Importance. Accounting all incomes, expenses, assets & liabilities in monetary terms. is the sole determinant of all economic activities

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1 Importance Accounting all incomes, expenses, assets & liabilities in monetary terms is the sole determinant of all economic activities of all businesses, industry, trade,commerce as well as software giants, media and even NGOs like CRY or Lijjat Papad.

2 Importance Accounting helps recording all financial transactions thus enabling preparation of these principal financial statements: - Trial Balance - Profit & Loss Account - Balance Sheet - Cash Flow Statement

3 Importance Several segments of the Society called Stakeholders need to use Financial Statements. Shareholders Creditors Suppliers, Vendors Local, State, Central Governments Investment Advisors Investment Analysts Workers, Employees Researchers Students of Finance

4 Limitations Reflects and records only monetary values of all transactions and hence quantitative measurements; hence qualitative aspects are ignored. On account of inflation value of rupee fluctuates and decreases; but no adjustments made in the accounts.

5 Scope A financial accounting system provides summarized and categorized information about the company s performance and state of affairs mainly for external decision makers.

6 Scope A financial accounting system provides summarized and categorized information about the company s performance and state of affairs mainly for external decision makers, allowing them to answer questions: $ Is the company earning satisfactory income? $ How does the company compare in size and profitability with competitors? $ Will the company be able to pay its debts when they become due?

7 GAAP Financial accounting is governed by rules or guidelines collectively called Generally Accepted Accounting Principles (GAAP).

8 GAAP Financial accounting is governed by rules or guidelines collectively called Generally Accepted Accounting Principles (GAAP). - many of these are mandatory by law of the country.

9 GAAP Financial accounting is governed by rules or guidelines collectively called Generally Accepted Accounting Principles (GAAP). - many of these are mandatory by law of the country. - those that are not mandatory, have considerable persuasive force.

10 GAAP Financial accounting is governed by rules or guidelines collectively called Generally Accepted Accounting Principles (GAAP). - many of these are mandatory by law of the country. - those that are not mandatory, have considerable persuasive force. - primary agency responsible for GAAP in India, is the Standards Board of the Institute of Chartered Accountants of India.

11 Concepts Є Entity Concept An accounting entity is a separate and distinct unit, standing apart from its owners & shareholders.

12 Concepts Є Entity Concept An accounting entity is a separate and distinct unit, standing apart from its owners & shareholders. Hence : $ Share Capital and reserves of the company ( really belonging to owners) are shown under liabilities.

13 Concepts Є Entity Concept An accounting entity is a separate and distinct unit, standing apart from its owners & shareholders. Hence : $ Share Capital and reserves of the company ( really belonging to owners) are shown under liabilities. $ Losses are shown under assets ( because they represent what owners owe the business).

14 Concepts Є Є Entity Concept Reliability Principle accounting records and statements must be based on the most objective data available - hence importance of bills, invoices, vouchers during audit.

15 Concepts Є Є Entity Concept Reliability Principle Є Historical Cost Concept acquired assets, inventories and services are recorded at their actual costs. - Hence current market value not considered.

16 Concepts Є Entity Concept Є Reliability Principle Є Historical Cost Concept Є Going Concern Concept assumes that the accounting entity will continue in the foreseeable future - hence fixed assets held by the business are always shown at actual cost less accumulated depreciation.

17 Concepts Є Entity Concept Є Reliability Principle Є Historical Cost Concept Є Going Concern Concept Є Stable Monetary Unit Concept business transactions are recorded in terms of single currency (rupees in India), and no adjustment is made for inflation

18 Concepts Є Entity Concept Є Reliability Principle Є Historical Cost Concept Є Going Concern Concept Є Stable Monetary Unit Concept Є Full Disclosure Principle all circumstances and events that are likely to make a difference to users of the financial statements must be disclosed.

19 Concepts Є Entity Concept Є Reliability Principle Є Historical Cost Concept Є Going Concern Concept Є Stable Monetary Unit Concept Є Full Disclosure Principle Є Materiality The constraint of determining whether an item is large enough to likely influence a decision.

20 Concepts Є Entity Concept Є Reliability Principle Є Historical Cost Concept Є Going Concern Concept Є Stable Monetary Unit Concept Є Full Disclosure Principle Є Materiality Є Conservatism The constraint of determining whether an item is large enough to likely influence a decision.

21 Concepts Є Entity Concept Є Reliability Principle Є Historical Cost Concept Є Going Concern Concept Є Stable Monetary Unit Concept Є Full Disclosure Principle Є Materiality Є Conservatism In addition to these principles, the Institute of Chartered Accountants of India has issued 28 accounting standards for compliance with varying degrees of legal compulsion

22 The importance of accounting is that it is the universal language of business, and a basic understanding of it is necessary for almost any job in the business world!