fundamental of financial accounting
TRANSCRIPT
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Introduction Financial Accounting
-Nabaraj Adhikari ( Faculty of Accounting)-Nirajan silwal(RE-EDITED)
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What is Accounting?
• Accounting is a process of identifying, classifying and recording the business activities to provide the economic information to interested users.
• It is one of the fastest growing concept and most popular field of study.
• Accounting can be defines as career.
• Accounting is a language of business.
• It is important for both accountants and non accountants.
• It provides the information for planning , controlling and decision making.
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Users of Accounting Information
1. Internal Users- Those users who are directly involve in day to day operation of organization. They require information for internal use.
2. External Users- Those who are not directly associated with the organization but they also require information for their own purpose.
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Internal Users• BOD • Managers.• Employee.• Accountants and others.
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External Users• Investors/shareholders.• Suppliers.• Lenders.• Customers.• Government.• Trade Unions.• Security analyst.• Newspaper and media.
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Accounting
Accounting is the process of measuring, interpreting, and communicating financial information to support internal and
external business decision making.
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Business Activities Involving
Accounting1. Operating Activities.
2. Investing Activities.
3. Financing Activities.
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Operating Activities• The business activities which are involved in the day to
day activities is called operating activities.• Activities which result the cash inflow or outflow in
connection with the purchase and sales of tradable items of goods.
• Such transactions may appear at least once in a year in the organization.
• For e.g. sales revenue, interest revenue, dividend received, purchase, operating expenses, interest expenses, Tax expenses etc.
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Investing Activities• Those activities which are related to the purchase and
sale of business assets, investments and intangible assets is called investing activities.
• Such transactions are not necessary to be appeared at least once in a year in the business.
• For e.g. purchase and sales of plant, property and equipment, purchase and sales of intangible assets and investment.
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Financing Activities• Those activities which are related with the raising funds
required for the business and repayment of fund is called financing activities.
• It is also non operating activities.• It affects the changes in long-term liabilities and stockholders
equity section in balance sheet. • For e.g. issue of shares, loan taken and repayment of loan,
issue and redemption of debt securities , dividend paid etc.
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The Accounting Cycle
Accounting process - set of activities involved in converting information about transactions
into financial statements.
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Relationship of Financial, Management, and Cost Accounting
FINANCIALACCOUNTING
MANAGEMENTACCOUNTING
COSTACCOUNTING
Product Costs
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©.
Types of Accounting
1.Financial Accounting
2. Management or managerial Accounting
3. Cost Accounting
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What is Financial Accounting?
• Financial accounting is the preparation and communication of financial information to its users.
• Financial accounting is based on Generally Accepted Accounting Principles[GAAP].
• It records only monetary transactions.• It is fully guided by GAAP.• The data and information which financial accounting provides is
historical natured.• Under financial accounting, the reports are generally prepared for a
certain specified period.
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To be continue….
• It does not have any provision of cost control and cost planning. It merely focuses on the recording of cost in financial reporting.
• It is a statutory obligation for a firm.• Under financial accounting, the valuation of inventory is made on the
basis of cost or market value whichever is less.• The users of financial accounting are mainly external users such as
government, debtors , creditors, investors etc.• It generally intends to report the result of business operation and
financial condition for a period.• The nature of financial accounting is routine and clerical.
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Managerial accountingVs.
Financial Accounting
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Managerial Accounting
Financial accounting
Nature Records material, labour and overhead costs in product or jobReports produced are for internal management and contol
Records company transaction eventsExternal financial statements are produced
Accounting system
Not based on the double entry system
Follows the double entry system
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Managerial Accounting
Financial Accounting
Accounting principles
No need to use accounting principlesAdopt any accounting techniques that generates useful accounting information
Use Generally Accepted Accounting Principles for recording transactions
Users of information
Used by different levels of management or departments responsible for respective activities
Used by external parties: shareholders, creditors, government, etc
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Managerial Accounting
Financial Accounting
Operation guidelines or standards
Based on management instructions and requirements
Conforms to company Ordinances, stock exchange rules, HKSSAPs
Time span
Reports are prepared whenever neededThey may be prepared on a weekly or daily basis
Reports are prepared for a definite period, usually yearly and half yearly
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Managerial Accounting
Financial Accounting
Time focus
Future orientation: forecasts, estimates and historic data for management actions
Past orientation: use of historic data for reporting and evaluation
Perspective
Detailed analysis of parts of the entity, products, regions, etc
Financial summary of the whole orgainisation
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Cost Accountingvs.
Managerial Accounting
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Managerial Accounting
Cost Accounting
Objective To provide information for planning and decision making by the management
To ascertain and control cost
Basic of recording
Concerned with transactions related to the future
Based on both present and future transactions for cost ascertainment
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Managerial Accounting
Cost Accounting
Coverage Covers a wider area: financial accounts, cost accounts, taxation, etc.
Covers matters relating to ascertainment and control of cost of product or service
Utility Only the needs of internal management
The needs of both internal and external interested groups
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Managerial Accounting
Cost Accounting
Types of transactions
Deals with both monetary any non-monetary transactions, covering both quantitative and qualitative aspects
Deals only with monetary transactions, covering only quantitative aspect
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Cost AccountingVs.
Financial Accounting
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Financial Accounting
Cost Accounting
Objective The main objective of financial accounting is to prepare the financial statement and communicate to the users.
To ascertain and control cost
Basic of recording
Concerned with transactions related to historical.
Based on both present and future transactions for cost ascertainment
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Financial Accounting
Cost Accounting
Coverage It works with financial statements and and reporting it .
Covers matters relating to ascertainment and control of cost of product or service
Statutory obligation
It is a statutory for a firm to maintain financial accounting.
It is not a statutory for a firm to maintain cost accounting.
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Financial Accounting
Cost Accounting
Inventory valuation
Inventory Valuation is made on the basis of cost price or market price whichever is less.
Inventory Valuation is made on the basis of cost price.
Cost control
It does not have any provision of cost control.
It aims on controlling costs such as material, labor, overhead.
Users It mainly focuses on external users.
It mainly focuses on internal users.
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Generally Accepted Accounting Principles. [GAAP]
• Financial Accounting has evolved accounting principles, concepts and conventions which are generally accepted and universally practiced.
• Financial accounting relies on certain standards or guides which remains same all over the world are called GAAP.
• These principles are established by International Financial Accounting Standard Board [IFASB].
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Accounting concepts
1.Business entity concept.2.Money measurement concept.3.Going concern concept.4.Accounting period concept.
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Accounting Principles.1.Cost Principles.2.Revenue Principles.3.Matching Principles.4.Full disclosure Principles.
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What is Business?
A continuous economic activity carried out to earn profit through:
Production and sales of goods and services to customers
Generating and rendering services
Legal and continuous process
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Forms of Business organization.
1.Sole trading firm.2.Partnerships.3.Corporations/Joint
stock companies.
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1. Sole proprietorships.
Advantages Disadvantages-Easy to establish. -Limited capital.-effective management. -Unlimited liability.-incentive to work. -Lack of effective management.-no profit sharing. -Narrow scope.-quick decision. -No loss sharing.-tax advantage. -Lack of perpetual existence.-high secrecy.
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2. Partnerships.
• Advantages-Easy to establish.-Tax advantage.-Effective management.-Easy for promotion.-Risk sharing.-New idea and skills.-Easy to collect capital.
• Disadvantages.-Unlimited liability.- Lack of perpetual existence.-Conflict.-Delay in decision making.-Lack of sufficient capital.-Profit sharing.-Difficulty in secrecy.
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3. Corporations/Joint stock company.
• Advantages.-sufficient capital.-Limited liability.-Ownership transfer.-Democratic management.-Effective management.-Perpetual existence.-Popular in market.
• Disadvantages.-Difficulty in formation.-Delay in decision.-Lack of secrecy.-Profit sharing.-Excessive legal provisions.
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Qualitative Characteristics of accounting information.
1. Understandability.2. Relevance.3. Reliability.4. Comparability.
5. Consistency.6. materiality.7. conservatism.
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