Unit 1 Introduction to Financial Accounting

Unit 1 Introduction to Financial Accounting

Learning Outcome

After reading this unit, you will be able to: ? Explain succinctly financial accounting concepts ? Elucidate on different principles of financial accounting ? Explicate the importance and scope of financial accounting ? Understand Generally Accepted Accounting Principles(GAAP) ? Identify limitations of Financial Accounting

Time Required to Complete the unit

1. 1st Reading: It will need 3 Hrs for reading a unit 2. 2nd Reading with understanding: It will need 4 Hrs for reading and understanding a

unit 3. Self Assessment: It will need 3 Hrs for reading and understanding a unit 4. Assignment: It will need 2 Hrs for completing an assignment 5. Revision and Further Reading: It is a continuous process

Content Map

1.1 Introduction 1.2 Role of Financial Accounting 1.3 Principles of Financial Accounting 1.4 Importance of Financial Accounting 1.5 Benefits of Financial Accounting 1.6 Limitations of Financial Accounting

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1.7 Accounting Principles 1.8 Accounting Concepts and Conventions 1.9 Accounting Standards in India and International Accounting Standards 1.10 Summary 1.11 Self-Assessment Test 1.12 Further Reading

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1.1 Introduction

Financial accountancy (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners and other stakeholders. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power. The central need for financial accounting is to reduce the various principal-agent problems, by measuring and monitoring the agents' performance and thereafter reporting the results to interested users.

Financial accountancy is used to prepare accountancy data for people outside the organisation or for those, who are not involved in the mundane administration of the company. Management accounting, provides accounting information to help managers make decisions to manage and enhance the business.

In short, financial accounting is the process of summarising financial data, which is taken from an organisation's accounting records and publishing it in the form of annual or quarterly reports, for the benefit of people outside the organisation.

Financial accountancy is governed not only by local standards but also by international accounting standard.

1.2 Role of Financial Accounting

? Financial accounting generates some key documents, which includes profit and loss account, patterning the method of business traded for a specific period and the balance sheet that provides a statement, showing mode of trade in business for a specific period.

? It records financial transactions showing both the inflows and outflows of money from sales, wages etc.

? Financial accounting empowers the managers and aids them in managing more efficiently by preparing standard financial information, which includes monthly management report tracing the costs and profits against budgets, sales and investigations of the cost.

Study Notes

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Assessment

1. Define "Financial Accounting". 2. Write in short difference between Financial Accounting and Management Accounting.

Discussion

1. Discuss the role of Financial Accounting.

1.3 Principles of Financial Accounting

Financial accounting is based on several principles known as Generally Accepted Accounting Principles (GAAP) (Williamson 2007). These include the business entity principle, the objectivity principle, the cost principle and the going-concern principle. ? Business entity principle: Every business requires to be accounted for separately by the

proprietor. Personal and business-related dealings should not be mixed. ? Objectivity principle: The information contained in financial statements should be

treated objectively and not shadowed by personal opinion. ? Cost principle: The information contained in financial statements requires it to be based

on costs incurred in business transactions. ? Going-concern principle: The business will continue operating and will not close but will

realise assets and discharge liabilities in the normal course of operations

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Accounting for Managers

Study Notes

Assessment

1. Write notes on: ? Objectivity principle. ? Cost principle.

Discussion

1. Discuss the Generally Accepted Accounting Principles (GAAP)

1.4 Importance of Financial Accounting

? It provides legal information to stakeholders such as financial accounts in the form of trading, profit and loss account and balance sheet.

? It shows the mode of investment for shareholders. ? It provides business trade credit for suppliers. ? It notifies the risks of loan in business for banks and lenders.

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