Introduction

Financial Reporting &
Analysis
Chapter 1
Accounting
• American Institute Of Certified Public accountants has defined Accounting

as follows:
• “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 atleast,of financial character and interpreting the results
thereof”
Accounting Cycle
• Accounting Cycle is a series of steps which are repeated every reporting period
• Recording - Journal
• Classifying - Ledger
• Summarizing – Income statement & Balance sheet
• Analyzing
• communicating
Accounting Cycle
Forms of Business Organizations
• Sole proprietorship
• Partnership
• Limited Liability Partnership
• One person company (OPC)
• Private company limited
• Public company limited
Types of Businesses
• Manufacturing
• Merchandising
• Service Providers
Users of Accounting Information
• Investors
• Lenders
• Creditors
• Debtors
• Employees
• Government
• Analyst
• Public
Branches of Accounting
Financial
Accounting
Cost accounting
Management
Accounting
Generally Accepted Accounting principles(US
GAAP)
Accounting concepts
Accounting Conventions
Accounting Concepts and Conventions
• Concepts are the basic ideas, the theories on how and why certain
categories of transactions should be treated in a particular manner.
• Once the theories have been established and tested and proved to be
acceptable, the task of the Conventions is to set out the limit of their
applications.
Accounting Concepts
• Business Entity Concept – business is a separate entity.

• Money Measurement Concept – money common denominator of
measurement.
• Going Concern Concept – perpetual succession.
• Accounting Period Concept – pre-determined periodicity generally an year.
• Cost Concept – an asset’s cost is the basis of all subsequent accounting.
Accounting Concepts
• Realization Concept – revenue should be recognized “when it is earned”.

• Matching Concept – associating the cause and effect relationship of
revenues and expenses.
• Accrual Concept – similar to matching, period should be decided on the
basis of accrual.
• Dual Aspect Concept – 2 aspects must be examined – the giving and the
receiving.
Accounting Conventions
• Consistency – method once adopted should be followed.

• Disclosure – all relevant facts concerning financial position must be
communicated to users.
• Materiality – concerned with significant information.
• Objectivity – unbiased and subject to verification by external expert.
• Stable Monetary Unit – the Indian Rupee.
• Conservatism or Prudence – when in doubt, choose the solution that is least
likely to overstate net assets and net income for the current period.
Important Terminology Of Accounting
• Assets : The economic resources which are owned by a business and are
expected to benefit future operations. Assets may have definite physical
form, such as buildings, machinery or merchandise. Assets can also be liquid
assets and intangible assets.
• Equity : this is the claim against the assets owned by the business. Equities
or claim against the assets indicate the sources from which the assets of a
business were obtained.
• Liabilities : liabilities are the debts owed by a business to out side parties (
called creditors ). This includes amount owed to suppliers for goods or
services purchased amount borrowed from banks or other lenders, salaries
and taxes due but not paid.
• Net worth : the term net worth, proprietorship, owner’s investment, or
capital– all have the same meaning in accounting : namely, the owner’s
equity or interest in the assets of the business. It is the difference between
what the business owns and what it owes.
• Revenue : It may be defined as the inflow of cash assets resulting from the
sale of goods and services in the ordinary course of business. For eg. interest
received on investments, commission received, rent received etc. Revenue
cause an increase in capital.
• Expenses : it may be defined as the cost of the goods and services used up in
the process of obtaining revenue. Example include - the cost of goods sold,
wages and salaries of employees, charges for news paper, advertising etc.
• Business Transactions
• Depreciation
• Profit
• Capital Expenditure
• Revenue Expenditure
• Goodwill
Assets
Fixed Assets Current Assets Wasting Assets
Intangible assets Fictitious assets

Liabilities
share capital Liabilities
Reserves
Debentures
Bonds
Long term • Long Short term/
loans term current
Eg:
Short term Loans

Outsider Insider
Bank overdraft
funds/Debt Funds/Equity
Outstanding expenses
Bills payable
creditors

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Financial Reporting &

• American Institute Of Certified Public accountants has defined Accounting

• Business Entity Concept – business is a separate entity.

• Realization Concept – revenue should be recognized “when it is earned”.

• Consistency – method once adopted should be followed.

Fixed Assets Current Assets Wasting Assets

Intangible assets Fictitious assets

Short term Loans

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