&rninmarinally profitable. The res&ltant bottomline re' #7% at Rs 2.20 crore.


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Engineers India EI!3

• The company reported an earnins ro'th of33% to Rs 6.68 crore for the 4&arter endedMar ’08. 5tron sales ro'th of #% to Rs2#2.82 crore 'as 'ell bac1ed by e-pansion in

operatin marin th&s ta1in operatin profit&p by 7% to Rs 7.$ crore. o'e)er thero'th at ",T le)el 'as limited to 27%strained by lo'er other income do'n 3% andhiher depreciation &p 3$%. ith !e-penses bein lo'er by $2% to Rs 30 crore(the ",T after ! re' by 0%. The ro'th atnet profit le)el 'as 33% to Rs 6.68 croreboed do'n by hiher ta-ation.


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0ole of Accounting

• Accounting is a s4stem t+at pro5idesinformation on6

9 Amounts of resources'

9 7ow resources were financed' 9 7ow were t+e resources in5ested'

9 0esults ac+ie5ed 84 using t+ose resources'

• %+roug+ Internal 9 E:ternal 0eporting

• For6

9 arties inside and outside t+e organi;ation'


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%+eAccounting

process

=ecision

makers

Economicacti5ities,onetar4 9

Non.monetar43

Actionsdecisions3

Accounting connectsdecision makers wit+

economic acti5itiesand t+e c4cle

continues wit+ t+eresults of t+eir

decisions

Accounting

InformationFinancial 9,anagement

Accounting3

,onetar4 acti5ities

,one4 ,easurement Concept3


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Financial Accounting

Accounting

FinancialAccounting

Accounting

Used for Financial reporting

Audience6 E:ternal usersIn5estors> Creditors>?o5t' #odies> societ4> etc'3

ro5iding information for

planning and control

Audience6 Internal users

,anagers> #O= 9 emplo4ees3

,anagement


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rocess of Accounting

• Creating Accounting +eads 9 Asset> !ia8ilit4> E-uit4> Income 9 E:pense

• =ou8le Entr4 s4stem

• Accounting E-uationAssets @ Owners E-uit4 B !ia8ilities

• 0esources financed 84 @ 8usiness creditorsB lenders B capital pro5ided 84 owners'

• 0esources In5ested in @ Fi:ed Asset BIn5estment B Current Assets

• !7S @ 07S

• ields Financial Statements


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11/331–11


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Financial Elements . =efinition

• Assets are "robable :&t&re economicbenefits obtained or controlled by a partic&larentity as a res&lt of past transaction or

e)ents.

• !ia8ilities are probable :&t&re 5acrifices ofeconomic benefits( arisin from presentobliations of a partic&lar entity to transferassets in the f&t&re( as a res&lt of pasttransaction or e)ents.

• E-uit4 is the resid&al interest in the assets of anentity that remains after ded&ctin its liabilities./n b&siness enterprises( the e4&ity is theo'nership interest.


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Financial Elements


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aga8ond %ra5el Agenc4

#alance S+eet

=ecem8er "1> 2((<

Assets !ia8ilities 9 OwnersF E-uit4

Cas+ 22>/((G !ia8ilities6Notes recei5a8le 1(>((( Notes pa4a8le $1>(((G

Accounts recei5a8le &(>/(( Accounts pa4a8le "&>(((

Supplies 2>((( Salaries pa4a8le ">(((

!and 1((>((( %otal lia8ilities )(>(((G

#uilding (>((( OwnersF E-uit4Office e-uipment 1/>((( Capital stock 1/(>(((

0etained earnings (((

%otal "((>(((G %otal "((>(((G

Assets @ !ia8ilities B Owners E-uit4

G"((>((( @ G)(>((( B G22(>(((

Assets @ !ia8ilities B Owners E-uit4

G"((>((( @ G)(>((( B G22(>(((

Accounting E-uation


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Financial Elements . =efinition

• 0e5enues D Incomes represent act&al or e-pectedcash inflo's that res&lt from an entity’s central

operation or core acti)ities or principal b&siness.

9 -amples; 5ales for Man&fact&rin * Tradin


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Accounting E-uation

• Assets @ Owners E-uit4 B !ia8ilities• !'ner’s 4&ity ? Total +ssets 9 Total -ternal

@iability

• /n ,A5 as per /ndian B++" 9 !'ner’s 4&ity ? :+ C /n)estments C


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Accounting e-uation in 8alance. anillustration

• :e' of &s Eointly promote a tradin


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Contd

• Too1 a ban1 loan Rs 20 la1hs.

+ssets ? @iabilities C !'ner’s 4&ity


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Contd

• Rented a sho'room( paid la1hs asref&ndable ad)ance to be ret&rned on )acatinthe premises. Rent is areed at $ la1h p.m.


+d)ance rent C


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Contd

• ,o&ht f&rnit&re for the sho'room for la1hs.


:&rnit&re C


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Contd

• "&rchased in)entory for 60 la1hs. "aid0% in cash and areed to pay the

balance in 60 days time.


/n)entory 60 C


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Contd

• 5old #0 la1hs 'orth of in)entory for 0la1hsG

9 cash sales 30 la1hs( * balance on credit.

+ssets ? @iabilities C !'ner’s 4&ity/n)entory F#0 C >ebtors 20 C


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Contd

• Manaer informs abo&t the follo'in d&es Fstaff salary 2 la1hs( ad)ertisemente-penses 2 la1hs( interest 20(000 * rent $la1h.

+ssets ? @iabilities C !'ner’s 4&ity0 ? -penses payable .2 C ! F.2

ebtors 20 C +d)ance C


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Contd

• >i)idend paid to in)estors $ la1h



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#alance S+eet as at "1.(1.()

!ia8ilities Assets

5hare capital 30 Fi:ed Assets

:&rnit&re

Reser)es * 5&rpl&s 3.8

Owners E-uit4 33.8 Current Assets !oans 9 Ad5ances /n)entory 20

@oan from ,an1 20 >ebtors 20

Rent +d)ance

Current !ia8ilities 9 ro5isions


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Income Statement for t+e mont+ ending "1.(1.()

Income

5ales 0

!ther /ncome 0Total /ncome 0

E:penditure

epreciation 0/nterest 0.2

#% #.8

Ta- 0

A%D=isposa8le profit #.8

>i)idend $


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Cas+ Flow Summar4 for t+e period (


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=ate at8eginning

of period

=ate atend of

period

#alanceS+eet

#alanceS+eet

%ime

Income Statement

Statement of Cas+ Flows

0elations+ip among Financial Statements

Fi i l St t t A ti l t


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Financial Statements Articulate

#alance S+eet as at "1.(1.()

!ia8ilities Assets

5hare capital 30 Fi:ed Assets

:&rnit&re

Reser)es *5&rpl&s 3.8

OwnersE-uit4 33.8

Current Assets !oans 9Ad5ances

/n)entory 20

@oan from,an1 20 >ebtors 20

Rent +d)ance

Current !ia8ilities 9ro5isions


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urpose of Financial Accounting

• %o pro5ide financial information a8out an organi;ation> its

current financial position as well as its a8ilit4 to generate

earnings 9 cas+ flows> to 5arious interested parties'

• Suc+ parties include

9 Investors

9 Creditors

9 9 Ot+ers including t+e 0egulators> Industr4 Associations>

0esearc+ers including Academicians 9 Hall3 Street Anal4sts>

?eneral u8lic> etc'

• It s+ould 8e noted t+at all t+ese interested parties are e:ternal

to t+e organi;ation'

Th&s +cco&ntin /nformation &sed for decision ma1in

meets certain 4&alitati)e characteristics.

lit ti C+ t i ti f


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ualitati5e C+aracteristics ofAccounting Information

$. Dnderstandability

2. Dsef&lness

$. Rele)ance

1. Be timely (2. Provide feedback ( and

3. Help predict future conditions

2. Reliability

$. :aithf&l Representation

2.


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#asic Accounting Assumptions

• +n &nderstandin of basic acco&ntinass&mptions is )ital to &nderstand the

process of acco&ntin.

• +cco&ntin concepts &nderlyin therecordin of transactions;

9 5eparate ntity


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tutorial 1-conceptual framework of accounting-uploaded

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