FINANCIAL ACCOUNTING AND ANALYSIS

ACCOUNTING It is a systematic process of Identifying Recording Measuring Classifying Verifying Summarizing Interpreting Communicating financial information

FINANCIAL ACCOUNTING It is the maintenance of daily record of all financial transaction.

GENERALLY ACCEPTING ACCOUNTING PRINCIPLES The set of rules and regulations adopted or proposed as a guide to action.

WHY GAAP? For making comparisons To avoid confusion To achieve uniformity

OBJECTIVES OF GAAP Useful to present to potential investors Financial decisions Long term decision making Useful in maintaining records Improving business performance

GAAP PRINCIPLES Accounting Principles are classified as:

BUSINESS ENTITY CONCEPT The business and it’s owner(s) are two separate entities. Personal incomes and expenses of the owner(s) should not be treated as that of business income and expense.

MONEY MEASUREMENT CONCEPT The transaction data expressed in terms of money can only be included in the accounting records. example: Technological changes will not be recorded.

ACCOUNTING PERIOD Economic transactions and events are to be recorded/accounted in the accounting period to which they relate Accounting period is of two types: Finsncial year(1 st April to 31 st march) Calender year(1 st jan to 31 st december)

DUAL ASPECT CONCEPT “For every debit, there is a credit”. Every transaction should have two sided effect to the extent of same amount.

For example, if A starts a business with a capital of Rs On the one hand the business has assets of 10,000 while on the other hand the business has to pay to the proprietor a sum of 10,000 which is taken as proprietor’s capital.

COST PRINCIPLE Report and record assets based on their actual cost incurred to acquire them. Example: Purchase of machinery worth Rs. 2,00,000. As per cost principle 2,00,000 is to be considered as cost of machinery.

MATCHING PRINCIPLE This principle allows for real time analysis of expenses and revenues. Matching principle dictates that efforts(expenses) be matched with accomplishments(revenues)

REALIZATION PRINCIPLE Revenues should be recognized when the major economic activities have been completed Sales are recognized when the goods are sold and delivered to customers or services are rendered

CONSERVATISM “Anticipate no profits and provide for all possible losses and if in doubt write off”.

CONSISTENCY CONCEPT Businesses must practice and adhere to rules, assumptions or principles consistently. They cannot simply change their practices without concrete reasons For example: If the accounting period for a firm is from January 1 to December 31 for the current year, the firm cannot simply change the accounting period for next year to be April 1 to March 31.

MATERIALITY PRINCIPLE Materiality principle implies that the transaction and events that have immaterial or significant effects should not be recorded. For example: $10,000 is material to a small business with sales of $100,000. However, $10,000 isn’t material to a large company with the annual sales of $10,000,000.

CONCLUSION Generally Accepted Accounting Principles are necessary for smooth working if accounting work and specially helpful for creditors, insurers and all stake holders.