Accounting And Financial Analysis

Introduction of Accounting :

The word "account" has been derived from the Latin word "computare," which means "to calculate" or "to count." However, the concept of accounting itself, including the recording and management of financial transactions, has ancient roots that predate the Latin language.

Scientific Term : The scientific term for accounts would be "financial accounting," which means the structured process of recording and analyzing financial transactions according to established principles and standards.

Definition :-

Accounting is the process of identifying, recording, classifying, summarizing, analyzing, and interpretation of financial transactions and events.

It involves the application of principles, standards, and methodologies to quantify and summarize financial transactions, events, and conditions.

Identifying - Identifying refers to recognizing and capturing relevant financial transactions or events that occur within a business or organization

Recording - Recording in accounting means carefully writing down all the money-related activities of a business in an organized way. This could be done in special books called journals or using computer programs made for accounting.

Classifying - Refers to categorizing recorded transactions into specific accounts based on their nature or purpose. In double-entry accounting, each transaction affects at least two accounts, with one account debited and another credited.

Summarizing: Summarizing in accounting means putting together and simplifying all the categorized financial information to create important reports. These reports include things like the balance sheet, income statement, and cash flow statement.

Analysis: Analysis involves examining summarized financial data to identify trends, patterns, and relationships. Financial analysis helps stakeholders assess the financial health and performance of a business, identify areas of strength and weakness, and make informed decisions.

Interpretation: Interpretation in accounting means understanding what the analyzed numbers tell us about the business. It's like reading between the lines of a story to figure out what it means. This helps us see how well the business is doing and what it might need to change to reach its goals.

Function and objectives of accounting

Recording Financial Transactions - The main goal of accounting is to keep track of all the money-related activities of a business in a careful and organized way. This includes things like sales, purchases, money spent, money earned, investments, and loans.

Decision Making - Accounting helps people make smart choices. Managers use financial info to see how well the business is doing, decide where to spend money, and plan for the future. Investors .

Financial Reporting - Accounting creates important reports about money. These reports include things like a snapshot of what a company owns and owes (balance sheets), how much money it makes and spends (income statements), where its cash comes from and goes (cash flow statements), and how its ownership changes over time (statements of changes in equity).

Resource Allocation - Accounting helps decide where to put money. By looking at financial data, managers can figure out where the company is making the most money or where it's wasting resources. Then they can put money where it will make the most profit.

Evolution of performance - Accounting helps how well a business is doing over time. By looking at financial statements from different times , people involved in business can see if things are getting better or worse.

Budgeting and Forecasting - Helping create budgets and predict future finances to plan activities and use resources efficiently.

Assessing Financial Performance - checking how profitable and efficient a company is, and its overall financial health, to help plan strategies and improve performance.

Assets - An asset is anything of value that is owned by an individual or organization. Assets can provide future economic benefits and are classified into different categories.

Types of Asset

1. Current Assets

2. Fixed Asset

1. Current Assets

Current assets are those assets that can be converted into cash or used up within a year or within the operating cycle of business whichever is longer.

1. Short-term investments

2. Inventory (goods held for sale)

3. Prepaid expenses (expenses paid in advance)

4. Marketable securities (easily tradable financial instruments)

5. Notes receivable (promissory notes from customers or others)

6. Supplies (materials used in business operations)

7. Accrued income (income earned but not yet received)

8. Other receivables (such as tax refunds due)

9. Deferred expenses (expenses paid but not yet incurred)

19. Work in progress (partially completed goods)

11. Advances to suppliers or employees

12. Deposits (e.g., security deposits)

Fixed Asset -

Fixed assets are things a company owns for the long term to help it do business and make money. These are physical items like buildings, machinery, vehicles, and land that the company needs to operate. Unlike stuff the company sells, fixed assets aren't meant to be sold quickly. Instead, they're used over many years to keep the business running smoothly.

⇒ Machinery
⇒ Building
⇒ Land
⇒ Vehicle
⇒ Furniture
⇒ Goodwill

Accounting concept / Assuption

Accounting Principle

1. Accounting Concept

2. Accounting Convention

1. Accounting concept

i) Money measure concept

ii) Separate business entity

iii) Going concern concept

iv) Cost concept

v) Dual concept

vi) Accounting period concept

vii) Matching concept

viii) Accrual concept

ix) Realization concept

x) Prudence concept

Accounting concept -

Accounting concept refers to the basic principles and assumptions underlying the practice of accounting. These concepts provide a framework for recording, summarizing, and reporting financial transactions. Some fundamental accounting concepts include.

i) Money measurement concept - According to this concept,the transactions that can be expressed in monetary terms are recorded in the accounting records. It excludes qualitative information that cannot be measured in monetary units.

ii) Separate business entity - Separate business entity means that the business is treated as its own thing, separate from the people who own it. This means the business has its own money, assets, debts, and responsibilities, separate from the personal finances of the owners.

iii) Going concern concept - The going concern concept is like saying, "We believe this business will keep going strong." It's the idea that unless there's a good reason to think otherwise, the business will continue operating for the foreseeable future. This concept helps in preparing financial statements with the assumption that the business will keep running smoothly, without suddenly shutting down. It's all about looking ahead and planning for the future of the business.

iv) Cost concept - The cost concept in accounting is about using the price you first paid for something when you write it down in your records. So, if you bought a machine for $10,000, even if it's worth more or less later on, you still write it down as $10,000. This way, it's easier to keep track of what things originally cost and helps keep the records neat and easy to understand.

v) Dual concept - The dual aspect concept in accounting is like a seesaw: every time there's a transaction, there are two parts to it. One part is what you receive, and the other part is what you give.

vi) Accounting period concept - The accounting period concept means that businesses should share their financial information regularly, like every month or every year. It's like breaking down the year into smaller pieces to see how well the business is doing financially during each chunk of time.

vii) Matching concept - The matching concept in accounting means that a business should match the expenses it incurs with the revenues it generates in the same accounting period. This ensures that the financial statements accurately reflect the business's profitability for a given period.

viii) Accrual concept - The accrual concept says that in accounting, we record transactions when they happen, not necessarily when the money is received or paid. So, if a business earns money or incurs costs, we record those right away, even if the actual cash exchange happens later.

ix) Realization concept - It states that revenue should be recognized when it is earned and when it can be reliably measured, regardless of when the cash is actually received. In simpler terms, it means that revenue should be recorded when a company has completed a sale or provided a service, and it's certain that they will receive payment for it.

2. Accounting convention

i) Convention of full disclosure

ii) Convention of consistency

iii) Convention of conservation or prudence

iv) Convention materiality

Accounting convention

Accounting convention means the principles, guidelines, and practices that shape how financial transactions are recorded, reported, and interpreted in accounting. These conventions provide a framework for ensuring consistency, comparability, reliability in financial reporting across different organizations and industries.

i) Convention of full disclosure - Convention of full disclosure means that businesses should display all relevant financial information, not just the good stuff. This principle ensures that stakeholders, like investors and regulators, have a complete picture of a company's financial situation, including any potential risks or uncertainties.

ii) Convention of consistency - It means that businesses should adhere to the same accounting methods and practices from one period to another. By doing this, financial statements remain comparable over time, making it easier for users to understand and analyze the company's performance

iii) Convention of conservation or prudence - The convention of conservatism or prudence in accounting is about being careful. It means that accountants should expect bad things might happen and prepare for them, but they should only count good things when they're absolutely sure.

iv) Convention of materiality - The convention of materiality in accounting is like focusing on what really matters. It means that accountants don't need to report unwanted or every tiny detail. Instead, they should focus on reporting information that could affect decisions made by users of financial statements.

Accounting equation

The accounting equation is a fundamental principle in accounting that represents the relationship between a company's assets, liabilities, and owner's equity. It is expressed as:

Assets = Capital + liabilities

This equation shows that the total assets of a company must equal the sum of its liabilities and owner's equity. In other words, a company's resources (assets) are financed by either borrowing money (liabilities) or by the owner's investment (owner's equity). This equation must always remain in balance, meaning that any change in one element must be accompanied by an equal change in another element to maintain the equation's equality.

International accounting principle and standards

International accounting principles and standards refer to the guidelines and regulations established to ensure consistency, transparency, and comparability in financial reporting across different countries and jurisdictions. The primary body responsible for setting these standards is the International Accounting Standards Board (IASB), which develops International Financial Reporting Standards (IFRS).

IFRS are a set of accounting standards used globally for the preparation and presentation of financial statements. They provide a common language for business affairs so that company financial statements are understandable and comparable across international boundaries. Some key features and principles of IFRS include:

1. Principle-based Approach: IFRS is based on principles rather than specific rules, allowing for flexibility in application while ensuring the substance of transactions is faithfully represented.

2. Fair Presentation and Faithful Representation: Financial statements prepared in accordance with IFRS should present a true and fair view of the financial position, performance, and cash flows of an entity.

3. Relevance and Reliability: Information presented in financial statements should be relevant to the needs of users and reliable, meaning it is free from material error and bias.

4. Comparability and Consistency: Financial statements prepared using IFRS should be comparable over time and across different entities, enabling users to make meaningful comparisons.

5. Going Concern Assumption: Financial statements are prepared on the assumption that the entity will continue to operate indefinitely unless there is evidence to the contrary.

6. Substance over Form: Transactions should be accounted for based on their economic substance rather than merely their legal form.

7. Materiality: Only information that could influence the economic decisions of users should be included in financial statements, with immaterial items being disregarded.

These principles and standards are continuously updated and refined by the IASB to reflect changes in business practices, economic environments, and regulatory requirements worldwide. While many countries have adopted IFRS or converged their national accounting standards with IFRS, some still maintain their own national accounting standards or generally accepted accounting principles (GAAP). However, the trend towards global adoption of IFRS continues to grow, promoting consistency and transparency in financial reporting on an international scale.

Matching of Indian accounting standards with international accounting standards

India has made significant achievements in aligning its accounting standards with international accounting standards over the years. The process of convergence with International Financial Reporting Standards (IFRS) began with the establishment of the National Advisory Committee on Accounting Standards (NACAS) in 2001, which later evolved into the National Financial Reporting Authority (NFRA). Here are some key steps and developments in the matching of Indian accounting standards with international accounting standards:

1. Convergence Roadmap: The Ministry of Corporate Affairs (MCA) in India laid out a roadmap for the convergence of Indian Accounting Standards (Ind AS) with IFRS. This roadmap was formulated to gradually converge Indian accounting standards with IFRS over a phased timeline.

2. Adoption of Ind AS: India started the convergence process by adopting Indian Accounting Standards (Ind AS), which are largely based on IFRS, for certain classes of companies. These include listed companies, certain unlisted companies, and specified classes of companies as per the Companies Act, 2013.

3. Implementation Phases: The implementation of Ind AS was phased over multiple years, with different classes of companies required to adopt the standards in a staggered manner. This approach allowed companies time to prepare for the transition and ensured a smooth adoption process.

4. Alignment with IFRS: Ind AS were developed with the objective of achieving convergence with IFRS while considering the specific requirements and circumstances of the Indian economy and regulatory environment. The standards are periodically updated to maintain alignment with the latest developments in IFRS.

5. Convergence of Regulatory Framework: In addition to accounting standards, efforts have been made to align other regulatory frameworks in India with international best practices. This includes regulatory requirements related to financial reporting, auditing, and corporate governance.

6. Monitoring and Oversight: The NFRA plays a key role in overseeing compliance with accounting standards in India and ensuring the quality of financial reporting. It works in coherence with other regulatory bodies such as the Institute of Chartered Accountants of India (ICAI) to promote consistency and adherence to international standards.

7. Continued Progress: The process of convergence is ongoing, with periodic updates and revisions to accounting standards in India to maintain alignment with international best practices. Efforts are also being made to address any remaining differences between Ind AS and IFRS.

Overall, India has made significant progress in aligning its accounting standards with international standards, particularly with the adoption of Ind AS. This convergence enhances the comparability and transparency of financial reporting in India and facilitates access to global capital markets for Indian companies.

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