Introduction to the Accounting Process
https://www.youtube.com/watch?v=qyNMo-nKIvg#action=share
https://www.youtube.com/watch?v=qyNMo-nKIvg#action=share
Monday, 23 March 2020
Financial Statement Analysis - II
Profitability Ratios - Return on Assets and Return on Equity
Fixed Asset Turnover Ratios
Current Asset Turnover Ratios
Unilever Income Statement & Balance Sheet (Excel file)
Unilever Income Statement & Balance Sheet (Excel file)
What is Financial Statement Analysis
https://www.youtube.com/watch?v=GQb-hx2d7lk#action=share
Students Analyzing the Financial Statements
Horizontal Analysis of Financial Statements
Common Size Analysis of Financial Statements
Trade/Accounts Receivables and Other Current Assets
Trade/Accounts Receivables and Other Current Assets
Practical Exposure to Current Assets
IIMFRAXX2017-V001500
Sunday, 22 March 2020
A CLOSER LOOK AT BALANCE SHEET
A Closer Look at the Balance Sheet
Welcome Message
In Conversation
Clever and Trigger have been a part of your journey in week 1. They share their excitement on understanding the basics of financial statements. Listen to a conversation between Clever and Trigger to understand why they are so excited about this week.
Introduction to Balance Sheet
In this session, you will understand in greater detail the format and structure of the balance sheet. You may have come across different formats of a balance sheet and may be intrigued by it.
What do we mean by assets? What are the different items that can be considered as assets?
For example, Intel had almost 107,000 employees worldwide as on December 2015. Are employees an asset to a company? Of course! they are. But, are they reflected in the balance sheet?
Like assets, what do we mean by liabilities? Are all liabilities supposed to be discharged immediately?
How is the business funded? Who does the funding? What is equity? Does it include only owner’s contribution to the business?
Let us now define the different terms associated with the balance sheet.
Watch the following video to get a basic understanding of the balance sheet and its elements, followed by a practical example under the unit "Unravel your Company".
Note: Enhance your knowledge on the topics covered so far. Move to the next unit, Unravel your Company and enrich yourself with the practical understanding of topics discussed in the lecture video(s).
Note: Enhance your knowledge on the topics covered so far. Move to the next unit, Unravel your Company and enrich yourself with the practical understanding of topics discussed in the lecture video(s).
Unravel Your Company
The following exercise is for your practice. There is no grades for this exercise .
Introduction to Non-Current Assets
In the preceding videos, we had defined the term assets, liabilities and equity in the balance sheet.
Broadly assets can be classified as non-current assets and current assets. Now let us get started with assets in detail.
What do we mean by non-current assets? Watch the following video to get a brief idea about non-current assets.
Property, Plant & Equipment (Video)
Practical Exposure to Balance Sheet and Non-Current Assets (Video)
Introduction to Current assets (Video)
Intangible Assets and other Non-Current Assets
You are fully fatigued and thirsty in summer. What’s the first thing that comes to your mind? Pepsi ! But why Pepsi? Is it because of its established brand name or is it because of the formula (patented)? Whatever be the reason, these are very valuable to Pepsi Co. Can we record them on the balance sheet as assets?
Think! Facebook acquired WhatsApp for around $20 billion. What assets did it have in the balance sheet to entail this valuation? What about the training cost? Do we include that as an intangible asset?
Businesses have to make advance payments to suppliers frequently. Some advances are made for a long period of time, say three to five years. How should this item be classified and reported in the balance sheet?
Watch the following video to understand how a brand, goodwill, other intangibles and non-current assets should be accounted for in the books.
Inventory(Video)
Trade/Accounts Receivables and Other Current Assets
INTRODUCTION TO FINANCIAL ACCOUNTING - Dr.N.Lakshmi
https://www.youtube.com/watch?v=14z4gKJGroA#action=share
Introducing Clever and Trigger
Welcome to Week 1 of the course. Before you begin this learning journey, we would like to introduce, two very special people- Trigger and Clever. They have played a key role in making the course interesting and interactive. Trigger and Clever will be your friends and learning partners throughout this journey. They will be your voice. They will ask questions that probably you would have asked your faculty in a face-to-face classroom setup.
Clever is a working professional. He does not have a finance background. However, he is eager to know about the financial statements and the interpretation of different accounting terms. Gaining knowledge about finance and accounting would help him solve most of his queries at his workplace.
Trigger is your student pursuing his masters. One of his core subjects is finance. He is keen on taking this course as it will help him to improve his understanding of the subject. He is motivated to get good grades in his upcoming exams.
Using Financial Information for Decision Making
What is Accounting System
Can all the transactions be recorded in the books? Are there any rules to record these transactions? What are the different reports generated by the accounting system?
Watch the following video to get an in depth understanding of accounting system.
Understanding Business Transactions: A Visit to Raj Cafe
What are the different transactions that get generated in a business?
Let us meet Raj in his cafe to get a practical understanding of his business transactions.
Accounting Equation
Every transaction has equal and opposite reaction in the accounting equation. What is an accounting equation? How does it help in the process of recording transaction? How does it balance?
Learn more on accounting equation from the following video.
Accounting Equation
Accounting Equation
Preparing Financial Statements of Raj Cafe
Now that you have understood the accounting equation, let us prepare Raj Cafe's balance sheet using the accounting equation.
Please download the transactions of Raj Cafe from the following link:
Preparing Financial Statements of Raj Cafe (Video)
Recap
Friday, 20 March 2020
FINANCIAL ACCOUNTING
Financial accounting, in its literal terms, is a process of recording financial transactions of an organization in a specific format in a particular set of books. It is related to only those transactions of business, which can be expressed in exact monetary terms. Over a period of time, the scope of financial accounting function has increased from mere recording of financial transactions to the extent of interpretation these records for the purpose of decision-making.
There are a number of reasons causing the need of accounting function for business. This include limitness of human memory, calculation of business results, exploring financial position of business, control on business activities, meeting statutory requirements, etc., There are a number of users interested in accounting information of an organization and these users can be broadly classified as Internal Users and External Users. Internal users basically include Owners and Management, whereas all the other stakeholders are users include.
No doubt, accounting function helps the business to a great extent. But, on the other hand, there are a number of limitations of this function of business. This includes Incomplete Business Records, Room for Biasness, Possibility of Window-dressing, No Consideration to Time Value of Money, etc. In course of time, certain fundamental rules have been evolved on the basis of practices of accounting profession, which gives a direction to standardization of accounting function across the globe. These rules denote the fundamental truths and generalized decisions for practicing the accounting function and are known as accounting principles. These principles are broadly classified as Accounting Concepts and Accounting Conventions. Accounting concepts are the basic principles, which provide conceptual guidelines for practicing the accounting function in an organization, i.e. recording, measuring, finalizing, communicating and interpreting the information relating to the financial transactions of an organization. Accounting Conventions are the assumptions that have been generated out from the practice of accounting function over the centuries. Like Concepts, accounting conventions have also a universal acceptability. When compared with Accounting Concepts, the binding force of accounting conventions is less and organizations, at times, may deviate from accounting conventions so as to honor the accounting concepts. This means that if there is a clash between an accounting concept and an accounting convention, the concept must prevail over the convention.
Accounting systems implies the processes and procedures adopting in discharge of financial accounting function. The most prevalent accounting system all across the globe is double entry system of accounting. Dual aspect Concept of Accounting states that every accounting transaction has two aspects; Debit and Credit. This concept of accounting is the basic foundation of Double Entry System of Accounting. Double Entry System of Accounting is that system of accounting, which records all the accounting transactions twice, once for debit, and once for credit. This means that every accounting transaction is debited and credited for the same amount. The number of accounts affected by a single transaction may be more than two, but the aspects are always two; Debit and credit. The term DEBIT is represented by abbreviation “Dr.” Similarly, the term CREDIT is represented by abbreviation “Cr.” Based on “Dual Aspect” Accounting Concept. Double Entry Accounting and gives birth to basic Accounting Equation; that says DEBIT = CREDIT.
For passing journal entries relating to goods and merchandize of business, “Goods A/c.” is used as the related account. But as this account may have many different types of transactions like “sale of goods”, “purchase of goods”, “return back of goods purchased by firm to suppliers” (Purchase return), “return back of goods sold by firm by customers” (Sales return), etc. In such a situation, it will be very confusing if all the transactions are recorded using single account, i.e. “goods a/c.”. So, for the sake of convenience in recording various aspects of goods account, it has been classified in six different accounts including “Purchase A/c.”, “Sales A/c.”, “Purchase Return A/c.”, “Sales Return A/c.”, “Opening Stock A/c.” and “Closing Stock A/c. As Goods account is a Real Account, all these accounts, being classification of goods account, are also Real Accounts. The last two accounts, “Opening Stock Account” and “Closing Stock Account”, show the value of goods at the beginning and at the end of accounting period respectively. The remaining four accounts are operational and can be understood by their nomenclature respectively. Further, transactions relating to goods/merchandize of the business but not falling in four specific categories of sales, purchase, sales return and purchase return, are recorded through PURCHASE ACCOUNT. On the similar lines, to
facilitate recording of transactions relating to owner of the business, “Owner’s A/c.” is divided in two parts, “Capital A/c.” and “Drawings A/c.” The first account, i.e. “Capital account”, is basically credited whenever owner contributes (gives) to business in cash or kind, whereas “Drawings account” is debited whenever owner takes from business in cash or kind.
Discount is the amount of benefit offered to a customer. On the basis of nature, discount can be classified as “Trade Discount” and “Cash Discount”. When discount is allowed by the seller to the purchaser on the list or catalogue price of the goods, it is termed as trade discount. In fact, trade discount is a dummy discount and the basic objective behind offering trade discount is to promote sale. The list/catalogue price and amount of trade discount are not recorded in books of accounts. The price arrived at after deducting trade discount is the actual transaction value and is actual sale/purchase price. The transactions are recorded in books of accounts on the basis of this net price, i.e., price arrived at after deducting the trade discount. Cash discount, on the other hand, is discount allowed by the seller to the purchaser for making payment of price within a specified time period. Such a discount is an actual loss to seller firm (and gain for buyer) and is hence recorded in books of
accounts. It is offered on the actual transaction value and the price after deducting the cash discount is cash price of the transaction.
Seen from a business point of view, “Cash Discount” may be loss or gain. When goods are sold by firm and cash discount is allowed by business to its customers, it is a loss for business as it loses some part of its sales revenue. This cash discount, being a loss to the firm, is recorded in “Discount Allowed A/c. On the other hand, when a business purchases goods from its suppliers and receives cash discount, it is a gain to it. This cash discount, being a gain to the firm, is recorded in “Discount Received A/c.
The procedure of recording accounting transactions in double entry system of accounting is divided into various systematic and sequential stages. These stages include Recording, Classifying, Summarizing, Finalizing, Communicating and Interpretation of the accounting information and are collectively known as accounting cycle.
Journalizing is the first stage in Double Entry Accounting, which literally implies writing the accounting transactions in a specific book called Journal. A journal is a specific book recording the accounting transactions initially, so it is known as book of original entry or primary record. It is the book where the transactions are first recorded on the basis of sequence of their taking place and the documentary proof sup porting them, i.e. voucher. It is also referred as a book of original entry as it is the first hand record of accounting transactions taking place in a business. It is also termed as “day book” as the word journal has its origin in the French word “jour”, which means ‘day’. The process of writing transactions in journal is known as “journalizing”, and the record of one single transaction is termed as “journal entry”. A journal shows all the accounting transactions in order of date, showing date for
each transaction, accounts debited and credited with related amounts and a summarized explanation of the transaction known as “narration” of the entry. All the transactions are recorded in a particular order following the rules of debit and credit. All business transactions can be recorded in a simple journal, though firms with large number of transactions use specific journals, which are sub-‐divided parts of journal and are collectively known as subsidiary books. The journal becomes the basis of remaining stages of accounting, as ledger is prepared on the basis of journal, which, in turn, is the basis of preparing trial balance, which is the basis of preparing final accounts of the firm.
Journal is the very foundation of entire double entry accounting process as the entire process is based on journal entries passed. So, journalizing is the most important phase in entire accounting process and writing transactions in journal has a high significance. It Facilitates Ledger Posting and remaining accounting process, helps in analysis of accounting transactions, Provides periodical records of Transactions, provides a basis for solving business disputes, and also Supports Audit Function.
The transactions relating to one particular aspect of business operation are debited or credited using a particular title or name. This title/name is termed as account. Different accounts in accounting books of a firm represent various assets, Liabilities, expenses, incomes or individuals (who are debtors or creditors of business in some form) related to the business. A particular account is debited or credited for a particular transaction on the basis of rules of journalizing. To apply the rules for journalizing, various accounts are broadly classified in two different categories, viz. personal accounts and impersonal accounts. Personal accounts are opened in business only for those transactions, which have a credit aspect. These accounts are broadly of three types, i.e. Accounts of Natural persons, Accounts of Artificial persons, and Representative personal accounts. On the other hand, impersonal accounts can be divided as Real Accounts and Nominal Accounts. Real accounts are accounts of things and properties, whereas nominal accounts are accounts of expenses/losses and incomes/gains.
The rule governing Personal Accounts for journalizing the accounting transactions is “DEBIT THE RECEIVER, CREDIT THE GIVER”. This rule implies that in an accounting transaction entered in by business, if the person involved (opposite party) is receiving from business, his account is to be debited, and if that person involved is giving to business, his account is to be credited. Real Accounts are governed by the rule “DEBIT WHAT COMES IN, CREDIT WHAT GOES OUT” while journalizing the related accounting transactions. It implies that in an accounting transaction, if a thing/property is coming in business, its account will be debited. Likewise, if in an accounting transaction, if a thing/property is moving out from business, its account will be credited. Nominal Accounts are governed by the rule “DEBIT ALL EXPENSES AND LOSSES, CREDIT ALL INCOMES AND GAINS” While journalizing the related accounting transactions. If an expense is accrued/paid for by business, the account of the concerned expense is debited. Similarly, when a business generates/receives an income, the account of the concerned income is credited. Following these three golden rules of accounting, journal entries for all the accounting transactions of a business are passed.
Small firms with less number of accounting transactions maintain all their journal entries in a single journal book. This journal is known as “Journal Proper” or simply journal. When an organization has large number of transactions on regular basis, the journal becomes cumbersome and practically serves no purpose if all the transactions are recorded in journal proper. So, in such a situation, journal is sub-‐ divided into specific journals meant for recording specific types of accounting transactions. These specific books resulting from sub-‐ division of journal are known as specific journals or subsidiary books. Subsidiary books include seven specific journals including Purchase Book, Sales Book, Purchase Return Book, Sales Return Book, Bills Receivable Book, Bills Payable Book and Cash Book. Purchase Book and Sales Book are meant for recording all credit purchase of goods/merchandise and all credit sale of goods/merchandise by business respectively. Likewise, Purchase Return Book and Sales Return Book are meant for recording all return of goods/merchandise by business back to its suppliers on credit basis and all return back of goods/merchandise by its customers to business on credit basis respectively. All these four books have single column for recording the related amount as each of these books record only one aspect of the
transaction, i.e., either debit (in case of Purchase Book and Sales Return Book) or credit (in case of Sales Book and Purchase Return Book )
Bills receivable book is a specific journal kept for recording the details of bills drawn/received by a business from its customers for credit. The customers to whom business has sold goods for credit and who have written bills in favor of the business are technically termed as bills receivable. As business firm would receive money against all such bills, these are termed as bills receivable. Similarly Bills payable book is a specific journal kept for recording the details of bills issued/accepted by a business in favor of its suppliers for credit. The suppliers from whom business has purchased goods for credit and who have drawn bills to the business are technically termed as bills payable. As business firm would pay money against all such bills, these are termed as bills payable. These two subsidiary books also have single column for recording the related amount as each of these books record only one aspect of the transaction, i.e., either debit (in case of Bills Receivable Book) or credit (in case of Bills Payable Book).
On the other hand, Cash Book is meant for recording all the cash transactions of the business. It records all the cash transactions of the business irrespective of their nature. As this book records both, cash
receipts as well as cash payments, there are two amount columns, one for debit (for cash receipts) and one for credit (for cash payments). The left hand side records cash receipts and right hand side records cash payments.
A business may have such transactions, which do not find a place in any of these seven subsidiary books. All such transactions are recorded in Journal Proper. So, Journal Proper is a primary book, which records all the accounting transactions that cannot be recorded in any of the seven specific subsidiary books meant for specific transactions. It is absolutely not necessary that a firm has to maintain all the seven specific subsidiary books. A firm can increase or decrease the number of subsidiary books as per its requirements at a point of time.
This sub-‐division of journal in various subsidiary books and journal proper leads to many advantages for the related business firm. Not only it results in saving of time and labor, but it also promotes division of work and specialization. Further, it generates ease in ledger posting and cross referencing of transactions between journal and ledger.
Cash Book: A Cash Book is meant for recording all the cash transactions of the business. This book records all the cash transactions, receipts as well as payments, irrespective of their nature.
Simple Cash Book: A cash book with one amount column on each side is known as simple cash book. It is also known as one column cash book.
Two column cash book: This book is an extension of simple cash book. It is also known as Discount Column Cash Book. There are two amount columns on each side, first one for recording cash receipts and payments and second one for recording cash discount allowed and received.
A three column cash book is an extension of two column cash book. Along with a column for discount on both the sides, this cash book also has an additional column on both the sides for recording bank related transactions. Hence, it is also known as Cash Book with Bank and Discount column. The first amount column records cash discount allowed/received, the second amount column records cash receipts/payments, and the last amount column records bank related transactions. Though cash book is a type of journal, its format is similar to that of a ledger account. So, it also serves the purpose of a ledger account. So, when a three column cash book is maintained, there is no need to maintain separate cash account, bank account and discount allowed and discount received accounts in ledger, as it would amount to duplication of the work.
A three column cash book is very useful as it not only records all the cash receipts and payments of a firm, but also records information relating to cash discount allowed and received and bank related transactions. With the automation of business processes and increasing role of information technology in business, banking transactions have
become a considerable part of accounting transactions. A large number of receipts and payments associated with a firm are dealt with through banks, i.e. using cheques and through electronic transactions. In this changed scenario, a businessman aspires to have spontaneous information of firm’s banking transactions as well. A three column cash book facilitates the same.
Every business involves considerable number of petty payments of different expenses on regular basis. This includes expenses like conveyance, stationary, postage, carriage, etc. Normally, firms appoint an assistant cashier to handle all such payments. Such a person is termed as petty cashier. The petty cashier is required to maintain all such petty payments and keep a systematic record of the same. The book maintained by petty cashier to record such payments is called petty cash book. At the end of the concerned period, the petty cashier is required to account for all his payments to the head cashier, who enters the details in main cash book in summarized manner.
Under imprest system of petty cash book, the petty cashier is released an advance of fixed amount of cash in the beginning of concerned period to incur the petty expenses. This amount is referred as imprest money. During the period, the petty cashier is required to make payment of all small expenses out of this imprest money. At the end of the concerned period, the petty cashier is required to account for the details of amount spent by him and he is released the same amount. In this manner, he will have the same amount of advance in the beginning of every period.
A petty cash book, like other cashbooks, is also maintained in a columnar structure. , with the difference that amount column on right hand side for payments is divided into sub-‐columns for various routine payments. With this, an analysis of various petty expenses is automatic. So, this cash book is also known as analytical petty cash book. The procedure of recording transactions in this cash book is also similar to that of the previously discussed cash books.
After recording the accounting transactions in primary book (Journal) in the form of journal entries, these are transferred to a secondary book called Ledger. Hence, this process of transferring accounting transactions from journal to ledger is known as ledger posting. The term “posting”, implies writing accounting transactions in ledger. Ledger means a specific book, where different accounts are opened and maintained. A ledger book contains a large number of pages in account format, which are consecutively numbered, and each account is allotted one or mare pages, as required.
Technically, an account means a title or name used for recording transactions in journal. The transactions relating to one particular aspect of business operations are debited or credited using a particular title or name. This title/name is termed as account. Physically, an account is a T shape structure divided from the center, and its left hand side represent debit side, whereas its’ right hand side represent credit side. Each page of ledger book is in the format of account. That is why a ledger is also known as account book.
Ledger accounts are needed because of the limitations of journal. As journal is a chronological record that maintains a date wise record of all the accounting transactions at one place, it cannot provide information relating to a particular aspect/account of business quickly and easily. This limitation of journal is overcome by ledger, as during ledger posting, the transactions relating to one account are written at one place known as account. Every account opened in the ledger gives complete details and position of all the transactions of a particular account.
The process of transferring accounting information from journal to ledger is called Ledger Posting or simply “Posting.” The accountant has to open as many accounts in ledger book as are the number of different titles/names used on debit and credit sides of all journal entries put together. A title/name of account may have been used many times in different journal entries, but only one account for it will be opened in ledger book. As Cash Book is a subsidiary book that works as Cash Account as well, no separate Cash Account is maintained in ledger. Similarly if a firm maintains a cash book with bank column, it will not be required to open “Bank account”, in its ledger as well, as the bank column of cash book will serve the purpose of bank account.
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