--- Content provided by FirstRanker.com ---The financial statements that summarize a large company's operations, financial position and
cash flows over a particular period are a concise summary of hundreds of thousands of financial
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
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FINANCIAL ACCOU NTINGANDANALY SIS
Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
cash flows over a particular period are a concise summary of hundreds of thousands of financial
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
payment which is not due to him.
vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
compulsorily required to maintain accounts as per the law governing their operations such as the
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
accounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
LEDGER:
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
Posting refers to the process of entering in the ledger the information given in the journal. In the
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
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FINANCIAL ACCOU NTINGANDANALY SIS
Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
cash flows over a particular period are a concise summary of hundreds of thousands of financial
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
payment which is not due to him.
vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
compulsorily required to maintain accounts as per the law governing their operations such as the
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
accounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
LEDGER:
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
Posting refers to the process of entering in the ledger the information given in the journal. In the
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
these sub?divided journals, the double entry principles of accounting are strictly followed.
Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
ledger with the required explanation called as narration and hence, it plays a dual role of a
journal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
Accounting concepts:
The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
A business unit is an organization of persons established to accomplish an economic goal.
Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
Money Measurement Concept:
In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
accounting does not give a complete picture of all the transactions of a business unit. This
concept does not also take care of the effects of inflation because it assumes astable value for
measuring.
Going Concern Concept:
longer period of time, i.e., a business unit is considered to be a going concern and not a
liquidated one. Keeping this in view, the suppliers and other companies enter into business
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MBA DEPARTMNET
Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objectives of Accounting:
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
of the some period.
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
iv) To portray the liquidity position: Financial reporting should provide information about how
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
When the business transactions take place, the first step is to record the same in the books of
accounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
as a journal entry.
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
SU BSIDIARYBOOKS
Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
also referred to as English System. Though the usual type of journal entries are not passed in
Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
journal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
receipts at any time.
The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
Business Entity Concept:
Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants.
In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
concept does not also take care of the effects of inflation because it assumes astable value for
measuring.
Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a
liquidated one. Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
as assets, although they may be practically unsaleable.
According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
assets of the business unit are equal to its total liabilities. Liabilities here relate both to the
outsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly
future (as per goingconcern concept), the measurement of income and studying the financial
position of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
during that accounting period and Balance Sheet is prepared which depicts the financial position
of the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
Historical Cost Concept:
respective amounts involved. For example, if an asset is purchases, it is entered in the accounting
record at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
methodically reduced in its value by way of charging depreciation. However, in the light of
the financial position of the business.
Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
particular period should be compared with the revenues associated to the same period to obtain
it is this concept (matching concept) which necessitated the provisions of different adjustments
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MBA DEPARTMNET
FINANCIAL ACCOU NTINGANDANALY SIS
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
cash flows over a particular period are a concise summary of hundreds of thousands of financial
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objectives of Accounting:
Objective of accounting may differ from business to business depending upon their specific
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
of the some period.
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
iv) To portray the liquidity position: Financial reporting should provide information about how
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
payment which is not due to him.
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
compulsorily required to maintain accounts as per the law governing their operations such as the
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
When the business transactions take place, the first step is to record the same in the books of
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
as a journal entry.
LEDGER:
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
Posting refers to the process of entering in the ledger the information given in the journal. In the
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
SU BSIDIARYBOOKS
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
also referred to as English System. Though the usual type of journal entries are not passed in
these sub?divided journals, the double entry principles of accounting are strictly followed.
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
ledger with the required explanation called as narration and hence, it plays a dual role of a
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
receipts at any time.
Accounting concepts:
upon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
Business Entity Concept:
A business unit is an organization of persons established to accomplish an economic goal.
who provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants.
Money Measurement Concept:
a common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
accounting does not give a complete picture of all the transactions of a business unit. This
measuring.
Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a
longer period of time, i.e., a business unit is considered to be a going concern and not a
transactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
as assets, although they may be practically unsaleable.
Dual Aspect Concept:
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the total
outsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly
the result of each period is ascertained. Though the business is assumed to be continuing in
position of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made
of the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
Historical Cost Concept:
According to this concept, the transactions are recorded in the books of account with the
record at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
methodically reduced in its value by way of charging depreciation. However, in the light of
inflationary conditions, the application of this concept is considered highly irrelevant for judging
Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
particular period should be compared with the revenues associated to the same period to obtain
the net income of the business. Under this concept, the accounting period concept is relevant and
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
advance, etc., during the course of preparing the financial statements at the end of the accounting
period.
Realisation Concept:
complete when the ownership and property are transferred from the seller to the buyer and the
consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire
purchase system where the ownership is transferred to the buyer when the last instalment is paid
and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract is
Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual
receipt. Similarly the costs are recognized when they are incurred and not when payment is
made. This assumption makes it necessary to give certain adjustments in the preparation of
and costs are recognized only when they are actually received or paid. Hence, the combination
of both cash and accrual system is preferable to get rid of the limitations of each system.
Objective Evidence Concept:
This concept ensures that all accounting must be based on objective evidence, i.e., every
existence. Only then, the transactions can be verified by the auditors and declared as true or
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,
Manufacturing Account:
Manufacturing concerns which convert raw material into finished product is required to prepare
manufacturing account and then prepare trading and profit and loss account. This is necessary
because they have to ascertain cost of goods manufactured, gross profit and net profit.
Trading account is prepared for an accounting period to find the trading results or gross margin
of the business i.e., the amount of gross profit the concern has made from buying and selling
during the accounting period. The difference between the sales and cost of sales is gross profit.
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FINANCIAL ACCOU NTINGANDANALY SIS
Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
cash flows over a particular period are a concise summary of hundreds of thousands of financial
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
payment which is not due to him.
vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
compulsorily required to maintain accounts as per the law governing their operations such as the
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
accounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
LEDGER:
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
Posting refers to the process of entering in the ledger the information given in the journal. In the
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
these sub?divided journals, the double entry principles of accounting are strictly followed.
Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
ledger with the required explanation called as narration and hence, it plays a dual role of a
journal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
Accounting concepts:
The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
A business unit is an organization of persons established to accomplish an economic goal.
Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
Money Measurement Concept:
In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
accounting does not give a complete picture of all the transactions of a business unit. This
concept does not also take care of the effects of inflation because it assumes astable value for
measuring.
Going Concern Concept:
longer period of time, i.e., a business unit is considered to be a going concern and not a
liquidated one. Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
Dual Aspect Concept:
According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the total
assets of the business unit are equal to its total liabilities. Liabilities here relate both to the
outsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
the result of each period is ascertained. Though the business is assumed to be continuing in
future (as per goingconcern concept), the measurement of income and studying the financial
position of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made
during that accounting period and Balance Sheet is prepared which depicts the financial position
of the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
According to this concept, the transactions are recorded in the books of account with the
respective amounts involved. For example, if an asset is purchases, it is entered in the accounting
record at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
inflationary conditions, the application of this concept is considered highly irrelevant for judging
the financial position of the business.
Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
the net income of the business. Under this concept, the accounting period concept is relevant and
it is this concept (matching concept) which necessitated the provisions of different adjustments
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
advance, etc., during the course of preparing the financial statements at the end of the accounting
Realisation Concept:
This concept assumes or recognizes revenue when a sale is made. Sale is considered to be
complete when the ownership and property are transferred from the seller to the buyer and the
consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire
and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract is
completed, the profit is calculated on the basis of work certified each year.
Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual
made. This assumption makes it necessary to give certain adjustments in the preparation of
income statement regarding revenues and costs. But under cash accounting system, the revenues
and costs are recognized only when they are actually received or paid. Hence, the combination
of both cash and accrual system is preferable to get rid of the limitations of each system.
This concept ensures that all accounting must be based on objective evidence, i.e., every
transaction recorded in the books of account must have a verifiable document in support of its,
existence. Only then, the transactions can be verified by the auditors and declared as true or
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,
avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,
valuation of inventory, etc., and the accountants are required to disclose the regulations followed.
Manufacturing Account:
Manufacturing concerns which convert raw material into finished product is required to prepare
because they have to ascertain cost of goods manufactured, gross profit and net profit.
Trading account:
Trading account is prepared for an accounting period to find the trading results or gross margin
of the business i.e., the amount of gross profit the concern has made from buying and selling
For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,
direct expenses on purchasing and manufacturing are added up and closing stock of finished
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
the profit and loss account.
In the words of Prof. Carter ?Profit and loss account is an account into which all gains and losses
are collected in order to ascertain the excess of gains over the losses or vice versa.?
Balance sheet:
?Balance sheet is a screen picture of the financial position of a going business concern at a
Asset:
Any physical thing or right owned that has a money value is an asset. In other words, an asset is
that expenditure which results in acquiring of some property or benefits of a lasting nature.
They are classified on the basis of their nature. Different types of assets are as under:
the business with the objective of making profits. Land and building, Plant and machinery,
Furniture and Fixtures are examples of fixed assets.
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
receivable and stock are called current assets as they can be realised within an operating cycle of
(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? they
can be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be both
fixed assets and current assets.
(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt but
of intangible assets. They are usually classified under fixed assets.
(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenses
which are capitalised for the time being, expenses for promotion of organisations (preliminary
expenses), discount on issue of shares, debit balance of profit and loss account etc. are the
Liability:
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MBA DEPARTMNET
FINANCIAL ACCOU NTINGANDANALY SIS
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
cash flows over a particular period are a concise summary of hundreds of thousands of financial
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objectives of Accounting:
Objective of accounting may differ from business to business depending upon their specific
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
of the some period.
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
iv) To portray the liquidity position: Financial reporting should provide information about how
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
payment which is not due to him.
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
compulsorily required to maintain accounts as per the law governing their operations such as the
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
When the business transactions take place, the first step is to record the same in the books of
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
as a journal entry.
LEDGER:
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
Posting refers to the process of entering in the ledger the information given in the journal. In the
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
SU BSIDIARYBOOKS
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
also referred to as English System. Though the usual type of journal entries are not passed in
these sub?divided journals, the double entry principles of accounting are strictly followed.
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
ledger with the required explanation called as narration and hence, it plays a dual role of a
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
receipts at any time.
Accounting concepts:
upon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
Business Entity Concept:
A business unit is an organization of persons established to accomplish an economic goal.
who provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants.
Money Measurement Concept:
a common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
accounting does not give a complete picture of all the transactions of a business unit. This
measuring.
Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a
longer period of time, i.e., a business unit is considered to be a going concern and not a
transactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
as assets, although they may be practically unsaleable.
Dual Aspect Concept:
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the total
outsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly
the result of each period is ascertained. Though the business is assumed to be continuing in
position of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made
of the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
Historical Cost Concept:
According to this concept, the transactions are recorded in the books of account with the
record at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
methodically reduced in its value by way of charging depreciation. However, in the light of
inflationary conditions, the application of this concept is considered highly irrelevant for judging
Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
particular period should be compared with the revenues associated to the same period to obtain
the net income of the business. Under this concept, the accounting period concept is relevant and
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
advance, etc., during the course of preparing the financial statements at the end of the accounting
period.
Realisation Concept:
complete when the ownership and property are transferred from the seller to the buyer and the
consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire
purchase system where the ownership is transferred to the buyer when the last instalment is paid
and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract is
Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual
receipt. Similarly the costs are recognized when they are incurred and not when payment is
made. This assumption makes it necessary to give certain adjustments in the preparation of
and costs are recognized only when they are actually received or paid. Hence, the combination
of both cash and accrual system is preferable to get rid of the limitations of each system.
Objective Evidence Concept:
This concept ensures that all accounting must be based on objective evidence, i.e., every
existence. Only then, the transactions can be verified by the auditors and declared as true or
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,
Manufacturing Account:
Manufacturing concerns which convert raw material into finished product is required to prepare
manufacturing account and then prepare trading and profit and loss account. This is necessary
because they have to ascertain cost of goods manufactured, gross profit and net profit.
Trading account is prepared for an accounting period to find the trading results or gross margin
of the business i.e., the amount of gross profit the concern has made from buying and selling
during the accounting period. The difference between the sales and cost of sales is gross profit.
For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
the profit and loss account.
Profit and Loss Account:
In the words of Prof. Carter ?Profit and loss account is an account into which all gains and losses
Balance sheet:
?Balance sheet is a screen picture of the financial position of a going business concern at a
certain moment? ? Francis.
Asset:
that expenditure which results in acquiring of some property or benefits of a lasting nature.
They are classified on the basis of their nature. Different types of assets are as under:
(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
the business with the objective of making profits. Land and building, Plant and machinery,
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
receivable and stock are called current assets as they can be realised within an operating cycle of
one year to discharge liabilities.
(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? they
fixed assets and current assets.
(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt but
have value are called intangible assets. Goodwill, patents, trade marks and licences are examples
of intangible assets. They are usually classified under fixed assets.
which are capitalised for the time being, expenses for promotion of organisations (preliminary
expenses), discount on issue of shares, debit balance of profit and loss account etc. are the
examples of fictitious assets.
Liability:
words of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
claims of those who ate not owners are called liabilities?.
In simple terms, debts repayable to outsiders by the business are known as liabilities.
Long term Liabilities: Liabilities repayable after specific duration of long period of time are
Current liabilities: Liabilities which are repayable during the operating cycle of business,
usually within a year, are called short term liabilities or current liabilities
FINANCIAL STATEMENT ANALY SIS
Financial Statement : A financial statement is an organized collection of data according to
Purpose: To understand the financial aspects of a business form.
Financial Statement
Income Statement Balance Sheet Statement of retained earnings Statement of changes in
financial position
Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
Financial statement Analysis: To analyze the firm?s profitability & financial soundness
The following are the types of Financial Statement Analysis.
1.On the basis of Material used : According to the material used.
External Analysis: This analysis is done by the outsiders like Investors /Credit
agencies/Government agencies and other Creditors.
Internal Analysis: This analysis is done by the internal executives / employees of the
organization.
MBA DEPARTMNET
FINANCIAL ACCOU NTINGANDANALY SIS
Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
The financial statements that summarize a large company's operations, financial position and
cash flows over a particular period are a concise summary of hundreds of thousands of financial
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
Objectives of Accounting:
Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
business transactions in the books of account.
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
of the some period.
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
iv) To portray the liquidity position: Financial reporting should provide information about how
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
payment which is not due to him.
vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
compulsorily required to maintain accounts as per the law governing their operations such as the
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
When the business transactions take place, the first step is to record the same in the books of
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
accounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
as a journal entry.
LEDGER:
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
Posting refers to the process of entering in the ledger the information given in the journal. In the
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
SU BSIDIARYBOOKS
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
also referred to as English System. Though the usual type of journal entries are not passed in
these sub?divided journals, the double entry principles of accounting are strictly followed.
Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
ledger with the required explanation called as narration and hence, it plays a dual role of a
journal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
receipts at any time.
Accounting concepts:
The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
Business Entity Concept:
A business unit is an organization of persons established to accomplish an economic goal.
Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
owns the assets and in turn owes to various claimants.
Money Measurement Concept:
In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
accounting does not give a complete picture of all the transactions of a business unit. This
concept does not also take care of the effects of inflation because it assumes astable value for
measuring.
Under this concept, the transactions are recorded assuming that the business will exist for a
longer period of time, i.e., a business unit is considered to be a going concern and not a
liquidated one. Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of valuing the assets at
as assets, although they may be practically unsaleable.
Dual Aspect Concept:
According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the total
assets of the business unit are equal to its total liabilities. Liabilities here relate both to the
outsiders and the owners. Liabilities to the owners are considered as capital.
Under this concept, the life of the business is segmented into different periods and accordingly
the result of each period is ascertained. Though the business is assumed to be continuing in
future (as per goingconcern concept), the measurement of income and studying the financial
position of the business for a shorter and definite period will help in taking corrective steps at the
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made
during that accounting period and Balance Sheet is prepared which depicts the financial position
of the business as on the last day of that period. During the course of preparation of these
Historical Cost Concept:
According to this concept, the transactions are recorded in the books of account with the
respective amounts involved. For example, if an asset is purchases, it is entered in the accounting
record at the price paid to acquire the same and that cost is considered to be the base for all
methodically reduced in its value by way of charging depreciation. However, in the light of
inflationary conditions, the application of this concept is considered highly irrelevant for judging
the financial position of the business.
Matching Concept:
particular period should be compared with the revenues associated to the same period to obtain
the net income of the business. Under this concept, the accounting period concept is relevant and
it is this concept (matching concept) which necessitated the provisions of different adjustments
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
period.
Realisation Concept:
This concept assumes or recognizes revenue when a sale is made. Sale is considered to be
complete when the ownership and property are transferred from the seller to the buyer and the
purchase system where the ownership is transferred to the buyer when the last instalment is paid
and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract is
completed, the profit is calculated on the basis of work certified each year.
Accrual Concept:
receipt. Similarly the costs are recognized when they are incurred and not when payment is
made. This assumption makes it necessary to give certain adjustments in the preparation of
income statement regarding revenues and costs. But under cash accounting system, the revenues
and costs are recognized only when they are actually received or paid. Hence, the combination
Objective Evidence Concept:
This concept ensures that all accounting must be based on objective evidence, i.e., every
transaction recorded in the books of account must have a verifiable document in support of its,
existence. Only then, the transactions can be verified by the auditors and declared as true or
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,
valuation of inventory, etc., and the accountants are required to disclose the regulations followed.
Manufacturing Account:
manufacturing account and then prepare trading and profit and loss account. This is necessary
because they have to ascertain cost of goods manufactured, gross profit and net profit.
Trading account:
Trading account is prepared for an accounting period to find the trading results or gross margin
during the accounting period. The difference between the sales and cost of sales is gross profit.
For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,
direct expenses on purchasing and manufacturing are added up and closing stock of finished
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
Profit and Loss Account:
In the words of Prof. Carter ?Profit and loss account is an account into which all gains and losses
are collected in order to ascertain the excess of gains over the losses or vice versa.?
Balance sheet:
certain moment? ? Francis.
Asset:
Any physical thing or right owned that has a money value is an asset. In other words, an asset is
that expenditure which results in acquiring of some property or benefits of a lasting nature.
(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
the business with the objective of making profits. Land and building, Plant and machinery,
Furniture and Fixtures are examples of fixed assets.
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
one year to discharge liabilities.
(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? they
can be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be both
fixed assets and current assets.
have value are called intangible assets. Goodwill, patents, trade marks and licences are examples
of intangible assets. They are usually classified under fixed assets.
(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenses
which are capitalised for the time being, expenses for promotion of organisations (preliminary
examples of fictitious assets.
Liability:
It means the amount which the firm owes to outsiders that is, excepting the proprietors. In the
words of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
In simple terms, debts repayable to outsiders by the business are known as liabilities.
Long term Liabilities: Liabilities repayable after specific duration of long period of time are
called long term liabilities.
Current liabilities: Liabilities which are repayable during the operating cycle of business,
FINANCIAL STATEMENT ANALY SIS
Financial Statement : A financial statement is an organized collection of data according to
logical and consistent accounting procedures
Purpose: To understand the financial aspects of a business form.
Income Statement Balance Sheet Statement of retained earnings Statement of changes in
financial position
Analysis : MethodicalClassificationofdatagiveninthe financialstatements nsimplifiedform.
Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
The following are the types of Financial Statement Analysis.
1.On the basis of Material used : According to the material used.
External Analysis Internal Analysis
External Analysis: This analysis is done by the outsiders like Investors /Credit
Internal Analysis: This analysis is done by the internal executives / employees of the
organization.
2.On the basis of modus operandi : According to the method of operation followed in the
analysis.
Dynamic / Horizontal Analysis: This analysis refers to the financial data of a company for
several years. The figures of various years are compared with the base year. It helps to focus
attention on items that have changed significantly during the period under review. Changes in
different elements of cost and sales over no . of years.
Static / Vertical Analysis: A study is made of the quantitative relationship of the various items in
the financial statements in a particular date.
Percentage of each element of cost to sales.
Tools employed are common?size financial statements and financial ratios.
Particular period and in the same company
One division ? FMCG goods
Another division ? Medicines than
So the ratio is measured & compared the performance of one division to another division
One company ? FMCG goods
Another company ? FMCG goods
So the ratio is measured and compared the performance of one company to another company.
Methods and Devices of Financial Analysis:
and to analyze the position of the enterprise.
The following are the methods:
1.Comparative statements
2.Trend Analysis
4.Funds Flow Analysis
5.Cash Flow Analysis
6.Ratio Analysis
7.Cost?Volume?Profit Analysis
MBA DEPARTMNET
FINANCIAL ACCOU NTINGANDANALY SIS
Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
The financial statements that summarize a large company's operations, financial position and
cash flows over a particular period are a concise summary of hundreds of thousands of financial
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
Objectives of Accounting:
Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
business transactions in the books of account.
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
of the some period.
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
iv) To portray the liquidity position: Financial reporting should provide information about how
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
payment which is not due to him.
vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
compulsorily required to maintain accounts as per the law governing their operations such as the
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
When the business transactions take place, the first step is to record the same in the books of
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
accounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
as a journal entry.
LEDGER:
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
Posting refers to the process of entering in the ledger the information given in the journal. In the
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
SU BSIDIARYBOOKS
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
also referred to as English System. Though the usual type of journal entries are not passed in
these sub?divided journals, the double entry principles of accounting are strictly followed.
Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
ledger with the required explanation called as narration and hence, it plays a dual role of a
journal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
receipts at any time.
Accounting concepts:
The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
Business Entity Concept:
A business unit is an organization of persons established to accomplish an economic goal.
Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
owns the assets and in turn owes to various claimants.
Money Measurement Concept:
In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
accounting does not give a complete picture of all the transactions of a business unit. This
concept does not also take care of the effects of inflation because it assumes astable value for
measuring.
Under this concept, the transactions are recorded assuming that the business will exist for a
longer period of time, i.e., a business unit is considered to be a going concern and not a
liquidated one. Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of valuing the assets at
as assets, although they may be practically unsaleable.
Dual Aspect Concept:
According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the total
assets of the business unit are equal to its total liabilities. Liabilities here relate both to the
outsiders and the owners. Liabilities to the owners are considered as capital.
Under this concept, the life of the business is segmented into different periods and accordingly
the result of each period is ascertained. Though the business is assumed to be continuing in
future (as per goingconcern concept), the measurement of income and studying the financial
position of the business for a shorter and definite period will help in taking corrective steps at the
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made
during that accounting period and Balance Sheet is prepared which depicts the financial position
of the business as on the last day of that period. During the course of preparation of these
Historical Cost Concept:
According to this concept, the transactions are recorded in the books of account with the
respective amounts involved. For example, if an asset is purchases, it is entered in the accounting
record at the price paid to acquire the same and that cost is considered to be the base for all
methodically reduced in its value by way of charging depreciation. However, in the light of
inflationary conditions, the application of this concept is considered highly irrelevant for judging
the financial position of the business.
Matching Concept:
particular period should be compared with the revenues associated to the same period to obtain
the net income of the business. Under this concept, the accounting period concept is relevant and
it is this concept (matching concept) which necessitated the provisions of different adjustments
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
period.
Realisation Concept:
This concept assumes or recognizes revenue when a sale is made. Sale is considered to be
complete when the ownership and property are transferred from the seller to the buyer and the
purchase system where the ownership is transferred to the buyer when the last instalment is paid
and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract is
completed, the profit is calculated on the basis of work certified each year.
Accrual Concept:
receipt. Similarly the costs are recognized when they are incurred and not when payment is
made. This assumption makes it necessary to give certain adjustments in the preparation of
income statement regarding revenues and costs. But under cash accounting system, the revenues
and costs are recognized only when they are actually received or paid. Hence, the combination
Objective Evidence Concept:
This concept ensures that all accounting must be based on objective evidence, i.e., every
transaction recorded in the books of account must have a verifiable document in support of its,
existence. Only then, the transactions can be verified by the auditors and declared as true or
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,
valuation of inventory, etc., and the accountants are required to disclose the regulations followed.
Manufacturing Account:
manufacturing account and then prepare trading and profit and loss account. This is necessary
because they have to ascertain cost of goods manufactured, gross profit and net profit.
Trading account:
Trading account is prepared for an accounting period to find the trading results or gross margin
during the accounting period. The difference between the sales and cost of sales is gross profit.
For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,
direct expenses on purchasing and manufacturing are added up and closing stock of finished
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
Profit and Loss Account:
In the words of Prof. Carter ?Profit and loss account is an account into which all gains and losses
are collected in order to ascertain the excess of gains over the losses or vice versa.?
Balance sheet:
certain moment? ? Francis.
Asset:
Any physical thing or right owned that has a money value is an asset. In other words, an asset is
that expenditure which results in acquiring of some property or benefits of a lasting nature.
(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
the business with the objective of making profits. Land and building, Plant and machinery,
Furniture and Fixtures are examples of fixed assets.
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
one year to discharge liabilities.
(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? they
can be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be both
fixed assets and current assets.
have value are called intangible assets. Goodwill, patents, trade marks and licences are examples
of intangible assets. They are usually classified under fixed assets.
(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenses
which are capitalised for the time being, expenses for promotion of organisations (preliminary
examples of fictitious assets.
Liability:
It means the amount which the firm owes to outsiders that is, excepting the proprietors. In the
words of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
In simple terms, debts repayable to outsiders by the business are known as liabilities.
Long term Liabilities: Liabilities repayable after specific duration of long period of time are
called long term liabilities.
Current liabilities: Liabilities which are repayable during the operating cycle of business,
FINANCIAL STATEMENT ANALY SIS
Financial Statement : A financial statement is an organized collection of data according to
logical and consistent accounting procedures
Purpose: To understand the financial aspects of a business form.
Income Statement Balance Sheet Statement of retained earnings Statement of changes in
financial position
Analysis : MethodicalClassificationofdatagiveninthe financialstatements nsimplifiedform.
Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
The following are the types of Financial Statement Analysis.
1.On the basis of Material used : According to the material used.
External Analysis Internal Analysis
External Analysis: This analysis is done by the outsiders like Investors /Credit
Internal Analysis: This analysis is done by the internal executives / employees of the
organization.
2.On the basis of modus operandi : According to the method of operation followed in the
analysis.
Dynamic / Horizontal Analysis: This analysis refers to the financial data of a company for
several years. The figures of various years are compared with the base year. It helps to focus
attention on items that have changed significantly during the period under review. Changes in
different elements of cost and sales over no . of years.
Static / Vertical Analysis: A study is made of the quantitative relationship of the various items in
the financial statements in a particular date.
Percentage of each element of cost to sales.
Tools employed are common?size financial statements and financial ratios.
Particular period and in the same company
One division ? FMCG goods
Another division ? Medicines than
So the ratio is measured & compared the performance of one division to another division
One company ? FMCG goods
Another company ? FMCG goods
So the ratio is measured and compared the performance of one company to another company.
Methods and Devices of Financial Analysis:
and to analyze the position of the enterprise.
The following are the methods:
1.Comparative statements
2.Trend Analysis
4.Funds Flow Analysis
5.Cash Flow Analysis
6.Ratio Analysis
7.Cost?Volume?Profit Analysis
The comparative financial statements are statements of the financial position at different periods,
of time. The elements of financial position are shown in a comparative form so as to give an idea
of financial position at two or more periods. The following are the two types of comparative
statements.
items and computed items in two or more balance sheets of the same business enterprise on
different dates. The changes in periodic balance sheet items reflect the conduct of a business. It
has four columns and the fourth column is used for giving percentages of increases or decreases.
Guidelines for interpretation : nterpreter is expected to study the following aspects
?Long?term financial position
?Profitability of the concern
?For studying current financial position or short?term financial position of a concern, should see
the working capital in both the years.
business. It gives an idea of the progress of a business over a period of time. Like comparative
balance sheet it also has 4 columns and the fourth column is used to show increase or decrease in
figures, in absolute amounts and percentages respectively.
Guidelines for interpretation : nterpreter is expected to study the following aspects
goods sold.
?To analyze the study of operational profits.
?The increase or decrease in net profit will give an idea about the overall profitability of the
concern.
Trend Analysis:
The financial statements may be analyzed by computing trends of series of information. This
method determines the direction upwards or downwards and involves the computation of the
percentage relationship that each statement item bears to the same item in base year.
?One year is taken as a base year. Generally the first or the last is taken as base year.
?The figures of base year are taken as 100.
?Trend percentages are calculated in relation to base year. If a figure in one year is less than the
figure in base year the trend percentage will be less than 100 and it will be more than 100 if
COMMON?SIZE STATEMENT ANALY SIS
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FINANCIAL ACCOU NTINGANDANALY SIS
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
cash flows over a particular period are a concise summary of hundreds of thousands of financial
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objectives of Accounting:
Objective of accounting may differ from business to business depending upon their specific
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
of the some period.
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
iv) To portray the liquidity position: Financial reporting should provide information about how
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
payment which is not due to him.
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
compulsorily required to maintain accounts as per the law governing their operations such as the
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
When the business transactions take place, the first step is to record the same in the books of
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
as a journal entry.
LEDGER:
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
Posting refers to the process of entering in the ledger the information given in the journal. In the
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
SU BSIDIARYBOOKS
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
also referred to as English System. Though the usual type of journal entries are not passed in
these sub?divided journals, the double entry principles of accounting are strictly followed.
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
ledger with the required explanation called as narration and hence, it plays a dual role of a
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
receipts at any time.
Accounting concepts:
upon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
Business Entity Concept:
A business unit is an organization of persons established to accomplish an economic goal.
who provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants.
Money Measurement Concept:
a common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
accounting does not give a complete picture of all the transactions of a business unit. This
measuring.
Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a
longer period of time, i.e., a business unit is considered to be a going concern and not a
transactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
as assets, although they may be practically unsaleable.
Dual Aspect Concept:
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the total
outsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly
the result of each period is ascertained. Though the business is assumed to be continuing in
position of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made
of the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
Historical Cost Concept:
According to this concept, the transactions are recorded in the books of account with the
record at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
methodically reduced in its value by way of charging depreciation. However, in the light of
inflationary conditions, the application of this concept is considered highly irrelevant for judging
Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
particular period should be compared with the revenues associated to the same period to obtain
the net income of the business. Under this concept, the accounting period concept is relevant and
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
advance, etc., during the course of preparing the financial statements at the end of the accounting
period.
Realisation Concept:
complete when the ownership and property are transferred from the seller to the buyer and the
consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire
purchase system where the ownership is transferred to the buyer when the last instalment is paid
and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract is
Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual
receipt. Similarly the costs are recognized when they are incurred and not when payment is
made. This assumption makes it necessary to give certain adjustments in the preparation of
and costs are recognized only when they are actually received or paid. Hence, the combination
of both cash and accrual system is preferable to get rid of the limitations of each system.
Objective Evidence Concept:
This concept ensures that all accounting must be based on objective evidence, i.e., every
existence. Only then, the transactions can be verified by the auditors and declared as true or
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,
Manufacturing Account:
Manufacturing concerns which convert raw material into finished product is required to prepare
manufacturing account and then prepare trading and profit and loss account. This is necessary
because they have to ascertain cost of goods manufactured, gross profit and net profit.
Trading account is prepared for an accounting period to find the trading results or gross margin
of the business i.e., the amount of gross profit the concern has made from buying and selling
during the accounting period. The difference between the sales and cost of sales is gross profit.
For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
the profit and loss account.
Profit and Loss Account:
In the words of Prof. Carter ?Profit and loss account is an account into which all gains and losses
Balance sheet:
?Balance sheet is a screen picture of the financial position of a going business concern at a
certain moment? ? Francis.
Asset:
that expenditure which results in acquiring of some property or benefits of a lasting nature.
They are classified on the basis of their nature. Different types of assets are as under:
(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
the business with the objective of making profits. Land and building, Plant and machinery,
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
receivable and stock are called current assets as they can be realised within an operating cycle of
one year to discharge liabilities.
(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? they
fixed assets and current assets.
(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt but
have value are called intangible assets. Goodwill, patents, trade marks and licences are examples
of intangible assets. They are usually classified under fixed assets.
which are capitalised for the time being, expenses for promotion of organisations (preliminary
expenses), discount on issue of shares, debit balance of profit and loss account etc. are the
examples of fictitious assets.
Liability:
words of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
claims of those who ate not owners are called liabilities?.
In simple terms, debts repayable to outsiders by the business are known as liabilities.
Long term Liabilities: Liabilities repayable after specific duration of long period of time are
Current liabilities: Liabilities which are repayable during the operating cycle of business,
usually within a year, are called short term liabilities or current liabilities
FINANCIAL STATEMENT ANALY SIS
Financial Statement : A financial statement is an organized collection of data according to
Purpose: To understand the financial aspects of a business form.
Financial Statement
Income Statement Balance Sheet Statement of retained earnings Statement of changes in
financial position
Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
Financial statement Analysis: To analyze the firm?s profitability & financial soundness
The following are the types of Financial Statement Analysis.
1.On the basis of Material used : According to the material used.
External Analysis: This analysis is done by the outsiders like Investors /Credit
agencies/Government agencies and other Creditors.
Internal Analysis: This analysis is done by the internal executives / employees of the
organization.
analysis.
Dynamic / Horizontal Analysis Static / Vertical Analysis
Dynamic / Horizontal Analysis: This analysis refers to the financial data of a company for
several years. The figures of various years are compared with the base year. It helps to focus
different elements of cost and sales over no . of years.
Tools employed are comparative statements and trend percentages.
Static / Vertical Analysis: A study is made of the quantitative relationship of the various items in
the financial statements in a particular date.
Tools employed are common?size financial statements and financial ratios.
Ex: Item based
Particular period and in the same company
One division ? FMCG goods
So the ratio is measured & compared the performance of one division to another division
Particular period and with different companies
One company ? FMCG goods
Another company ? FMCG goods
Methods and Devices of Financial Analysis:
A number of methods or devices are used to study the relationship between different statements
and to analyze the position of the enterprise.
The following are the methods:
2.Trend Analysis
3.Common?size statements
4.Funds Flow Analysis
5.Cash Flow Analysis
7.Cost?Volume?Profit Analysis
Comparative Statements:
The comparative financial statements are statements of the financial position at different periods,
of time. The elements of financial position are shown in a comparative form so as to give an idea
statements.
1.Comparative Balance Sheet: The analysis is the study of the trend of the same items, groups of
items and computed items in two or more balance sheets of the same business enterprise on
different dates. The changes in periodic balance sheet items reflect the conduct of a business. It
Guidelines for interpretation : nterpreter is expected to study the following aspects
?Current financial position and liquidity position
?Long?term financial position
?Profitability of the concern
the working capital in both the years.
2.Comparative Income Statement: The income statement gives the results of the operations of a
business. It gives an idea of the progress of a business over a period of time. Like comparative
balance sheet it also has 4 columns and the fourth column is used to show increase or decrease in
Guidelines for interpretation : nterpreter is expected to study the following aspects
?The increase or decrease in sales should be compared with the increase or decrease in cost of
goods sold.
?To analyze the study of operational profits.
concern.
?Should mention whether the overall profitability is good or not.
Trend Analysis:
The financial statements may be analyzed by computing trends of series of information. This
percentage relationship that each statement item bears to the same item in base year.
Procedure for calculating trends.
?One year is taken as a base year. Generally the first or the last is taken as base year.
?The figures of base year are taken as 100.
figure in base year the trend percentage will be less than 100 and it will be more than 100 if
figure is more than base year figure. Each year?s figure is divided by the base year?s figure.
COMMON?SIZE STATEMENT ANALY SIS
The common?size statements, balance sheet and income statement are shown in analytical and
sales. These statements are also known as components percentage or 100 percent statement.
1.The total of assets or liabilities are taken as 100.
2.The individual assets are expressed as percentage of total assets.
Ex: Total assets = Rs.5,00,000, nventory value = Rs.50,000
Calculation: 50000 x 00
? = 10%
5,00,000
Common?size Balance sheet: A statement in which balance sheet items are expressed as the ratio
size balance sheet.
Common?size Income Statement: The items in income statement can be shown as percentage of
sales to show the relation of each item to sales. A significant relationship can be established
between items of income statement and volume of sales.
expenses
Sales decreases selling expenses decreases ? there will be no affect on other administrative
expenses
If sales increase to a considerable extent then administrative and financial expenses go up.
activities of the enterprise.
Funds Flow Statement : The term flow means movement and includes both inflow and outflow.
The term flow of funds means transfer of economic values from one asset to another.
Source of funds: If the effect of transaction results in the increase of funds, it is called a source of
Application of funds: If the effect of transaction results in the decrease of funds, it is called
application of funds.
Cash Flow Statement : Cash flow statement is a statement which describes the inflows and
outflows of cash and cash equivalents in an enterprise period of time.
Cash Equivalents: Cash Equivalents are short term, high liquid investments that are readily
convertible into known as amount of cash.
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Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objectives of Accounting:
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
of the some period.
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
iv) To portray the liquidity position: Financial reporting should provide information about how
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
When the business transactions take place, the first step is to record the same in the books of
accounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
as a journal entry.
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
SU BSIDIARYBOOKS
Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
also referred to as English System. Though the usual type of journal entries are not passed in
Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
journal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
receipts at any time.
The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
Business Entity Concept:
Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants.
In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
concept does not also take care of the effects of inflation because it assumes astable value for
measuring.
Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a
liquidated one. Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
as assets, although they may be practically unsaleable.
According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
assets of the business unit are equal to its total liabilities. Liabilities here relate both to the
outsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly
future (as per goingconcern concept), the measurement of income and studying the financial
position of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
during that accounting period and Balance Sheet is prepared which depicts the financial position
of the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
Historical Cost Concept:
respective amounts involved. For example, if an asset is purchases, it is entered in the accounting
record at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
methodically reduced in its value by way of charging depreciation. However, in the light of
the financial position of the business.
Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
particular period should be compared with the revenues associated to the same period to obtain
it is this concept (matching concept) which necessitated the provisions of different adjustments
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
advance, etc., during the course of preparing the financial statements at the end of the accounting
period.
This concept assumes or recognizes revenue when a sale is made. Sale is considered to be
complete when the ownership and property are transferred from the seller to the buyer and the
consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire
purchase system where the ownership is transferred to the buyer when the last instalment is paid
completed, the profit is calculated on the basis of work certified each year.
Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual
receipt. Similarly the costs are recognized when they are incurred and not when payment is
income statement regarding revenues and costs. But under cash accounting system, the revenues
and costs are recognized only when they are actually received or paid. Hence, the combination
of both cash and accrual system is preferable to get rid of the limitations of each system.
Objective Evidence Concept:
transaction recorded in the books of account must have a verifiable document in support of its,
existence. Only then, the transactions can be verified by the auditors and declared as true or
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
valuation of inventory, etc., and the accountants are required to disclose the regulations followed.
Manufacturing Account:
Manufacturing concerns which convert raw material into finished product is required to prepare
manufacturing account and then prepare trading and profit and loss account. This is necessary
Trading account:
Trading account is prepared for an accounting period to find the trading results or gross margin
of the business i.e., the amount of gross profit the concern has made from buying and selling
during the accounting period. The difference between the sales and cost of sales is gross profit.
direct expenses on purchasing and manufacturing are added up and closing stock of finished
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
the profit and loss account.
Profit and Loss Account:
are collected in order to ascertain the excess of gains over the losses or vice versa.?
Balance sheet:
?Balance sheet is a screen picture of the financial position of a going business concern at a
certain moment? ? Francis.
Any physical thing or right owned that has a money value is an asset. In other words, an asset is
that expenditure which results in acquiring of some property or benefits of a lasting nature.
They are classified on the basis of their nature. Different types of assets are as under:
(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
Furniture and Fixtures are examples of fixed assets.
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
receivable and stock are called current assets as they can be realised within an operating cycle of
one year to discharge liabilities.
can be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be both
fixed assets and current assets.
(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt but
have value are called intangible assets. Goodwill, patents, trade marks and licences are examples
(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenses
which are capitalised for the time being, expenses for promotion of organisations (preliminary
expenses), discount on issue of shares, debit balance of profit and loss account etc. are the
examples of fictitious assets.
It means the amount which the firm owes to outsiders that is, excepting the proprietors. In the
words of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
claims of those who ate not owners are called liabilities?.
In simple terms, debts repayable to outsiders by the business are known as liabilities.
called long term liabilities.
Current liabilities: Liabilities which are repayable during the operating cycle of business,
usually within a year, are called short term liabilities or current liabilities
FINANCIAL STATEMENT ANALY SIS
logical and consistent accounting procedures
Purpose: To understand the financial aspects of a business form.
Financial Statement
Income Statement Balance Sheet Statement of retained earnings Statement of changes in
Analysis : MethodicalClassificationofdatagiveninthe financialstatements nsimplifiedform.
Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
Financial statement Analysis: To analyze the firm?s profitability & financial soundness
The following are the types of Financial Statement Analysis.
External Analysis Internal Analysis
External Analysis: This analysis is done by the outsiders like Investors /Credit
agencies/Government agencies and other Creditors.
Internal Analysis: This analysis is done by the internal executives / employees of the
2.On the basis of modus operandi : According to the method of operation followed in the
analysis.
Dynamic / Horizontal Analysis Static / Vertical Analysis
Dynamic / Horizontal Analysis: This analysis refers to the financial data of a company for
attention on items that have changed significantly during the period under review. Changes in
different elements of cost and sales over no . of years.
Tools employed are comparative statements and trend percentages.
Static / Vertical Analysis: A study is made of the quantitative relationship of the various items in
Percentage of each element of cost to sales.
Tools employed are common?size financial statements and financial ratios.
Ex: Item based
Particular period and in the same company
Another division ? Medicines than
So the ratio is measured & compared the performance of one division to another division
Particular period and with different companies
One company ? FMCG goods
So the ratio is measured and compared the performance of one company to another company.
Methods and Devices of Financial Analysis:
A number of methods or devices are used to study the relationship between different statements
and to analyze the position of the enterprise.
1.Comparative statements
2.Trend Analysis
3.Common?size statements
4.Funds Flow Analysis
6.Ratio Analysis
7.Cost?Volume?Profit Analysis
Comparative Statements:
The comparative financial statements are statements of the financial position at different periods,
of financial position at two or more periods. The following are the two types of comparative
statements.
1.Comparative Balance Sheet: The analysis is the study of the trend of the same items, groups of
items and computed items in two or more balance sheets of the same business enterprise on
has four columns and the fourth column is used for giving percentages of increases or decreases.
Guidelines for interpretation : nterpreter is expected to study the following aspects
?Current financial position and liquidity position
?Long?term financial position
?For studying current financial position or short?term financial position of a concern, should see
the working capital in both the years.
2.Comparative Income Statement: The income statement gives the results of the operations of a
business. It gives an idea of the progress of a business over a period of time. Like comparative
figures, in absolute amounts and percentages respectively.
Guidelines for interpretation : nterpreter is expected to study the following aspects
?The increase or decrease in sales should be compared with the increase or decrease in cost of
goods sold.
?The increase or decrease in net profit will give an idea about the overall profitability of the
concern.
?Should mention whether the overall profitability is good or not.
Trend Analysis:
method determines the direction upwards or downwards and involves the computation of the
percentage relationship that each statement item bears to the same item in base year.
Procedure for calculating trends.
?One year is taken as a base year. Generally the first or the last is taken as base year.
?Trend percentages are calculated in relation to base year. If a figure in one year is less than the
figure in base year the trend percentage will be less than 100 and it will be more than 100 if
figure is more than base year figure. Each year?s figure is divided by the base year?s figure.
COMMON?SIZE STATEMENT ANALY SIS
percentages. The figures are shown as the percentage of total assets, total liabilities and total
sales. These statements are also known as components percentage or 100 percent statement.
1.The total of assets or liabilities are taken as 100.
2.The individual assets are expressed as percentage of total assets.
If total assets are taken as 100
Calculation: 50000 x 00
? = 10%
5,00,000
of each asset to total assets and the ratio of each liabilities to total liabilities is called common?
size balance sheet.
Common?size Income Statement: The items in income statement can be shown as percentage of
sales to show the relation of each item to sales. A significant relationship can be established
Sales increases selling expenses increases ? there will be no affect on other administrative
expenses
Sales decreases selling expenses decreases ? there will be no affect on other administrative
expenses
So a relationship is established between sales and other items in income in evaluating operational
activities of the enterprise.
Funds Flow Statement : The term flow means movement and includes both inflow and outflow.
The term flow of funds means transfer of economic values from one asset to another.
funds.
Application of funds: If the effect of transaction results in the decrease of funds, it is called
application of funds.
Cash Flow Statement : Cash flow statement is a statement which describes the inflows and
Cash: Cash comprises cash on hand and demand deposits at bank.
Cash Equivalents: Cash Equivalents are short term, high liquid investments that are readily
convertible into known as amount of cash.
Cash flow: Cash flows are inflows and outflows of cash and cash equivalents.
activities of the enterprise and other activities that are not investing or finance activities.
Cash flow from investing activities: The cash flow represent the extent to which expenditures
have been made for resources intended to generate future income and cash flows.
Cash flows from financing activities: Financial activities are activities that result in changes in
Cost?volume?profit analysis: Cost?Volume?Profit (CVP) analysis is a managerial accounting
technique that is concerned with the effect of sales volume and product costs on operating profit
of a business. It deals with how operating profit is affected by changes in variable costs, fixed
costs, selling price per unit and the sales mix of two or more different products.
?All cost can be categorized as variable or fixed.
?Sales price per unit, variable cost per unit and total fixed cost are constant.
?All units produced are sold.
RATIONALE:
estimate rationales usually document
why a particular choice was made,
how the basis of its selection was developed,
why and how the particular information or assumptions were relied on and
RATIO ANALY SIS :
It is a technical of analysis and interpretation of financial statements. It is the process of
establishing and interpreting various ratios for helping in making the certain decisions.
According to Accountants? Handbook of Wixon, Kell and Bedford a ratio is an
Accounting ratios
Traditional Functional
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Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objectives of Accounting:
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
of the some period.
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
iv) To portray the liquidity position: Financial reporting should provide information about how
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
When the business transactions take place, the first step is to record the same in the books of
accounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
as a journal entry.
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
SU BSIDIARYBOOKS
Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
also referred to as English System. Though the usual type of journal entries are not passed in
Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
journal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
receipts at any time.
The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
Business Entity Concept:
Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants.
In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
concept does not also take care of the effects of inflation because it assumes astable value for
measuring.
Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a
liquidated one. Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
as assets, although they may be practically unsaleable.
According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
assets of the business unit are equal to its total liabilities. Liabilities here relate both to the
outsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly
future (as per goingconcern concept), the measurement of income and studying the financial
position of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
during that accounting period and Balance Sheet is prepared which depicts the financial position
of the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
Historical Cost Concept:
respective amounts involved. For example, if an asset is purchases, it is entered in the accounting
record at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
methodically reduced in its value by way of charging depreciation. However, in the light of
the financial position of the business.
Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
particular period should be compared with the revenues associated to the same period to obtain
it is this concept (matching concept) which necessitated the provisions of different adjustments
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
advance, etc., during the course of preparing the financial statements at the end of the accounting
period.
This concept assumes or recognizes revenue when a sale is made. Sale is considered to be
complete when the ownership and property are transferred from the seller to the buyer and the
consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire
purchase system where the ownership is transferred to the buyer when the last instalment is paid
completed, the profit is calculated on the basis of work certified each year.
Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual
receipt. Similarly the costs are recognized when they are incurred and not when payment is
income statement regarding revenues and costs. But under cash accounting system, the revenues
and costs are recognized only when they are actually received or paid. Hence, the combination
of both cash and accrual system is preferable to get rid of the limitations of each system.
Objective Evidence Concept:
transaction recorded in the books of account must have a verifiable document in support of its,
existence. Only then, the transactions can be verified by the auditors and declared as true or
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
valuation of inventory, etc., and the accountants are required to disclose the regulations followed.
Manufacturing Account:
Manufacturing concerns which convert raw material into finished product is required to prepare
manufacturing account and then prepare trading and profit and loss account. This is necessary
Trading account:
Trading account is prepared for an accounting period to find the trading results or gross margin
of the business i.e., the amount of gross profit the concern has made from buying and selling
during the accounting period. The difference between the sales and cost of sales is gross profit.
direct expenses on purchasing and manufacturing are added up and closing stock of finished
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
the profit and loss account.
Profit and Loss Account:
are collected in order to ascertain the excess of gains over the losses or vice versa.?
Balance sheet:
?Balance sheet is a screen picture of the financial position of a going business concern at a
certain moment? ? Francis.
Any physical thing or right owned that has a money value is an asset. In other words, an asset is
that expenditure which results in acquiring of some property or benefits of a lasting nature.
They are classified on the basis of their nature. Different types of assets are as under:
(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
Furniture and Fixtures are examples of fixed assets.
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
receivable and stock are called current assets as they can be realised within an operating cycle of
one year to discharge liabilities.
can be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be both
fixed assets and current assets.
(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt but
have value are called intangible assets. Goodwill, patents, trade marks and licences are examples
(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenses
which are capitalised for the time being, expenses for promotion of organisations (preliminary
expenses), discount on issue of shares, debit balance of profit and loss account etc. are the
examples of fictitious assets.
It means the amount which the firm owes to outsiders that is, excepting the proprietors. In the
words of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
claims of those who ate not owners are called liabilities?.
In simple terms, debts repayable to outsiders by the business are known as liabilities.
called long term liabilities.
Current liabilities: Liabilities which are repayable during the operating cycle of business,
usually within a year, are called short term liabilities or current liabilities
FINANCIAL STATEMENT ANALY SIS
logical and consistent accounting procedures
Purpose: To understand the financial aspects of a business form.
Financial Statement
Income Statement Balance Sheet Statement of retained earnings Statement of changes in
Analysis : MethodicalClassificationofdatagiveninthe financialstatements nsimplifiedform.
Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
Financial statement Analysis: To analyze the firm?s profitability & financial soundness
The following are the types of Financial Statement Analysis.
External Analysis Internal Analysis
External Analysis: This analysis is done by the outsiders like Investors /Credit
agencies/Government agencies and other Creditors.
Internal Analysis: This analysis is done by the internal executives / employees of the
2.On the basis of modus operandi : According to the method of operation followed in the
analysis.
Dynamic / Horizontal Analysis Static / Vertical Analysis
Dynamic / Horizontal Analysis: This analysis refers to the financial data of a company for
attention on items that have changed significantly during the period under review. Changes in
different elements of cost and sales over no . of years.
Tools employed are comparative statements and trend percentages.
Static / Vertical Analysis: A study is made of the quantitative relationship of the various items in
Percentage of each element of cost to sales.
Tools employed are common?size financial statements and financial ratios.
Ex: Item based
Particular period and in the same company
Another division ? Medicines than
So the ratio is measured & compared the performance of one division to another division
Particular period and with different companies
One company ? FMCG goods
So the ratio is measured and compared the performance of one company to another company.
Methods and Devices of Financial Analysis:
A number of methods or devices are used to study the relationship between different statements
and to analyze the position of the enterprise.
1.Comparative statements
2.Trend Analysis
3.Common?size statements
4.Funds Flow Analysis
6.Ratio Analysis
7.Cost?Volume?Profit Analysis
Comparative Statements:
The comparative financial statements are statements of the financial position at different periods,
of financial position at two or more periods. The following are the two types of comparative
statements.
1.Comparative Balance Sheet: The analysis is the study of the trend of the same items, groups of
items and computed items in two or more balance sheets of the same business enterprise on
has four columns and the fourth column is used for giving percentages of increases or decreases.
Guidelines for interpretation : nterpreter is expected to study the following aspects
?Current financial position and liquidity position
?Long?term financial position
?For studying current financial position or short?term financial position of a concern, should see
the working capital in both the years.
2.Comparative Income Statement: The income statement gives the results of the operations of a
business. It gives an idea of the progress of a business over a period of time. Like comparative
figures, in absolute amounts and percentages respectively.
Guidelines for interpretation : nterpreter is expected to study the following aspects
?The increase or decrease in sales should be compared with the increase or decrease in cost of
goods sold.
?The increase or decrease in net profit will give an idea about the overall profitability of the
concern.
?Should mention whether the overall profitability is good or not.
Trend Analysis:
method determines the direction upwards or downwards and involves the computation of the
percentage relationship that each statement item bears to the same item in base year.
Procedure for calculating trends.
?One year is taken as a base year. Generally the first or the last is taken as base year.
?Trend percentages are calculated in relation to base year. If a figure in one year is less than the
figure in base year the trend percentage will be less than 100 and it will be more than 100 if
figure is more than base year figure. Each year?s figure is divided by the base year?s figure.
COMMON?SIZE STATEMENT ANALY SIS
percentages. The figures are shown as the percentage of total assets, total liabilities and total
sales. These statements are also known as components percentage or 100 percent statement.
1.The total of assets or liabilities are taken as 100.
2.The individual assets are expressed as percentage of total assets.
If total assets are taken as 100
Calculation: 50000 x 00
? = 10%
5,00,000
of each asset to total assets and the ratio of each liabilities to total liabilities is called common?
size balance sheet.
Common?size Income Statement: The items in income statement can be shown as percentage of
sales to show the relation of each item to sales. A significant relationship can be established
Sales increases selling expenses increases ? there will be no affect on other administrative
expenses
Sales decreases selling expenses decreases ? there will be no affect on other administrative
expenses
So a relationship is established between sales and other items in income in evaluating operational
activities of the enterprise.
Funds Flow Statement : The term flow means movement and includes both inflow and outflow.
The term flow of funds means transfer of economic values from one asset to another.
funds.
Application of funds: If the effect of transaction results in the decrease of funds, it is called
application of funds.
Cash Flow Statement : Cash flow statement is a statement which describes the inflows and
Cash: Cash comprises cash on hand and demand deposits at bank.
Cash Equivalents: Cash Equivalents are short term, high liquid investments that are readily
convertible into known as amount of cash.
Cash flow: Cash flows are inflows and outflows of cash and cash equivalents.
activities of the enterprise and other activities that are not investing or finance activities.
Cash flow from investing activities: The cash flow represent the extent to which expenditures
have been made for resources intended to generate future income and cash flows.
Cash flows from financing activities: Financial activities are activities that result in changes in
Cost?volume?profit analysis: Cost?Volume?Profit (CVP) analysis is a managerial accounting
technique that is concerned with the effect of sales volume and product costs on operating profit
of a business. It deals with how operating profit is affected by changes in variable costs, fixed
costs, selling price per unit and the sales mix of two or more different products.
?All cost can be categorized as variable or fixed.
?Sales price per unit, variable cost per unit and total fixed cost are constant.
?All units produced are sold.
RATIONALE:
estimate rationales usually document
why a particular choice was made,
how the basis of its selection was developed,
why and how the particular information or assumptions were relied on and
RATIO ANALY SIS :
It is a technical of analysis and interpretation of financial statements. It is the process of
establishing and interpreting various ratios for helping in making the certain decisions.
According to Accountants? Handbook of Wixon, Kell and Bedford a ratio is an
Accounting ratios
Traditional Functional
P&L A/c Profitability Coverage Turnover
Financial
Composite Ratio
Overall profitability ratio Fixed interest coverage ratio Fixed assets turnover
ratio
Return on Investment Fixed dividend coverage ratio Working capital
Equity per Share (EPS) Debt service coverage ratio Working capital
leverage
Price Earning Ratio
Gross Profit ratio
Operating Expenses ratio
Payout ratio
Dividend Yield ratio
Liquidity Ratio and Stability Ratio
Change in current ratio Capital Structure ratio
Quick ratio Capital gearing ratio
Super quick ratio Debt?equity ratio
Defensive interval ratio
SL
NO
RATIO
CLASSIFICATION
FORMULA
PURPOSE
Traditional Functional
1 Gross Profit Ratio
Revenue
Statement
Ratio
Probability
Gross Profit
Indicates the efficiency of the
production / trading operations
x100
2 Net Profit Ratio ? ? Net Profit Indicates net margin on sales
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MBA DEPARTMNET
FINANCIAL ACCOU NTINGANDANALY SIS
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
cash flows over a particular period are a concise summary of hundreds of thousands of financial
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objectives of Accounting:
Objective of accounting may differ from business to business depending upon their specific
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
of the some period.
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
iv) To portray the liquidity position: Financial reporting should provide information about how
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
payment which is not due to him.
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
compulsorily required to maintain accounts as per the law governing their operations such as the
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
When the business transactions take place, the first step is to record the same in the books of
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
as a journal entry.
LEDGER:
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
Posting refers to the process of entering in the ledger the information given in the journal. In the
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
SU BSIDIARYBOOKS
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
also referred to as English System. Though the usual type of journal entries are not passed in
these sub?divided journals, the double entry principles of accounting are strictly followed.
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
ledger with the required explanation called as narration and hence, it plays a dual role of a
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
receipts at any time.
Accounting concepts:
upon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
Business Entity Concept:
A business unit is an organization of persons established to accomplish an economic goal.
who provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants.
Money Measurement Concept:
a common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
accounting does not give a complete picture of all the transactions of a business unit. This
measuring.
Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a
longer period of time, i.e., a business unit is considered to be a going concern and not a
transactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
as assets, although they may be practically unsaleable.
Dual Aspect Concept:
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the total
outsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly
the result of each period is ascertained. Though the business is assumed to be continuing in
position of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made
of the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
Historical Cost Concept:
According to this concept, the transactions are recorded in the books of account with the
record at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
methodically reduced in its value by way of charging depreciation. However, in the light of
inflationary conditions, the application of this concept is considered highly irrelevant for judging
Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
particular period should be compared with the revenues associated to the same period to obtain
the net income of the business. Under this concept, the accounting period concept is relevant and
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
advance, etc., during the course of preparing the financial statements at the end of the accounting
period.
Realisation Concept:
complete when the ownership and property are transferred from the seller to the buyer and the
consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire
purchase system where the ownership is transferred to the buyer when the last instalment is paid
and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract is
Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual
receipt. Similarly the costs are recognized when they are incurred and not when payment is
made. This assumption makes it necessary to give certain adjustments in the preparation of
and costs are recognized only when they are actually received or paid. Hence, the combination
of both cash and accrual system is preferable to get rid of the limitations of each system.
Objective Evidence Concept:
This concept ensures that all accounting must be based on objective evidence, i.e., every
existence. Only then, the transactions can be verified by the auditors and declared as true or
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,
Manufacturing Account:
Manufacturing concerns which convert raw material into finished product is required to prepare
manufacturing account and then prepare trading and profit and loss account. This is necessary
because they have to ascertain cost of goods manufactured, gross profit and net profit.
Trading account is prepared for an accounting period to find the trading results or gross margin
of the business i.e., the amount of gross profit the concern has made from buying and selling
during the accounting period. The difference between the sales and cost of sales is gross profit.
For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
the profit and loss account.
Profit and Loss Account:
In the words of Prof. Carter ?Profit and loss account is an account into which all gains and losses
Balance sheet:
?Balance sheet is a screen picture of the financial position of a going business concern at a
certain moment? ? Francis.
Asset:
that expenditure which results in acquiring of some property or benefits of a lasting nature.
They are classified on the basis of their nature. Different types of assets are as under:
(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
the business with the objective of making profits. Land and building, Plant and machinery,
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
receivable and stock are called current assets as they can be realised within an operating cycle of
one year to discharge liabilities.
(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? they
fixed assets and current assets.
(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt but
have value are called intangible assets. Goodwill, patents, trade marks and licences are examples
of intangible assets. They are usually classified under fixed assets.
which are capitalised for the time being, expenses for promotion of organisations (preliminary
expenses), discount on issue of shares, debit balance of profit and loss account etc. are the
examples of fictitious assets.
Liability:
words of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
claims of those who ate not owners are called liabilities?.
In simple terms, debts repayable to outsiders by the business are known as liabilities.
Long term Liabilities: Liabilities repayable after specific duration of long period of time are
Current liabilities: Liabilities which are repayable during the operating cycle of business,
usually within a year, are called short term liabilities or current liabilities
FINANCIAL STATEMENT ANALY SIS
Financial Statement : A financial statement is an organized collection of data according to
Purpose: To understand the financial aspects of a business form.
Financial Statement
Income Statement Balance Sheet Statement of retained earnings Statement of changes in
financial position
Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
Financial statement Analysis: To analyze the firm?s profitability & financial soundness
The following are the types of Financial Statement Analysis.
1.On the basis of Material used : According to the material used.
External Analysis: This analysis is done by the outsiders like Investors /Credit
agencies/Government agencies and other Creditors.
Internal Analysis: This analysis is done by the internal executives / employees of the
organization.
analysis.
Dynamic / Horizontal Analysis Static / Vertical Analysis
Dynamic / Horizontal Analysis: This analysis refers to the financial data of a company for
several years. The figures of various years are compared with the base year. It helps to focus
different elements of cost and sales over no . of years.
Tools employed are comparative statements and trend percentages.
Static / Vertical Analysis: A study is made of the quantitative relationship of the various items in
the financial statements in a particular date.
Tools employed are common?size financial statements and financial ratios.
Ex: Item based
Particular period and in the same company
One division ? FMCG goods
So the ratio is measured & compared the performance of one division to another division
Particular period and with different companies
One company ? FMCG goods
Another company ? FMCG goods
Methods and Devices of Financial Analysis:
A number of methods or devices are used to study the relationship between different statements
and to analyze the position of the enterprise.
The following are the methods:
2.Trend Analysis
3.Common?size statements
4.Funds Flow Analysis
5.Cash Flow Analysis
7.Cost?Volume?Profit Analysis
Comparative Statements:
The comparative financial statements are statements of the financial position at different periods,
of time. The elements of financial position are shown in a comparative form so as to give an idea
statements.
1.Comparative Balance Sheet: The analysis is the study of the trend of the same items, groups of
items and computed items in two or more balance sheets of the same business enterprise on
different dates. The changes in periodic balance sheet items reflect the conduct of a business. It
Guidelines for interpretation : nterpreter is expected to study the following aspects
?Current financial position and liquidity position
?Long?term financial position
?Profitability of the concern
the working capital in both the years.
2.Comparative Income Statement: The income statement gives the results of the operations of a
business. It gives an idea of the progress of a business over a period of time. Like comparative
balance sheet it also has 4 columns and the fourth column is used to show increase or decrease in
Guidelines for interpretation : nterpreter is expected to study the following aspects
?The increase or decrease in sales should be compared with the increase or decrease in cost of
goods sold.
?To analyze the study of operational profits.
concern.
?Should mention whether the overall profitability is good or not.
Trend Analysis:
The financial statements may be analyzed by computing trends of series of information. This
percentage relationship that each statement item bears to the same item in base year.
Procedure for calculating trends.
?One year is taken as a base year. Generally the first or the last is taken as base year.
?The figures of base year are taken as 100.
figure in base year the trend percentage will be less than 100 and it will be more than 100 if
figure is more than base year figure. Each year?s figure is divided by the base year?s figure.
COMMON?SIZE STATEMENT ANALY SIS
The common?size statements, balance sheet and income statement are shown in analytical and
sales. These statements are also known as components percentage or 100 percent statement.
1.The total of assets or liabilities are taken as 100.
2.The individual assets are expressed as percentage of total assets.
Ex: Total assets = Rs.5,00,000, nventory value = Rs.50,000
Calculation: 50000 x 00
? = 10%
5,00,000
Common?size Balance sheet: A statement in which balance sheet items are expressed as the ratio
size balance sheet.
Common?size Income Statement: The items in income statement can be shown as percentage of
sales to show the relation of each item to sales. A significant relationship can be established
between items of income statement and volume of sales.
expenses
Sales decreases selling expenses decreases ? there will be no affect on other administrative
expenses
If sales increase to a considerable extent then administrative and financial expenses go up.
activities of the enterprise.
Funds Flow Statement : The term flow means movement and includes both inflow and outflow.
The term flow of funds means transfer of economic values from one asset to another.
Source of funds: If the effect of transaction results in the increase of funds, it is called a source of
Application of funds: If the effect of transaction results in the decrease of funds, it is called
application of funds.
Cash Flow Statement : Cash flow statement is a statement which describes the inflows and
outflows of cash and cash equivalents in an enterprise period of time.
Cash Equivalents: Cash Equivalents are short term, high liquid investments that are readily
convertible into known as amount of cash.
Cash flow: Cash flows are inflows and outflows of cash and cash equivalents.
Cash flows from operating activities: Operating activities are the principal of revenue?producing
Cash flow from investing activities: The cash flow represent the extent to which expenditures
have been made for resources intended to generate future income and cash flows.
Cash flows from financing activities: Financial activities are activities that result in changes in
the size and composition of the owner?s capital and borrowings of the enterprise.
technique that is concerned with the effect of sales volume and product costs on operating profit
of a business. It deals with how operating profit is affected by changes in variable costs, fixed
costs, selling price per unit and the sales mix of two or more different products.
CVP analysis has following assumptions:
?Sales price per unit, variable cost per unit and total fixed cost are constant.
?All units produced are sold.
RATIONALE:
Explanation of the logical reasons or principles employed in consciously arriving at a decision or
why a particular choice was made,
how the basis of its selection was developed,
why and how the particular information or assumptions were relied on and
why the conclusion is deemed credible or realistic.
It is a technical of analysis and interpretation of financial statements. It is the process of
establishing and interpreting various ratios for helping in making the certain decisions.
According to Accountants? Handbook of Wixon, Kell and Bedford a ratio is an
?Expression of the quantitative relationship between two numbers?.
Traditional Functional
P&L A/c Profitability Coverage Turnover
Financial
Balance Sheet Ratio Ratio Ratio Ratio
Overall profitability ratio Fixed interest coverage ratio Fixed assets turnover
ratio
Return on Investment Fixed dividend coverage ratio Working capital
turnover ratio
leverage
Price Earning Ratio
Gross Profit ratio
Net Profit ratio
Payout ratio
Dividend Yield ratio
Liquidity Ratio and Stability Ratio
Current Ratio Fixed assets ratio
Quick ratio Capital gearing ratio
Super quick ratio Debt?equity ratio
Defensive interval ratio
CLASSIFICATION, CALCU LATIONANDINTERPRETATIONOF RATIOS
NO
RATIO
CLASSIFICATION
COMPUTATION
PURPOSE
Traditional Functional
1 Gross Profit Ratio
P&L A/c or
Statement
Ratio
Probability
Ratio
Indicates the efficiency of the
production / trading operations
x100
Net Sales
x100
Net Sales
3
Operating or
? ? x100
Operating cost
A measure of management?s
ability to keep operating
level of sales achieved
Net Sales
4
Net Profit to Total
Composite
Ratio
?
Net profit after
A measure of productivity of
Total
Assets x100
Total assets
Return on
Shareholders?
funds
? ?
equity shareholders
Shows the amount of earnings
attributable to each equity shar
x100
shareholders?s funds
6
Earning per equity
share
equity shareholders
Shows the amount of earnings
attributes to each equity share.
? ? x100
Shares
7 Dividend yield
? ?
Market
shareholders in the form of
dividends based on the market
price of the share.
x100
share
8 Price Earning ratio ? ?
Market price of a
share
value of a share. May also be
used to measure the rate of retu
expected by investors.
x100
9
Fixed Interest
Cover
P&L or
Statement
Ratio
Profitability
Ratio
Shows the margin of coverage
interest requirements Annual Interest
Expense
10
Cover
Net Income
Shows the extent to which curr
are available to pay
? ? earnings
Annual Preference
Dividends
11 Inventory Turnover ?
Efficiency
ratio
Cost of goods sold Evaluation of the liquidity of
inventory and adequacy of
12
Accounts
Receivable
Turnover
ratio
?
Net Sales on Credit Measures liquidity of accounts
receivable and the effectivenes
13 Current ratio
Balance
sheet ratio
Financial
Current Assets
Measures short?term debt payi
ability.
Current Liabilities
MBA DEPARTMNET
FINANCIAL ACCOU NTINGANDANALY SIS
Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
The financial statements that summarize a large company's operations, financial position and
cash flows over a particular period are a concise summary of hundreds of thousands of financial
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
Objectives of Accounting:
Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
business transactions in the books of account.
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
of the some period.
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
iv) To portray the liquidity position: Financial reporting should provide information about how
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
payment which is not due to him.
vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
compulsorily required to maintain accounts as per the law governing their operations such as the
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
When the business transactions take place, the first step is to record the same in the books of
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
accounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
as a journal entry.
LEDGER:
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
Posting refers to the process of entering in the ledger the information given in the journal. In the
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
SU BSIDIARYBOOKS
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
also referred to as English System. Though the usual type of journal entries are not passed in
these sub?divided journals, the double entry principles of accounting are strictly followed.
Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
ledger with the required explanation called as narration and hence, it plays a dual role of a
journal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
receipts at any time.
Accounting concepts:
The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
Business Entity Concept:
A business unit is an organization of persons established to accomplish an economic goal.
Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
owns the assets and in turn owes to various claimants.
Money Measurement Concept:
In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
accounting does not give a complete picture of all the transactions of a business unit. This
concept does not also take care of the effects of inflation because it assumes astable value for
measuring.
Under this concept, the transactions are recorded assuming that the business will exist for a
longer period of time, i.e., a business unit is considered to be a going concern and not a
liquidated one. Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of valuing the assets at
as assets, although they may be practically unsaleable.
Dual Aspect Concept:
According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the total
assets of the business unit are equal to its total liabilities. Liabilities here relate both to the
outsiders and the owners. Liabilities to the owners are considered as capital.
Under this concept, the life of the business is segmented into different periods and accordingly
the result of each period is ascertained. Though the business is assumed to be continuing in
future (as per goingconcern concept), the measurement of income and studying the financial
position of the business for a shorter and definite period will help in taking corrective steps at the
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made
during that accounting period and Balance Sheet is prepared which depicts the financial position
of the business as on the last day of that period. During the course of preparation of these
Historical Cost Concept:
According to this concept, the transactions are recorded in the books of account with the
respective amounts involved. For example, if an asset is purchases, it is entered in the accounting
record at the price paid to acquire the same and that cost is considered to be the base for all
methodically reduced in its value by way of charging depreciation. However, in the light of
inflationary conditions, the application of this concept is considered highly irrelevant for judging
the financial position of the business.
Matching Concept:
particular period should be compared with the revenues associated to the same period to obtain
the net income of the business. Under this concept, the accounting period concept is relevant and
it is this concept (matching concept) which necessitated the provisions of different adjustments
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
period.
Realisation Concept:
This concept assumes or recognizes revenue when a sale is made. Sale is considered to be
complete when the ownership and property are transferred from the seller to the buyer and the
purchase system where the ownership is transferred to the buyer when the last instalment is paid
and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract is
completed, the profit is calculated on the basis of work certified each year.
Accrual Concept:
receipt. Similarly the costs are recognized when they are incurred and not when payment is
made. This assumption makes it necessary to give certain adjustments in the preparation of
income statement regarding revenues and costs. But under cash accounting system, the revenues
and costs are recognized only when they are actually received or paid. Hence, the combination
Objective Evidence Concept:
This concept ensures that all accounting must be based on objective evidence, i.e., every
transaction recorded in the books of account must have a verifiable document in support of its,
existence. Only then, the transactions can be verified by the auditors and declared as true or
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,
valuation of inventory, etc., and the accountants are required to disclose the regulations followed.
Manufacturing Account:
manufacturing account and then prepare trading and profit and loss account. This is necessary
because they have to ascertain cost of goods manufactured, gross profit and net profit.
Trading account:
Trading account is prepared for an accounting period to find the trading results or gross margin
during the accounting period. The difference between the sales and cost of sales is gross profit.
For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,
direct expenses on purchasing and manufacturing are added up and closing stock of finished
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
Profit and Loss Account:
In the words of Prof. Carter ?Profit and loss account is an account into which all gains and losses
are collected in order to ascertain the excess of gains over the losses or vice versa.?
Balance sheet:
certain moment? ? Francis.
Asset:
Any physical thing or right owned that has a money value is an asset. In other words, an asset is
that expenditure which results in acquiring of some property or benefits of a lasting nature.
(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
the business with the objective of making profits. Land and building, Plant and machinery,
Furniture and Fixtures are examples of fixed assets.
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
one year to discharge liabilities.
(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? they
can be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be both
fixed assets and current assets.
have value are called intangible assets. Goodwill, patents, trade marks and licences are examples
of intangible assets. They are usually classified under fixed assets.
(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenses
which are capitalised for the time being, expenses for promotion of organisations (preliminary
examples of fictitious assets.
Liability:
It means the amount which the firm owes to outsiders that is, excepting the proprietors. In the
words of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
In simple terms, debts repayable to outsiders by the business are known as liabilities.
Long term Liabilities: Liabilities repayable after specific duration of long period of time are
called long term liabilities.
Current liabilities: Liabilities which are repayable during the operating cycle of business,
FINANCIAL STATEMENT ANALY SIS
Financial Statement : A financial statement is an organized collection of data according to
logical and consistent accounting procedures
Purpose: To understand the financial aspects of a business form.
Income Statement Balance Sheet Statement of retained earnings Statement of changes in
financial position
Analysis : MethodicalClassificationofdatagiveninthe financialstatements nsimplifiedform.
Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
The following are the types of Financial Statement Analysis.
1.On the basis of Material used : According to the material used.
External Analysis Internal Analysis
External Analysis: This analysis is done by the outsiders like Investors /Credit
Internal Analysis: This analysis is done by the internal executives / employees of the
organization.
2.On the basis of modus operandi : According to the method of operation followed in the
analysis.
Dynamic / Horizontal Analysis: This analysis refers to the financial data of a company for
several years. The figures of various years are compared with the base year. It helps to focus
attention on items that have changed significantly during the period under review. Changes in
different elements of cost and sales over no . of years.
Static / Vertical Analysis: A study is made of the quantitative relationship of the various items in
the financial statements in a particular date.
Percentage of each element of cost to sales.
Tools employed are common?size financial statements and financial ratios.
Particular period and in the same company
One division ? FMCG goods
Another division ? Medicines than
So the ratio is measured & compared the performance of one division to another division
One company ? FMCG goods
Another company ? FMCG goods
So the ratio is measured and compared the performance of one company to another company.
Methods and Devices of Financial Analysis:
and to analyze the position of the enterprise.
The following are the methods:
1.Comparative statements
2.Trend Analysis
4.Funds Flow Analysis
5.Cash Flow Analysis
6.Ratio Analysis
7.Cost?Volume?Profit Analysis
The comparative financial statements are statements of the financial position at different periods,
of time. The elements of financial position are shown in a comparative form so as to give an idea
of financial position at two or more periods. The following are the two types of comparative
statements.
items and computed items in two or more balance sheets of the same business enterprise on
different dates. The changes in periodic balance sheet items reflect the conduct of a business. It
has four columns and the fourth column is used for giving percentages of increases or decreases.
Guidelines for interpretation : nterpreter is expected to study the following aspects
?Long?term financial position
?Profitability of the concern
?For studying current financial position or short?term financial position of a concern, should see
the working capital in both the years.
business. It gives an idea of the progress of a business over a period of time. Like comparative
balance sheet it also has 4 columns and the fourth column is used to show increase or decrease in
figures, in absolute amounts and percentages respectively.
Guidelines for interpretation : nterpreter is expected to study the following aspects
goods sold.
?To analyze the study of operational profits.
?The increase or decrease in net profit will give an idea about the overall profitability of the
concern.
Trend Analysis:
The financial statements may be analyzed by computing trends of series of information. This
method determines the direction upwards or downwards and involves the computation of the
percentage relationship that each statement item bears to the same item in base year.
?One year is taken as a base year. Generally the first or the last is taken as base year.
?The figures of base year are taken as 100.
?Trend percentages are calculated in relation to base year. If a figure in one year is less than the
figure in base year the trend percentage will be less than 100 and it will be more than 100 if
COMMON?SIZE STATEMENT ANALY SIS
The common?size statements, balance sheet and income statement are shown in analytical and
percentages. The figures are shown as the percentage of total assets, total liabilities and total
sales. These statements are also known as components percentage or 100 percent statement.
2.The individual assets are expressed as percentage of total assets.
Ex: Total assets = Rs.5,00,000, nventory value = Rs.50,000
If total assets are taken as 100
Calculation: 50000 x 00
5,00,000
Common?size Balance sheet: A statement in which balance sheet items are expressed as the ratio
of each asset to total assets and the ratio of each liabilities to total liabilities is called common?
size balance sheet.
sales to show the relation of each item to sales. A significant relationship can be established
between items of income statement and volume of sales.
Sales increases selling expenses increases ? there will be no affect on other administrative
expenses
expenses
If sales increase to a considerable extent then administrative and financial expenses go up.
So a relationship is established between sales and other items in income in evaluating operational
activities of the enterprise.
The term flow of funds means transfer of economic values from one asset to another.
Source of funds: If the effect of transaction results in the increase of funds, it is called a source of
funds.
Application of funds: If the effect of transaction results in the decrease of funds, it is called
Cash Flow Statement : Cash flow statement is a statement which describes the inflows and
outflows of cash and cash equivalents in an enterprise period of time.
Cash: Cash comprises cash on hand and demand deposits at bank.
Cash Equivalents: Cash Equivalents are short term, high liquid investments that are readily
Cash flow: Cash flows are inflows and outflows of cash and cash equivalents.
Cash flows from operating activities: Operating activities are the principal of revenue?producing
activities of the enterprise and other activities that are not investing or finance activities.
Cash flow from investing activities: The cash flow represent the extent to which expenditures
Cash flows from financing activities: Financial activities are activities that result in changes in
the size and composition of the owner?s capital and borrowings of the enterprise.
Cost?volume?profit analysis: Cost?Volume?Profit (CVP) analysis is a managerial accounting
technique that is concerned with the effect of sales volume and product costs on operating profit
costs, selling price per unit and the sales mix of two or more different products.
CVP analysis has following assumptions:
?All cost can be categorized as variable or fixed.
?Sales price per unit, variable cost per unit and total fixed cost are constant.
RATIONALE:
Explanation of the logical reasons or principles employed in consciously arriving at a decision or
estimate rationales usually document
why a particular choice was made,
why and how the particular information or assumptions were relied on and
why the conclusion is deemed credible or realistic.
RATIO ANALY SIS :
It is a technical of analysis and interpretation of financial statements. It is the process of
According to Accountants? Handbook of Wixon, Kell and Bedford a ratio is an
?Expression of the quantitative relationship between two numbers?.
Accounting ratios
Traditional Functional
Financial
Balance Sheet Ratio Ratio Ratio Ratio
Composite Ratio
Overall profitability ratio Fixed interest coverage ratio Fixed assets turnover
Return on Investment Fixed dividend coverage ratio Working capital
turnover ratio
Equity per Share (EPS) Debt service coverage ratio Working capital
leverage
Gross Profit ratio
Net Profit ratio
Operating Expenses ratio
Payout ratio
Liquidity Ratio and Stability Ratio
Current Ratio Fixed assets ratio
Change in current ratio Capital Structure ratio
Quick ratio Capital gearing ratio
Defensive interval ratio
CLASSIFICATION, CALCU LATIONANDINTERPRETATIONOF RATIOS
SL
NO
CLASSIFICATION
COMPUTATION
FORMULA
PURPOSE
1 Gross Profit Ratio
P&L A/c or
Revenue
Statement
Probability
Ratio
Gross Profit
Indicates the efficiency of the
x100
Net Sales
2 Net Profit Ratio ? ? Net Profit Indicates net margin on sales
x100
3
Operating or
Expenses ratio
? ? x100
A measure of management?s
ability to keep operating
expenses properly controlled f
level of sales achieved
4
Net Profit to Total
Assets
Composite
?
Net profit after
tax + Interest
A measure of productivity of
Assets x100
Total assets
5
Return on
funds
? ?
Profit available for
equity shareholders
attributable to each equity shar
x100
Average equity
shareholders?s funds
Earning per equity
share
Profit available for
equity shareholders
attributes to each equity share.
? ? x100
No. of Equity
Shares
? ?
Market
Dividend per share Shows the rate of return to
shareholders in the form of
price of the share.
x100
price per
share
Market price of a
share
A measure for determining the
value of a share. May also be
expected by investors.
x100
Earning per share
9
Cover
P&L or
Revenue
Statement
Profitability
Ratio
Operating Income
Shows the margin of coverage
Expense
10
Fixed Dividend
Cover
Shows the extent to which curr
are available to pay
dividends on preference shares.
? ? earnings
Dividends
11 Inventory Turnover ?
Turnover or
Efficiency
Cost of goods sold Evaluation of the liquidity of
inventory and adequacy of
inventory controls. Average Inventory
12
Receivable
Turnover
Composite
ratio
Net Sales on Credit Measures liquidity of accounts
receivable and the effectivenes
of credit policy. Average Receivable
13 Current ratio
sheet ratio
Financial
ratio
Current Assets
ability.
Current Liabilities
14
Quick (Acid Test)
? ? term
(i) Quick Assets
Current Liabilities
(ii) Quick Assets
A refined measure of the short-
debt paying ability by
measuring short?term liquidity.
15 Proprietary ratio
Funds
Measures conservatism of capi
structure and shows the extent
funds in the total
? ?
shareholders?
Total Tangible Assets
1 6 Debt?Equity ratio
(ii)
(i) External Equities
Indicates the percentage of fun
being financed through
extent of trading on equity.
Internal Equities
Total Long?term
Debt
Funds
U TILITYOF RATIONANALY SIS
Ratios are of immense importance in the analysis and interpretation of financial statements as
they bring strength or weaknesses of the firm.
1.Managerial uses of ratio analysis: This analysis helps in decision making through information
provided in financial statements, financial forecasting and planning like looking ahead and ratios
calculated are used as a guide for future , helps in communication like understanding financial
strengths and weaknesses, co?ordination helps in effective business management, control like
2.Utility to Shareholders / Investors: Ratio analysis is used in making up investor mind whether
present financial position of the concern, warrants further investment or not.
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MBA DEPARTMNET
Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objectives of Accounting:
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
of the some period.
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
iv) To portray the liquidity position: Financial reporting should provide information about how
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
When the business transactions take place, the first step is to record the same in the books of
accounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
as a journal entry.
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
SU BSIDIARYBOOKS
Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
also referred to as English System. Though the usual type of journal entries are not passed in
Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
journal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
receipts at any time.
The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
Business Entity Concept:
Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants.
In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
concept does not also take care of the effects of inflation because it assumes astable value for
measuring.
Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a
liquidated one. Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
as assets, although they may be practically unsaleable.
According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
assets of the business unit are equal to its total liabilities. Liabilities here relate both to the
outsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly
future (as per goingconcern concept), the measurement of income and studying the financial
position of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
during that accounting period and Balance Sheet is prepared which depicts the financial position
of the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
Historical Cost Concept:
respective amounts involved. For example, if an asset is purchases, it is entered in the accounting
record at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
methodically reduced in its value by way of charging depreciation. However, in the light of
the financial position of the business.
Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
particular period should be compared with the revenues associated to the same period to obtain
it is this concept (matching concept) which necessitated the provisions of different adjustments
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
advance, etc., during the course of preparing the financial statements at the end of the accounting
period.
This concept assumes or recognizes revenue when a sale is made. Sale is considered to be
complete when the ownership and property are transferred from the seller to the buyer and the
consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire
purchase system where the ownership is transferred to the buyer when the last instalment is paid
completed, the profit is calculated on the basis of work certified each year.
Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual
receipt. Similarly the costs are recognized when they are incurred and not when payment is
income statement regarding revenues and costs. But under cash accounting system, the revenues
and costs are recognized only when they are actually received or paid. Hence, the combination
of both cash and accrual system is preferable to get rid of the limitations of each system.
Objective Evidence Concept:
transaction recorded in the books of account must have a verifiable document in support of its,
existence. Only then, the transactions can be verified by the auditors and declared as true or
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
valuation of inventory, etc., and the accountants are required to disclose the regulations followed.
Manufacturing Account:
Manufacturing concerns which convert raw material into finished product is required to prepare
manufacturing account and then prepare trading and profit and loss account. This is necessary
Trading account:
Trading account is prepared for an accounting period to find the trading results or gross margin
of the business i.e., the amount of gross profit the concern has made from buying and selling
during the accounting period. The difference between the sales and cost of sales is gross profit.
direct expenses on purchasing and manufacturing are added up and closing stock of finished
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
the profit and loss account.
Profit and Loss Account:
are collected in order to ascertain the excess of gains over the losses or vice versa.?
Balance sheet:
?Balance sheet is a screen picture of the financial position of a going business concern at a
certain moment? ? Francis.
Any physical thing or right owned that has a money value is an asset. In other words, an asset is
that expenditure which results in acquiring of some property or benefits of a lasting nature.
They are classified on the basis of their nature. Different types of assets are as under:
(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
Furniture and Fixtures are examples of fixed assets.
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
receivable and stock are called current assets as they can be realised within an operating cycle of
one year to discharge liabilities.
can be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be both
fixed assets and current assets.
(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt but
have value are called intangible assets. Goodwill, patents, trade marks and licences are examples
(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenses
which are capitalised for the time being, expenses for promotion of organisations (preliminary
expenses), discount on issue of shares, debit balance of profit and loss account etc. are the
examples of fictitious assets.
It means the amount which the firm owes to outsiders that is, excepting the proprietors. In the
words of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
claims of those who ate not owners are called liabilities?.
In simple terms, debts repayable to outsiders by the business are known as liabilities.
called long term liabilities.
Current liabilities: Liabilities which are repayable during the operating cycle of business,
usually within a year, are called short term liabilities or current liabilities
FINANCIAL STATEMENT ANALY SIS
logical and consistent accounting procedures
Purpose: To understand the financial aspects of a business form.
Financial Statement
Income Statement Balance Sheet Statement of retained earnings Statement of changes in
Analysis : MethodicalClassificationofdatagiveninthe financialstatements nsimplifiedform.
Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
Financial statement Analysis: To analyze the firm?s profitability & financial soundness
The following are the types of Financial Statement Analysis.
External Analysis Internal Analysis
External Analysis: This analysis is done by the outsiders like Investors /Credit
agencies/Government agencies and other Creditors.
Internal Analysis: This analysis is done by the internal executives / employees of the
2.On the basis of modus operandi : According to the method of operation followed in the
analysis.
Dynamic / Horizontal Analysis Static / Vertical Analysis
Dynamic / Horizontal Analysis: This analysis refers to the financial data of a company for
attention on items that have changed significantly during the period under review. Changes in
different elements of cost and sales over no . of years.
Tools employed are comparative statements and trend percentages.
Static / Vertical Analysis: A study is made of the quantitative relationship of the various items in
Percentage of each element of cost to sales.
Tools employed are common?size financial statements and financial ratios.
Ex: Item based
Particular period and in the same company
Another division ? Medicines than
So the ratio is measured & compared the performance of one division to another division
Particular period and with different companies
One company ? FMCG goods
So the ratio is measured and compared the performance of one company to another company.
Methods and Devices of Financial Analysis:
A number of methods or devices are used to study the relationship between different statements
and to analyze the position of the enterprise.
1.Comparative statements
2.Trend Analysis
3.Common?size statements
4.Funds Flow Analysis
6.Ratio Analysis
7.Cost?Volume?Profit Analysis
Comparative Statements:
The comparative financial statements are statements of the financial position at different periods,
of financial position at two or more periods. The following are the two types of comparative
statements.
1.Comparative Balance Sheet: The analysis is the study of the trend of the same items, groups of
items and computed items in two or more balance sheets of the same business enterprise on
has four columns and the fourth column is used for giving percentages of increases or decreases.
Guidelines for interpretation : nterpreter is expected to study the following aspects
?Current financial position and liquidity position
?Long?term financial position
?For studying current financial position or short?term financial position of a concern, should see
the working capital in both the years.
2.Comparative Income Statement: The income statement gives the results of the operations of a
business. It gives an idea of the progress of a business over a period of time. Like comparative
figures, in absolute amounts and percentages respectively.
Guidelines for interpretation : nterpreter is expected to study the following aspects
?The increase or decrease in sales should be compared with the increase or decrease in cost of
goods sold.
?The increase or decrease in net profit will give an idea about the overall profitability of the
concern.
?Should mention whether the overall profitability is good or not.
Trend Analysis:
method determines the direction upwards or downwards and involves the computation of the
percentage relationship that each statement item bears to the same item in base year.
Procedure for calculating trends.
?One year is taken as a base year. Generally the first or the last is taken as base year.
?Trend percentages are calculated in relation to base year. If a figure in one year is less than the
figure in base year the trend percentage will be less than 100 and it will be more than 100 if
figure is more than base year figure. Each year?s figure is divided by the base year?s figure.
COMMON?SIZE STATEMENT ANALY SIS
percentages. The figures are shown as the percentage of total assets, total liabilities and total
sales. These statements are also known as components percentage or 100 percent statement.
1.The total of assets or liabilities are taken as 100.
2.The individual assets are expressed as percentage of total assets.
If total assets are taken as 100
Calculation: 50000 x 00
? = 10%
5,00,000
of each asset to total assets and the ratio of each liabilities to total liabilities is called common?
size balance sheet.
Common?size Income Statement: The items in income statement can be shown as percentage of
sales to show the relation of each item to sales. A significant relationship can be established
Sales increases selling expenses increases ? there will be no affect on other administrative
expenses
Sales decreases selling expenses decreases ? there will be no affect on other administrative
expenses
So a relationship is established between sales and other items in income in evaluating operational
activities of the enterprise.
Funds Flow Statement : The term flow means movement and includes both inflow and outflow.
The term flow of funds means transfer of economic values from one asset to another.
funds.
Application of funds: If the effect of transaction results in the decrease of funds, it is called
application of funds.
Cash Flow Statement : Cash flow statement is a statement which describes the inflows and
Cash: Cash comprises cash on hand and demand deposits at bank.
Cash Equivalents: Cash Equivalents are short term, high liquid investments that are readily
convertible into known as amount of cash.
Cash flow: Cash flows are inflows and outflows of cash and cash equivalents.
activities of the enterprise and other activities that are not investing or finance activities.
Cash flow from investing activities: The cash flow represent the extent to which expenditures
have been made for resources intended to generate future income and cash flows.
Cash flows from financing activities: Financial activities are activities that result in changes in
Cost?volume?profit analysis: Cost?Volume?Profit (CVP) analysis is a managerial accounting
technique that is concerned with the effect of sales volume and product costs on operating profit
of a business. It deals with how operating profit is affected by changes in variable costs, fixed
costs, selling price per unit and the sales mix of two or more different products.
?All cost can be categorized as variable or fixed.
?Sales price per unit, variable cost per unit and total fixed cost are constant.
?All units produced are sold.
RATIONALE:
estimate rationales usually document
why a particular choice was made,
how the basis of its selection was developed,
why and how the particular information or assumptions were relied on and
RATIO ANALY SIS :
It is a technical of analysis and interpretation of financial statements. It is the process of
establishing and interpreting various ratios for helping in making the certain decisions.
According to Accountants? Handbook of Wixon, Kell and Bedford a ratio is an
Accounting ratios
Traditional Functional
P&L A/c Profitability Coverage Turnover
Financial
Composite Ratio
Overall profitability ratio Fixed interest coverage ratio Fixed assets turnover
ratio
Return on Investment Fixed dividend coverage ratio Working capital
Equity per Share (EPS) Debt service coverage ratio Working capital
leverage
Price Earning Ratio
Gross Profit ratio
Operating Expenses ratio
Payout ratio
Dividend Yield ratio
Liquidity Ratio and Stability Ratio
Change in current ratio Capital Structure ratio
Quick ratio Capital gearing ratio
Super quick ratio Debt?equity ratio
Defensive interval ratio
SL
NO
RATIO
CLASSIFICATION
FORMULA
PURPOSE
Traditional Functional
1 Gross Profit Ratio
Revenue
Statement
Ratio
Probability
Gross Profit
Indicates the efficiency of the
production / trading operations
x100
2 Net Profit Ratio ? ? Net Profit Indicates net margin on sales
x100
Net Sales
3
Expenses ratio
? ? x100
Operating cost
A measure of management?s
expenses properly controlled f
level of sales achieved
Net Sales
4
Assets
Composite
Ratio
?
tax + Interest
A measure of productivity of
Total
Assets x100
5
Return on
Shareholders?
funds
Profit available for
equity shareholders
Shows the amount of earnings
attributable to each equity shar
Average equity
shareholders?s funds
6
Earning per equity
Profit available for
equity shareholders
Shows the amount of earnings
attributes to each equity share.
No. of Equity
Shares
7 Dividend yield
? ?
Dividend per share Shows the rate of return to
shareholders in the form of
dividends based on the market
price of the share.
price per
share
8 Price Earning ratio ? ?
Market price of a
A measure for determining the
value of a share. May also be
used to measure the rate of retu
expected by investors.
Earning per share
9
Fixed Interest
Cover
Revenue
Statement
Ratio
Profitability
Operating Income
Shows the margin of coverage
interest requirements Annual Interest
Expense
Fixed Dividend
Cover
Net Income
Shows the extent to which curr
dividends on preference shares.
? ? earnings
Annual Preference
Dividends
Turnover or
Efficiency
ratio
Cost of goods sold Evaluation of the liquidity of
inventory controls. Average Inventory
12
Accounts
Receivable
Composite
ratio
?
Net Sales on Credit Measures liquidity of accounts
of credit policy. Average Receivable
13 Current ratio
Balance
sheet ratio
ratio
Current Assets
Measures short?term debt payi
ability.
14
Quick (Acid Test)
ratio
? ? term
Current Liabilities
(ii) Quick Assets
Quick Liabilities
A refined measure of the short-
measuring short?term liquidity.
15 Proprietary ratio
Total Shareholders?
Funds
structure and shows the extent
funds in the total
assets employed in the busines
? ?
Total Tangible Assets
1 6 Debt?Equity ratio
? ?
(ii)
Indicates the percentage of fun
being financed through
borrowings? a measure of the
extent of trading on equity.
Total Long?term
Debt
Total Lon?term
Funds
Ratios are of immense importance in the analysis and interpretation of financial statements as
they bring strength or weaknesses of the firm.
The following are the types of utility of ratio analysis.
1.Managerial uses of ratio analysis: This analysis helps in decision making through information
calculated are used as a guide for future , helps in communication like understanding financial
strengths and weaknesses, co?ordination helps in effective business management, control like
comparing actual with standards & other uses like budgetary control and standard costing.
2.Utility to Shareholders / Investors: Ratio analysis is used in making up investor mind whether
3.Utility to Creditors: Ratio analysis is used to know whether current assets are quite sufficient to
current liabilities.
4.Utility to Employees: Profitability of financial statements like Gross?profit, Net?profit,
Operating?profit will enable the employees to put forward their view point for the increase of
5.Utility to Government: Government also interested to know overall strength of the industry.
So the ratio act as an indicator to know the overall strength of the public and private sector.
6. Tax?audit requirements: Ratios are used to analyze the Gross?profit/turnover, Net?
profit/turnover, Stock?in?trade/turnover and material consumed/finished goods product.
cash flows over a particular period are a concise summary of hundreds of thousands of financial
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
--- Content provided by FirstRanker.com ---
Objectives of Accounting:Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
--- Content provided by FirstRanker.com ---
business transactions in the books of account.ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
--- Content provided by FirstRanker.com ---
of the some period.iii) To ascertain the financial position of the business: In addition to profit, a businessman must
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
--- Content provided by FirstRanker.com ---
iv) To portray the liquidity position: Financial reporting should provide information about howan enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
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--- Content provided by FirstRanker.com ---
MBA DEPARTMNETFINANCIAL ACCOU NTINGANDANALY SIS
Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
--- Content provided by FirstRanker.com ---
The financial statements that summarize a large company's operations, financial position andcash flows over a particular period are a concise summary of hundreds of thousands of financial
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
--- Content provided by FirstRanker.com ---
Objectives of Accounting:Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
--- Content provided by FirstRanker.com ---
business transactions in the books of account.ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
--- Content provided by FirstRanker.com ---
of the some period.iii) To ascertain the financial position of the business: In addition to profit, a businessman must
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
--- Content provided by FirstRanker.com ---
iv) To portray the liquidity position: Financial reporting should provide information about howan enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
--- Content provided by FirstRanker.com ---
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim apayment which is not due to him.
vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
--- Content provided by FirstRanker.com ---
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts arecompulsorily required to maintain accounts as per the law governing their operations such as the
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
--- Content provided by FirstRanker.com ---
When the business transactions take place, the first step is to record the same in the books oforiginal entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
accounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
--- Content provided by FirstRanker.com ---
as a journal entry.LEDGER:
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
--- Content provided by FirstRanker.com ---
together at one place. But, the preparation of different ledger accounts helps to get a consolidatedpicture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
--- Content provided by FirstRanker.com ---
first entered in the journal and subsequently posted to the concerned accounts in the ledger.Posting refers to the process of entering in the ledger the information given in the journal. In the
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
--- Content provided by FirstRanker.com ---
SU BSIDIARYBOOKSJournal is subdivided into various parts known as subsidiary books or subdivisions of journal.
Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
FirstRanker.com - FirstRanker's Choice
--- Content provided by FirstRanker.com ---
MBA DEPARTMNETFINANCIAL ACCOU NTINGANDANALY SIS
Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
--- Content provided by FirstRanker.com ---
The financial statements that summarize a large company's operations, financial position andcash flows over a particular period are a concise summary of hundreds of thousands of financial
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
--- Content provided by FirstRanker.com ---
Objectives of Accounting:Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
--- Content provided by FirstRanker.com ---
business transactions in the books of account.ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
--- Content provided by FirstRanker.com ---
of the some period.iii) To ascertain the financial position of the business: In addition to profit, a businessman must
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
--- Content provided by FirstRanker.com ---
iv) To portray the liquidity position: Financial reporting should provide information about howan enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
--- Content provided by FirstRanker.com ---
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim apayment which is not due to him.
vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
--- Content provided by FirstRanker.com ---
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts arecompulsorily required to maintain accounts as per the law governing their operations such as the
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
--- Content provided by FirstRanker.com ---
When the business transactions take place, the first step is to record the same in the books oforiginal entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
accounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
--- Content provided by FirstRanker.com ---
as a journal entry.LEDGER:
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
--- Content provided by FirstRanker.com ---
together at one place. But, the preparation of different ledger accounts helps to get a consolidatedpicture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
--- Content provided by FirstRanker.com ---
first entered in the journal and subsequently posted to the concerned accounts in the ledger.Posting refers to the process of entering in the ledger the information given in the journal. In the
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
--- Content provided by FirstRanker.com ---
SU BSIDIARYBOOKSJournal is subdivided into various parts known as subsidiary books or subdivisions of journal.
Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
--- Content provided by FirstRanker.com ---
also referred to as English System. Though the usual type of journal entries are not passed inthese sub?divided journals, the double entry principles of accounting are strictly followed.
Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
--- Content provided by FirstRanker.com ---
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of aledger with the required explanation called as narration and hence, it plays a dual role of a
journal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
--- Content provided by FirstRanker.com ---
receipts at any time.Accounting concepts:
The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
--- Content provided by FirstRanker.com ---
Business Entity Concept:A business unit is an organization of persons established to accomplish an economic goal.
Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
--- Content provided by FirstRanker.com ---
owns the assets and in turn owes to various claimants.Money Measurement Concept:
In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
--- Content provided by FirstRanker.com ---
which cannot be expressed in monetary terms are not recorded in accounting. Hence, theaccounting does not give a complete picture of all the transactions of a business unit. This
concept does not also take care of the effects of inflation because it assumes astable value for
measuring.
Going Concern Concept:
--- Content provided by FirstRanker.com ---
Under this concept, the transactions are recorded assuming that the business will exist for alonger period of time, i.e., a business unit is considered to be a going concern and not a
liquidated one. Keeping this in view, the suppliers and other companies enter into business
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MBA DEPARTMNET
--- Content provided by FirstRanker.com ---
FINANCIAL ACCOU NTINGANDANALY SISAccounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
--- Content provided by FirstRanker.com ---
cash flows over a particular period are a concise summary of hundreds of thousands of financialtransactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objectives of Accounting:
--- Content provided by FirstRanker.com ---
Objective of accounting may differ from business to business depending upon their specificrequirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.
--- Content provided by FirstRanker.com ---
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profitearned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
of the some period.
--- Content provided by FirstRanker.com ---
iii) To ascertain the financial position of the business: In addition to profit, a businessman mustknow his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
iv) To portray the liquidity position: Financial reporting should provide information about how
--- Content provided by FirstRanker.com ---
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about itscapital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
--- Content provided by FirstRanker.com ---
payment which is not due to him.vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
--- Content provided by FirstRanker.com ---
compulsorily required to maintain accounts as per the law governing their operations such as theCompanies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
When the business transactions take place, the first step is to record the same in the books of
--- Content provided by FirstRanker.com ---
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book ofaccounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
as a journal entry.
--- Content provided by FirstRanker.com ---
LEDGER:Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
--- Content provided by FirstRanker.com ---
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account maybe defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
--- Content provided by FirstRanker.com ---
Posting refers to the process of entering in the ledger the information given in the journal. In thepast, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
SU BSIDIARYBOOKS
--- Content provided by FirstRanker.com ---
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
also referred to as English System. Though the usual type of journal entries are not passed in
--- Content provided by FirstRanker.com ---
these sub?divided journals, the double entry principles of accounting are strictly followed.Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
--- Content provided by FirstRanker.com ---
ledger with the required explanation called as narration and hence, it plays a dual role of ajournal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
receipts at any time.
--- Content provided by FirstRanker.com ---
Accounting concepts:The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
Business Entity Concept:
--- Content provided by FirstRanker.com ---
A business unit is an organization of persons established to accomplish an economic goal.Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants.
--- Content provided by FirstRanker.com ---
Money Measurement Concept:In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
--- Content provided by FirstRanker.com ---
accounting does not give a complete picture of all the transactions of a business unit. Thisconcept does not also take care of the effects of inflation because it assumes astable value for
measuring.
Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a
--- Content provided by FirstRanker.com ---
longer period of time, i.e., a business unit is considered to be a going concern and not aliquidated one. Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
as assets, although they may be practically unsaleable.
--- Content provided by FirstRanker.com ---
Dual Aspect Concept:According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
--- Content provided by FirstRanker.com ---
Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the totalassets of the business unit are equal to its total liabilities. Liabilities here relate both to the
outsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly
--- Content provided by FirstRanker.com ---
the result of each period is ascertained. Though the business is assumed to be continuing infuture (as per goingconcern concept), the measurement of income and studying the financial
position of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
--- Content provided by FirstRanker.com ---
end of an accounting period, an Income Statement is prepared to ascertain the profit or loss madeduring that accounting period and Balance Sheet is prepared which depicts the financial position
of the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
Historical Cost Concept:
--- Content provided by FirstRanker.com ---
According to this concept, the transactions are recorded in the books of account with therespective amounts involved. For example, if an asset is purchases, it is entered in the accounting
record at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
methodically reduced in its value by way of charging depreciation. However, in the light of
--- Content provided by FirstRanker.com ---
inflationary conditions, the application of this concept is considered highly irrelevant for judgingthe financial position of the business.
Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
particular period should be compared with the revenues associated to the same period to obtain
--- Content provided by FirstRanker.com ---
the net income of the business. Under this concept, the accounting period concept is relevant andit is this concept (matching concept) which necessitated the provisions of different adjustments
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MBA DEPARTMNET
FINANCIAL ACCOU NTINGANDANALY SIS
--- Content provided by FirstRanker.com ---
Accounting:The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
cash flows over a particular period are a concise summary of hundreds of thousands of financial
--- Content provided by FirstRanker.com ---
transactions it may have entered into over this period. Accounting is one of the key functions foralmost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objectives of Accounting:
Objective of accounting may differ from business to business depending upon their specific
--- Content provided by FirstRanker.com ---
requirements. However, the following are the general objectives of accounting.i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
--- Content provided by FirstRanker.com ---
earned or loss suffered in business during a particular period. For this purpose, a business entityprepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
of the some period.
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
--- Content provided by FirstRanker.com ---
know his financial position i.e., availability of cash, position of assets and liabilities etc. Thishelps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
iv) To portray the liquidity position: Financial reporting should provide information about how
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
--- Content provided by FirstRanker.com ---
capital transactions, cash dividends and other distributions of resources by the enterprise toowners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
payment which is not due to him.
--- Content provided by FirstRanker.com ---
vi) To facilitate rational decision ? making: Accounting records and financial statements providefinancial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
compulsorily required to maintain accounts as per the law governing their operations such as the
--- Content provided by FirstRanker.com ---
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is alsocompulsory under the Sales Tax Act and Income Tax Act.
Journal:
When the business transactions take place, the first step is to record the same in the books of
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
--- Content provided by FirstRanker.com ---
accounts in which all the business transactions are originally recorded in chronological order andfrom which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
as a journal entry.
LEDGER:
--- Content provided by FirstRanker.com ---
Ledger is a main book of account in which various accounts of personal, real and nominal nature,are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
--- Content provided by FirstRanker.com ---
be defined as a summary statement of all the transactions relating to a person, asset, expense, orincome or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
Posting refers to the process of entering in the ledger the information given in the journal. In the
--- Content provided by FirstRanker.com ---
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leafones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
SU BSIDIARYBOOKS
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
--- Content provided by FirstRanker.com ---
Each one of the subsidiary books is a special journal and a book of original or prime entry.There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
also referred to as English System. Though the usual type of journal entries are not passed in
these sub?divided journals, the double entry principles of accounting are strictly followed.
--- Content provided by FirstRanker.com ---
Cash Book:Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
ledger with the required explanation called as narration and hence, it plays a dual role of a
--- Content provided by FirstRanker.com ---
journal as well as ledger. All cash receipts are recorded on the debit side and all cash paymentsare recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
receipts at any time.
Accounting concepts:
--- Content provided by FirstRanker.com ---
The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditionsupon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
Business Entity Concept:
A business unit is an organization of persons established to accomplish an economic goal.
--- Content provided by FirstRanker.com ---
Business entity concept implies that the business unit is separate and distinct from the personswho provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants.
Money Measurement Concept:
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In accounting all events and transactions are recode in terms of money. Money is considered asa common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
accounting does not give a complete picture of all the transactions of a business unit. This
--- Content provided by FirstRanker.com ---
concept does not also take care of the effects of inflation because it assumes astable value formeasuring.
Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a
longer period of time, i.e., a business unit is considered to be a going concern and not a
--- Content provided by FirstRanker.com ---
liquidated one. Keeping this in view, the suppliers and other companies enter into businesstransactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
as assets, although they may be practically unsaleable.
Dual Aspect Concept:
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According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the total
--- Content provided by FirstRanker.com ---
assets of the business unit are equal to its total liabilities. Liabilities here relate both to theoutsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly
the result of each period is ascertained. Though the business is assumed to be continuing in
--- Content provided by FirstRanker.com ---
future (as per goingconcern concept), the measurement of income and studying the financialposition of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made
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during that accounting period and Balance Sheet is prepared which depicts the financial positionof the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
Historical Cost Concept:
According to this concept, the transactions are recorded in the books of account with the
--- Content provided by FirstRanker.com ---
respective amounts involved. For example, if an asset is purchases, it is entered in the accountingrecord at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
methodically reduced in its value by way of charging depreciation. However, in the light of
inflationary conditions, the application of this concept is considered highly irrelevant for judging
--- Content provided by FirstRanker.com ---
the financial position of the business.Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
particular period should be compared with the revenues associated to the same period to obtain
the net income of the business. Under this concept, the accounting period concept is relevant and
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it is this concept (matching concept) which necessitated the provisions of different adjustmentsfor recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
advance, etc., during the course of preparing the financial statements at the end of the accounting
period.
Realisation Concept:
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This concept assumes or recognizes revenue when a sale is made. Sale is considered to becomplete when the ownership and property are transferred from the seller to the buyer and the
consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire
purchase system where the ownership is transferred to the buyer when the last instalment is paid
and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract is
--- Content provided by FirstRanker.com ---
completed, the profit is calculated on the basis of work certified each year.Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual
receipt. Similarly the costs are recognized when they are incurred and not when payment is
made. This assumption makes it necessary to give certain adjustments in the preparation of
--- Content provided by FirstRanker.com ---
income statement regarding revenues and costs. But under cash accounting system, the revenuesand costs are recognized only when they are actually received or paid. Hence, the combination
of both cash and accrual system is preferable to get rid of the limitations of each system.
Objective Evidence Concept:
This concept ensures that all accounting must be based on objective evidence, i.e., every
--- Content provided by FirstRanker.com ---
transaction recorded in the books of account must have a verifiable document in support of its,existence. Only then, the transactions can be verified by the auditors and declared as true or
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,
--- Content provided by FirstRanker.com ---
valuation of inventory, etc., and the accountants are required to disclose the regulations followed.Manufacturing Account:
Manufacturing concerns which convert raw material into finished product is required to prepare
manufacturing account and then prepare trading and profit and loss account. This is necessary
because they have to ascertain cost of goods manufactured, gross profit and net profit.
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Trading account:Trading account is prepared for an accounting period to find the trading results or gross margin
of the business i.e., the amount of gross profit the concern has made from buying and selling
during the accounting period. The difference between the sales and cost of sales is gross profit.
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MBA DEPARTMNETFINANCIAL ACCOU NTINGANDANALY SIS
Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
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The financial statements that summarize a large company's operations, financial position andcash flows over a particular period are a concise summary of hundreds of thousands of financial
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
--- Content provided by FirstRanker.com ---
Objectives of Accounting:Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
--- Content provided by FirstRanker.com ---
business transactions in the books of account.ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
--- Content provided by FirstRanker.com ---
of the some period.iii) To ascertain the financial position of the business: In addition to profit, a businessman must
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
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iv) To portray the liquidity position: Financial reporting should provide information about howan enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
--- Content provided by FirstRanker.com ---
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim apayment which is not due to him.
vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
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vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts arecompulsorily required to maintain accounts as per the law governing their operations such as the
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
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When the business transactions take place, the first step is to record the same in the books oforiginal entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
accounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
--- Content provided by FirstRanker.com ---
as a journal entry.LEDGER:
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
--- Content provided by FirstRanker.com ---
together at one place. But, the preparation of different ledger accounts helps to get a consolidatedpicture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
--- Content provided by FirstRanker.com ---
first entered in the journal and subsequently posted to the concerned accounts in the ledger.Posting refers to the process of entering in the ledger the information given in the journal. In the
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
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SU BSIDIARYBOOKSJournal is subdivided into various parts known as subsidiary books or subdivisions of journal.
Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
--- Content provided by FirstRanker.com ---
also referred to as English System. Though the usual type of journal entries are not passed inthese sub?divided journals, the double entry principles of accounting are strictly followed.
Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
--- Content provided by FirstRanker.com ---
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of aledger with the required explanation called as narration and hence, it plays a dual role of a
journal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
--- Content provided by FirstRanker.com ---
receipts at any time.Accounting concepts:
The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
--- Content provided by FirstRanker.com ---
Business Entity Concept:A business unit is an organization of persons established to accomplish an economic goal.
Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
--- Content provided by FirstRanker.com ---
owns the assets and in turn owes to various claimants.Money Measurement Concept:
In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
--- Content provided by FirstRanker.com ---
which cannot be expressed in monetary terms are not recorded in accounting. Hence, theaccounting does not give a complete picture of all the transactions of a business unit. This
concept does not also take care of the effects of inflation because it assumes astable value for
measuring.
Going Concern Concept:
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Under this concept, the transactions are recorded assuming that the business will exist for alonger period of time, i.e., a business unit is considered to be a going concern and not a
liquidated one. Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
--- Content provided by FirstRanker.com ---
as assets, although they may be practically unsaleable.Dual Aspect Concept:
According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
--- Content provided by FirstRanker.com ---
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities orCapital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the total
assets of the business unit are equal to its total liabilities. Liabilities here relate both to the
outsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
--- Content provided by FirstRanker.com ---
Under this concept, the life of the business is segmented into different periods and accordinglythe result of each period is ascertained. Though the business is assumed to be continuing in
future (as per goingconcern concept), the measurement of income and studying the financial
position of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
--- Content provided by FirstRanker.com ---
a year. The businessman has to analyse and evaluate the results ascertained periodically. At theend of an accounting period, an Income Statement is prepared to ascertain the profit or loss made
during that accounting period and Balance Sheet is prepared which depicts the financial position
of the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
--- Content provided by FirstRanker.com ---
Historical Cost Concept:According to this concept, the transactions are recorded in the books of account with the
respective amounts involved. For example, if an asset is purchases, it is entered in the accounting
record at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
--- Content provided by FirstRanker.com ---
methodically reduced in its value by way of charging depreciation. However, in the light ofinflationary conditions, the application of this concept is considered highly irrelevant for judging
the financial position of the business.
Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
--- Content provided by FirstRanker.com ---
particular period should be compared with the revenues associated to the same period to obtainthe net income of the business. Under this concept, the accounting period concept is relevant and
it is this concept (matching concept) which necessitated the provisions of different adjustments
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
advance, etc., during the course of preparing the financial statements at the end of the accounting
--- Content provided by FirstRanker.com ---
period.Realisation Concept:
This concept assumes or recognizes revenue when a sale is made. Sale is considered to be
complete when the ownership and property are transferred from the seller to the buyer and the
consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire
--- Content provided by FirstRanker.com ---
purchase system where the ownership is transferred to the buyer when the last instalment is paidand 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract is
completed, the profit is calculated on the basis of work certified each year.
Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual
--- Content provided by FirstRanker.com ---
receipt. Similarly the costs are recognized when they are incurred and not when payment ismade. This assumption makes it necessary to give certain adjustments in the preparation of
income statement regarding revenues and costs. But under cash accounting system, the revenues
and costs are recognized only when they are actually received or paid. Hence, the combination
of both cash and accrual system is preferable to get rid of the limitations of each system.
--- Content provided by FirstRanker.com ---
Objective Evidence Concept:This concept ensures that all accounting must be based on objective evidence, i.e., every
transaction recorded in the books of account must have a verifiable document in support of its,
existence. Only then, the transactions can be verified by the auditors and declared as true or
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,
--- Content provided by FirstRanker.com ---
it should be objective in nature and not subjective. However, in reality the subjectivity cannot beavoided in the aspects like provision for bad and doubtful debts, provision for depreciation,
valuation of inventory, etc., and the accountants are required to disclose the regulations followed.
Manufacturing Account:
Manufacturing concerns which convert raw material into finished product is required to prepare
--- Content provided by FirstRanker.com ---
manufacturing account and then prepare trading and profit and loss account. This is necessarybecause they have to ascertain cost of goods manufactured, gross profit and net profit.
Trading account:
Trading account is prepared for an accounting period to find the trading results or gross margin
of the business i.e., the amount of gross profit the concern has made from buying and selling
--- Content provided by FirstRanker.com ---
during the accounting period. The difference between the sales and cost of sales is gross profit.For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,
direct expenses on purchasing and manufacturing are added up and closing stock of finished
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
the profit and loss account.
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Profit and Loss Account:In the words of Prof. Carter ?Profit and loss account is an account into which all gains and losses
are collected in order to ascertain the excess of gains over the losses or vice versa.?
Balance sheet:
?Balance sheet is a screen picture of the financial position of a going business concern at a
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certain moment? ? Francis.Asset:
Any physical thing or right owned that has a money value is an asset. In other words, an asset is
that expenditure which results in acquiring of some property or benefits of a lasting nature.
They are classified on the basis of their nature. Different types of assets are as under:
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(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used inthe business with the objective of making profits. Land and building, Plant and machinery,
Furniture and Fixtures are examples of fixed assets.
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
receivable and stock are called current assets as they can be realised within an operating cycle of
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one year to discharge liabilities.(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? they
can be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be both
fixed assets and current assets.
(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt but
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have value are called intangible assets. Goodwill, patents, trade marks and licences are examplesof intangible assets. They are usually classified under fixed assets.
(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenses
which are capitalised for the time being, expenses for promotion of organisations (preliminary
expenses), discount on issue of shares, debit balance of profit and loss account etc. are the
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examples of fictitious assets.Liability:
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MBA DEPARTMNET
FINANCIAL ACCOU NTINGANDANALY SIS
--- Content provided by FirstRanker.com ---
Accounting:The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
cash flows over a particular period are a concise summary of hundreds of thousands of financial
--- Content provided by FirstRanker.com ---
transactions it may have entered into over this period. Accounting is one of the key functions foralmost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objectives of Accounting:
Objective of accounting may differ from business to business depending upon their specific
--- Content provided by FirstRanker.com ---
requirements. However, the following are the general objectives of accounting.i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
--- Content provided by FirstRanker.com ---
earned or loss suffered in business during a particular period. For this purpose, a business entityprepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
of the some period.
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
--- Content provided by FirstRanker.com ---
know his financial position i.e., availability of cash, position of assets and liabilities etc. Thishelps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
iv) To portray the liquidity position: Financial reporting should provide information about how
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
--- Content provided by FirstRanker.com ---
capital transactions, cash dividends and other distributions of resources by the enterprise toowners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
payment which is not due to him.
--- Content provided by FirstRanker.com ---
vi) To facilitate rational decision ? making: Accounting records and financial statements providefinancial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
compulsorily required to maintain accounts as per the law governing their operations such as the
--- Content provided by FirstRanker.com ---
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is alsocompulsory under the Sales Tax Act and Income Tax Act.
Journal:
When the business transactions take place, the first step is to record the same in the books of
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
--- Content provided by FirstRanker.com ---
accounts in which all the business transactions are originally recorded in chronological order andfrom which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
as a journal entry.
LEDGER:
--- Content provided by FirstRanker.com ---
Ledger is a main book of account in which various accounts of personal, real and nominal nature,are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
--- Content provided by FirstRanker.com ---
be defined as a summary statement of all the transactions relating to a person, asset, expense, orincome or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
Posting refers to the process of entering in the ledger the information given in the journal. In the
--- Content provided by FirstRanker.com ---
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leafones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
SU BSIDIARYBOOKS
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
--- Content provided by FirstRanker.com ---
Each one of the subsidiary books is a special journal and a book of original or prime entry.There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
also referred to as English System. Though the usual type of journal entries are not passed in
these sub?divided journals, the double entry principles of accounting are strictly followed.
--- Content provided by FirstRanker.com ---
Cash Book:Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
ledger with the required explanation called as narration and hence, it plays a dual role of a
--- Content provided by FirstRanker.com ---
journal as well as ledger. All cash receipts are recorded on the debit side and all cash paymentsare recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
receipts at any time.
Accounting concepts:
--- Content provided by FirstRanker.com ---
The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditionsupon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
Business Entity Concept:
A business unit is an organization of persons established to accomplish an economic goal.
--- Content provided by FirstRanker.com ---
Business entity concept implies that the business unit is separate and distinct from the personswho provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants.
Money Measurement Concept:
--- Content provided by FirstRanker.com ---
In accounting all events and transactions are recode in terms of money. Money is considered asa common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
accounting does not give a complete picture of all the transactions of a business unit. This
--- Content provided by FirstRanker.com ---
concept does not also take care of the effects of inflation because it assumes astable value formeasuring.
Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a
longer period of time, i.e., a business unit is considered to be a going concern and not a
--- Content provided by FirstRanker.com ---
liquidated one. Keeping this in view, the suppliers and other companies enter into businesstransactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
as assets, although they may be practically unsaleable.
Dual Aspect Concept:
--- Content provided by FirstRanker.com ---
According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the total
--- Content provided by FirstRanker.com ---
assets of the business unit are equal to its total liabilities. Liabilities here relate both to theoutsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly
the result of each period is ascertained. Though the business is assumed to be continuing in
--- Content provided by FirstRanker.com ---
future (as per goingconcern concept), the measurement of income and studying the financialposition of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made
--- Content provided by FirstRanker.com ---
during that accounting period and Balance Sheet is prepared which depicts the financial positionof the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
Historical Cost Concept:
According to this concept, the transactions are recorded in the books of account with the
--- Content provided by FirstRanker.com ---
respective amounts involved. For example, if an asset is purchases, it is entered in the accountingrecord at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
methodically reduced in its value by way of charging depreciation. However, in the light of
inflationary conditions, the application of this concept is considered highly irrelevant for judging
--- Content provided by FirstRanker.com ---
the financial position of the business.Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
particular period should be compared with the revenues associated to the same period to obtain
the net income of the business. Under this concept, the accounting period concept is relevant and
--- Content provided by FirstRanker.com ---
it is this concept (matching concept) which necessitated the provisions of different adjustmentsfor recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
advance, etc., during the course of preparing the financial statements at the end of the accounting
period.
Realisation Concept:
--- Content provided by FirstRanker.com ---
This concept assumes or recognizes revenue when a sale is made. Sale is considered to becomplete when the ownership and property are transferred from the seller to the buyer and the
consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire
purchase system where the ownership is transferred to the buyer when the last instalment is paid
and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract is
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completed, the profit is calculated on the basis of work certified each year.Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual
receipt. Similarly the costs are recognized when they are incurred and not when payment is
made. This assumption makes it necessary to give certain adjustments in the preparation of
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income statement regarding revenues and costs. But under cash accounting system, the revenuesand costs are recognized only when they are actually received or paid. Hence, the combination
of both cash and accrual system is preferable to get rid of the limitations of each system.
Objective Evidence Concept:
This concept ensures that all accounting must be based on objective evidence, i.e., every
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transaction recorded in the books of account must have a verifiable document in support of its,existence. Only then, the transactions can be verified by the auditors and declared as true or
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,
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valuation of inventory, etc., and the accountants are required to disclose the regulations followed.Manufacturing Account:
Manufacturing concerns which convert raw material into finished product is required to prepare
manufacturing account and then prepare trading and profit and loss account. This is necessary
because they have to ascertain cost of goods manufactured, gross profit and net profit.
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Trading account:Trading account is prepared for an accounting period to find the trading results or gross margin
of the business i.e., the amount of gross profit the concern has made from buying and selling
during the accounting period. The difference between the sales and cost of sales is gross profit.
For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,
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direct expenses on purchasing and manufacturing are added up and closing stock of finishedgoods is reduced. The balance of this account shows gross profit or loss which is transferred to
the profit and loss account.
Profit and Loss Account:
In the words of Prof. Carter ?Profit and loss account is an account into which all gains and losses
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are collected in order to ascertain the excess of gains over the losses or vice versa.?Balance sheet:
?Balance sheet is a screen picture of the financial position of a going business concern at a
certain moment? ? Francis.
Asset:
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Any physical thing or right owned that has a money value is an asset. In other words, an asset isthat expenditure which results in acquiring of some property or benefits of a lasting nature.
They are classified on the basis of their nature. Different types of assets are as under:
(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
the business with the objective of making profits. Land and building, Plant and machinery,
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Furniture and Fixtures are examples of fixed assets.(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
receivable and stock are called current assets as they can be realised within an operating cycle of
one year to discharge liabilities.
(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? they
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can be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be bothfixed assets and current assets.
(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt but
have value are called intangible assets. Goodwill, patents, trade marks and licences are examples
of intangible assets. They are usually classified under fixed assets.
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(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenseswhich are capitalised for the time being, expenses for promotion of organisations (preliminary
expenses), discount on issue of shares, debit balance of profit and loss account etc. are the
examples of fictitious assets.
Liability:
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It means the amount which the firm owes to outsiders that is, excepting the proprietors. In thewords of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
claims of those who ate not owners are called liabilities?.
In simple terms, debts repayable to outsiders by the business are known as liabilities.
Long term Liabilities: Liabilities repayable after specific duration of long period of time are
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called long term liabilities.Current liabilities: Liabilities which are repayable during the operating cycle of business,
usually within a year, are called short term liabilities or current liabilities
FINANCIAL STATEMENT ANALY SIS
Financial Statement : A financial statement is an organized collection of data according to
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logical and consistent accounting proceduresPurpose: To understand the financial aspects of a business form.
Financial Statement
Income Statement Balance Sheet Statement of retained earnings Statement of changes in
financial position
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Analysis : MethodicalClassificationofdatagiveninthe financialstatements nsimplifiedform.Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
Financial statement Analysis: To analyze the firm?s profitability & financial soundness
The following are the types of Financial Statement Analysis.
1.On the basis of Material used : According to the material used.
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External Analysis Internal AnalysisExternal Analysis: This analysis is done by the outsiders like Investors /Credit
agencies/Government agencies and other Creditors.
Internal Analysis: This analysis is done by the internal executives / employees of the
organization.
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FirstRanker.com - FirstRanker's ChoiceMBA DEPARTMNET
FINANCIAL ACCOU NTINGANDANALY SIS
Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
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Accounting also refers to the process of summarizing, analyzing and reporting these transactions.The financial statements that summarize a large company's operations, financial position and
cash flows over a particular period are a concise summary of hundreds of thousands of financial
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
--- Content provided by FirstRanker.com ---
sizable finance departments with dozens of employees at larger companies.Objectives of Accounting:
Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
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take place. Accounting serves this purpose of record keeping by promptly recording all thebusiness transactions in the books of account.
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
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which shows the profit or loss of the business by matching the items of revenue and expenditureof the some period.
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
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health of a business entity.iv) To portray the liquidity position: Financial reporting should provide information about how
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
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v) To protect business properties: Accounting provides upto date information about the variousassets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
payment which is not due to him.
vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
--- Content provided by FirstRanker.com ---
taken in respect of various aspects of business.vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
compulsorily required to maintain accounts as per the law governing their operations such as the
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
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Journal:When the business transactions take place, the first step is to record the same in the books of
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
accounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
--- Content provided by FirstRanker.com ---
the act of recording each transaction in the journal and the form in which it is recorded, is knownas a journal entry.
LEDGER:
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
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chronologically, it is very difficult to obtain all the transactions pertaining to one head of accounttogether at one place. But, the preparation of different ledger accounts helps to get a consolidated
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
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effect ultimately. From the above definition, it is clear that when transactions take place, they arefirst entered in the journal and subsequently posted to the concerned accounts in the ledger.
Posting refers to the process of entering in the ledger the information given in the journal. In the
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
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accounts and arrangement of accounts in any required manner.SU BSIDIARYBOOKS
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
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a special journal and then in the ledger accounts is the practical system of accounting which isalso referred to as English System. Though the usual type of journal entries are not passed in
these sub?divided journals, the double entry principles of accounting are strictly followed.
Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
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payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are postedsubsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
ledger with the required explanation called as narration and hence, it plays a dual role of a
journal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
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Book. The Cash Book will always show a debit balance since payments cannot exceed thereceipts at any time.
Accounting concepts:
The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
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common accounting concepts adopted by many businessconcerns .Business Entity Concept:
A business unit is an organization of persons established to accomplish an economic goal.
Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
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equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itselfowns the assets and in turn owes to various claimants.
Money Measurement Concept:
In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
--- Content provided by FirstRanker.com ---
business can be expressed in terms of numbers. In other words, facts, events and transactionswhich cannot be expressed in monetary terms are not recorded in accounting. Hence, the
accounting does not give a complete picture of all the transactions of a business unit. This
concept does not also take care of the effects of inflation because it assumes astable value for
measuring.
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Going Concern Concept:Under this concept, the transactions are recorded assuming that the business will exist for a
longer period of time, i.e., a business unit is considered to be a going concern and not a
liquidated one. Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of valuing the assets at
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historical cost or replacement cost. This concept also supports the treatment of prepaid expensesas assets, although they may be practically unsaleable.
Dual Aspect Concept:
According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
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system is that every debit has a corresponding and equal amount of credit. This is the underlyingassumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the total
assets of the business unit are equal to its total liabilities. Liabilities here relate both to the
outsiders and the owners. Liabilities to the owners are considered as capital.
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Periodicity Concept:Under this concept, the life of the business is segmented into different periods and accordingly
the result of each period is ascertained. Though the business is assumed to be continuing in
future (as per goingconcern concept), the measurement of income and studying the financial
position of the business for a shorter and definite period will help in taking corrective steps at the
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appropriate time. Each segmented period is called ?accounting period? and the same is normallya year. The businessman has to analyse and evaluate the results ascertained periodically. At the
end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made
during that accounting period and Balance Sheet is prepared which depicts the financial position
of the business as on the last day of that period. During the course of preparation of these
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statements capital revenue items are to be necessarily distinguished.Historical Cost Concept:
According to this concept, the transactions are recorded in the books of account with the
respective amounts involved. For example, if an asset is purchases, it is entered in the accounting
record at the price paid to acquire the same and that cost is considered to be the base for all
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future accounting. It means that the asset is recorded at cost at the time of purchase but it may bemethodically reduced in its value by way of charging depreciation. However, in the light of
inflationary conditions, the application of this concept is considered highly irrelevant for judging
the financial position of the business.
Matching Concept:
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The essence of the matching concept lies in the view that all costs which are associated to aparticular period should be compared with the revenues associated to the same period to obtain
the net income of the business. Under this concept, the accounting period concept is relevant and
it is this concept (matching concept) which necessitated the provisions of different adjustments
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
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advance, etc., during the course of preparing the financial statements at the end of the accountingperiod.
Realisation Concept:
This concept assumes or recognizes revenue when a sale is made. Sale is considered to be
complete when the ownership and property are transferred from the seller to the buyer and the
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consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hirepurchase system where the ownership is transferred to the buyer when the last instalment is paid
and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract is
completed, the profit is calculated on the basis of work certified each year.
Accrual Concept:
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According to this concept the revenue is recognized on its realization and not on its actualreceipt. Similarly the costs are recognized when they are incurred and not when payment is
made. This assumption makes it necessary to give certain adjustments in the preparation of
income statement regarding revenues and costs. But under cash accounting system, the revenues
and costs are recognized only when they are actually received or paid. Hence, the combination
--- Content provided by FirstRanker.com ---
of both cash and accrual system is preferable to get rid of the limitations of each system.Objective Evidence Concept:
This concept ensures that all accounting must be based on objective evidence, i.e., every
transaction recorded in the books of account must have a verifiable document in support of its,
existence. Only then, the transactions can be verified by the auditors and declared as true or
--- Content provided by FirstRanker.com ---
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,
valuation of inventory, etc., and the accountants are required to disclose the regulations followed.
Manufacturing Account:
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Manufacturing concerns which convert raw material into finished product is required to preparemanufacturing account and then prepare trading and profit and loss account. This is necessary
because they have to ascertain cost of goods manufactured, gross profit and net profit.
Trading account:
Trading account is prepared for an accounting period to find the trading results or gross margin
--- Content provided by FirstRanker.com ---
of the business i.e., the amount of gross profit the concern has made from buying and sellingduring the accounting period. The difference between the sales and cost of sales is gross profit.
For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,
direct expenses on purchasing and manufacturing are added up and closing stock of finished
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
--- Content provided by FirstRanker.com ---
the profit and loss account.Profit and Loss Account:
In the words of Prof. Carter ?Profit and loss account is an account into which all gains and losses
are collected in order to ascertain the excess of gains over the losses or vice versa.?
Balance sheet:
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?Balance sheet is a screen picture of the financial position of a going business concern at acertain moment? ? Francis.
Asset:
Any physical thing or right owned that has a money value is an asset. In other words, an asset is
that expenditure which results in acquiring of some property or benefits of a lasting nature.
--- Content provided by FirstRanker.com ---
They are classified on the basis of their nature. Different types of assets are as under:(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
the business with the objective of making profits. Land and building, Plant and machinery,
Furniture and Fixtures are examples of fixed assets.
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
--- Content provided by FirstRanker.com ---
receivable and stock are called current assets as they can be realised within an operating cycle ofone year to discharge liabilities.
(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? they
can be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be both
fixed assets and current assets.
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(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt buthave value are called intangible assets. Goodwill, patents, trade marks and licences are examples
of intangible assets. They are usually classified under fixed assets.
(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenses
which are capitalised for the time being, expenses for promotion of organisations (preliminary
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expenses), discount on issue of shares, debit balance of profit and loss account etc. are theexamples of fictitious assets.
Liability:
It means the amount which the firm owes to outsiders that is, excepting the proprietors. In the
words of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
--- Content provided by FirstRanker.com ---
claims of those who ate not owners are called liabilities?.In simple terms, debts repayable to outsiders by the business are known as liabilities.
Long term Liabilities: Liabilities repayable after specific duration of long period of time are
called long term liabilities.
Current liabilities: Liabilities which are repayable during the operating cycle of business,
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usually within a year, are called short term liabilities or current liabilitiesFINANCIAL STATEMENT ANALY SIS
Financial Statement : A financial statement is an organized collection of data according to
logical and consistent accounting procedures
Purpose: To understand the financial aspects of a business form.
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Financial StatementIncome Statement Balance Sheet Statement of retained earnings Statement of changes in
financial position
Analysis : MethodicalClassificationofdatagiveninthe financialstatements nsimplifiedform.
Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
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Financial statement Analysis: To analyze the firm?s profitability & financial soundnessThe following are the types of Financial Statement Analysis.
1.On the basis of Material used : According to the material used.
External Analysis Internal Analysis
External Analysis: This analysis is done by the outsiders like Investors /Credit
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agencies/Government agencies and other Creditors.Internal Analysis: This analysis is done by the internal executives / employees of the
organization.
2.On the basis of modus operandi : According to the method of operation followed in the
analysis.
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Dynamic / Horizontal Analysis Static / Vertical AnalysisDynamic / Horizontal Analysis: This analysis refers to the financial data of a company for
several years. The figures of various years are compared with the base year. It helps to focus
attention on items that have changed significantly during the period under review. Changes in
different elements of cost and sales over no . of years.
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Tools employed are comparative statements and trend percentages.Static / Vertical Analysis: A study is made of the quantitative relationship of the various items in
the financial statements in a particular date.
Percentage of each element of cost to sales.
Tools employed are common?size financial statements and financial ratios.
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Ex: Item basedParticular period and in the same company
One division ? FMCG goods
Another division ? Medicines than
So the ratio is measured & compared the performance of one division to another division
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Particular period and with different companiesOne company ? FMCG goods
Another company ? FMCG goods
So the ratio is measured and compared the performance of one company to another company.
Methods and Devices of Financial Analysis:
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A number of methods or devices are used to study the relationship between different statementsand to analyze the position of the enterprise.
The following are the methods:
1.Comparative statements
2.Trend Analysis
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3.Common?size statements4.Funds Flow Analysis
5.Cash Flow Analysis
6.Ratio Analysis
7.Cost?Volume?Profit Analysis
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FirstRanker.com - FirstRanker's ChoiceMBA DEPARTMNET
FINANCIAL ACCOU NTINGANDANALY SIS
Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
--- Content provided by FirstRanker.com ---
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.The financial statements that summarize a large company's operations, financial position and
cash flows over a particular period are a concise summary of hundreds of thousands of financial
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
--- Content provided by FirstRanker.com ---
sizable finance departments with dozens of employees at larger companies.Objectives of Accounting:
Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
--- Content provided by FirstRanker.com ---
take place. Accounting serves this purpose of record keeping by promptly recording all thebusiness transactions in the books of account.
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
--- Content provided by FirstRanker.com ---
which shows the profit or loss of the business by matching the items of revenue and expenditureof the some period.
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
--- Content provided by FirstRanker.com ---
health of a business entity.iv) To portray the liquidity position: Financial reporting should provide information about how
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
--- Content provided by FirstRanker.com ---
v) To protect business properties: Accounting provides upto date information about the variousassets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
payment which is not due to him.
vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
--- Content provided by FirstRanker.com ---
taken in respect of various aspects of business.vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
compulsorily required to maintain accounts as per the law governing their operations such as the
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
--- Content provided by FirstRanker.com ---
Journal:When the business transactions take place, the first step is to record the same in the books of
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
accounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
--- Content provided by FirstRanker.com ---
the act of recording each transaction in the journal and the form in which it is recorded, is knownas a journal entry.
LEDGER:
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
--- Content provided by FirstRanker.com ---
chronologically, it is very difficult to obtain all the transactions pertaining to one head of accounttogether at one place. But, the preparation of different ledger accounts helps to get a consolidated
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
--- Content provided by FirstRanker.com ---
effect ultimately. From the above definition, it is clear that when transactions take place, they arefirst entered in the journal and subsequently posted to the concerned accounts in the ledger.
Posting refers to the process of entering in the ledger the information given in the journal. In the
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
--- Content provided by FirstRanker.com ---
accounts and arrangement of accounts in any required manner.SU BSIDIARYBOOKS
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
--- Content provided by FirstRanker.com ---
a special journal and then in the ledger accounts is the practical system of accounting which isalso referred to as English System. Though the usual type of journal entries are not passed in
these sub?divided journals, the double entry principles of accounting are strictly followed.
Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
--- Content provided by FirstRanker.com ---
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are postedsubsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
ledger with the required explanation called as narration and hence, it plays a dual role of a
journal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
--- Content provided by FirstRanker.com ---
Book. The Cash Book will always show a debit balance since payments cannot exceed thereceipts at any time.
Accounting concepts:
The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
--- Content provided by FirstRanker.com ---
common accounting concepts adopted by many businessconcerns .Business Entity Concept:
A business unit is an organization of persons established to accomplish an economic goal.
Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
--- Content provided by FirstRanker.com ---
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itselfowns the assets and in turn owes to various claimants.
Money Measurement Concept:
In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
--- Content provided by FirstRanker.com ---
business can be expressed in terms of numbers. In other words, facts, events and transactionswhich cannot be expressed in monetary terms are not recorded in accounting. Hence, the
accounting does not give a complete picture of all the transactions of a business unit. This
concept does not also take care of the effects of inflation because it assumes astable value for
measuring.
--- Content provided by FirstRanker.com ---
Going Concern Concept:Under this concept, the transactions are recorded assuming that the business will exist for a
longer period of time, i.e., a business unit is considered to be a going concern and not a
liquidated one. Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of valuing the assets at
--- Content provided by FirstRanker.com ---
historical cost or replacement cost. This concept also supports the treatment of prepaid expensesas assets, although they may be practically unsaleable.
Dual Aspect Concept:
According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
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system is that every debit has a corresponding and equal amount of credit. This is the underlyingassumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the total
assets of the business unit are equal to its total liabilities. Liabilities here relate both to the
outsiders and the owners. Liabilities to the owners are considered as capital.
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Periodicity Concept:Under this concept, the life of the business is segmented into different periods and accordingly
the result of each period is ascertained. Though the business is assumed to be continuing in
future (as per goingconcern concept), the measurement of income and studying the financial
position of the business for a shorter and definite period will help in taking corrective steps at the
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appropriate time. Each segmented period is called ?accounting period? and the same is normallya year. The businessman has to analyse and evaluate the results ascertained periodically. At the
end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made
during that accounting period and Balance Sheet is prepared which depicts the financial position
of the business as on the last day of that period. During the course of preparation of these
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statements capital revenue items are to be necessarily distinguished.Historical Cost Concept:
According to this concept, the transactions are recorded in the books of account with the
respective amounts involved. For example, if an asset is purchases, it is entered in the accounting
record at the price paid to acquire the same and that cost is considered to be the base for all
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future accounting. It means that the asset is recorded at cost at the time of purchase but it may bemethodically reduced in its value by way of charging depreciation. However, in the light of
inflationary conditions, the application of this concept is considered highly irrelevant for judging
the financial position of the business.
Matching Concept:
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The essence of the matching concept lies in the view that all costs which are associated to aparticular period should be compared with the revenues associated to the same period to obtain
the net income of the business. Under this concept, the accounting period concept is relevant and
it is this concept (matching concept) which necessitated the provisions of different adjustments
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
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advance, etc., during the course of preparing the financial statements at the end of the accountingperiod.
Realisation Concept:
This concept assumes or recognizes revenue when a sale is made. Sale is considered to be
complete when the ownership and property are transferred from the seller to the buyer and the
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consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hirepurchase system where the ownership is transferred to the buyer when the last instalment is paid
and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract is
completed, the profit is calculated on the basis of work certified each year.
Accrual Concept:
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According to this concept the revenue is recognized on its realization and not on its actualreceipt. Similarly the costs are recognized when they are incurred and not when payment is
made. This assumption makes it necessary to give certain adjustments in the preparation of
income statement regarding revenues and costs. But under cash accounting system, the revenues
and costs are recognized only when they are actually received or paid. Hence, the combination
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of both cash and accrual system is preferable to get rid of the limitations of each system.Objective Evidence Concept:
This concept ensures that all accounting must be based on objective evidence, i.e., every
transaction recorded in the books of account must have a verifiable document in support of its,
existence. Only then, the transactions can be verified by the auditors and declared as true or
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otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,
valuation of inventory, etc., and the accountants are required to disclose the regulations followed.
Manufacturing Account:
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Manufacturing concerns which convert raw material into finished product is required to preparemanufacturing account and then prepare trading and profit and loss account. This is necessary
because they have to ascertain cost of goods manufactured, gross profit and net profit.
Trading account:
Trading account is prepared for an accounting period to find the trading results or gross margin
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of the business i.e., the amount of gross profit the concern has made from buying and sellingduring the accounting period. The difference between the sales and cost of sales is gross profit.
For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,
direct expenses on purchasing and manufacturing are added up and closing stock of finished
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
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the profit and loss account.Profit and Loss Account:
In the words of Prof. Carter ?Profit and loss account is an account into which all gains and losses
are collected in order to ascertain the excess of gains over the losses or vice versa.?
Balance sheet:
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?Balance sheet is a screen picture of the financial position of a going business concern at acertain moment? ? Francis.
Asset:
Any physical thing or right owned that has a money value is an asset. In other words, an asset is
that expenditure which results in acquiring of some property or benefits of a lasting nature.
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They are classified on the basis of their nature. Different types of assets are as under:(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
the business with the objective of making profits. Land and building, Plant and machinery,
Furniture and Fixtures are examples of fixed assets.
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
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receivable and stock are called current assets as they can be realised within an operating cycle ofone year to discharge liabilities.
(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? they
can be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be both
fixed assets and current assets.
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(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt buthave value are called intangible assets. Goodwill, patents, trade marks and licences are examples
of intangible assets. They are usually classified under fixed assets.
(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenses
which are capitalised for the time being, expenses for promotion of organisations (preliminary
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expenses), discount on issue of shares, debit balance of profit and loss account etc. are theexamples of fictitious assets.
Liability:
It means the amount which the firm owes to outsiders that is, excepting the proprietors. In the
words of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
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claims of those who ate not owners are called liabilities?.In simple terms, debts repayable to outsiders by the business are known as liabilities.
Long term Liabilities: Liabilities repayable after specific duration of long period of time are
called long term liabilities.
Current liabilities: Liabilities which are repayable during the operating cycle of business,
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usually within a year, are called short term liabilities or current liabilitiesFINANCIAL STATEMENT ANALY SIS
Financial Statement : A financial statement is an organized collection of data according to
logical and consistent accounting procedures
Purpose: To understand the financial aspects of a business form.
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Financial StatementIncome Statement Balance Sheet Statement of retained earnings Statement of changes in
financial position
Analysis : MethodicalClassificationofdatagiveninthe financialstatements nsimplifiedform.
Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
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Financial statement Analysis: To analyze the firm?s profitability & financial soundnessThe following are the types of Financial Statement Analysis.
1.On the basis of Material used : According to the material used.
External Analysis Internal Analysis
External Analysis: This analysis is done by the outsiders like Investors /Credit
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agencies/Government agencies and other Creditors.Internal Analysis: This analysis is done by the internal executives / employees of the
organization.
2.On the basis of modus operandi : According to the method of operation followed in the
analysis.
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Dynamic / Horizontal Analysis Static / Vertical AnalysisDynamic / Horizontal Analysis: This analysis refers to the financial data of a company for
several years. The figures of various years are compared with the base year. It helps to focus
attention on items that have changed significantly during the period under review. Changes in
different elements of cost and sales over no . of years.
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Tools employed are comparative statements and trend percentages.Static / Vertical Analysis: A study is made of the quantitative relationship of the various items in
the financial statements in a particular date.
Percentage of each element of cost to sales.
Tools employed are common?size financial statements and financial ratios.
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Ex: Item basedParticular period and in the same company
One division ? FMCG goods
Another division ? Medicines than
So the ratio is measured & compared the performance of one division to another division
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Particular period and with different companiesOne company ? FMCG goods
Another company ? FMCG goods
So the ratio is measured and compared the performance of one company to another company.
Methods and Devices of Financial Analysis:
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A number of methods or devices are used to study the relationship between different statementsand to analyze the position of the enterprise.
The following are the methods:
1.Comparative statements
2.Trend Analysis
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3.Common?size statements4.Funds Flow Analysis
5.Cash Flow Analysis
6.Ratio Analysis
7.Cost?Volume?Profit Analysis
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Comparative Statements:The comparative financial statements are statements of the financial position at different periods,
of time. The elements of financial position are shown in a comparative form so as to give an idea
of financial position at two or more periods. The following are the two types of comparative
statements.
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1.Comparative Balance Sheet: The analysis is the study of the trend of the same items, groups ofitems and computed items in two or more balance sheets of the same business enterprise on
different dates. The changes in periodic balance sheet items reflect the conduct of a business. It
has four columns and the fourth column is used for giving percentages of increases or decreases.
Guidelines for interpretation : nterpreter is expected to study the following aspects
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?Current financial position and liquidity position?Long?term financial position
?Profitability of the concern
?For studying current financial position or short?term financial position of a concern, should see
the working capital in both the years.
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2.Comparative Income Statement: The income statement gives the results of the operations of abusiness. It gives an idea of the progress of a business over a period of time. Like comparative
balance sheet it also has 4 columns and the fourth column is used to show increase or decrease in
figures, in absolute amounts and percentages respectively.
Guidelines for interpretation : nterpreter is expected to study the following aspects
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?The increase or decrease in sales should be compared with the increase or decrease in cost ofgoods sold.
?To analyze the study of operational profits.
?The increase or decrease in net profit will give an idea about the overall profitability of the
concern.
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?Should mention whether the overall profitability is good or not.Trend Analysis:
The financial statements may be analyzed by computing trends of series of information. This
method determines the direction upwards or downwards and involves the computation of the
percentage relationship that each statement item bears to the same item in base year.
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Procedure for calculating trends.?One year is taken as a base year. Generally the first or the last is taken as base year.
?The figures of base year are taken as 100.
?Trend percentages are calculated in relation to base year. If a figure in one year is less than the
figure in base year the trend percentage will be less than 100 and it will be more than 100 if
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figure is more than base year figure. Each year?s figure is divided by the base year?s figure.COMMON?SIZE STATEMENT ANALY SIS
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FINANCIAL ACCOU NTINGANDANALY SIS
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Accounting:The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
cash flows over a particular period are a concise summary of hundreds of thousands of financial
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transactions it may have entered into over this period. Accounting is one of the key functions foralmost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objectives of Accounting:
Objective of accounting may differ from business to business depending upon their specific
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requirements. However, the following are the general objectives of accounting.i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
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earned or loss suffered in business during a particular period. For this purpose, a business entityprepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
of the some period.
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
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know his financial position i.e., availability of cash, position of assets and liabilities etc. Thishelps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
iv) To portray the liquidity position: Financial reporting should provide information about how
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
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capital transactions, cash dividends and other distributions of resources by the enterprise toowners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
payment which is not due to him.
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vi) To facilitate rational decision ? making: Accounting records and financial statements providefinancial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
compulsorily required to maintain accounts as per the law governing their operations such as the
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Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is alsocompulsory under the Sales Tax Act and Income Tax Act.
Journal:
When the business transactions take place, the first step is to record the same in the books of
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
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accounts in which all the business transactions are originally recorded in chronological order andfrom which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
as a journal entry.
LEDGER:
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Ledger is a main book of account in which various accounts of personal, real and nominal nature,are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
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be defined as a summary statement of all the transactions relating to a person, asset, expense, orincome or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
Posting refers to the process of entering in the ledger the information given in the journal. In the
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past, the ledgers were kept in bound books. But with the passage of time, they became loose?leafones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
SU BSIDIARYBOOKS
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
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Each one of the subsidiary books is a special journal and a book of original or prime entry.There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
also referred to as English System. Though the usual type of journal entries are not passed in
these sub?divided journals, the double entry principles of accounting are strictly followed.
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Cash Book:Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
ledger with the required explanation called as narration and hence, it plays a dual role of a
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journal as well as ledger. All cash receipts are recorded on the debit side and all cash paymentsare recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
receipts at any time.
Accounting concepts:
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The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditionsupon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
Business Entity Concept:
A business unit is an organization of persons established to accomplish an economic goal.
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Business entity concept implies that the business unit is separate and distinct from the personswho provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants.
Money Measurement Concept:
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In accounting all events and transactions are recode in terms of money. Money is considered asa common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
accounting does not give a complete picture of all the transactions of a business unit. This
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concept does not also take care of the effects of inflation because it assumes astable value formeasuring.
Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a
longer period of time, i.e., a business unit is considered to be a going concern and not a
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liquidated one. Keeping this in view, the suppliers and other companies enter into businesstransactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
as assets, although they may be practically unsaleable.
Dual Aspect Concept:
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According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the total
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assets of the business unit are equal to its total liabilities. Liabilities here relate both to theoutsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly
the result of each period is ascertained. Though the business is assumed to be continuing in
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future (as per goingconcern concept), the measurement of income and studying the financialposition of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made
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during that accounting period and Balance Sheet is prepared which depicts the financial positionof the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
Historical Cost Concept:
According to this concept, the transactions are recorded in the books of account with the
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respective amounts involved. For example, if an asset is purchases, it is entered in the accountingrecord at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
methodically reduced in its value by way of charging depreciation. However, in the light of
inflationary conditions, the application of this concept is considered highly irrelevant for judging
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the financial position of the business.Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
particular period should be compared with the revenues associated to the same period to obtain
the net income of the business. Under this concept, the accounting period concept is relevant and
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it is this concept (matching concept) which necessitated the provisions of different adjustmentsfor recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
advance, etc., during the course of preparing the financial statements at the end of the accounting
period.
Realisation Concept:
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This concept assumes or recognizes revenue when a sale is made. Sale is considered to becomplete when the ownership and property are transferred from the seller to the buyer and the
consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire
purchase system where the ownership is transferred to the buyer when the last instalment is paid
and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract is
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completed, the profit is calculated on the basis of work certified each year.Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual
receipt. Similarly the costs are recognized when they are incurred and not when payment is
made. This assumption makes it necessary to give certain adjustments in the preparation of
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income statement regarding revenues and costs. But under cash accounting system, the revenuesand costs are recognized only when they are actually received or paid. Hence, the combination
of both cash and accrual system is preferable to get rid of the limitations of each system.
Objective Evidence Concept:
This concept ensures that all accounting must be based on objective evidence, i.e., every
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transaction recorded in the books of account must have a verifiable document in support of its,existence. Only then, the transactions can be verified by the auditors and declared as true or
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,
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valuation of inventory, etc., and the accountants are required to disclose the regulations followed.Manufacturing Account:
Manufacturing concerns which convert raw material into finished product is required to prepare
manufacturing account and then prepare trading and profit and loss account. This is necessary
because they have to ascertain cost of goods manufactured, gross profit and net profit.
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Trading account:Trading account is prepared for an accounting period to find the trading results or gross margin
of the business i.e., the amount of gross profit the concern has made from buying and selling
during the accounting period. The difference between the sales and cost of sales is gross profit.
For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,
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direct expenses on purchasing and manufacturing are added up and closing stock of finishedgoods is reduced. The balance of this account shows gross profit or loss which is transferred to
the profit and loss account.
Profit and Loss Account:
In the words of Prof. Carter ?Profit and loss account is an account into which all gains and losses
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are collected in order to ascertain the excess of gains over the losses or vice versa.?Balance sheet:
?Balance sheet is a screen picture of the financial position of a going business concern at a
certain moment? ? Francis.
Asset:
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Any physical thing or right owned that has a money value is an asset. In other words, an asset isthat expenditure which results in acquiring of some property or benefits of a lasting nature.
They are classified on the basis of their nature. Different types of assets are as under:
(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
the business with the objective of making profits. Land and building, Plant and machinery,
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Furniture and Fixtures are examples of fixed assets.(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
receivable and stock are called current assets as they can be realised within an operating cycle of
one year to discharge liabilities.
(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? they
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can be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be bothfixed assets and current assets.
(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt but
have value are called intangible assets. Goodwill, patents, trade marks and licences are examples
of intangible assets. They are usually classified under fixed assets.
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(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenseswhich are capitalised for the time being, expenses for promotion of organisations (preliminary
expenses), discount on issue of shares, debit balance of profit and loss account etc. are the
examples of fictitious assets.
Liability:
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It means the amount which the firm owes to outsiders that is, excepting the proprietors. In thewords of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
claims of those who ate not owners are called liabilities?.
In simple terms, debts repayable to outsiders by the business are known as liabilities.
Long term Liabilities: Liabilities repayable after specific duration of long period of time are
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called long term liabilities.Current liabilities: Liabilities which are repayable during the operating cycle of business,
usually within a year, are called short term liabilities or current liabilities
FINANCIAL STATEMENT ANALY SIS
Financial Statement : A financial statement is an organized collection of data according to
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logical and consistent accounting proceduresPurpose: To understand the financial aspects of a business form.
Financial Statement
Income Statement Balance Sheet Statement of retained earnings Statement of changes in
financial position
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Analysis : MethodicalClassificationofdatagiveninthe financialstatements nsimplifiedform.Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
Financial statement Analysis: To analyze the firm?s profitability & financial soundness
The following are the types of Financial Statement Analysis.
1.On the basis of Material used : According to the material used.
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External Analysis Internal AnalysisExternal Analysis: This analysis is done by the outsiders like Investors /Credit
agencies/Government agencies and other Creditors.
Internal Analysis: This analysis is done by the internal executives / employees of the
organization.
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2.On the basis of modus operandi : According to the method of operation followed in theanalysis.
Dynamic / Horizontal Analysis Static / Vertical Analysis
Dynamic / Horizontal Analysis: This analysis refers to the financial data of a company for
several years. The figures of various years are compared with the base year. It helps to focus
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attention on items that have changed significantly during the period under review. Changes indifferent elements of cost and sales over no . of years.
Tools employed are comparative statements and trend percentages.
Static / Vertical Analysis: A study is made of the quantitative relationship of the various items in
the financial statements in a particular date.
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Percentage of each element of cost to sales.Tools employed are common?size financial statements and financial ratios.
Ex: Item based
Particular period and in the same company
One division ? FMCG goods
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Another division ? Medicines thanSo the ratio is measured & compared the performance of one division to another division
Particular period and with different companies
One company ? FMCG goods
Another company ? FMCG goods
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So the ratio is measured and compared the performance of one company to another company.Methods and Devices of Financial Analysis:
A number of methods or devices are used to study the relationship between different statements
and to analyze the position of the enterprise.
The following are the methods:
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1.Comparative statements2.Trend Analysis
3.Common?size statements
4.Funds Flow Analysis
5.Cash Flow Analysis
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6.Ratio Analysis7.Cost?Volume?Profit Analysis
Comparative Statements:
The comparative financial statements are statements of the financial position at different periods,
of time. The elements of financial position are shown in a comparative form so as to give an idea
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of financial position at two or more periods. The following are the two types of comparativestatements.
1.Comparative Balance Sheet: The analysis is the study of the trend of the same items, groups of
items and computed items in two or more balance sheets of the same business enterprise on
different dates. The changes in periodic balance sheet items reflect the conduct of a business. It
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has four columns and the fourth column is used for giving percentages of increases or decreases.Guidelines for interpretation : nterpreter is expected to study the following aspects
?Current financial position and liquidity position
?Long?term financial position
?Profitability of the concern
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?For studying current financial position or short?term financial position of a concern, should seethe working capital in both the years.
2.Comparative Income Statement: The income statement gives the results of the operations of a
business. It gives an idea of the progress of a business over a period of time. Like comparative
balance sheet it also has 4 columns and the fourth column is used to show increase or decrease in
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figures, in absolute amounts and percentages respectively.Guidelines for interpretation : nterpreter is expected to study the following aspects
?The increase or decrease in sales should be compared with the increase or decrease in cost of
goods sold.
?To analyze the study of operational profits.
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?The increase or decrease in net profit will give an idea about the overall profitability of theconcern.
?Should mention whether the overall profitability is good or not.
Trend Analysis:
The financial statements may be analyzed by computing trends of series of information. This
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method determines the direction upwards or downwards and involves the computation of thepercentage relationship that each statement item bears to the same item in base year.
Procedure for calculating trends.
?One year is taken as a base year. Generally the first or the last is taken as base year.
?The figures of base year are taken as 100.
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?Trend percentages are calculated in relation to base year. If a figure in one year is less than thefigure in base year the trend percentage will be less than 100 and it will be more than 100 if
figure is more than base year figure. Each year?s figure is divided by the base year?s figure.
COMMON?SIZE STATEMENT ANALY SIS
The common?size statements, balance sheet and income statement are shown in analytical and
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percentages. The figures are shown as the percentage of total assets, total liabilities and totalsales. These statements are also known as components percentage or 100 percent statement.
1.The total of assets or liabilities are taken as 100.
2.The individual assets are expressed as percentage of total assets.
Ex: Total assets = Rs.5,00,000, nventory value = Rs.50,000
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If total assets are taken as 100Calculation: 50000 x 00
? = 10%
5,00,000
Common?size Balance sheet: A statement in which balance sheet items are expressed as the ratio
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of each asset to total assets and the ratio of each liabilities to total liabilities is called common?size balance sheet.
Common?size Income Statement: The items in income statement can be shown as percentage of
sales to show the relation of each item to sales. A significant relationship can be established
between items of income statement and volume of sales.
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Sales increases selling expenses increases ? there will be no affect on other administrativeexpenses
Sales decreases selling expenses decreases ? there will be no affect on other administrative
expenses
If sales increase to a considerable extent then administrative and financial expenses go up.
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So a relationship is established between sales and other items in income in evaluating operationalactivities of the enterprise.
Funds Flow Statement : The term flow means movement and includes both inflow and outflow.
The term flow of funds means transfer of economic values from one asset to another.
Source of funds: If the effect of transaction results in the increase of funds, it is called a source of
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funds.Application of funds: If the effect of transaction results in the decrease of funds, it is called
application of funds.
Cash Flow Statement : Cash flow statement is a statement which describes the inflows and
outflows of cash and cash equivalents in an enterprise period of time.
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Cash: Cash comprises cash on hand and demand deposits at bank.Cash Equivalents: Cash Equivalents are short term, high liquid investments that are readily
convertible into known as amount of cash.
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FINANCIAL ACCOU NTINGANDANALY SISAccounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
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cash flows over a particular period are a concise summary of hundreds of thousands of financialtransactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objectives of Accounting:
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Objective of accounting may differ from business to business depending upon their specificrequirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.
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ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profitearned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
of the some period.
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iii) To ascertain the financial position of the business: In addition to profit, a businessman mustknow his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
iv) To portray the liquidity position: Financial reporting should provide information about how
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an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about itscapital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
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payment which is not due to him.vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
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compulsorily required to maintain accounts as per the law governing their operations such as theCompanies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
When the business transactions take place, the first step is to record the same in the books of
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original entry or subsidiary books or books of prime or journal. Thus journal is a simple book ofaccounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
as a journal entry.
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LEDGER:Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
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picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account maybe defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
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Posting refers to the process of entering in the ledger the information given in the journal. In thepast, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
SU BSIDIARYBOOKS
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Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
also referred to as English System. Though the usual type of journal entries are not passed in
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these sub?divided journals, the double entry principles of accounting are strictly followed.Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
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ledger with the required explanation called as narration and hence, it plays a dual role of ajournal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
receipts at any time.
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Accounting concepts:The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
Business Entity Concept:
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A business unit is an organization of persons established to accomplish an economic goal.Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants.
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Money Measurement Concept:In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
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accounting does not give a complete picture of all the transactions of a business unit. Thisconcept does not also take care of the effects of inflation because it assumes astable value for
measuring.
Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a
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longer period of time, i.e., a business unit is considered to be a going concern and not aliquidated one. Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
as assets, although they may be practically unsaleable.
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Dual Aspect Concept:According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
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Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the totalassets of the business unit are equal to its total liabilities. Liabilities here relate both to the
outsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly
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the result of each period is ascertained. Though the business is assumed to be continuing infuture (as per goingconcern concept), the measurement of income and studying the financial
position of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
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end of an accounting period, an Income Statement is prepared to ascertain the profit or loss madeduring that accounting period and Balance Sheet is prepared which depicts the financial position
of the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
Historical Cost Concept:
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According to this concept, the transactions are recorded in the books of account with therespective amounts involved. For example, if an asset is purchases, it is entered in the accounting
record at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
methodically reduced in its value by way of charging depreciation. However, in the light of
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inflationary conditions, the application of this concept is considered highly irrelevant for judgingthe financial position of the business.
Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
particular period should be compared with the revenues associated to the same period to obtain
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the net income of the business. Under this concept, the accounting period concept is relevant andit is this concept (matching concept) which necessitated the provisions of different adjustments
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
advance, etc., during the course of preparing the financial statements at the end of the accounting
period.
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Realisation Concept:This concept assumes or recognizes revenue when a sale is made. Sale is considered to be
complete when the ownership and property are transferred from the seller to the buyer and the
consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire
purchase system where the ownership is transferred to the buyer when the last instalment is paid
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and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract iscompleted, the profit is calculated on the basis of work certified each year.
Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual
receipt. Similarly the costs are recognized when they are incurred and not when payment is
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made. This assumption makes it necessary to give certain adjustments in the preparation ofincome statement regarding revenues and costs. But under cash accounting system, the revenues
and costs are recognized only when they are actually received or paid. Hence, the combination
of both cash and accrual system is preferable to get rid of the limitations of each system.
Objective Evidence Concept:
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This concept ensures that all accounting must be based on objective evidence, i.e., everytransaction recorded in the books of account must have a verifiable document in support of its,
existence. Only then, the transactions can be verified by the auditors and declared as true or
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
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avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,valuation of inventory, etc., and the accountants are required to disclose the regulations followed.
Manufacturing Account:
Manufacturing concerns which convert raw material into finished product is required to prepare
manufacturing account and then prepare trading and profit and loss account. This is necessary
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because they have to ascertain cost of goods manufactured, gross profit and net profit.Trading account:
Trading account is prepared for an accounting period to find the trading results or gross margin
of the business i.e., the amount of gross profit the concern has made from buying and selling
during the accounting period. The difference between the sales and cost of sales is gross profit.
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For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,direct expenses on purchasing and manufacturing are added up and closing stock of finished
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
the profit and loss account.
Profit and Loss Account:
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In the words of Prof. Carter ?Profit and loss account is an account into which all gains and lossesare collected in order to ascertain the excess of gains over the losses or vice versa.?
Balance sheet:
?Balance sheet is a screen picture of the financial position of a going business concern at a
certain moment? ? Francis.
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Asset:Any physical thing or right owned that has a money value is an asset. In other words, an asset is
that expenditure which results in acquiring of some property or benefits of a lasting nature.
They are classified on the basis of their nature. Different types of assets are as under:
(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
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the business with the objective of making profits. Land and building, Plant and machinery,Furniture and Fixtures are examples of fixed assets.
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
receivable and stock are called current assets as they can be realised within an operating cycle of
one year to discharge liabilities.
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(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? theycan be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be both
fixed assets and current assets.
(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt but
have value are called intangible assets. Goodwill, patents, trade marks and licences are examples
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of intangible assets. They are usually classified under fixed assets.(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenses
which are capitalised for the time being, expenses for promotion of organisations (preliminary
expenses), discount on issue of shares, debit balance of profit and loss account etc. are the
examples of fictitious assets.
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Liability:It means the amount which the firm owes to outsiders that is, excepting the proprietors. In the
words of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
claims of those who ate not owners are called liabilities?.
In simple terms, debts repayable to outsiders by the business are known as liabilities.
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Long term Liabilities: Liabilities repayable after specific duration of long period of time arecalled long term liabilities.
Current liabilities: Liabilities which are repayable during the operating cycle of business,
usually within a year, are called short term liabilities or current liabilities
FINANCIAL STATEMENT ANALY SIS
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Financial Statement : A financial statement is an organized collection of data according tological and consistent accounting procedures
Purpose: To understand the financial aspects of a business form.
Financial Statement
Income Statement Balance Sheet Statement of retained earnings Statement of changes in
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financial positionAnalysis : MethodicalClassificationofdatagiveninthe financialstatements nsimplifiedform.
Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
Financial statement Analysis: To analyze the firm?s profitability & financial soundness
The following are the types of Financial Statement Analysis.
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1.On the basis of Material used : According to the material used.External Analysis Internal Analysis
External Analysis: This analysis is done by the outsiders like Investors /Credit
agencies/Government agencies and other Creditors.
Internal Analysis: This analysis is done by the internal executives / employees of the
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organization.2.On the basis of modus operandi : According to the method of operation followed in the
analysis.
Dynamic / Horizontal Analysis Static / Vertical Analysis
Dynamic / Horizontal Analysis: This analysis refers to the financial data of a company for
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several years. The figures of various years are compared with the base year. It helps to focusattention on items that have changed significantly during the period under review. Changes in
different elements of cost and sales over no . of years.
Tools employed are comparative statements and trend percentages.
Static / Vertical Analysis: A study is made of the quantitative relationship of the various items in
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the financial statements in a particular date.Percentage of each element of cost to sales.
Tools employed are common?size financial statements and financial ratios.
Ex: Item based
Particular period and in the same company
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One division ? FMCG goodsAnother division ? Medicines than
So the ratio is measured & compared the performance of one division to another division
Particular period and with different companies
One company ? FMCG goods
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Another company ? FMCG goodsSo the ratio is measured and compared the performance of one company to another company.
Methods and Devices of Financial Analysis:
A number of methods or devices are used to study the relationship between different statements
and to analyze the position of the enterprise.
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The following are the methods:1.Comparative statements
2.Trend Analysis
3.Common?size statements
4.Funds Flow Analysis
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5.Cash Flow Analysis6.Ratio Analysis
7.Cost?Volume?Profit Analysis
Comparative Statements:
The comparative financial statements are statements of the financial position at different periods,
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of time. The elements of financial position are shown in a comparative form so as to give an ideaof financial position at two or more periods. The following are the two types of comparative
statements.
1.Comparative Balance Sheet: The analysis is the study of the trend of the same items, groups of
items and computed items in two or more balance sheets of the same business enterprise on
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different dates. The changes in periodic balance sheet items reflect the conduct of a business. Ithas four columns and the fourth column is used for giving percentages of increases or decreases.
Guidelines for interpretation : nterpreter is expected to study the following aspects
?Current financial position and liquidity position
?Long?term financial position
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?Profitability of the concern?For studying current financial position or short?term financial position of a concern, should see
the working capital in both the years.
2.Comparative Income Statement: The income statement gives the results of the operations of a
business. It gives an idea of the progress of a business over a period of time. Like comparative
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balance sheet it also has 4 columns and the fourth column is used to show increase or decrease infigures, in absolute amounts and percentages respectively.
Guidelines for interpretation : nterpreter is expected to study the following aspects
?The increase or decrease in sales should be compared with the increase or decrease in cost of
goods sold.
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?To analyze the study of operational profits.?The increase or decrease in net profit will give an idea about the overall profitability of the
concern.
?Should mention whether the overall profitability is good or not.
Trend Analysis:
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The financial statements may be analyzed by computing trends of series of information. Thismethod determines the direction upwards or downwards and involves the computation of the
percentage relationship that each statement item bears to the same item in base year.
Procedure for calculating trends.
?One year is taken as a base year. Generally the first or the last is taken as base year.
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?The figures of base year are taken as 100.?Trend percentages are calculated in relation to base year. If a figure in one year is less than the
figure in base year the trend percentage will be less than 100 and it will be more than 100 if
figure is more than base year figure. Each year?s figure is divided by the base year?s figure.
COMMON?SIZE STATEMENT ANALY SIS
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The common?size statements, balance sheet and income statement are shown in analytical andpercentages. The figures are shown as the percentage of total assets, total liabilities and total
sales. These statements are also known as components percentage or 100 percent statement.
1.The total of assets or liabilities are taken as 100.
2.The individual assets are expressed as percentage of total assets.
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Ex: Total assets = Rs.5,00,000, nventory value = Rs.50,000If total assets are taken as 100
Calculation: 50000 x 00
? = 10%
5,00,000
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Common?size Balance sheet: A statement in which balance sheet items are expressed as the ratioof each asset to total assets and the ratio of each liabilities to total liabilities is called common?
size balance sheet.
Common?size Income Statement: The items in income statement can be shown as percentage of
sales to show the relation of each item to sales. A significant relationship can be established
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between items of income statement and volume of sales.Sales increases selling expenses increases ? there will be no affect on other administrative
expenses
Sales decreases selling expenses decreases ? there will be no affect on other administrative
expenses
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If sales increase to a considerable extent then administrative and financial expenses go up.So a relationship is established between sales and other items in income in evaluating operational
activities of the enterprise.
Funds Flow Statement : The term flow means movement and includes both inflow and outflow.
The term flow of funds means transfer of economic values from one asset to another.
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Source of funds: If the effect of transaction results in the increase of funds, it is called a source offunds.
Application of funds: If the effect of transaction results in the decrease of funds, it is called
application of funds.
Cash Flow Statement : Cash flow statement is a statement which describes the inflows and
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outflows of cash and cash equivalents in an enterprise period of time.Cash: Cash comprises cash on hand and demand deposits at bank.
Cash Equivalents: Cash Equivalents are short term, high liquid investments that are readily
convertible into known as amount of cash.
Cash flow: Cash flows are inflows and outflows of cash and cash equivalents.
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Cash flows from operating activities: Operating activities are the principal of revenue?producingactivities of the enterprise and other activities that are not investing or finance activities.
Cash flow from investing activities: The cash flow represent the extent to which expenditures
have been made for resources intended to generate future income and cash flows.
Cash flows from financing activities: Financial activities are activities that result in changes in
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the size and composition of the owner?s capital and borrowings of the enterprise.Cost?volume?profit analysis: Cost?Volume?Profit (CVP) analysis is a managerial accounting
technique that is concerned with the effect of sales volume and product costs on operating profit
of a business. It deals with how operating profit is affected by changes in variable costs, fixed
costs, selling price per unit and the sales mix of two or more different products.
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CVP analysis has following assumptions:?All cost can be categorized as variable or fixed.
?Sales price per unit, variable cost per unit and total fixed cost are constant.
?All units produced are sold.
RATIONALE:
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Explanation of the logical reasons or principles employed in consciously arriving at a decision orestimate rationales usually document
why a particular choice was made,
how the basis of its selection was developed,
why and how the particular information or assumptions were relied on and
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why the conclusion is deemed credible or realistic.RATIO ANALY SIS :
It is a technical of analysis and interpretation of financial statements. It is the process of
establishing and interpreting various ratios for helping in making the certain decisions.
According to Accountants? Handbook of Wixon, Kell and Bedford a ratio is an
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?Expression of the quantitative relationship between two numbers?.Accounting ratios
Traditional Functional
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FINANCIAL ACCOU NTINGANDANALY SISAccounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
--- Content provided by FirstRanker.com ---
cash flows over a particular period are a concise summary of hundreds of thousands of financialtransactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objectives of Accounting:
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Objective of accounting may differ from business to business depending upon their specificrequirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.
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ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profitearned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
of the some period.
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iii) To ascertain the financial position of the business: In addition to profit, a businessman mustknow his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
iv) To portray the liquidity position: Financial reporting should provide information about how
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an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about itscapital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
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payment which is not due to him.vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
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compulsorily required to maintain accounts as per the law governing their operations such as theCompanies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
When the business transactions take place, the first step is to record the same in the books of
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original entry or subsidiary books or books of prime or journal. Thus journal is a simple book ofaccounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
as a journal entry.
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LEDGER:Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
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picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account maybe defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
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Posting refers to the process of entering in the ledger the information given in the journal. In thepast, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
SU BSIDIARYBOOKS
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Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
also referred to as English System. Though the usual type of journal entries are not passed in
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these sub?divided journals, the double entry principles of accounting are strictly followed.Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
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ledger with the required explanation called as narration and hence, it plays a dual role of ajournal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
receipts at any time.
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Accounting concepts:The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
Business Entity Concept:
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A business unit is an organization of persons established to accomplish an economic goal.Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants.
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Money Measurement Concept:In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
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accounting does not give a complete picture of all the transactions of a business unit. Thisconcept does not also take care of the effects of inflation because it assumes astable value for
measuring.
Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a
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longer period of time, i.e., a business unit is considered to be a going concern and not aliquidated one. Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
as assets, although they may be practically unsaleable.
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Dual Aspect Concept:According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
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Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the totalassets of the business unit are equal to its total liabilities. Liabilities here relate both to the
outsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly
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the result of each period is ascertained. Though the business is assumed to be continuing infuture (as per goingconcern concept), the measurement of income and studying the financial
position of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
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end of an accounting period, an Income Statement is prepared to ascertain the profit or loss madeduring that accounting period and Balance Sheet is prepared which depicts the financial position
of the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
Historical Cost Concept:
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According to this concept, the transactions are recorded in the books of account with therespective amounts involved. For example, if an asset is purchases, it is entered in the accounting
record at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
methodically reduced in its value by way of charging depreciation. However, in the light of
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inflationary conditions, the application of this concept is considered highly irrelevant for judgingthe financial position of the business.
Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
particular period should be compared with the revenues associated to the same period to obtain
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the net income of the business. Under this concept, the accounting period concept is relevant andit is this concept (matching concept) which necessitated the provisions of different adjustments
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
advance, etc., during the course of preparing the financial statements at the end of the accounting
period.
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Realisation Concept:This concept assumes or recognizes revenue when a sale is made. Sale is considered to be
complete when the ownership and property are transferred from the seller to the buyer and the
consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire
purchase system where the ownership is transferred to the buyer when the last instalment is paid
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and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract iscompleted, the profit is calculated on the basis of work certified each year.
Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual
receipt. Similarly the costs are recognized when they are incurred and not when payment is
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made. This assumption makes it necessary to give certain adjustments in the preparation ofincome statement regarding revenues and costs. But under cash accounting system, the revenues
and costs are recognized only when they are actually received or paid. Hence, the combination
of both cash and accrual system is preferable to get rid of the limitations of each system.
Objective Evidence Concept:
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This concept ensures that all accounting must be based on objective evidence, i.e., everytransaction recorded in the books of account must have a verifiable document in support of its,
existence. Only then, the transactions can be verified by the auditors and declared as true or
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
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avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,valuation of inventory, etc., and the accountants are required to disclose the regulations followed.
Manufacturing Account:
Manufacturing concerns which convert raw material into finished product is required to prepare
manufacturing account and then prepare trading and profit and loss account. This is necessary
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because they have to ascertain cost of goods manufactured, gross profit and net profit.Trading account:
Trading account is prepared for an accounting period to find the trading results or gross margin
of the business i.e., the amount of gross profit the concern has made from buying and selling
during the accounting period. The difference between the sales and cost of sales is gross profit.
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For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,direct expenses on purchasing and manufacturing are added up and closing stock of finished
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
the profit and loss account.
Profit and Loss Account:
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In the words of Prof. Carter ?Profit and loss account is an account into which all gains and lossesare collected in order to ascertain the excess of gains over the losses or vice versa.?
Balance sheet:
?Balance sheet is a screen picture of the financial position of a going business concern at a
certain moment? ? Francis.
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Asset:Any physical thing or right owned that has a money value is an asset. In other words, an asset is
that expenditure which results in acquiring of some property or benefits of a lasting nature.
They are classified on the basis of their nature. Different types of assets are as under:
(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
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the business with the objective of making profits. Land and building, Plant and machinery,Furniture and Fixtures are examples of fixed assets.
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
receivable and stock are called current assets as they can be realised within an operating cycle of
one year to discharge liabilities.
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(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? theycan be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be both
fixed assets and current assets.
(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt but
have value are called intangible assets. Goodwill, patents, trade marks and licences are examples
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of intangible assets. They are usually classified under fixed assets.(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenses
which are capitalised for the time being, expenses for promotion of organisations (preliminary
expenses), discount on issue of shares, debit balance of profit and loss account etc. are the
examples of fictitious assets.
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Liability:It means the amount which the firm owes to outsiders that is, excepting the proprietors. In the
words of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
claims of those who ate not owners are called liabilities?.
In simple terms, debts repayable to outsiders by the business are known as liabilities.
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Long term Liabilities: Liabilities repayable after specific duration of long period of time arecalled long term liabilities.
Current liabilities: Liabilities which are repayable during the operating cycle of business,
usually within a year, are called short term liabilities or current liabilities
FINANCIAL STATEMENT ANALY SIS
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Financial Statement : A financial statement is an organized collection of data according tological and consistent accounting procedures
Purpose: To understand the financial aspects of a business form.
Financial Statement
Income Statement Balance Sheet Statement of retained earnings Statement of changes in
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financial positionAnalysis : MethodicalClassificationofdatagiveninthe financialstatements nsimplifiedform.
Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
Financial statement Analysis: To analyze the firm?s profitability & financial soundness
The following are the types of Financial Statement Analysis.
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1.On the basis of Material used : According to the material used.External Analysis Internal Analysis
External Analysis: This analysis is done by the outsiders like Investors /Credit
agencies/Government agencies and other Creditors.
Internal Analysis: This analysis is done by the internal executives / employees of the
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organization.2.On the basis of modus operandi : According to the method of operation followed in the
analysis.
Dynamic / Horizontal Analysis Static / Vertical Analysis
Dynamic / Horizontal Analysis: This analysis refers to the financial data of a company for
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several years. The figures of various years are compared with the base year. It helps to focusattention on items that have changed significantly during the period under review. Changes in
different elements of cost and sales over no . of years.
Tools employed are comparative statements and trend percentages.
Static / Vertical Analysis: A study is made of the quantitative relationship of the various items in
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the financial statements in a particular date.Percentage of each element of cost to sales.
Tools employed are common?size financial statements and financial ratios.
Ex: Item based
Particular period and in the same company
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One division ? FMCG goodsAnother division ? Medicines than
So the ratio is measured & compared the performance of one division to another division
Particular period and with different companies
One company ? FMCG goods
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Another company ? FMCG goodsSo the ratio is measured and compared the performance of one company to another company.
Methods and Devices of Financial Analysis:
A number of methods or devices are used to study the relationship between different statements
and to analyze the position of the enterprise.
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The following are the methods:1.Comparative statements
2.Trend Analysis
3.Common?size statements
4.Funds Flow Analysis
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5.Cash Flow Analysis6.Ratio Analysis
7.Cost?Volume?Profit Analysis
Comparative Statements:
The comparative financial statements are statements of the financial position at different periods,
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of time. The elements of financial position are shown in a comparative form so as to give an ideaof financial position at two or more periods. The following are the two types of comparative
statements.
1.Comparative Balance Sheet: The analysis is the study of the trend of the same items, groups of
items and computed items in two or more balance sheets of the same business enterprise on
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different dates. The changes in periodic balance sheet items reflect the conduct of a business. Ithas four columns and the fourth column is used for giving percentages of increases or decreases.
Guidelines for interpretation : nterpreter is expected to study the following aspects
?Current financial position and liquidity position
?Long?term financial position
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?Profitability of the concern?For studying current financial position or short?term financial position of a concern, should see
the working capital in both the years.
2.Comparative Income Statement: The income statement gives the results of the operations of a
business. It gives an idea of the progress of a business over a period of time. Like comparative
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balance sheet it also has 4 columns and the fourth column is used to show increase or decrease infigures, in absolute amounts and percentages respectively.
Guidelines for interpretation : nterpreter is expected to study the following aspects
?The increase or decrease in sales should be compared with the increase or decrease in cost of
goods sold.
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?To analyze the study of operational profits.?The increase or decrease in net profit will give an idea about the overall profitability of the
concern.
?Should mention whether the overall profitability is good or not.
Trend Analysis:
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The financial statements may be analyzed by computing trends of series of information. Thismethod determines the direction upwards or downwards and involves the computation of the
percentage relationship that each statement item bears to the same item in base year.
Procedure for calculating trends.
?One year is taken as a base year. Generally the first or the last is taken as base year.
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?The figures of base year are taken as 100.?Trend percentages are calculated in relation to base year. If a figure in one year is less than the
figure in base year the trend percentage will be less than 100 and it will be more than 100 if
figure is more than base year figure. Each year?s figure is divided by the base year?s figure.
COMMON?SIZE STATEMENT ANALY SIS
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The common?size statements, balance sheet and income statement are shown in analytical andpercentages. The figures are shown as the percentage of total assets, total liabilities and total
sales. These statements are also known as components percentage or 100 percent statement.
1.The total of assets or liabilities are taken as 100.
2.The individual assets are expressed as percentage of total assets.
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Ex: Total assets = Rs.5,00,000, nventory value = Rs.50,000If total assets are taken as 100
Calculation: 50000 x 00
? = 10%
5,00,000
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Common?size Balance sheet: A statement in which balance sheet items are expressed as the ratioof each asset to total assets and the ratio of each liabilities to total liabilities is called common?
size balance sheet.
Common?size Income Statement: The items in income statement can be shown as percentage of
sales to show the relation of each item to sales. A significant relationship can be established
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between items of income statement and volume of sales.Sales increases selling expenses increases ? there will be no affect on other administrative
expenses
Sales decreases selling expenses decreases ? there will be no affect on other administrative
expenses
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If sales increase to a considerable extent then administrative and financial expenses go up.So a relationship is established between sales and other items in income in evaluating operational
activities of the enterprise.
Funds Flow Statement : The term flow means movement and includes both inflow and outflow.
The term flow of funds means transfer of economic values from one asset to another.
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Source of funds: If the effect of transaction results in the increase of funds, it is called a source offunds.
Application of funds: If the effect of transaction results in the decrease of funds, it is called
application of funds.
Cash Flow Statement : Cash flow statement is a statement which describes the inflows and
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outflows of cash and cash equivalents in an enterprise period of time.Cash: Cash comprises cash on hand and demand deposits at bank.
Cash Equivalents: Cash Equivalents are short term, high liquid investments that are readily
convertible into known as amount of cash.
Cash flow: Cash flows are inflows and outflows of cash and cash equivalents.
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Cash flows from operating activities: Operating activities are the principal of revenue?producingactivities of the enterprise and other activities that are not investing or finance activities.
Cash flow from investing activities: The cash flow represent the extent to which expenditures
have been made for resources intended to generate future income and cash flows.
Cash flows from financing activities: Financial activities are activities that result in changes in
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the size and composition of the owner?s capital and borrowings of the enterprise.Cost?volume?profit analysis: Cost?Volume?Profit (CVP) analysis is a managerial accounting
technique that is concerned with the effect of sales volume and product costs on operating profit
of a business. It deals with how operating profit is affected by changes in variable costs, fixed
costs, selling price per unit and the sales mix of two or more different products.
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CVP analysis has following assumptions:?All cost can be categorized as variable or fixed.
?Sales price per unit, variable cost per unit and total fixed cost are constant.
?All units produced are sold.
RATIONALE:
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Explanation of the logical reasons or principles employed in consciously arriving at a decision orestimate rationales usually document
why a particular choice was made,
how the basis of its selection was developed,
why and how the particular information or assumptions were relied on and
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why the conclusion is deemed credible or realistic.RATIO ANALY SIS :
It is a technical of analysis and interpretation of financial statements. It is the process of
establishing and interpreting various ratios for helping in making the certain decisions.
According to Accountants? Handbook of Wixon, Kell and Bedford a ratio is an
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?Expression of the quantitative relationship between two numbers?.Accounting ratios
Traditional Functional
P&L A/c Profitability Coverage Turnover
Financial
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Balance Sheet Ratio Ratio Ratio RatioComposite Ratio
Overall profitability ratio Fixed interest coverage ratio Fixed assets turnover
ratio
Return on Investment Fixed dividend coverage ratio Working capital
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turnover ratioEquity per Share (EPS) Debt service coverage ratio Working capital
leverage
Price Earning Ratio
Gross Profit ratio
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Net Profit ratioOperating Expenses ratio
Payout ratio
Dividend Yield ratio
Liquidity Ratio and Stability Ratio
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Current Ratio Fixed assets ratioChange in current ratio Capital Structure ratio
Quick ratio Capital gearing ratio
Super quick ratio Debt?equity ratio
Defensive interval ratio
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CLASSIFICATION, CALCU LATIONANDINTERPRETATIONOF RATIOSSL
NO
RATIO
CLASSIFICATION
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COMPUTATIONFORMULA
PURPOSE
Traditional Functional
1 Gross Profit Ratio
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P&L A/c orRevenue
Statement
Ratio
Probability
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RatioGross Profit
Indicates the efficiency of the
production / trading operations
x100
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Net Sales2 Net Profit Ratio ? ? Net Profit Indicates net margin on sales
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MBA DEPARTMNET
FINANCIAL ACCOU NTINGANDANALY SIS
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Accounting:The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
cash flows over a particular period are a concise summary of hundreds of thousands of financial
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transactions it may have entered into over this period. Accounting is one of the key functions foralmost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objectives of Accounting:
Objective of accounting may differ from business to business depending upon their specific
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requirements. However, the following are the general objectives of accounting.i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
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earned or loss suffered in business during a particular period. For this purpose, a business entityprepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
of the some period.
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
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know his financial position i.e., availability of cash, position of assets and liabilities etc. Thishelps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
iv) To portray the liquidity position: Financial reporting should provide information about how
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
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capital transactions, cash dividends and other distributions of resources by the enterprise toowners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
payment which is not due to him.
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vi) To facilitate rational decision ? making: Accounting records and financial statements providefinancial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
compulsorily required to maintain accounts as per the law governing their operations such as the
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Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is alsocompulsory under the Sales Tax Act and Income Tax Act.
Journal:
When the business transactions take place, the first step is to record the same in the books of
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
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accounts in which all the business transactions are originally recorded in chronological order andfrom which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
as a journal entry.
LEDGER:
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Ledger is a main book of account in which various accounts of personal, real and nominal nature,are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
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be defined as a summary statement of all the transactions relating to a person, asset, expense, orincome or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
Posting refers to the process of entering in the ledger the information given in the journal. In the
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past, the ledgers were kept in bound books. But with the passage of time, they became loose?leafones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
SU BSIDIARYBOOKS
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
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Each one of the subsidiary books is a special journal and a book of original or prime entry.There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
also referred to as English System. Though the usual type of journal entries are not passed in
these sub?divided journals, the double entry principles of accounting are strictly followed.
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Cash Book:Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
ledger with the required explanation called as narration and hence, it plays a dual role of a
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journal as well as ledger. All cash receipts are recorded on the debit side and all cash paymentsare recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
receipts at any time.
Accounting concepts:
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The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditionsupon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
Business Entity Concept:
A business unit is an organization of persons established to accomplish an economic goal.
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Business entity concept implies that the business unit is separate and distinct from the personswho provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants.
Money Measurement Concept:
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In accounting all events and transactions are recode in terms of money. Money is considered asa common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
accounting does not give a complete picture of all the transactions of a business unit. This
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concept does not also take care of the effects of inflation because it assumes astable value formeasuring.
Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a
longer period of time, i.e., a business unit is considered to be a going concern and not a
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liquidated one. Keeping this in view, the suppliers and other companies enter into businesstransactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
as assets, although they may be practically unsaleable.
Dual Aspect Concept:
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According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the total
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assets of the business unit are equal to its total liabilities. Liabilities here relate both to theoutsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly
the result of each period is ascertained. Though the business is assumed to be continuing in
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future (as per goingconcern concept), the measurement of income and studying the financialposition of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made
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during that accounting period and Balance Sheet is prepared which depicts the financial positionof the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
Historical Cost Concept:
According to this concept, the transactions are recorded in the books of account with the
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respective amounts involved. For example, if an asset is purchases, it is entered in the accountingrecord at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
methodically reduced in its value by way of charging depreciation. However, in the light of
inflationary conditions, the application of this concept is considered highly irrelevant for judging
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the financial position of the business.Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
particular period should be compared with the revenues associated to the same period to obtain
the net income of the business. Under this concept, the accounting period concept is relevant and
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it is this concept (matching concept) which necessitated the provisions of different adjustmentsfor recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
advance, etc., during the course of preparing the financial statements at the end of the accounting
period.
Realisation Concept:
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This concept assumes or recognizes revenue when a sale is made. Sale is considered to becomplete when the ownership and property are transferred from the seller to the buyer and the
consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire
purchase system where the ownership is transferred to the buyer when the last instalment is paid
and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract is
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completed, the profit is calculated on the basis of work certified each year.Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual
receipt. Similarly the costs are recognized when they are incurred and not when payment is
made. This assumption makes it necessary to give certain adjustments in the preparation of
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income statement regarding revenues and costs. But under cash accounting system, the revenuesand costs are recognized only when they are actually received or paid. Hence, the combination
of both cash and accrual system is preferable to get rid of the limitations of each system.
Objective Evidence Concept:
This concept ensures that all accounting must be based on objective evidence, i.e., every
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transaction recorded in the books of account must have a verifiable document in support of its,existence. Only then, the transactions can be verified by the auditors and declared as true or
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,
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valuation of inventory, etc., and the accountants are required to disclose the regulations followed.Manufacturing Account:
Manufacturing concerns which convert raw material into finished product is required to prepare
manufacturing account and then prepare trading and profit and loss account. This is necessary
because they have to ascertain cost of goods manufactured, gross profit and net profit.
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Trading account:Trading account is prepared for an accounting period to find the trading results or gross margin
of the business i.e., the amount of gross profit the concern has made from buying and selling
during the accounting period. The difference between the sales and cost of sales is gross profit.
For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,
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direct expenses on purchasing and manufacturing are added up and closing stock of finishedgoods is reduced. The balance of this account shows gross profit or loss which is transferred to
the profit and loss account.
Profit and Loss Account:
In the words of Prof. Carter ?Profit and loss account is an account into which all gains and losses
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are collected in order to ascertain the excess of gains over the losses or vice versa.?Balance sheet:
?Balance sheet is a screen picture of the financial position of a going business concern at a
certain moment? ? Francis.
Asset:
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Any physical thing or right owned that has a money value is an asset. In other words, an asset isthat expenditure which results in acquiring of some property or benefits of a lasting nature.
They are classified on the basis of their nature. Different types of assets are as under:
(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
the business with the objective of making profits. Land and building, Plant and machinery,
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Furniture and Fixtures are examples of fixed assets.(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
receivable and stock are called current assets as they can be realised within an operating cycle of
one year to discharge liabilities.
(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? they
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can be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be bothfixed assets and current assets.
(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt but
have value are called intangible assets. Goodwill, patents, trade marks and licences are examples
of intangible assets. They are usually classified under fixed assets.
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(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenseswhich are capitalised for the time being, expenses for promotion of organisations (preliminary
expenses), discount on issue of shares, debit balance of profit and loss account etc. are the
examples of fictitious assets.
Liability:
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It means the amount which the firm owes to outsiders that is, excepting the proprietors. In thewords of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
claims of those who ate not owners are called liabilities?.
In simple terms, debts repayable to outsiders by the business are known as liabilities.
Long term Liabilities: Liabilities repayable after specific duration of long period of time are
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called long term liabilities.Current liabilities: Liabilities which are repayable during the operating cycle of business,
usually within a year, are called short term liabilities or current liabilities
FINANCIAL STATEMENT ANALY SIS
Financial Statement : A financial statement is an organized collection of data according to
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logical and consistent accounting proceduresPurpose: To understand the financial aspects of a business form.
Financial Statement
Income Statement Balance Sheet Statement of retained earnings Statement of changes in
financial position
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Analysis : MethodicalClassificationofdatagiveninthe financialstatements nsimplifiedform.Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
Financial statement Analysis: To analyze the firm?s profitability & financial soundness
The following are the types of Financial Statement Analysis.
1.On the basis of Material used : According to the material used.
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External Analysis Internal AnalysisExternal Analysis: This analysis is done by the outsiders like Investors /Credit
agencies/Government agencies and other Creditors.
Internal Analysis: This analysis is done by the internal executives / employees of the
organization.
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2.On the basis of modus operandi : According to the method of operation followed in theanalysis.
Dynamic / Horizontal Analysis Static / Vertical Analysis
Dynamic / Horizontal Analysis: This analysis refers to the financial data of a company for
several years. The figures of various years are compared with the base year. It helps to focus
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attention on items that have changed significantly during the period under review. Changes indifferent elements of cost and sales over no . of years.
Tools employed are comparative statements and trend percentages.
Static / Vertical Analysis: A study is made of the quantitative relationship of the various items in
the financial statements in a particular date.
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Percentage of each element of cost to sales.Tools employed are common?size financial statements and financial ratios.
Ex: Item based
Particular period and in the same company
One division ? FMCG goods
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Another division ? Medicines thanSo the ratio is measured & compared the performance of one division to another division
Particular period and with different companies
One company ? FMCG goods
Another company ? FMCG goods
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So the ratio is measured and compared the performance of one company to another company.Methods and Devices of Financial Analysis:
A number of methods or devices are used to study the relationship between different statements
and to analyze the position of the enterprise.
The following are the methods:
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1.Comparative statements2.Trend Analysis
3.Common?size statements
4.Funds Flow Analysis
5.Cash Flow Analysis
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6.Ratio Analysis7.Cost?Volume?Profit Analysis
Comparative Statements:
The comparative financial statements are statements of the financial position at different periods,
of time. The elements of financial position are shown in a comparative form so as to give an idea
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of financial position at two or more periods. The following are the two types of comparativestatements.
1.Comparative Balance Sheet: The analysis is the study of the trend of the same items, groups of
items and computed items in two or more balance sheets of the same business enterprise on
different dates. The changes in periodic balance sheet items reflect the conduct of a business. It
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has four columns and the fourth column is used for giving percentages of increases or decreases.Guidelines for interpretation : nterpreter is expected to study the following aspects
?Current financial position and liquidity position
?Long?term financial position
?Profitability of the concern
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?For studying current financial position or short?term financial position of a concern, should seethe working capital in both the years.
2.Comparative Income Statement: The income statement gives the results of the operations of a
business. It gives an idea of the progress of a business over a period of time. Like comparative
balance sheet it also has 4 columns and the fourth column is used to show increase or decrease in
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figures, in absolute amounts and percentages respectively.Guidelines for interpretation : nterpreter is expected to study the following aspects
?The increase or decrease in sales should be compared with the increase or decrease in cost of
goods sold.
?To analyze the study of operational profits.
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?The increase or decrease in net profit will give an idea about the overall profitability of theconcern.
?Should mention whether the overall profitability is good or not.
Trend Analysis:
The financial statements may be analyzed by computing trends of series of information. This
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method determines the direction upwards or downwards and involves the computation of thepercentage relationship that each statement item bears to the same item in base year.
Procedure for calculating trends.
?One year is taken as a base year. Generally the first or the last is taken as base year.
?The figures of base year are taken as 100.
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?Trend percentages are calculated in relation to base year. If a figure in one year is less than thefigure in base year the trend percentage will be less than 100 and it will be more than 100 if
figure is more than base year figure. Each year?s figure is divided by the base year?s figure.
COMMON?SIZE STATEMENT ANALY SIS
The common?size statements, balance sheet and income statement are shown in analytical and
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percentages. The figures are shown as the percentage of total assets, total liabilities and totalsales. These statements are also known as components percentage or 100 percent statement.
1.The total of assets or liabilities are taken as 100.
2.The individual assets are expressed as percentage of total assets.
Ex: Total assets = Rs.5,00,000, nventory value = Rs.50,000
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If total assets are taken as 100Calculation: 50000 x 00
? = 10%
5,00,000
Common?size Balance sheet: A statement in which balance sheet items are expressed as the ratio
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of each asset to total assets and the ratio of each liabilities to total liabilities is called common?size balance sheet.
Common?size Income Statement: The items in income statement can be shown as percentage of
sales to show the relation of each item to sales. A significant relationship can be established
between items of income statement and volume of sales.
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Sales increases selling expenses increases ? there will be no affect on other administrativeexpenses
Sales decreases selling expenses decreases ? there will be no affect on other administrative
expenses
If sales increase to a considerable extent then administrative and financial expenses go up.
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So a relationship is established between sales and other items in income in evaluating operationalactivities of the enterprise.
Funds Flow Statement : The term flow means movement and includes both inflow and outflow.
The term flow of funds means transfer of economic values from one asset to another.
Source of funds: If the effect of transaction results in the increase of funds, it is called a source of
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funds.Application of funds: If the effect of transaction results in the decrease of funds, it is called
application of funds.
Cash Flow Statement : Cash flow statement is a statement which describes the inflows and
outflows of cash and cash equivalents in an enterprise period of time.
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Cash: Cash comprises cash on hand and demand deposits at bank.Cash Equivalents: Cash Equivalents are short term, high liquid investments that are readily
convertible into known as amount of cash.
Cash flow: Cash flows are inflows and outflows of cash and cash equivalents.
Cash flows from operating activities: Operating activities are the principal of revenue?producing
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activities of the enterprise and other activities that are not investing or finance activities.Cash flow from investing activities: The cash flow represent the extent to which expenditures
have been made for resources intended to generate future income and cash flows.
Cash flows from financing activities: Financial activities are activities that result in changes in
the size and composition of the owner?s capital and borrowings of the enterprise.
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Cost?volume?profit analysis: Cost?Volume?Profit (CVP) analysis is a managerial accountingtechnique that is concerned with the effect of sales volume and product costs on operating profit
of a business. It deals with how operating profit is affected by changes in variable costs, fixed
costs, selling price per unit and the sales mix of two or more different products.
CVP analysis has following assumptions:
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?All cost can be categorized as variable or fixed.?Sales price per unit, variable cost per unit and total fixed cost are constant.
?All units produced are sold.
RATIONALE:
Explanation of the logical reasons or principles employed in consciously arriving at a decision or
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estimate rationales usually documentwhy a particular choice was made,
how the basis of its selection was developed,
why and how the particular information or assumptions were relied on and
why the conclusion is deemed credible or realistic.
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RATIO ANALY SIS :It is a technical of analysis and interpretation of financial statements. It is the process of
establishing and interpreting various ratios for helping in making the certain decisions.
According to Accountants? Handbook of Wixon, Kell and Bedford a ratio is an
?Expression of the quantitative relationship between two numbers?.
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Accounting ratiosTraditional Functional
P&L A/c Profitability Coverage Turnover
Financial
Balance Sheet Ratio Ratio Ratio Ratio
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Composite RatioOverall profitability ratio Fixed interest coverage ratio Fixed assets turnover
ratio
Return on Investment Fixed dividend coverage ratio Working capital
turnover ratio
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Equity per Share (EPS) Debt service coverage ratio Working capitalleverage
Price Earning Ratio
Gross Profit ratio
Net Profit ratio
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Operating Expenses ratioPayout ratio
Dividend Yield ratio
Liquidity Ratio and Stability Ratio
Current Ratio Fixed assets ratio
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Change in current ratio Capital Structure ratioQuick ratio Capital gearing ratio
Super quick ratio Debt?equity ratio
Defensive interval ratio
CLASSIFICATION, CALCU LATIONANDINTERPRETATIONOF RATIOS
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SLNO
RATIO
CLASSIFICATION
COMPUTATION
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FORMULAPURPOSE
Traditional Functional
1 Gross Profit Ratio
P&L A/c or
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RevenueStatement
Ratio
Probability
Ratio
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Gross ProfitIndicates the efficiency of the
production / trading operations
x100
Net Sales
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2 Net Profit Ratio ? ? Net Profit Indicates net margin on salesx100
Net Sales
3
Operating or
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Expenses ratio? ? x100
Operating cost
A measure of management?s
ability to keep operating
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expenses properly controlled flevel of sales achieved
Net Sales
4
Net Profit to Total
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AssetsComposite
Ratio
?
Net profit after
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tax + InterestA measure of productivity of
Total
Assets x100
Total assets
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5Return on
Shareholders?
funds
? ?
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Profit available forequity shareholders
Shows the amount of earnings
attributable to each equity shar
x100
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Average equityshareholders?s funds
6
Earning per equity
share
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Profit available forequity shareholders
Shows the amount of earnings
attributes to each equity share.
? ? x100
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No. of EquityShares
7 Dividend yield
? ?
Market
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Dividend per share Shows the rate of return toshareholders in the form of
dividends based on the market
price of the share.
x100
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price pershare
8 Price Earning ratio ? ?
Market price of a
share
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A measure for determining thevalue of a share. May also be
used to measure the rate of retu
expected by investors.
x100
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Earning per share9
Fixed Interest
Cover
P&L or
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RevenueStatement
Ratio
Profitability
Ratio
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Operating IncomeShows the margin of coverage
interest requirements Annual Interest
Expense
10
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Fixed DividendCover
Net Income
Shows the extent to which curr
are available to pay
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dividends on preference shares.? ? earnings
Annual Preference
Dividends
11 Inventory Turnover ?
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Turnover orEfficiency
ratio
Cost of goods sold Evaluation of the liquidity of
inventory and adequacy of
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inventory controls. Average Inventory12
Accounts
Receivable
Turnover
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Compositeratio
?
Net Sales on Credit Measures liquidity of accounts
receivable and the effectivenes
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of credit policy. Average Receivable13 Current ratio
Balance
sheet ratio
Financial
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ratioCurrent Assets
Measures short?term debt payi
ability.
Current Liabilities
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FirstRanker.com - FirstRanker's ChoiceMBA DEPARTMNET
FINANCIAL ACCOU NTINGANDANALY SIS
Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
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Accounting also refers to the process of summarizing, analyzing and reporting these transactions.The financial statements that summarize a large company's operations, financial position and
cash flows over a particular period are a concise summary of hundreds of thousands of financial
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
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sizable finance departments with dozens of employees at larger companies.Objectives of Accounting:
Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
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take place. Accounting serves this purpose of record keeping by promptly recording all thebusiness transactions in the books of account.
ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit
earned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
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which shows the profit or loss of the business by matching the items of revenue and expenditureof the some period.
iii) To ascertain the financial position of the business: In addition to profit, a businessman must
know his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
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health of a business entity.iv) To portray the liquidity position: Financial reporting should provide information about how
an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its
capital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
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v) To protect business properties: Accounting provides upto date information about the variousassets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
payment which is not due to him.
vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
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taken in respect of various aspects of business.vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
compulsorily required to maintain accounts as per the law governing their operations such as the
Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
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Journal:When the business transactions take place, the first step is to record the same in the books of
original entry or subsidiary books or books of prime or journal. Thus journal is a simple book of
accounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
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the act of recording each transaction in the journal and the form in which it is recorded, is knownas a journal entry.
LEDGER:
Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
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chronologically, it is very difficult to obtain all the transactions pertaining to one head of accounttogether at one place. But, the preparation of different ledger accounts helps to get a consolidated
picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account may
be defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
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effect ultimately. From the above definition, it is clear that when transactions take place, they arefirst entered in the journal and subsequently posted to the concerned accounts in the ledger.
Posting refers to the process of entering in the ledger the information given in the journal. In the
past, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
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accounts and arrangement of accounts in any required manner.SU BSIDIARYBOOKS
Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.
Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
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a special journal and then in the ledger accounts is the practical system of accounting which isalso referred to as English System. Though the usual type of journal entries are not passed in
these sub?divided journals, the double entry principles of accounting are strictly followed.
Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
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payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are postedsubsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
ledger with the required explanation called as narration and hence, it plays a dual role of a
journal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
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Book. The Cash Book will always show a debit balance since payments cannot exceed thereceipts at any time.
Accounting concepts:
The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
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common accounting concepts adopted by many businessconcerns .Business Entity Concept:
A business unit is an organization of persons established to accomplish an economic goal.
Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
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equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itselfowns the assets and in turn owes to various claimants.
Money Measurement Concept:
In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
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business can be expressed in terms of numbers. In other words, facts, events and transactionswhich cannot be expressed in monetary terms are not recorded in accounting. Hence, the
accounting does not give a complete picture of all the transactions of a business unit. This
concept does not also take care of the effects of inflation because it assumes astable value for
measuring.
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Going Concern Concept:Under this concept, the transactions are recorded assuming that the business will exist for a
longer period of time, i.e., a business unit is considered to be a going concern and not a
liquidated one. Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of valuing the assets at
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historical cost or replacement cost. This concept also supports the treatment of prepaid expensesas assets, although they may be practically unsaleable.
Dual Aspect Concept:
According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
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system is that every debit has a corresponding and equal amount of credit. This is the underlyingassumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the total
assets of the business unit are equal to its total liabilities. Liabilities here relate both to the
outsiders and the owners. Liabilities to the owners are considered as capital.
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Periodicity Concept:Under this concept, the life of the business is segmented into different periods and accordingly
the result of each period is ascertained. Though the business is assumed to be continuing in
future (as per goingconcern concept), the measurement of income and studying the financial
position of the business for a shorter and definite period will help in taking corrective steps at the
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appropriate time. Each segmented period is called ?accounting period? and the same is normallya year. The businessman has to analyse and evaluate the results ascertained periodically. At the
end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made
during that accounting period and Balance Sheet is prepared which depicts the financial position
of the business as on the last day of that period. During the course of preparation of these
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statements capital revenue items are to be necessarily distinguished.Historical Cost Concept:
According to this concept, the transactions are recorded in the books of account with the
respective amounts involved. For example, if an asset is purchases, it is entered in the accounting
record at the price paid to acquire the same and that cost is considered to be the base for all
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future accounting. It means that the asset is recorded at cost at the time of purchase but it may bemethodically reduced in its value by way of charging depreciation. However, in the light of
inflationary conditions, the application of this concept is considered highly irrelevant for judging
the financial position of the business.
Matching Concept:
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The essence of the matching concept lies in the view that all costs which are associated to aparticular period should be compared with the revenues associated to the same period to obtain
the net income of the business. Under this concept, the accounting period concept is relevant and
it is this concept (matching concept) which necessitated the provisions of different adjustments
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
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advance, etc., during the course of preparing the financial statements at the end of the accountingperiod.
Realisation Concept:
This concept assumes or recognizes revenue when a sale is made. Sale is considered to be
complete when the ownership and property are transferred from the seller to the buyer and the
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consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hirepurchase system where the ownership is transferred to the buyer when the last instalment is paid
and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract is
completed, the profit is calculated on the basis of work certified each year.
Accrual Concept:
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According to this concept the revenue is recognized on its realization and not on its actualreceipt. Similarly the costs are recognized when they are incurred and not when payment is
made. This assumption makes it necessary to give certain adjustments in the preparation of
income statement regarding revenues and costs. But under cash accounting system, the revenues
and costs are recognized only when they are actually received or paid. Hence, the combination
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of both cash and accrual system is preferable to get rid of the limitations of each system.Objective Evidence Concept:
This concept ensures that all accounting must be based on objective evidence, i.e., every
transaction recorded in the books of account must have a verifiable document in support of its,
existence. Only then, the transactions can be verified by the auditors and declared as true or
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otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,
valuation of inventory, etc., and the accountants are required to disclose the regulations followed.
Manufacturing Account:
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Manufacturing concerns which convert raw material into finished product is required to preparemanufacturing account and then prepare trading and profit and loss account. This is necessary
because they have to ascertain cost of goods manufactured, gross profit and net profit.
Trading account:
Trading account is prepared for an accounting period to find the trading results or gross margin
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of the business i.e., the amount of gross profit the concern has made from buying and sellingduring the accounting period. The difference between the sales and cost of sales is gross profit.
For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,
direct expenses on purchasing and manufacturing are added up and closing stock of finished
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
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the profit and loss account.Profit and Loss Account:
In the words of Prof. Carter ?Profit and loss account is an account into which all gains and losses
are collected in order to ascertain the excess of gains over the losses or vice versa.?
Balance sheet:
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?Balance sheet is a screen picture of the financial position of a going business concern at acertain moment? ? Francis.
Asset:
Any physical thing or right owned that has a money value is an asset. In other words, an asset is
that expenditure which results in acquiring of some property or benefits of a lasting nature.
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They are classified on the basis of their nature. Different types of assets are as under:(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
the business with the objective of making profits. Land and building, Plant and machinery,
Furniture and Fixtures are examples of fixed assets.
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
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receivable and stock are called current assets as they can be realised within an operating cycle ofone year to discharge liabilities.
(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? they
can be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be both
fixed assets and current assets.
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(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt buthave value are called intangible assets. Goodwill, patents, trade marks and licences are examples
of intangible assets. They are usually classified under fixed assets.
(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenses
which are capitalised for the time being, expenses for promotion of organisations (preliminary
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expenses), discount on issue of shares, debit balance of profit and loss account etc. are theexamples of fictitious assets.
Liability:
It means the amount which the firm owes to outsiders that is, excepting the proprietors. In the
words of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
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claims of those who ate not owners are called liabilities?.In simple terms, debts repayable to outsiders by the business are known as liabilities.
Long term Liabilities: Liabilities repayable after specific duration of long period of time are
called long term liabilities.
Current liabilities: Liabilities which are repayable during the operating cycle of business,
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usually within a year, are called short term liabilities or current liabilitiesFINANCIAL STATEMENT ANALY SIS
Financial Statement : A financial statement is an organized collection of data according to
logical and consistent accounting procedures
Purpose: To understand the financial aspects of a business form.
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Financial StatementIncome Statement Balance Sheet Statement of retained earnings Statement of changes in
financial position
Analysis : MethodicalClassificationofdatagiveninthe financialstatements nsimplifiedform.
Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
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Financial statement Analysis: To analyze the firm?s profitability & financial soundnessThe following are the types of Financial Statement Analysis.
1.On the basis of Material used : According to the material used.
External Analysis Internal Analysis
External Analysis: This analysis is done by the outsiders like Investors /Credit
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agencies/Government agencies and other Creditors.Internal Analysis: This analysis is done by the internal executives / employees of the
organization.
2.On the basis of modus operandi : According to the method of operation followed in the
analysis.
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Dynamic / Horizontal Analysis Static / Vertical AnalysisDynamic / Horizontal Analysis: This analysis refers to the financial data of a company for
several years. The figures of various years are compared with the base year. It helps to focus
attention on items that have changed significantly during the period under review. Changes in
different elements of cost and sales over no . of years.
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Tools employed are comparative statements and trend percentages.Static / Vertical Analysis: A study is made of the quantitative relationship of the various items in
the financial statements in a particular date.
Percentage of each element of cost to sales.
Tools employed are common?size financial statements and financial ratios.
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Ex: Item basedParticular period and in the same company
One division ? FMCG goods
Another division ? Medicines than
So the ratio is measured & compared the performance of one division to another division
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Particular period and with different companiesOne company ? FMCG goods
Another company ? FMCG goods
So the ratio is measured and compared the performance of one company to another company.
Methods and Devices of Financial Analysis:
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A number of methods or devices are used to study the relationship between different statementsand to analyze the position of the enterprise.
The following are the methods:
1.Comparative statements
2.Trend Analysis
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3.Common?size statements4.Funds Flow Analysis
5.Cash Flow Analysis
6.Ratio Analysis
7.Cost?Volume?Profit Analysis
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Comparative Statements:The comparative financial statements are statements of the financial position at different periods,
of time. The elements of financial position are shown in a comparative form so as to give an idea
of financial position at two or more periods. The following are the two types of comparative
statements.
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1.Comparative Balance Sheet: The analysis is the study of the trend of the same items, groups ofitems and computed items in two or more balance sheets of the same business enterprise on
different dates. The changes in periodic balance sheet items reflect the conduct of a business. It
has four columns and the fourth column is used for giving percentages of increases or decreases.
Guidelines for interpretation : nterpreter is expected to study the following aspects
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?Current financial position and liquidity position?Long?term financial position
?Profitability of the concern
?For studying current financial position or short?term financial position of a concern, should see
the working capital in both the years.
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2.Comparative Income Statement: The income statement gives the results of the operations of abusiness. It gives an idea of the progress of a business over a period of time. Like comparative
balance sheet it also has 4 columns and the fourth column is used to show increase or decrease in
figures, in absolute amounts and percentages respectively.
Guidelines for interpretation : nterpreter is expected to study the following aspects
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?The increase or decrease in sales should be compared with the increase or decrease in cost ofgoods sold.
?To analyze the study of operational profits.
?The increase or decrease in net profit will give an idea about the overall profitability of the
concern.
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?Should mention whether the overall profitability is good or not.Trend Analysis:
The financial statements may be analyzed by computing trends of series of information. This
method determines the direction upwards or downwards and involves the computation of the
percentage relationship that each statement item bears to the same item in base year.
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Procedure for calculating trends.?One year is taken as a base year. Generally the first or the last is taken as base year.
?The figures of base year are taken as 100.
?Trend percentages are calculated in relation to base year. If a figure in one year is less than the
figure in base year the trend percentage will be less than 100 and it will be more than 100 if
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figure is more than base year figure. Each year?s figure is divided by the base year?s figure.COMMON?SIZE STATEMENT ANALY SIS
The common?size statements, balance sheet and income statement are shown in analytical and
percentages. The figures are shown as the percentage of total assets, total liabilities and total
sales. These statements are also known as components percentage or 100 percent statement.
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1.The total of assets or liabilities are taken as 100.2.The individual assets are expressed as percentage of total assets.
Ex: Total assets = Rs.5,00,000, nventory value = Rs.50,000
If total assets are taken as 100
Calculation: 50000 x 00
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? = 10%5,00,000
Common?size Balance sheet: A statement in which balance sheet items are expressed as the ratio
of each asset to total assets and the ratio of each liabilities to total liabilities is called common?
size balance sheet.
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Common?size Income Statement: The items in income statement can be shown as percentage ofsales to show the relation of each item to sales. A significant relationship can be established
between items of income statement and volume of sales.
Sales increases selling expenses increases ? there will be no affect on other administrative
expenses
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Sales decreases selling expenses decreases ? there will be no affect on other administrativeexpenses
If sales increase to a considerable extent then administrative and financial expenses go up.
So a relationship is established between sales and other items in income in evaluating operational
activities of the enterprise.
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Funds Flow Statement : The term flow means movement and includes both inflow and outflow.The term flow of funds means transfer of economic values from one asset to another.
Source of funds: If the effect of transaction results in the increase of funds, it is called a source of
funds.
Application of funds: If the effect of transaction results in the decrease of funds, it is called
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application of funds.Cash Flow Statement : Cash flow statement is a statement which describes the inflows and
outflows of cash and cash equivalents in an enterprise period of time.
Cash: Cash comprises cash on hand and demand deposits at bank.
Cash Equivalents: Cash Equivalents are short term, high liquid investments that are readily
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convertible into known as amount of cash.Cash flow: Cash flows are inflows and outflows of cash and cash equivalents.
Cash flows from operating activities: Operating activities are the principal of revenue?producing
activities of the enterprise and other activities that are not investing or finance activities.
Cash flow from investing activities: The cash flow represent the extent to which expenditures
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have been made for resources intended to generate future income and cash flows.Cash flows from financing activities: Financial activities are activities that result in changes in
the size and composition of the owner?s capital and borrowings of the enterprise.
Cost?volume?profit analysis: Cost?Volume?Profit (CVP) analysis is a managerial accounting
technique that is concerned with the effect of sales volume and product costs on operating profit
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of a business. It deals with how operating profit is affected by changes in variable costs, fixedcosts, selling price per unit and the sales mix of two or more different products.
CVP analysis has following assumptions:
?All cost can be categorized as variable or fixed.
?Sales price per unit, variable cost per unit and total fixed cost are constant.
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?All units produced are sold.RATIONALE:
Explanation of the logical reasons or principles employed in consciously arriving at a decision or
estimate rationales usually document
why a particular choice was made,
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how the basis of its selection was developed,why and how the particular information or assumptions were relied on and
why the conclusion is deemed credible or realistic.
RATIO ANALY SIS :
It is a technical of analysis and interpretation of financial statements. It is the process of
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establishing and interpreting various ratios for helping in making the certain decisions.According to Accountants? Handbook of Wixon, Kell and Bedford a ratio is an
?Expression of the quantitative relationship between two numbers?.
Accounting ratios
Traditional Functional
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P&L A/c Profitability Coverage TurnoverFinancial
Balance Sheet Ratio Ratio Ratio Ratio
Composite Ratio
Overall profitability ratio Fixed interest coverage ratio Fixed assets turnover
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ratioReturn on Investment Fixed dividend coverage ratio Working capital
turnover ratio
Equity per Share (EPS) Debt service coverage ratio Working capital
leverage
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Price Earning RatioGross Profit ratio
Net Profit ratio
Operating Expenses ratio
Payout ratio
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Dividend Yield ratioLiquidity Ratio and Stability Ratio
Current Ratio Fixed assets ratio
Change in current ratio Capital Structure ratio
Quick ratio Capital gearing ratio
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Super quick ratio Debt?equity ratioDefensive interval ratio
CLASSIFICATION, CALCU LATIONANDINTERPRETATIONOF RATIOS
SL
NO
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RATIOCLASSIFICATION
COMPUTATION
FORMULA
PURPOSE
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Traditional Functional1 Gross Profit Ratio
P&L A/c or
Revenue
Statement
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RatioProbability
Ratio
Gross Profit
Indicates the efficiency of the
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production / trading operationsx100
Net Sales
2 Net Profit Ratio ? ? Net Profit Indicates net margin on sales
x100
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Net Sales3
Operating or
Expenses ratio
? ? x100
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Operating costA measure of management?s
ability to keep operating
expenses properly controlled f
level of sales achieved
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Net Sales4
Net Profit to Total
Assets
Composite
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Ratio?
Net profit after
tax + Interest
A measure of productivity of
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TotalAssets x100
Total assets
5
Return on
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Shareholders?funds
? ?
Profit available for
equity shareholders
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Shows the amount of earningsattributable to each equity shar
x100
Average equity
shareholders?s funds
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6Earning per equity
share
Profit available for
equity shareholders
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Shows the amount of earningsattributes to each equity share.
? ? x100
No. of Equity
Shares
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7 Dividend yield? ?
Market
Dividend per share Shows the rate of return to
shareholders in the form of
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dividends based on the marketprice of the share.
x100
price per
share
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8 Price Earning ratio ? ?Market price of a
share
A measure for determining the
value of a share. May also be
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used to measure the rate of retuexpected by investors.
x100
Earning per share
9
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Fixed InterestCover
P&L or
Revenue
Statement
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RatioProfitability
Ratio
Operating Income
Shows the margin of coverage
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interest requirements Annual InterestExpense
10
Fixed Dividend
Cover
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Net IncomeShows the extent to which curr
are available to pay
dividends on preference shares.
? ? earnings
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Annual PreferenceDividends
11 Inventory Turnover ?
Turnover or
Efficiency
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ratioCost of goods sold Evaluation of the liquidity of
inventory and adequacy of
inventory controls. Average Inventory
12
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AccountsReceivable
Turnover
Composite
ratio
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?Net Sales on Credit Measures liquidity of accounts
receivable and the effectivenes
of credit policy. Average Receivable
13 Current ratio
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Balancesheet ratio
Financial
ratio
Current Assets
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Measures short?term debt payiability.
Current Liabilities
14
Quick (Acid Test)
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ratio? ? term
(i) Quick Assets
Current Liabilities
(ii) Quick Assets
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Quick LiabilitiesA refined measure of the short-
debt paying ability by
measuring short?term liquidity.
15 Proprietary ratio
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Total Shareholders?Funds
Measures conservatism of capi
structure and shows the extent
funds in the total
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assets employed in the busines? ?
shareholders?
Total Tangible Assets
1 6 Debt?Equity ratio
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? ?(ii)
(i) External Equities
Indicates the percentage of fun
being financed through
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borrowings? a measure of theextent of trading on equity.
Internal Equities
Total Long?term
Debt
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Total Lon?termFunds
U TILITYOF RATIONANALY SIS
Ratios are of immense importance in the analysis and interpretation of financial statements as
they bring strength or weaknesses of the firm.
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The following are the types of utility of ratio analysis.1.Managerial uses of ratio analysis: This analysis helps in decision making through information
provided in financial statements, financial forecasting and planning like looking ahead and ratios
calculated are used as a guide for future , helps in communication like understanding financial
strengths and weaknesses, co?ordination helps in effective business management, control like
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comparing actual with standards & other uses like budgetary control and standard costing.2.Utility to Shareholders / Investors: Ratio analysis is used in making up investor mind whether
present financial position of the concern, warrants further investment or not.
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MBA DEPARTMNET
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FINANCIAL ACCOU NTINGANDANALY SISAccounting:
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
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cash flows over a particular period are a concise summary of hundreds of thousands of financialtransactions it may have entered into over this period. Accounting is one of the key functions for
almost any business? it may be handled by a bookkeeper and accountant at small firms or by
sizable finance departments with dozens of employees at larger companies.
Objectives of Accounting:
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Objective of accounting may differ from business to business depending upon their specificrequirements. However, the following are the general objectives of accounting.
i) To keeping systematic record: It is very difficult to remember all the business transactions that
take place. Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.
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ii) To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profitearned or loss suffered in business during a particular period. For this purpose, a business entity
prepares either a Trading and Profit and Loss account or an Income and Expenditure account
which shows the profit or loss of the business by matching the items of revenue and expenditure
of the some period.
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iii) To ascertain the financial position of the business: In addition to profit, a businessman mustknow his financial position i.e., availability of cash, position of assets and liabilities etc. This
helps the businessman to know his financial strength. Financial statements are barometers of
health of a business entity.
iv) To portray the liquidity position: Financial reporting should provide information about how
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an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about itscapital transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise?s liquidity and solvency.
v) To protect business properties: Accounting provides upto date information about the various
assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a
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payment which is not due to him.vi) To facilitate rational decision ? making: Accounting records and financial statements provide
financial information which help the business in making rational decisions about the steps to be
taken in respect of various aspects of business.
vii) To satisfy the requirements of law: Entities such as companies, societies, public trusts are
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compulsorily required to maintain accounts as per the law governing their operations such as theCompanies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.
Journal:
When the business transactions take place, the first step is to record the same in the books of
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original entry or subsidiary books or books of prime or journal. Thus journal is a simple book ofaccounts in which all the business transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any convenient time. Journalsing refers to
the act of recording each transaction in the journal and the form in which it is recorded, is known
as a journal entry.
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LEDGER:Ledger is a main book of account in which various accounts of personal, real and nominal nature,
are opened and maintained. In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the transactions pertaining to one head of account
together at one place. But, the preparation of different ledger accounts helps to get a consolidated
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picture of the transactions pertaining to one ledger account at a time. Thus, a ledger account maybe defined as a summary statement of all the transactions relating to a person, asset, expense, or
income or gain or loss which have taken place during a specified period and shows their net
effect ultimately. From the above definition, it is clear that when transactions take place, they are
first entered in the journal and subsequently posted to the concerned accounts in the ledger.
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Posting refers to the process of entering in the ledger the information given in the journal. In thepast, the ledgers were kept in bound books. But with the passage of time, they became loose?leaf
ones and the advantages of the same lie in the removal of completed accounts, insertion of new
accounts and arrangement of accounts in any required manner.
SU BSIDIARYBOOKS
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Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.Each one of the subsidiary books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these books. Recording the transactions in
a special journal and then in the ledger accounts is the practical system of accounting which is
also referred to as English System. Though the usual type of journal entries are not passed in
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these sub?divided journals, the double entry principles of accounting are strictly followed.Cash Book:
Cash Book is a sub?division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted
subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a
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ledger with the required explanation called as narration and hence, it plays a dual role of ajournal as well as ledger. All cash receipts are recorded on the debit side and all cash payments
are recorded on the credit side. All cash transactions are recorded chronologically in the Cash
Book. The Cash Book will always show a debit balance since payments cannot exceed the
receipts at any time.
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Accounting concepts:The term ?concept? is used to denote accounting postulates, i.e., basic assumptions or conditions
upon the edifice of which the accounting super?structure is based. The following are the
common accounting concepts adopted by many businessconcerns .
Business Entity Concept:
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A business unit is an organization of persons established to accomplish an economic goal.Business entity concept implies that the business unit is separate and distinct from the persons
who provide the required capital to it. This concept can be expressed through an accounting
equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself
owns the assets and in turn owes to various claimants.
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Money Measurement Concept:In accounting all events and transactions are recode in terms of money. Money is considered as
a common denominator, by means of which various facts, events and transactions about a
business can be expressed in terms of numbers. In other words, facts, events and transactions
which cannot be expressed in monetary terms are not recorded in accounting. Hence, the
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accounting does not give a complete picture of all the transactions of a business unit. Thisconcept does not also take care of the effects of inflation because it assumes astable value for
measuring.
Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a
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longer period of time, i.e., a business unit is considered to be a going concern and not aliquidated one. Keeping this in view, the suppliers and other companies enter into business
transactions with the business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost. This concept also supports the treatment of prepaid expenses
as assets, although they may be practically unsaleable.
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Dual Aspect Concept:According to this basic concept of accounting, every transaction has a two?fold aspect, Viz.,
1.giving certain benefits and 2. Receiving certain benefits. The basic principle of double entry
system is that every debit has a corresponding and equal amount of credit. This is the underlying
assumption of this concept. The accounting equation viz., Assets = Capital + Liabilities or
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Capital = Assets ? Liabilities, will further clarify this concept, i.e., at any point of time the totalassets of the business unit are equal to its total liabilities. Liabilities here relate both to the
outsiders and the owners. Liabilities to the owners are considered as capital.
Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly
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the result of each period is ascertained. Though the business is assumed to be continuing infuture (as per goingconcern concept), the measurement of income and studying the financial
position of the business for a shorter and definite period will help in taking corrective steps at the
appropriate time. Each segmented period is called ?accounting period? and the same is normally
a year. The businessman has to analyse and evaluate the results ascertained periodically. At the
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end of an accounting period, an Income Statement is prepared to ascertain the profit or loss madeduring that accounting period and Balance Sheet is prepared which depicts the financial position
of the business as on the last day of that period. During the course of preparation of these
statements capital revenue items are to be necessarily distinguished.
Historical Cost Concept:
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According to this concept, the transactions are recorded in the books of account with therespective amounts involved. For example, if an asset is purchases, it is entered in the accounting
record at the price paid to acquire the same and that cost is considered to be the base for all
future accounting. It means that the asset is recorded at cost at the time of purchase but it may be
methodically reduced in its value by way of charging depreciation. However, in the light of
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inflationary conditions, the application of this concept is considered highly irrelevant for judgingthe financial position of the business.
Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a
particular period should be compared with the revenues associated to the same period to obtain
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the net income of the business. Under this concept, the accounting period concept is relevant andit is this concept (matching concept) which necessitated the provisions of different adjustments
for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in
advance, etc., during the course of preparing the financial statements at the end of the accounting
period.
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Realisation Concept:This concept assumes or recognizes revenue when a sale is made. Sale is considered to be
complete when the ownership and property are transferred from the seller to the buyer and the
consideration is paid in full. However, there are two exceptions to this concept, viz., 1. Hire
purchase system where the ownership is transferred to the buyer when the last instalment is paid
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and 2 . Contract accounts, in which the contractor is liable to pay only when the whole contract iscompleted, the profit is calculated on the basis of work certified each year.
Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual
receipt. Similarly the costs are recognized when they are incurred and not when payment is
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made. This assumption makes it necessary to give certain adjustments in the preparation ofincome statement regarding revenues and costs. But under cash accounting system, the revenues
and costs are recognized only when they are actually received or paid. Hence, the combination
of both cash and accrual system is preferable to get rid of the limitations of each system.
Objective Evidence Concept:
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This concept ensures that all accounting must be based on objective evidence, i.e., everytransaction recorded in the books of account must have a verifiable document in support of its,
existence. Only then, the transactions can be verified by the auditors and declared as true or
otherwise. The verifiable evidence for the transactions should be from the personal bias, i. e . ,
it should be objective in nature and not subjective. However, in reality the subjectivity cannot be
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avoided in the aspects like provision for bad and doubtful debts, provision for depreciation,valuation of inventory, etc., and the accountants are required to disclose the regulations followed.
Manufacturing Account:
Manufacturing concerns which convert raw material into finished product is required to prepare
manufacturing account and then prepare trading and profit and loss account. This is necessary
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because they have to ascertain cost of goods manufactured, gross profit and net profit.Trading account:
Trading account is prepared for an accounting period to find the trading results or gross margin
of the business i.e., the amount of gross profit the concern has made from buying and selling
during the accounting period. The difference between the sales and cost of sales is gross profit.
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For the purpose of computing cost of sales, value of opening stock of finished goods, purchases,direct expenses on purchasing and manufacturing are added up and closing stock of finished
goods is reduced. The balance of this account shows gross profit or loss which is transferred to
the profit and loss account.
Profit and Loss Account:
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In the words of Prof. Carter ?Profit and loss account is an account into which all gains and lossesare collected in order to ascertain the excess of gains over the losses or vice versa.?
Balance sheet:
?Balance sheet is a screen picture of the financial position of a going business concern at a
certain moment? ? Francis.
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Asset:Any physical thing or right owned that has a money value is an asset. In other words, an asset is
that expenditure which results in acquiring of some property or benefits of a lasting nature.
They are classified on the basis of their nature. Different types of assets are as under:
(i) Fixed assets: Fixed assets are the assets which are acquired and held permanently and used in
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the business with the objective of making profits. Land and building, Plant and machinery,Furniture and Fixtures are examples of fixed assets.
(ii) Current assets: The assets of the business in the form of cash, debtors bank balances, bill
receivable and stock are called current assets as they can be realised within an operating cycle of
one year to discharge liabilities.
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(iii) Tangible assets: Tangible assets have definite physical shape or identity and existence? theycan be seen, felt and have volume such as land, cash, stock etc. Thus tangible assets can be both
fixed assets and current assets.
(iv) Intangible assets: The assets which have no physical shape which cannot be seen or felt but
have value are called intangible assets. Goodwill, patents, trade marks and licences are examples
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of intangible assets. They are usually classified under fixed assets.(v) Fictitious assets: Fictitious assets are not real assets. Past accumulated losses or expenses
which are capitalised for the time being, expenses for promotion of organisations (preliminary
expenses), discount on issue of shares, debit balance of profit and loss account etc. are the
examples of fictitious assets.
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Liability:It means the amount which the firm owes to outsiders that is, excepting the proprietors. In the
words of Finny and Miller, ?Liabilities are debts? they are amounts owed to creditors? thus the
claims of those who ate not owners are called liabilities?.
In simple terms, debts repayable to outsiders by the business are known as liabilities.
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Long term Liabilities: Liabilities repayable after specific duration of long period of time arecalled long term liabilities.
Current liabilities: Liabilities which are repayable during the operating cycle of business,
usually within a year, are called short term liabilities or current liabilities
FINANCIAL STATEMENT ANALY SIS
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Financial Statement : A financial statement is an organized collection of data according tological and consistent accounting procedures
Purpose: To understand the financial aspects of a business form.
Financial Statement
Income Statement Balance Sheet Statement of retained earnings Statement of changes in
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financial positionAnalysis : MethodicalClassificationofdatagiveninthe financialstatements nsimplifiedform.
Interpretation: Explainingthemeaningandsignificanceofdatasosimplified.
Financial statement Analysis: To analyze the firm?s profitability & financial soundness
The following are the types of Financial Statement Analysis.
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1.On the basis of Material used : According to the material used.External Analysis Internal Analysis
External Analysis: This analysis is done by the outsiders like Investors /Credit
agencies/Government agencies and other Creditors.
Internal Analysis: This analysis is done by the internal executives / employees of the
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organization.2.On the basis of modus operandi : According to the method of operation followed in the
analysis.
Dynamic / Horizontal Analysis Static / Vertical Analysis
Dynamic / Horizontal Analysis: This analysis refers to the financial data of a company for
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several years. The figures of various years are compared with the base year. It helps to focusattention on items that have changed significantly during the period under review. Changes in
different elements of cost and sales over no . of years.
Tools employed are comparative statements and trend percentages.
Static / Vertical Analysis: A study is made of the quantitative relationship of the various items in
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the financial statements in a particular date.Percentage of each element of cost to sales.
Tools employed are common?size financial statements and financial ratios.
Ex: Item based
Particular period and in the same company
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One division ? FMCG goodsAnother division ? Medicines than
So the ratio is measured & compared the performance of one division to another division
Particular period and with different companies
One company ? FMCG goods
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Another company ? FMCG goodsSo the ratio is measured and compared the performance of one company to another company.
Methods and Devices of Financial Analysis:
A number of methods or devices are used to study the relationship between different statements
and to analyze the position of the enterprise.
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The following are the methods:1.Comparative statements
2.Trend Analysis
3.Common?size statements
4.Funds Flow Analysis
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5.Cash Flow Analysis6.Ratio Analysis
7.Cost?Volume?Profit Analysis
Comparative Statements:
The comparative financial statements are statements of the financial position at different periods,
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of time. The elements of financial position are shown in a comparative form so as to give an ideaof financial position at two or more periods. The following are the two types of comparative
statements.
1.Comparative Balance Sheet: The analysis is the study of the trend of the same items, groups of
items and computed items in two or more balance sheets of the same business enterprise on
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different dates. The changes in periodic balance sheet items reflect the conduct of a business. Ithas four columns and the fourth column is used for giving percentages of increases or decreases.
Guidelines for interpretation : nterpreter is expected to study the following aspects
?Current financial position and liquidity position
?Long?term financial position
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?Profitability of the concern?For studying current financial position or short?term financial position of a concern, should see
the working capital in both the years.
2.Comparative Income Statement: The income statement gives the results of the operations of a
business. It gives an idea of the progress of a business over a period of time. Like comparative
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balance sheet it also has 4 columns and the fourth column is used to show increase or decrease infigures, in absolute amounts and percentages respectively.
Guidelines for interpretation : nterpreter is expected to study the following aspects
?The increase or decrease in sales should be compared with the increase or decrease in cost of
goods sold.
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?To analyze the study of operational profits.?The increase or decrease in net profit will give an idea about the overall profitability of the
concern.
?Should mention whether the overall profitability is good or not.
Trend Analysis:
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The financial statements may be analyzed by computing trends of series of information. Thismethod determines the direction upwards or downwards and involves the computation of the
percentage relationship that each statement item bears to the same item in base year.
Procedure for calculating trends.
?One year is taken as a base year. Generally the first or the last is taken as base year.
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?The figures of base year are taken as 100.?Trend percentages are calculated in relation to base year. If a figure in one year is less than the
figure in base year the trend percentage will be less than 100 and it will be more than 100 if
figure is more than base year figure. Each year?s figure is divided by the base year?s figure.
COMMON?SIZE STATEMENT ANALY SIS
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The common?size statements, balance sheet and income statement are shown in analytical andpercentages. The figures are shown as the percentage of total assets, total liabilities and total
sales. These statements are also known as components percentage or 100 percent statement.
1.The total of assets or liabilities are taken as 100.
2.The individual assets are expressed as percentage of total assets.
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Ex: Total assets = Rs.5,00,000, nventory value = Rs.50,000If total assets are taken as 100
Calculation: 50000 x 00
? = 10%
5,00,000
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Common?size Balance sheet: A statement in which balance sheet items are expressed as the ratioof each asset to total assets and the ratio of each liabilities to total liabilities is called common?
size balance sheet.
Common?size Income Statement: The items in income statement can be shown as percentage of
sales to show the relation of each item to sales. A significant relationship can be established
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between items of income statement and volume of sales.Sales increases selling expenses increases ? there will be no affect on other administrative
expenses
Sales decreases selling expenses decreases ? there will be no affect on other administrative
expenses
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If sales increase to a considerable extent then administrative and financial expenses go up.So a relationship is established between sales and other items in income in evaluating operational
activities of the enterprise.
Funds Flow Statement : The term flow means movement and includes both inflow and outflow.
The term flow of funds means transfer of economic values from one asset to another.
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Source of funds: If the effect of transaction results in the increase of funds, it is called a source offunds.
Application of funds: If the effect of transaction results in the decrease of funds, it is called
application of funds.
Cash Flow Statement : Cash flow statement is a statement which describes the inflows and
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outflows of cash and cash equivalents in an enterprise period of time.Cash: Cash comprises cash on hand and demand deposits at bank.
Cash Equivalents: Cash Equivalents are short term, high liquid investments that are readily
convertible into known as amount of cash.
Cash flow: Cash flows are inflows and outflows of cash and cash equivalents.
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Cash flows from operating activities: Operating activities are the principal of revenue?producingactivities of the enterprise and other activities that are not investing or finance activities.
Cash flow from investing activities: The cash flow represent the extent to which expenditures
have been made for resources intended to generate future income and cash flows.
Cash flows from financing activities: Financial activities are activities that result in changes in
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the size and composition of the owner?s capital and borrowings of the enterprise.Cost?volume?profit analysis: Cost?Volume?Profit (CVP) analysis is a managerial accounting
technique that is concerned with the effect of sales volume and product costs on operating profit
of a business. It deals with how operating profit is affected by changes in variable costs, fixed
costs, selling price per unit and the sales mix of two or more different products.
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CVP analysis has following assumptions:?All cost can be categorized as variable or fixed.
?Sales price per unit, variable cost per unit and total fixed cost are constant.
?All units produced are sold.
RATIONALE:
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Explanation of the logical reasons or principles employed in consciously arriving at a decision orestimate rationales usually document
why a particular choice was made,
how the basis of its selection was developed,
why and how the particular information or assumptions were relied on and
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why the conclusion is deemed credible or realistic.RATIO ANALY SIS :
It is a technical of analysis and interpretation of financial statements. It is the process of
establishing and interpreting various ratios for helping in making the certain decisions.
According to Accountants? Handbook of Wixon, Kell and Bedford a ratio is an
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?Expression of the quantitative relationship between two numbers?.Accounting ratios
Traditional Functional
P&L A/c Profitability Coverage Turnover
Financial
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Balance Sheet Ratio Ratio Ratio RatioComposite Ratio
Overall profitability ratio Fixed interest coverage ratio Fixed assets turnover
ratio
Return on Investment Fixed dividend coverage ratio Working capital
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turnover ratioEquity per Share (EPS) Debt service coverage ratio Working capital
leverage
Price Earning Ratio
Gross Profit ratio
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Net Profit ratioOperating Expenses ratio
Payout ratio
Dividend Yield ratio
Liquidity Ratio and Stability Ratio
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Current Ratio Fixed assets ratioChange in current ratio Capital Structure ratio
Quick ratio Capital gearing ratio
Super quick ratio Debt?equity ratio
Defensive interval ratio
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CLASSIFICATION, CALCU LATIONANDINTERPRETATIONOF RATIOSSL
NO
RATIO
CLASSIFICATION
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COMPUTATIONFORMULA
PURPOSE
Traditional Functional
1 Gross Profit Ratio
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P&L A/c orRevenue
Statement
Ratio
Probability
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RatioGross Profit
Indicates the efficiency of the
production / trading operations
x100
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Net Sales2 Net Profit Ratio ? ? Net Profit Indicates net margin on sales
x100
Net Sales
3
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Operating orExpenses ratio
? ? x100
Operating cost
A measure of management?s
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ability to keep operatingexpenses properly controlled f
level of sales achieved
Net Sales
4
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Net Profit to TotalAssets
Composite
Ratio
?
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Net profit aftertax + Interest
A measure of productivity of
Total
Assets x100
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Total assets5
Return on
Shareholders?
funds
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? ?Profit available for
equity shareholders
Shows the amount of earnings
attributable to each equity shar
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x100Average equity
shareholders?s funds
6
Earning per equity
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shareProfit available for
equity shareholders
Shows the amount of earnings
attributes to each equity share.
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? ? x100No. of Equity
Shares
7 Dividend yield
? ?
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MarketDividend per share Shows the rate of return to
shareholders in the form of
dividends based on the market
price of the share.
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x100price per
share
8 Price Earning ratio ? ?
Market price of a
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shareA measure for determining the
value of a share. May also be
used to measure the rate of retu
expected by investors.
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x100Earning per share
9
Fixed Interest
Cover
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P&L orRevenue
Statement
Ratio
Profitability
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RatioOperating Income
Shows the margin of coverage
interest requirements Annual Interest
Expense
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10Fixed Dividend
Cover
Net Income
Shows the extent to which curr
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are available to paydividends on preference shares.
? ? earnings
Annual Preference
Dividends
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11 Inventory Turnover ?Turnover or
Efficiency
ratio
Cost of goods sold Evaluation of the liquidity of
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inventory and adequacy ofinventory controls. Average Inventory
12
Accounts
Receivable
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TurnoverComposite
ratio
?
Net Sales on Credit Measures liquidity of accounts
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receivable and the effectivenesof credit policy. Average Receivable
13 Current ratio
Balance
sheet ratio
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Financialratio
Current Assets
Measures short?term debt payi
ability.
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Current Liabilities14
Quick (Acid Test)
ratio
? ? term
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(i) Quick AssetsCurrent Liabilities
(ii) Quick Assets
Quick Liabilities
A refined measure of the short-
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debt paying ability bymeasuring short?term liquidity.
15 Proprietary ratio
Total Shareholders?
Funds
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Measures conservatism of capistructure and shows the extent
funds in the total
assets employed in the busines
? ?
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shareholders?Total Tangible Assets
1 6 Debt?Equity ratio
? ?
(ii)
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(i) External EquitiesIndicates the percentage of fun
being financed through
borrowings? a measure of the
extent of trading on equity.
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Internal EquitiesTotal Long?term
Debt
Total Lon?term
Funds
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U TILITYOF RATIONANALY SISRatios are of immense importance in the analysis and interpretation of financial statements as
they bring strength or weaknesses of the firm.
The following are the types of utility of ratio analysis.
1.Managerial uses of ratio analysis: This analysis helps in decision making through information
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provided in financial statements, financial forecasting and planning like looking ahead and ratioscalculated are used as a guide for future , helps in communication like understanding financial
strengths and weaknesses, co?ordination helps in effective business management, control like
comparing actual with standards & other uses like budgetary control and standard costing.
2.Utility to Shareholders / Investors: Ratio analysis is used in making up investor mind whether
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present financial position of the concern, warrants further investment or not.3.Utility to Creditors: Ratio analysis is used to know whether current assets are quite sufficient to
current liabilities.
4.Utility to Employees: Profitability of financial statements like Gross?profit, Net?profit,
Operating?profit will enable the employees to put forward their view point for the increase of
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their wages and benefits.5.Utility to Government: Government also interested to know overall strength of the industry.
So the ratio act as an indicator to know the overall strength of the public and private sector.
6. Tax?audit requirements: Ratios are used to analyze the Gross?profit/turnover, Net?
profit/turnover, Stock?in?trade/turnover and material consumed/finished goods product.
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