Financial accounting

I.                   Financial accounting :

Accounting: can be defined as a process which with the help of accounting records churns out financial statements from the churning of numerous transactions of business.

DEF. of A/Cing: 

Acc to AICPA Committee;           “A/cing is an art of recording, classifying and summarising in a significant manner and in terms of money; transactions and events which are in part at least of finl character and interpreting the results thereof.”    

Financial accounting V/S Cost Accounting:

Point of Difference	FA	CA
Definition	Concerned with preparation and communication of finl. Statements like B/S, P&L, CFS	Develops detailed info about costs as they relate to products, services, departments
Primary Objective	Communicating the results	Internal Control and for inventory valuation
	Superset of CA	Subset of FA
	Includes reports of Chairman, Directors

Cost Accounting V/S Managerial Accounting:

Managerial Accounting:

According to the Institute of Cost and Management Accountants of UK;

“as the application of professional knowledge and skill in preparation of accounting info in such a way as to assist management in the formulation of policies and in the planning and control of the operations undertaken.”

Point of Difference	CA	MA
Emphasis	Processing and Evaluation of Cost data	Use of Cost data in  internal planning and control and in Special decisions
		To assist managers in assisting managers in planning and control

Financial V/s Managerial Accounting:

Point of Difference	FA	MA
Intention/ Focus	For external reporting to owners, creditors etc.	Internal use of Finl info
Preparation approach	General in order to accommodate wide spectrum of users	Spl purpose finl statements are prepared acc to the needs of the mgrs.
Horizon of reporting	Reports Past	Past as well as future plans
External Enforcements / Compliance	GAAP	May be internal guidelines
Data type	Objective and Verifiable	Objective and Subjective

Preparation of 4 finl statements is basic to finl acctng:

·        Income Statement: provides info about the performance of the enterprise

o   Profitability is given importance in this regard as the past profitability (as retained earnings) acts as an imp source of growth and the current profitability emphasises on the capacity of the enterprise to use additional resources.

·        Balance Sheet: is a statement that shows at a point of time, the resources commanded by the enterprise and how these are financed.

o   Resources are called as Assets – financed by owners and lenders ;

§  Equity – assets financed by Owners

§  Liabilities – assets financed by Others

The various aspects of company can be analysed thru B/S namely the Performance, Liquidity, Solvency

·        Liquidity – Short term availability of CASH

·        Solvency – Long term       ”

·        Statement of Retained Earnings: reports the impact of NET INCOME and its distribution as a dividend on the finl position of the co.

o   Pointer to the DIVIDEND policy

·        Statement of cash Flow: a statement summarising the  CASH Inflows and OUT-flows during a time span as a result of           

o   Investing

o   Financing

o   Operating     activities.

·        Info : refined form of data

o   Info as a resource

Ø Environment: The world outside the system (Supra system)

Ø System: a collection of parts that work together harmoniously to achieve specific goals

 Ø Subsystems: units within the System that share some or all of the characteristics of the System.        

Ø Salient  Features of Systems:

o   Every system has a Purpose

o   Most systems have 5 components:

§  Input

§  Processing

§  Output         

§  Feedback

§  Control (taking necessary actions)

o   Systems are made up of Subsystems- goals of Subsys – subgoals

o   Goals are imp than subgoals

Finl A/cing Info Systems (FAIS) and its various subsystems:

FAIS is a system that provides info related to the determination of net Business Income for a period and the finl position of the enterprise on a date.

 Limitations of A/cing:

·        Only those measured in terms of money are considered

·        Cost concept; Fixed assets at Cost

·        Conflict between Principles E.g.: Principle of Conservatism vs. Consistency

·        Objectivity factor is lost

Various stakeholders for Info:

Material from Net:

The combination of the three words Accounting Information System indicate an integrated framework within an entity (such as a business firm) that employs physical resources (i.e., materials, supplies, personnel, equipment, funds) to transform economic data into financial information for;

 (1) Conducting the firm’s operations and activities, and

(2) Providing information concerning the entity to a variety of interested users.

Advantages of AIS:

·       Streamlining Data

·       Consolidation