A course on financial accounting is meant to provide the student an understanding of financial accounting, the various stages and processes involved in maintaining financial records of a business concern. After completing a course in financial accounting, students are able to prepare and understand corporate financial statements.
Financial accounting involves identification, recording, classification and summarization of the monetary transactions of the business concern. It is of prime importance to any business as it provides the required information to the external users and also provides management the information about the performance of the organization so that strategies for future use can be formulated.
The scope of accounting is very large as it includes all activities from identification of transactions to analysis of financial reports generated. However accounting also has certain limitations such as accounting ignores the non-monetary aspects, historical nature, absence of cost control mechanism and subjectivity involved.
International Accounting Standards are now replaced by the IFRS (International Financial Reporting standards) issued by the IASB (International Accounting Standards Board). They are internationally accepted set of accounting and reporting norms.
The accounting equation presents the basic rule of accounting, i.e., Assets = Liabilities + Equity
On the basis of nature, accounts are classified into real (accounts of tangible assets), personal (accounts of persons and organizations) and nominal (accounts of expenses, losses, incomes and gains).
The rules of debit and credit of these accounts are:
The transactions are initially recorded in the Journal (Book of Original Entry) in a chronological order. Sometimes, for ease of recording separate books are prepared for different types of transactions- cash book (for receipts and payments of cash), sales book (for recording credit sales), sales returns book (for goods sold being returned), purchase book (for purchases of goods on credit), purchase returns book (for goods returned to suppliers). The journal entries are then posted to the relevant ledger accounts.
The ledger balances are listed in a statement called trial balance, which is prepared to test the mathematical accuracy of the books of accounts.
Adjustment entries are made to ensure that the accounting records are in compliance with the matching concept.
Closing entries are made to transfer the balances of assets, liabilities and equity to the next financial period.
These accounts are opened by passing an opening entry at the start of the next financial year. On the basis of the trial balance, the financial statements, i.e., the Trading account, profit and loss account and Balance sheet are prepared.
According to this, assets are first recorded at their cost, then measured by a revaluation model and depreciated systematically over its useful life.
Depreciation means systematically distributing the cost of an asset over its useful life. It is done to ascertain the true profits, show the assets at their fair value and create funds for their replacement.
Methods of recording depreciation include the accumulated depreciation account and or the depreciation account (in case of no provision). Methods of calculating depreciation charge straight line, sum of the years digits, reducing balance and units of activity method. In case of change in method of calculating depreciation charge, no rectification is made for the past years and the depreciation is charges as per the new method from the subsequent years.
Depletion is accounting for the cost of the natural resources being exploited by the business. Amortization is the process of allocating the cost of an intangible asset over its useful life. Obsolescence refers to reduction in the utility obtained from an asset over time.
International Accounting Standards 16 and 38 have provision staging the procedure for charging depreciation and amortization.
International Accounting Standard 2 deals with accounting for inventory. It states that inventory be recorded at cost or net realizable value, whichever is lower.
The statement showing the sources and uses of cash for the various operating, investing and financing activities is called the cash flow statement. The funds flow statement provides information regarding the flows of cash between the beginning and close of the financial year.
Corporate finance statements include the Balance Sheet, Income Statement, Cash Flow Statement, Statement of Change in Equity, Directors report and Auditors report.
Annual Report contains the director’s report, corporate governance report, the financial report and the auditor’s report.
Computerized accounting refers to Creation of vouchers & recording transactions; preparing reports-cash book, ledger accounts, trial balance, income statement and balance sheet by using a reputed accounting software package. Some of the common accounting software packages are Perdisco MYOB, Reckon, Netsuite, Freshbooks, Zoho Books, Sage, Xero, Quickbooks etc.
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