Financial AccountingFinancial AccountingFinancial AccountingFinancial Accounting
Prof Padmini SrinivasanProf Padmini Srinivasan
You cant manage what you cant measure
Recap of Class 1Recap of Class 1Recap of Class 1Recap of Class 1
Identification
Select economic events
Business transactions
Recording
Record, classify
and summarize
Accounting Reports
SOFTBYTEAnnual Report
Accountingreports
Analyze and interpretfor users
Communication
ACCOUNTING SYSTEMACCOUNTING SYSTEM
FILTERS
Audit
Input Process Output
Monetary
Financial Statements• Accounting Reports• The Statement of Financial
position• The statement of Financial
performance• The Cash Flow statement
Balance Sheet
Accounting Concepts• The Entity Concept• Going Concern Concept• Money Measurement
The Accounting Equation
Assets
Owners’Equity
Liabilities
Assets = Liabilities + Owners’ Equity
Understanding Understanding Financial statements Financial statements
Understanding Understanding Financial statements Financial statements
Balance Sheet
EQUITY AND LIABILITIES
1)Shareholders’ Funds
2) Non-current liabilities
3) Current liabilities
ASSETS1) Non-current assets
(2) Current assets
Form as per Schedule VI of Companies Act.
Balance Sheet
EQUITY AND LIABILITIESShareholders’ Funds(a) Share capital(b) Reserves and surplus(2) Share Application moneypending allotment(3) Non-current liabilities(a) long-term borrowings(b) Deferred tax liabilities(c) Other long termliabilities(d) long-term provisions(4) Current liabilities(a) Short term borrowings(b) Trade payables(c) Other current liabilities(d) Short-term provisions
ASSETS-Non-current assets(a) Fixed Assets i. Tangible assets ii) Intangible assetsIii) Capital Work in progress(b) Non-current Investments(c) Deferred tax assets (net)(d) Long-term Loan and Advances(e) Other Non-current assets(2) Current assets(a) Current investments(b) Inventories(c) Trade receivables(d) Cash and cash equivalents(e) Short-term loans and advances(f) Other current assets
ASSETSASSETS
Assets are resources owned /(controlled) by a business.
They are capable of providing future benefits or cash flows
They must arise out of a past identifiable event and are objectively measurable
They are usually recorded at cost
ASSETSASSETS
They arise because of the investment decisions of the firm
BROADLY CLASSIFIED AS:Non current Assets (other than current assets (see
definition of current, later)
(a) Fixed Assets(b) Non-current Investments(c) Deferred tax assets (net)(d) Long-term Loan and Advances(e) Other Non-current assets
FIXED ASSETS
• General Characteristics• Meant to be used for producing goods or
services, renting out or for administrative use• Useful life of more than 1 year• They are not held for sale in the ordinary
course of business, Building, computer etc• Eg: Machinery• Disclosed as: • Gross Block• Less: Accumulated depreciation• Net Block Materiality
Concept
INVESTMENTS• Are assets held for “Accretion in wealth”
through distribution or for capital appreciation
• Eg. Investment in Shares and other securities of companies etc
• Classified as: • Long term/Current (based on holding 12
months• Current Investments with current Assets• Others under Non current asset• Quoted or unquoted (For example say in any
stock exchange )
Current Assets• Current assets are assets that form part of
the circulating capital (operating cycle) and take interrelated form, it is expected to be realized in, or is intended for sale or consumption
• It also includes assets that are expected to be converted into cash in next 12 months from the Balance sheet date
• Eg:- Inventory ( Raw Material Stock, Work in Progress, Finished Goods)
• Receivables (Sundry Debtors and Others)• Cash
LIABILITIES
LIABILITIESLIABILITIES
Liabilities are claims against assets.They are present obligations.Generally discharging the liability will
result in the decline of the assetsBroadly Classified into:
Debt (Borrowings) Current Liabilities
An entity can fall under all three categories too
OWNERS EQUITYOWNERS EQUITY
The ownership claim on total assets is known as Shareholder’s equity.
Divided into units called as a share, with a face value.
The share holders equity in a company’s balance sheet consists of:
• 1 Paid-UP (contributed) capital• 2 Retained earnings (Reserves
and Surplus)
Shareholders Equity / Share Capital
Amount contributed by owners towards the capital of the firm
They are residual claims on the total assets of the company.
They are divided into units called sharesTypes: Equity share• Preference shares
Retained Earnings/ Reserves and Surplus
Retained Earnings/ Reserves and Surplus
• Reserves and Surplus or Retained Earnings : Is the Net Profit or Loss from the business operations which is not distributed to the Shareholders ( retained in the business)
•INCREASE DECREASE•INCREASE DECREASE
Investments by
shareholders
Revenues
Owners’ Equity
Dividends toshareholders
Expenses
INCREASES AND DECREASES INOwners Equity
INCREASES AND DECREASES INOwners Equity
Non current Liabilities
• Loans: Amounts borrowed by the firm to be repaid as per agreed terms and are usually interest bearing
• Non current Provisions and other non current liabilities
Current Liabilities and Provisions
• Current Liabilities• Amounts due on account of
purchase goods/services and is expected to be settled in the company’s normal operating cycle;
• c. it is due to be settled within twelve months after the reporting date;
Current Liabilities and Provisions
• Provisions• Are also liabilities payable But the
exact amount cannot be quantified i.e they require estimation
• Eg: Provision for Doubtful debts etc
Question ?• All performance (operations)
changes the Balance sheet or the financial position of the company
• Can we say that all changes in the balance sheet is on account of performance ??