Business Accounting &

Finance
(ACC:501)

Credit Hours- 4 Credits

Hari Dallakoti
 Chapter – One

Introduction of
Accounting
 Background
• A business is a continuous economic activity carried out to earn profit
through:
• Production and sales of goods and services to customers
• Generating and rendering services
• It may be- Manufacturing, Merchandising/Trading Companies, Services
or Hybrid companies.
• Business Organizations will be of different forms- Sole Proprietorship ,
Partnership Firm, Joint Stock Company and Others like cooperative, non-
profit making etc.
• Such organizations need to take different decisions for their business
activities.
• Financial information is needed for decision making purpose.
• Book keeping and Accounting will provide such information.
 Meaning of Accounting
• Process of identifying, measuring, classifying, recording, summarizing
and interpretation of the transactions of a business in terms of money to
ascertain the result and financial position of business activities of
particular period.
• Accounting is the art of recording, classifying and summarizing, in a
significant manner and in terms of money, transactions and events which
are in the part at least, of a financial character and interpreting the
results there of.- AICPA
• Its features are-
• Financial language
• Financial information
• Systematic process
• Functions
• Information system
 The Nature of Accounting
• Science and art:
• record fact financial transactions based on set of principles.
• it involves practical work of presenting financial data and information in different
way.
• Process:
• process of recording, classifying and summarizing financial transaction of business
and interpreting the entire financial information to possible users.
• Financial information’s:
• deals only with transactions which are measured and expressed in money.
• record and delivers entire financial information.
• non monetary terms are not considered in accounting.
• Information system:
• uses financial transaction as inputs, process them and provide financial information as
its output to possible users.
• Function:
• process of accounting is useless until the information is communicated to the users
• basic function of accounting is to report the result to the users.
 The Purposes of Accounting
The objectives of accounting are-
• To maintain records-
• To generate accurate and authentic information, all the financial activities needs to be remembered
which will not be possible without keeping records. As accounting helps to memorize all the
transactions with records, it is the objective of accounting.
• To ascertain operating results-
• Accounting ascertains whether the business has earned a profit or suffered a loss by preparing
profit and loss statements, which shows the profit loss of business.
• To show the financial position of business-
• Besides profit or loss, the business also needs to know about it financial position at the end of
period. Therefore accounting shows the financial positions at the particular point of time by
preparing a statement called balance sheet. The balance sheet is the statement of capital, liabilities
and assets of business.
• To communicate financial information-
• All the people of accounting is useless until and unless the result or financial information is
communicated to the users. Therefore, accounting communicated the information of operations
and financial positions of business to possible users for decision making purpose.
• To determine tax liabilities-
• Accounting provides financial information to tax authorities, which helps in determining the
amount of tax liability.
 Functions of Accounting
The main functions of accounting are:
• Maintaining systematic and complete records- Maintains
permanent, complete and systematic records of transactions.
• Finding out operating results of business- The results of the
business operation ie profit or loss and financial position.
• Communicating accounting information- Financial information
generated will be communicated to potential users.
• Complying with legal requirement- Preparing books of
account and reports based on legal provision, helps to submit
in concerned departments.
• Protecting business resources- Helps to protect all types of
resources keeping their up to date records.
 Accounting Information and Economic Decisions
• Economic decisions are the decisions made concerning the
financial matters.
• The decisions should be accurate, authentic and reliable.
• Decisions with above nature can only help to take right decisions.
• Accounting information is the information regarding financial
matters.
• Accounting helps to ascertain authentic and reliable information.
• Helpful for taking right decisions.
 Users of Accounting Information
• Accounting information is accumulated to help someone
make decisions Like company president, a production
manager, a hospital or school administrator, a sales
manager, a shareholder, a small-business owner, a
politician–the list is almost infinite.
• Almost all managers in every organization are better
equipped to perform their duties when they have a
reasonable grasp of accounting data.
• In fact, a survey of managers ranked accounting as the
most important business course for future managers.
 Contd.
External users
– Creditors and Suppliers
– Tax authorities
– Regulatory bodies
– Economics Planners
– Government
– Customers
– Shareholders and Investors
– Employees and Workers
Internal users
– Managers, CEO, BODS, Supervisors
 Means of Accounting Information
• Income Statement,

• Balance Sheet,

• Statement Of Changes In Equity

• Statement Of Changes In Retained Earnings,

• Statement Of Cash Flow,

• Management Disclosure and Analysis

• Notes
 Characteristics of Information
• Relevance: Timely, neutral, prediction, feedback
• Reliable : Faithful, Verifiable and neutral
• Comparability: Different companies with same accounting
principles
• Consistency: Follows same accounting methods from year to year

• Materiality –Does not have to follow small values

• Conservatism – When doubt, choose the solution that will be least
likely to overstate assets and incomes
 Accounting Cycle or Process of Accounting

1. Identifying the Financial Transactions

2. Recording of Financial Transactions
3. Classifying Financial Transactions
4. Summarizing Financial Transactions
5. Analyzing and interpreting Financial Transactions
6. Communicating the Results of Business Operations and
Financial Position
 Basic Accounting Concepts
• The fundamental assumptions on which accounting is based are
known as accounting principles.
• They are the assumptions applied uniformly worldwide.
• They are known as Generally Accepted Accounting Principles.
• Accounting Principles consists of Accounting Concepts and
Accounting Conventions.

Accounting
Principles

Accounting Accounting
Concepts Conventions
 Accounting Principles
Accounting Concepts Accounting Conventions
The following are the most Accounting conventions are
important concepts of accounting: bearing the practical
considerations in recording the
1. Money measurement concept
transactions of the business
2. Business entity concept enterprise in systematic manner.
3. Going concern concept 1. Convention of consistency
4. Matching concept 2. Convention of conservatism
5. Accounting period concept 3. Convention of disclosure
6. Duality or double entry concept 4. Convention of materiality
7. Cost concept
 Accounting Concepts
• Business Entity Concept:
• Every organization will have independent entity than its owner and thus treated as
an artificial person.
• Enjoys all right as a natural person enjoy.
• So economics activities are to be separately identified and accounted for –
creditors, shareholders, customers.
• Going Concern Concept:
• Will have infinite lifetime and remain in operations for the foreseeable future.
• Money Measurement Concept:
• Things that can be expressed in monetary worth should be recorded in accounting.
• Accounting Period Concept:
• Life of a business can be divided into artificial time period that will be normally for
year.
• Monthly, quarterly, reports to shareholders and monthly statements for internal
purpose.
• Cost Concept:
• Indicates that assets are recorded at their cost price not only at the time of purchase
but also over the time assets are held.
 Contd.
• Matching Concept:
• Cost and expenses of a particular period mush be matched with
the revenues generated for the period to determine net income
and loss.

• Duality Concept:
• Every transaction has two fold effects.
• This is also foundation of double entry system.

• Objectivity Concept:
• Only those financial transaction which have the supporting
documents are to be recorded in books of account.
• The transactions recorded without proof is considered to be false.
 Accounting Conventions
• Convention of Consistency:
• Whatever the methods are followed to record the transactions in books of
account, should be similar and uniform for all the time.
• Helps for comparison.
• Convention of Disclosure:
• Events and circumstances that make differences in financial statements should
be disclosed.
• Convention of Conservatism:
• The conservatism won’t give any emphasis on the anticipation of the firm,
instead it gives paramount importance to all possible uneventualities of the
firm without considering the future profits.
• Convention of Materiality:
• The convention of materiality states that, to make financial statements
meaningful, only material fact i.e., important and relevant information should
be supplied to the users of accounting information.
 Branches of Accounting

• Financial Accounting

• Cost Accounting
• Management Accounting

• Social Accounting

• Human Resource Accounting

• Environmental Accounting
 Financial Accounting
• Financial accounting concerns with the preparation of
financial statements and reports like income statement
and balance sheets of specific periods for external users
to show the financial position of the company.
• It is a summarized form of the overall financial position
of company. It provides information for external users
like shareholders, creditors, suppliers, government etc.
• The branch of account, which develops information for
external decision makers like shareholders, creditors,
government, suppliers etc.
 Objectives of Financial Accounting
• To keep systematic records of financial
transactions
• To ascertain the results of operations

• To reveal the overall financial positions of

organization
• To report past performance and future prospects
 Cost Accounting
• Costs are the volume of resources sacrificed to produce goods and
services.
• Cost accounting is the system, which accumulates, classifies and
interprets costs to use in performance evaluation and decision-making
• Deals primarily with the accumulating cost data needed by the
management to control the current operations and plan for future.
• Provides accurate and timely information needed to help the business
and control costs.
• Generally, both financial accounting and management accounting use
costs accumulated and classified by the cost accounting for external
and internal purposes.
• Traditionally, focused in manufacturing cost only but at present it is
also used in non-manufacturing concerns for cost control.
 Features of Cost Accounting

• Systematic knowledge disciplined by itself.

• Consist its own principles, concepts and conventions.

• Science and arts.

• Use of costing techniques.

• Analysis of cost.

• Support to determine cost.

• Support to fix selling price.

 Objectives of Cost Accounting
• To ascertain cost per unit of different types of products
• To ascertain the element of costs
• To disclose sources of wastages and prepare report for
control
• To provide requisite data for fixation of price
• To exercise effective control of inventory
• To provide useful data for financial decision
• To organize cost reduction programs
• To advise management for future policies and projects
 Differences between Financial and Cost Accounting
Basis Financial Accounting  Cost Accounting 
Meaning  It is that accounting in which It is that accounting which is
transactions are recorded to make helpful to calculate and control the
the financial statements. cost.
Objective Its main objective is to show the Its main objective is to ascertain
financial statement correctly. cost for sound decision making.
Law  It should follow the rules of IFRS It can be made according to the
and income tax law. need of company.
Controlling  It is concerned only with record It is concerned with controlling the
of the transactions correctly. cost.
Profit It makes the income statement to It helps to find the profit per job or
Analysis show the net profit or loss or per batch or per service unit is
whole organization not one job or possible.
batch.
Record It uses only actual transaction for It uses both actual data and
recording purpose. estimations for analysis.
Valuation Under it, inventory is valued on Under it, inventory is valued on
of the cost or market value which cost.
inventory will be low.
 Management Accounting
‘Management accounting is concerned with the
accounting information that is useful to
management.’ – Robert Anthony

‘…….information used for formulation of strategy,

planning and controlling activities, decision
making, optimizing the use of resources, disclosure
to shareholders and others external to entity,
disclosure to employees and safeguarding assets.‘”

- CIMA
 Features of Management Accounting
• Budgeting, planning and forecasting

• Calculating the profitability of products, services and operations

• Measuring organizational, divisional and departmental performance

• Comparing results and performance within and between organizations

• Assisting and assessing the effectiveness and efficiency

• Advising about the product mix, markets to be served and selling prices,

whether to outsource products, components, activities and services

• Advising on decisions involving the investment of scarce funds between

a range of possible alternatives and assisting in the making of a wide

range of strategic decisions.

 Objectives of Management Accounting
• Providing information to the managers the for decision making and
planning in revenue and cost projection of organization
• Assisting managers in interpretation of financial data that are not
understand by internal users
• Assisting managers in directing and controlling operations through
its attention in their function
• Motivating managers toward the achievement of organization's
goals
• Measuring the performance of managers, subunits and employees
within organization
• Assessing the organizations competitive position, and working
with the other managers to ensure organization's long term
competitiveness
 Roles of Management Accounting
• In pursuing its goals, an organization acquires resources, hires
people, and then engages in an organized set of activities.
• It is up to the management team to make the best use of the
organization's resources, activities, and people in achieving the
organization's goals.
⮚ Planning
⮚ Directing operational activities
⮚ Controlling

⮚ Decision Making
 Differences between Financial and Management Accounting

Basis Financial Accounting Management accounting

Objectives It is to make periodical report It is to assist managers at all levels i.e.
Outsiders like shareholders, internal users by providing necessary
government, customers, suppliers etc accounting information.
as well as organizational managers
Sources of It uses data, which are historical, It uses data, which are subjective,
data subjective, and related with past. descriptive and related with future.

Accounting It is governed by GAAPs. Therefore, It has no such principles for

principles all organizations prepare the financial preparation and presentation of
reports in the same manner. reports. Therefore, reports differ from
one organization to another.

Reporting Financial reports are generally Reports are prepared in certain time
prepared at the end of the fiscal year interval according to need of
to report stakeholders. management.
Legal It is compulsory in every business It is voluntary. It is applied to increase
compulsion organization. management efficiency for attaining
organizational objectives.
 Differences between Cost and Management Accounting
Basis Cost Accounting Management accounting

Objectives Its objective is to determine Its objective is to assist

and record the cost of managers providing accounting
production of goods and information for decision-
services. making.
Scope Its scope is limited in cost It has broad scope, and includes
determination and record. financial and cost accounting.

Sources of data It uses the quantitative data It uses both quantitative and
only. qualitative data
Accounting Certain principles and No specific principles like
principles procedures are followed in cost accounting and cost accounting.
determination and allocation.

Nature It uses both past and present It uses past and present data in
data and figure. the projection of future.
 Accounting Records and Systems
• Cash System: The revenues are recognized only
at the moment of realization but the expenses are
recognized at the moment of payment.

• Accrual System: The revenues are recognized

only at the time of occurrence and expenses are
recognized only at the moment of incurring.

• Hybrid System: Combination of above two.

 Single and Double Entry System
•There is two systems of recording financial transactions in the books of
account ie Single Entry System and Double Entry System.
•Single entry system records only some selected transactions- related only with
cash and personal accounts.
•Large volume of transactions are omitted and thus will not be supportive for
generating accurate and authentic information.
•For generating accurate and authentic information, it is required to record all
the financial transactions that takes place in an organization.
•To overcome this limitation of single entry system, double entry system is
developed.
•Double-entry book-keeping system is the specific technique which reflects the
concept of duality.
•Recognizes two aspects of a transaction and records them giving their names
of debit and credit in two separate accounts with the equal effect.
•Works on the principle of “getting something having some value, giving
something having same value”.
 Elements of Financial Statements
• Generally Accounting and Finance Professionals get their information from
Financial Statements prepared by accountants.
• In general, Financial Statements are used to determine how the firm “is doing,” in
particular, how it has done over some period of time.
• Financial statements reflect the financial health of companies.
• The purpose of these statements is to help users make better decisions.
• Most corporations prepare three basic financial statements: Income Statement,
Balance Sheet and Cash Flow Statements.
• Income Statement:
– A Listing of Revenue, Expenses, and Profits over a period of time
• Balance sheet:
– A listing of Assets, Liabilities, and Net Worth at a single point in time. Generally
in terms of Book Value.
• Cash Flow Statement:
– The Flow of Cash over a period of time.
 Features of Financial Statements

⮚ Expressed in monetary terms.

⮚ Definite time.

⮚ Historical in nature.
 Objectives of Financial Statements

⮚ To provide the financial information to the potential

users.
⮚ To reveal the profitability and solvency of the firms.

⮚ To help to evaluate the financial position and

efficiency of the management.
⮚ To facilitate the intra and inter firms comparison of
the financial performance.
 Limitation of Financial Statements

⮚ Provide only quantitative information.

⮚ Historical in nature.

⮚ Summarized reports.

⮚ No adjustment of price level change .

 The Balance Sheet
• Balance sheet is a financial statement of the financial position of the firm at a
particular paint of time.
• It is only a statement not an account.
• It is prepared on a particular date, normally at the end of the accounting year
and thus information contained in it is valid only for that date.
• It provides the snapshot view of the firm’s financial resources and claims
against such resources.
• The financial resources reported on the balance sheet are known as assets
and the claims against such assets are known as liabilities and owners’ equity.
• It is simply a list of ledger balances of capital nature.
• It measures and reports the value of assets, liabilities and equity of a firm at a
given date.
• It helps to judge the long-term solvency of the organization.
• It can be prepared in horizontal format or vertical format.
 Format of Balance Sheet
Balance Sheet
As on
Capital and Liabilities ……….
Amount Assets Amount
Capital- Fixed Assets-
Capital xxxx Goodwill xxxxx
Add/ less Net profit/net loss xxxx Land and building xxxxx
Less Drawings xxxx xxxxx Plant and machinery xxxxx
Reserves xxxx Furniture and fittings xxxx
Secured loan- Vehicles xxxx
Debentures xxxx Equipments and tools xxxx
Mortgage loan xxxx Investments-
Bank loan xxxx Investment in share and debenture xxxx
Loan and advances from other xxxx Investment in securities xxxx
Unsecured loan- Current assets-
Short term loan from bank xxxx Inventories xxxx
Fixed deposits xxxx Bills/Account receivable xxxx
Current liabilities- Debtors xxxxx
Bills/Accounts payable xxxx Accrued income xxxx
Creditors xxxx Cash and bank balance xxxx
Income received in advances xxxx Loan and advances-
Bank overdraft xxxx Loan and advances to subsidiaries xxx
Outstanding expenses xxxx Prepaid expenses xxx
Provision- Miscellaneous expenditure-
Pension fund xxxx Preliminary expenses xxx
Bonus fund xxxx
xxxxxxxx xxxxxxxx
 The Income Statement
•It is a summary of revenue earned and expenses incurred which ultimately
results in profit or loss of to the company.
•It provides information about cost of goods sold, operating expenses, non
operating expenses, operating incomes and non operating incomes.
•It is governed by matching principle.
•The main objective of preparing the income statement is to ascertain the
net profit or net loss of the certain period of time.
•Gives the information about operating profit which is a yard stick for
evaluating operating performance of the company.
•Also gives information about net profit or loss of the company.
•Helps to evaluate the overall financial performance of the organization of
one particular period of time.
•No defined format in law and can be prepared as single step or multi step.
 Uses of Income Statement

• Summarize revenues & expenses

• Determine profit/loss

• Explain changes in owner equity

• Calculate financial measures

• Support loan application
 Format of Income Statement

The ABC Company, Inc.

Income Statement
For the year ended ……

Particulars Details Amount (Rs.)

Revenues xxxxxxx
Less: Cost of Goods Sold (xxxxx)
Gross Income xxxxxx
Less- Operating Expenses:
General and Administrative Expense xxxxx
Selling and Marketing Expense xxxxx xxxxx
Income from Operations xxxxxx
Add- Other income xxxx
Less- Interest expense (xxx)
Other expense (xxx) xxxx
Income before Taxes xxxxxx
Taxes xxx
Net Income xxxxxxx
Earnings Per Share xx
 Cash Flow Statement
• The cash flow statement is one of the important financial statements
resulting from the financial reporting process.
• The cash flow statement provides information about an entity’s
operating, investing and financing activities.
• It reports the firm’s cash flows during a period outlining where cash
generated from and where it was spent.
• It is an indicator of the amount of cash receipts and the amount of cash
disbursements during a specified time period.
• It provides information to help assess-
⮚ Entity’s ability to generate future cash flows.
⮚ Entity’s ability to pay dividends and obligations.
⮚ Reasons for difference between net income and net cash used by
operating activities.
⮚ Cash investing and financing transactions during the period.
 Classification of Cash Flows
⚫ Cash flow classifies the flow of cash in to three groups.
Operating Investing Financing
Activities Activities Activities
Generally Income Generally Long- Generally Long-
Term Asset Items Term Liability
Statement Items and Equity Items
Cash inflows: • Cash received (sale) or paid
(purchase) for: ⚫ Cash received from:
• From sale of goods or
– short term investments. ⚫ sale of stock
services.
– long-term investments. ⚫ issuance of debt
Cash outflows: – property plant and ⚫ Cash paid for
• To suppliers for equipment. ⚫ Payment of debt
inventory. – Cash received as interest, (principle only,
• To employees for dividend and rent. interest is in operating
services. • Look at change in investment activities)
• To government for taxes. and fixed asset accounts but
⚫ Payment of dividends
• To lenders for interest. ⚫ Look at change in stock,
may need more specific
• To others for expenses. debt and retained earnings
information.
 Format of the Statement of Cash Flows
• Order of Presentation:
1. Operating activities. Direct Method
2. Investing activities. Indirect
3. Financing activities. Method

⚫ The cash flows from operating activities section

always appears first, followed by the investing and
financing sections.
⚫ Cash flow statement can be prepared under to
methods- Direct method and Indirect method.
⚫ Companies favor the indirect method for two reasons:
1. It is easier and less costly to prepare, and
2. It focuses on the differences between net income
and net cash flow from operating activities.
Cash Flow Statement under Direct Method
Particulars Details Amount
Sales and collection from debtors-
Sales- xxxxxxx
Debtors/ Account receivables (xxxxxx)
Sales Discount- (xxxx) xxxxxxxx
Purchase and payment to creditors-
Purchases- (xxxxxx)
Creditors/ Account payables- xxxxx
Purchase Discount- xxxx (xxxxxx)
Payment to staffs and other expenses-
All the cash expenses paid- (xxxxx)
Outstanding expenses- xxxx
Prepaid expenses- (xxxxx) (xxxxxx)
Payment of interest and taxes-
Interest and tax paid- (xxxx)
Interest and tax refund- xxx (xxxx)
Cash flow from extra ordinary activities-
Bank Overdraft received- xxxx
Bank Overdraft repayment- (xxx)
Purchase of Marketable securities- (xxxx)
Sales of Marketable securities- xxxx (xxxx)
Net cash flow from operating activities- (xxxxx)
Cash flow from investing activities-
Purchase of fixed assets- (xxxxxx)
Sales of fixed assets- xxxxxx
Receipts of Interest, Rent, Dividend xxxxx
Net cash flow from investing activities- (xxxxx)
Cash flow from financing activities-
Capital- xxxxxxxx
Drawings- (xxxxx)
Dividend paid- (xxxx)
Net cash flow from financing activities- xxxxxx
Net cash flow for the year- XXXXXXXX
 Cash Flo
w Statem
under In ent
direct M
ethod
 Statement of Retained Earnings
• Retained earnings refers to the portion of net income of a firm
that is retained by the corporation.
•  Profit generated by a company that are not distributed to
stockholders as dividend.
• They are either reinvested in the business or kept as a reserve for
specific purpose.
• Retained earnings are reduced by losses, and are also called
accumulated earnings, accumulated profit, accumulated income,
accumulated surplus, earned surplus, undistributed earnings, or
undivided profits.
 Format of Retained Earnings
The ABC Company, Inc.
Statement of Retained Earnings
For the year ended ……

Particulars Details Amount (Rs.)

Opening Balance of Retained Earnings xxxxxxx
Add: Net Income for the Year (xxxxx)
Total Income Available xxxxxx
Less: Allocation of Income:
Income Tax Paid xxxxx
Dividend Paid xxxxx
General Reserve xxxxx
Reserve Funds xxxxx
Research and Development Funds xxxxx
Dividend Equalization Funds xxxxx
Pension Funds xxxxx
Total Allocation of Income xxxxxx
Retained Earnings xxxxxxx
 Sources of Capital

• Equity shares
• Preference shares
✔ Cumulative and non-cumulative preference shares
✔ Redeemable and non-redeemable preference shares
✔ Participating and non-participating preference shares
✔ Convertible and non-convertible preference shares
• Debenture
✔ Registered and bearer debentures
✔ Secured and unsecured debentures
✔ Redeemable and irredeemable debentures
✔ Convertible and non-convertible debentures
 End of The Unit

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