AFM Unit I
AFM Unit I
AFM Unit I
ADVANTAGES OF ACCOUNTING
BRANCHES OF ACCOUNTING
USERS OF ACCOUNTING
INFORMATIONS
ACCOUNTING CONCEPTS
ACCOUNTING PROCESS
ACOUNTING CONVENTIONS
ACCOUNTING STANDARDS
ACCOUNTING PRINCIPLES
MEANING & OBJECTIVES OF
ACCOUNTING
INTRODUCTION
Every organization enters into a number of transactions during its course of business to achieve its
objectives. These transaction affect its assets and liabilities.
All accounting work in the beginning was in the nature of financial accounting which was used to record
business transactions for a certain period usually called accounting period.
These transactions were classified and summarized in the form of profit and loss account to calculate profit
& loss at the end of accounting period.
Accounting also enables to find out the financial position of the business enterprise on the last date of
accounting period.
MEANING AND DEFINITION OF ACCOUNTING
Meaning of Accounting
Accounting is a specialized branch that keeps track of a company's transactions. Using
standardized guidelines, the transactions are recorded, summarized, and presented in a
financial report or financial statement such as an income statement or a balance sheet.
Definition
As per American Institute of Certified Public Accountant:-
Accounting is the art of recording, classifying and summarizing in a significant manner and
in terms of money, transaction and events which are in parts at least, of a manner character,
and interpreting the results thereof.
LET ME MAKE YOU UNDERSTAND THE CONCEPT OF ACCOUNTING
OBJECTIVES OF ACCOUNTING
4. ASSISTANCE TO MANAGEMENT
The Accounting information helps the management to plan its future activities
by preparing budgets in respect of sales, production, expenses, cash, etc.
5.HELPS IN TAXATION MATTERS
Income tax authorities could be convinced about the amount of taxable income
or actual sales as the case may be with the help of written records
6 PREVENTIONS OF FRAUDS AND ERRORS
Accounting records are subject to auditing in most of the case. Auditing helps
detection of errors and frauds that have taken place during the year and take
steps to prevent their recurrence.
7. COMMUNICATION TO EXTERNAL USERS
Accounting provides valuable financial information to external users like
investors, consumers, creditors, Govt. agencies etc. who require such
information for various purposes.
BRANCHES OF ACCOUNTING
BRANCHES OF ACCOUNTING
1. Financial Accounting.
2. Management Accounting (6) Green (7) Forensic (1)Financial
3. Cost Accounting. Accounting Accounting Accounting
4. Tax Accounting.
5. Human Resource Accounting
6. Green Accounting.
7. Forensic Accounting. (5)Human Branches of (2.)Managem
Resource Accounting ent
Accounting Accounting
(1)FINANCIAL ACCOUNTING
It is concerned with the recording of business transactions and periodic preparation
of income statement, balance sheet and cash flow statement from such records.
It is correctly said that “ Accounting was born without notice and brought up in
negligence. It means accountancy was first practiced and its principles (i.e. rules and
guidelines) were developed later on.
There is no doubt that rules and guidelines are necessary for recording the business
transactions to bring some uniformity in the preparation and interpretation of basic
financial statement namely i.e. profit and loss account and the balance sheet.
USERS OF ACCOUNTING INFORMATION
MANAGERS LENDERS
EMPLOYEES SUPPLIERS
CUSTOMERS
TAX AUTHOROTIES
GOVERNMENT
AUDITOR
PUBLIC
INTERNAL USERS OF ACCOUNTING INFORMATION
1. OWNERS
Financial statements provide information to owners about
the profitability of the overall business as well as individual
products and geographic segments.
2. MANAGERS
Managers need accounting information to plan, monitor and make
business decisions.
Management need accounting information to monitor the
performance of business by comparison against past performance,
competitor analysis, key performance indicators and industry
benchmarks.
INTERNAL USERS OF ACCOUNTING INFORMATION
3. EMPLOYEES
Employees are interested in knowing how
well a company is performing as it could
have implications for their job security
and income.
(1) INVESTORS
Investors need to know how well their investment is
performing. Investors primarily rely on the financial
statements published by companies to assess the
profitability, valuation and risk of their investment.
(2) LENDERS
Lenders use accounting information of borrowers to assess
their credit worthiness, i.e. their ability to pay back any loan.
Lenders offer loans and other credit facilities on terms that are
based on the assessment of financial health of borrowers.
(3)SUPPLIERS
Just like lenders, suppliers need accounting information to
assess the credit-worthiness of its customers before offering
goods and services on credit.
EXTERNAL USERS OF ACCOUNTING INFORMATION
(4)CUSTOMERS
Industrial consumers however need accounting information about
its suppliers in order to assess whether they have the required
resources that are necessary for a steady supply of goods or services
in the future.
(6) GOVERNMENT
Government ensures that a company’s disclosure of accounting
information is in accordance with the regulations that are in place to
protect the interest of various stakeholders who rely on such information
in forming their decisions.
(7)AUDITOR
External auditors examine the financial statements and the underlying
accounting record of businesses in order to form an audit opinion.
(8) PUBLIC
General public may also be interested in accounting information of a
company. These could include journalists, analysts, academics, activists
and individuals with an interest in economic developments.
LET ME MAKE YOU UNDERSTAND THE CONCEPT OF WHY THE USERS
NEED ACCOUNTING INFORMATION
ACCOUNTING CONCEPT
MEANING ACCOUNTING CONCEPTS
(3) GOING
CONCERN
CONCEPT
(4) COST
CONCEPT
ACCOUNTING CONCEPTS
Accounting process is the complete sequence of accounting procedures which begins with the recording of
business transactions from source of documents in the Journal.
There is no doubt that rules and guidelines are necessary for recording the business transactions to bring
some uniformity in the preparation and interpretation of basic financial statement namely i.e. profit and
loss account and the balance sheet.
Accounting Process is the complete sequence of accounting Procedures which begins with the recording of
business transactions from source documents in the journal purpose or special subsidiary books,
As the case may be and end with the preparation of two basic financial statement, namely , income
statement ( Profit and Loss account) and the balance sheet.
In Case of Limited Liability Companies, The Cash Flow Statement is also prepared.
The main purpose of the accounting process is to record all the transactions systematically without
missing an entry.
STEPS OF ACCOUNTING PROCESS (1/9)
ACCOUNTING PROCESS (2/9)
ACCOUNTING PROCESS (4/9)
Step No 7: Prepare financial Statement such as profit & loss A/c Balance sheet & Cash Flow Statement:
Financial statements are prepared from the balances from the adjusted trial balance. The financial
statements are made at the very last of the accounting period.
Financial Statements Includes (1) Profit & Loss A/c , (2) Balance Sheet, (3) Cash Flow Statement.
ACCOUNTING PROCESS (8/9)
CONVENTION
OF
CONSISTENCY
ACCOUNTING CONVENTIONS (3/6)
NATURE OF ACCOUNTING STANDARDS
Accounting Standards prescribe a model code or yardstick or benchmark of accounting policies and
Practices for guidance for the accountants as to how transactions and events are to be presented and
disclosed in the financial statements.
Accounting Standards eliminate the effects of several accounting policies and practices so that financial
statements of different firms become comparable.
Accounting Standards Provide the most suitable Accounting Methods to solve one or more accounting
problems. For Example , the accounting standard on revenue recognition enables the accountant to solve
the problem of the realization by suggesting sales as the main criterion.
Accounting Standards clearly Communicate to the users of the financial information the basis on which
financial statement have been prepared. For Example how the fixed assets and current assets have been
valued , how the cash from operating activities, investment activities and financial activities has been
arrived at.
ISSUES COVERED BY ACCOUNTING STANDARDS
(d) The disclosures requirements to enable the public in general and creditors, owners
and potential or future investors in particular to know what is inside the financial
statement so that they can take prudent or intelligent business decision.
LIST OF ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF
CHATERED ACCOUNTANTS OF INDIA (1/2)
MEANING OF GAAP
GAAP stand for Generally Accepted Accounting Principles. Accounting
Rules used to prepare & standardize the reporting of financial statements.
Those guidelines which help the Accountant in preparing the accounting
standards in such a way that uniformity and comparability in the
accounts. GAAP is implemented through measurement principles &
disclosures This general acceptability of accounting principles has made
them popular as Generally Acceptable Accounting Principle briefly
expressed GAAPs.
ICAI (Institute of Charted Accountant of India) is the body of India.
(a) RELEVANCE
Accounting principle is relevant if it is helpful in providing useful information to the users of
financial statements.
(b) OBJECTIVITY
Accounting principle is objective in the sense that the accounting information is free from
personal judgement or bias of those who provide it. The Accounting information must be
verifiable, that is there is some methods of findings out the correctness of the information
reported with the help of documentary evidence.
(c) FEASIBILTY
It means that the principle is practicable , that it can be used without much complications or
cost. This criterion or condition applies to time labor and cost pf providing accounting
information, its accuracy and resulting benefits.
SALIENT FEATURES OF GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES