Corporate & Management Accounting – Corporate Accounting – CS Executive Paper 5

Introduction

• Accounting is the universal language of business
• Reports financial information about a business entity to shareholders and managers
• Helps in maximizing profits, minimizing losses
• Impossible to survive in today’s advanced business environment without adequate knowledge of basic accountancy
• The financial statements are the end products of the accounting process
• Statutory provisions regarding the preparation of final accounts of companies
• Preparation of Statement of Profit & Loss and Balance Sheet
• Form a true and fair view of the financial statements
• Cash Flow Statement is additional information of a financial statement that shows cash inflows and outflows and cash equivalent.
• Cash Flow Statement assesses the ability of the organization to generate cash and utilize cash and used as a tool to assess liquidity and solvency of a company
• Accounting Standards (AS) are written policy documents by expert accounting body or by the government or other regulatory body covering the aspects of recognition, measurement, presentation and disclosure of accounting transactions in the financial statements

Branches of Accounting and its uses

• Accounting
  • Financial Accounting
    • External Users
      • Owners/Investors
      • Government Agencies
      • Creditors/Lenders
      • Trade Association
  • Cost Accounting
  • Management Accounting
    • Internal Users
      • Directors/CEOs
      • Employees
      • Line Manager

Accounting principles

• Accounting Assumptions
  • Money Measurement
  • Business
  • Entity
  • Going Concern
  • Time Period
• Accounting Concepts
  • Revenue Realisation
  • Matching
  • Full Disclosure
  • Historical Cost
  • Dual Aspects
  • Variable and Objective Evidence
• Accounting Constraints
  • Materiality
  • Prudence
  • Consistency
  • Cost Benefit
• Accounting Standards
  • Issued by Country Regulatory Body

Accounting as a Process

• Step 1: Analysis of Business Transactions
• Step 2: Make Journal Entries
• Step 3: Post to Ledger Accounts
• Step 4: Prepare Trial Balance
• Step 5: Make Adjusting Entries
• Step 6: Adjusted Trial Balance
• Step 7: Prepare Financial Statements
• Step 8: Close Accounts
• Step 9: Post Closing Trial Balance

Role of a Company Secretary in Corporates

• Adherence to Regulatory Guidelines
• Formulation of Corporate Management Policies
• Conducting Corporate Meetings
• Active Contributory to Corporate Governance
• Liaison in the Audit Process
• Advice to the Board of Directors
• Compliance Officer

Features

• Holds several key functions in the corporate sector
• Takes part in the formulation of various corporate policies for approval by the Board of Directors
• Systematic conduct of Board/Directors’ Committees/shareholders’ meetings

1. Introduction to Financial Accounting.

Introduction

• Business is an economic activity with a motive of earning profits and maximizing of the wealth for owners
• Rules are based on general principles of trade, social values and statutory framework encompassing national and international boundaries
• Need to track the use of the resources
• Recording of business activities has to be done in a scientific manner
• Measure the performance of a business

Objectives of Accounting

• Provide useful information for rational decision-making to stakeholders
• Various outcomes of business activities such as costs, prices, sales volume, value under ownership and return on investment are measure in the accounting process
• Systematic recording of financial transactions through book-keeping
• P&L is a core accounting measurement (in other words, revenue incomes and revenue expenses)
• Financial position, aka, Balance Sheet, is another core accounting measurement – statement of ownership of assets, liabilities, etc., to make financing and investment decisions.

Function of Accounting

• Measurement – past performance & current position
• Forecasting – future performance & future position
• Decision-Making – relevant information
• Comparison & Evaluation – achievement of targets and contingent liabilities
• Control – identifies weaknesses of the operational system
• Government Regulation – exercise control on the entity and also collect tax revenues

Book Keeping

• Science and art of correctly recording in books of accounts
• Foundation of accounting
• The output of book-keeping is an input for accounting
• Recording and classifying financial data
• Collection of basic financial information
• Identification of events and transactions with financial character
• Measurement of economic transactions in terms of money
• Preparing organized statement known as Trial Balance

Accounting Cycle

It is when a complete sequence of accounting procedure is done and repeated in same directions during an accounting period.

Steps/Phases of Accounting Cycle

• Recording of transaction
• Journal – Transactions are recorded
• Ledger – Journals are posted
• Trial Balance – end of the period for the preparations of financial statements
• Adjustment Entries – Adjusted before preparing financial statements
• Adjusted Trial Balance
• Closing Entries – Nominal accounts to be closed
• Financial Statements – true financial position & operating results

Basic Accounting Terms

• Transaction
• Goods/Services
• Profit
• Loss
• Asset – Current Assets, Non-current Assets
• Liability
• Current Liabilities – settled in the normal Operating Cycle
• Non-current liabilities – Loans, Debentures, etc
• Contingent Liability – potential obligation
• Capital
• Drawings
• Net worth – an excess of total assets over total liabilities
• Non-current investments – held beyond the current period for sale or disposal
• Current investments – readily realizable
• Debtor – Customer owes to the business
• Fictitious Assets – not assets as they are not represented by any tangible means
• Wasting Assets – assets that become exhausted by their working such as mines
• Creditor – Business owes money or money’s worth
• Capital Expenditure – incurred for the purpose of acquiring fixed asset
• Revenue Expenditure – incurred to earn revenue of the current period
• Balance Sheet – statement of the financial position of the business entity – list all liabilities, assets & capital
• P&L Account or Income Statement – profit earned or loss suffered by the business
• Trade Discount – Wholesaler to the retailer based on the list or invoice price and Not recorded in the book of accounts
• Cash Discount – To be recorded in the books of accounts, Calculated after deducting trade discount,
• Single Entry – incomplete double entry system

Double Entry System

• Luca Pacioli – Italian Mathematician first published the principles of Double Entry System
• Not only cash, but all aspects of mercantile transactions – helps in auditing

Features of Double Entry System

• Twofold aspects – giving the benefit and receiving the benefit. In other words, debit & credit.
• Every debit must have its corresponding and equal credit

Advantages of Double Entry System

• The arithmetical accuracy of the books of accounts
• prevents and minimizes frauds and helps in detecting fraud early
• Errors can be checked and rectified easily
• The balance of receivables and payables are determined easily
• can compare the financial position of the current year with that of the previous year
• helps in decision making
• Easy for the Government to collect tax
• Other stakeholders such as suppliers and banks take a proper decision regarding grant of credit or loans

Limitations of Double Entry System

• Does not disclose all the errors
• Costly due to the maintenance of number of books of accounts

Concept of Account

• Summarized record of transactions related to a person or thing
• Also related to things – tangible and intangible
• Identify the account that may be affected by any business transaction and apply the rules
• Account has two sides – Left-hand side – Debit (Dr.) & Right-hand side Credit (Cr.)

Types of Accounts

• Personal – persons
  • Natural
  • Artificial
  • Representative
• Real – assets or properties or possessions
  • Tangible Real Account – Physical
  • Intangible Real Account – Money & value attached such as patents, trademarks, etc
• Nominal – Expenses or losses | incomes or gains
  • Salary & Wages A/c
  • Rent of Rates A/c
  • Travelling Expenses A/c
  • Commission Received A/c
  • Loss by Fire A/c

Accounting Process

• American Approach or Modern Approach
• British Approach or Traditional Approach
  • Personal Account: Debit the receiver, Credit the giver
  • Real Account:  Debit what comes into business, Credit what goes out of business
  • Nominal Account: Debit all expenses or losses, credit all income or gains

Accounting Equation

Also known as Balance Sheet equation

ASSETS = LIABILITIES + OWNER’S EQUITY

A = L + P (or)

P = A – L (or)

L = A – P

where A=Assets, L=Liabilities, P=Capital; Incomes or gains will increase OE and expenses or losses will reduce it

Double Entry System, Books of Prime Entry, Subsidiary Books

Books of Prime Entry

• A journal is called as the Book of Prime Entry or Book of Original Entry
• Transactions recorded in the chronological order
• Journalization – the process of recording transaction
• Entry made in the Book of Prime Entry is called journal entry

Functions of Journal

• Analytical Function
• Recording Function
• Historical Function

Advantages of Journal

Sub-division of Journals

Compound Journal

Subsidiary Books

Recording of Cash and Bank Transactions

Cash Book

Types of Cash Book

Purchase Day Book

Sales Day Book

Journal Paper

Ledger Accounts

Ledger Posting

Posting to Ledger Accounts from Subsidiary Books

Typical Ledger Account Balances

Closing Balance and Opening Balance

Subdivisions of Ledger

Advantages of sub-division of Ledger

Trial Balance

Preparation of a Trial Balance

Purpose of a Trial Balance

Forms of a Trial Balance

Method of Preparation

Trial Balance – Utility and Interpretation

1. Introduction to Corporate Accounting: Records of accounts to be maintained by a company.
    
2. Accounting for Share Capital: Issue of Shares; Forfeiture and Re-issue of Shares, the Accounting treatment of premium,

Buyback of Shares; Redemption and Conversion; Capital Redemption Reserve, Bonus Shares; Rights Issue, ESOPs, ESPS,

Sweat Equity Shares; and Underwriting; Book Building.

1. Accounting for Debentures: Accounting Treatment, Debenture Redemption Reserve, Redemption of Debentures and

Conversion of Debentures into Shares. Deferred Tax.

1. Related Aspects of Company Accounts: Accounting for ESOP, Buy-back, Equity Shares with differential rights, Underwriting

and Debentures.

1. Financial Statements Interpretation: Preparation and Presentation of Financial Statements; Quarterly, Half-yearly and Annual

Financial Statement pursuant to Listing Regulations;Depreciation provisions and Reserves; Determination of Managerial

Remuneration, Corporate Social Responsibility spend, various disclosures under the Companies Act, 2013, LODR & applicable

accounting standards; Related party and segment reporting, Audit Queries; How to Read and interpret Financial Statements.

1. Consolidation of Accounts as per Companies Act, 2013: Holding Company, Subsidiary Companies, Associate Companies

and Joint Venture; Accounting Treatment and disclosures.

1. Corporate Financial Reporting: Requirements of Corporate Reporting; Recent trends in Financial Reporting.
2. Cash Flow Statements: Preparation and their analysis.
3. Accounting Standards (AS): Applicability, Interpretation, Scope and Compliance; International Financial Reporting Standards; Overview of AS, AS vs. Ind AS vs. IFRS.
4. National and International Accounting Authorities.
5. Adoption, Convergence and Interpretation of International Financial Reporting Standards (IFRS) and Accounting Standards in India.

Case Studies & Practical Aspects