Who all wants to be CEO ?

Foundation Module on Finanace & Accounting;

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 79 per cent of the top CEOs rate Finance
skills, as the most required skill to become the
CEO of the future.

KPMG survey.

Foundation Module on Finanace & Accounting;

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Foundation Module on Finance & Accounting

Topics to be covered

Business organizations & their types

Overview of Financial System
Indian Financial system – An Introduction
What is Accounting?
System of Book Keeping
Accounting Equation
Overview of Financial Statements
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 Business organizations & their types

A Business organization is involved in manufacturing,

selling, or supplying goods or services for exchange of
money.

A Business organization may function in the form of any

of the following:
•Proprietorship
•Partnership
•Limited Liability Partnership
•Joint stock Company
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 Foundation Module on Finanace & Accounting;
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 Choosing a form of business organization

Criteria Most beneficial Least beneficial

Cost of formation Sole Proprietorship Company
Ease of formation Sole proprietorship Company
Transfer of Ownership Public Ltd Company Partnership
Continuity Company Sole proprietorship
Regulations Sole Proprietorship Company
Flexibility Sole proprietorship Company
Availability of capital Company Sole proprietorship
Liability Company and LLP Sole proprietorship

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 Overview of Financial System

 Financial system refers to a set of complex, inter-linked

markets, institutions, instruments and services besides
agents, practices, claims & liabilities, in the economy which
facilitate the transfer and allocation of funds efficiently and
effectively.

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 Financial System

Provide Receive
Funds Funds
Financial System

Suppliers Users
of Funds of Funds
•Financial Markets
•Financial Institutions
•Financial Instruments
•& Services
Buy Issue
Securities Securities
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Financial System (Contd.)
 Financial System consists of the following three components,which
facilitate the transfer of funds :
 Financial Markets
 Structures through which funds flow.
 Centres that provide the facility of buying & selling of financial
claims
 Financial Institutions
 Organisations which channelise funds from Surplus Units to Deficit
Units thereby act as mobilisers & depositories of savings, and
creators of credit.
 E.g.:Commercial Banks, Insurance Cos. Mutual Funds,
Developmental Financial Institutions, NBFCs
 Financial Instruments
 Claims of the lenders of funds over the funds lent to the borrowers.

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 Financial Markets - Primary & Secondary Markets

 Primary Markets:
 Markets in which Users of funds raise resources through issue of new
financial instruments.
 Also called New Issues Market.
 Fund users have new projects but do not have sufficient funds
internally, hence they issue new securities in the Primary Market to
raise additional funds.
 Intermediary between the user (Issuer) and the suppliers (Investors)
which helps raise funds from the Primary Market  Investment
Banker (Merchant Banker).
 Funds may be raised thru’ Initial Public Offering (IPOs); Private
Placements; Secondary Public Offerings; Rights Issue (Seasoned
Offerings).

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 Foundation Module on Finanace & Accounting;
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Sudarshan Pharma Industries- Issue Details

http://www.moneycontrol.com/ipo/ipo-snapshot/new-fund-offers.html
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 Financial Markets - Primary & Secondary Markets

 Secondary Markets:
 Once the financial instruments have been issued in the Primary
Market, they are traded (bought and sold) in the Secondary Market.

 Deals in existing financial claims (securities).

 Provides a centralised marketplace for buyers and sellers to trade
efficiently (save on search costs).
 Trade takes place through a stock/securities broker.
 E.g.: National Stock Exchange (NSE); Bombay Stock Exchange
(BSE); NYSE, LSE.
 Advantages:
 Investors can trade at market values
 Market Value – an indicator of the performance of the company.
 Provides liquidity to Primary Market.

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 Financial Markets – Capital & Money Markets
 Money Markets:
 Deal (trade) in debt securities of maturities of one year and less.
 Economic entities with excess funds for short durations lend (buy
short-term instruments) to economic entities which face shortage of
funds for short duration (sell short-term instruments).
 Money Market Instruments issued by Government & Corporates
include:
 Treasury Bills (T-Bills)
 Call/Notice Money
 Repurchase Agreements (Repos)
 Commercial Papers (CPs)
 Certificates of Deposit (CDs)
 No physical location, but an Over-the-Counter (OTC) Market, Trades
are conducted via telephones,wire transfers, and Computer trading.

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 Financial Markets – Capital & Money Markets

 Capital Markets
 Deal in long-term securities (equity and debt) having maturities of
more than one year.
 Capital Market instruments include:
 Equity Shares
 Corporate & Government Bonds

 Due to long maturity periods, such instruments experience wide

fluctuations in the secondary market.

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 What is Accounting?

DEFINITION OF ACCOUNTING
Accounting may be defined as the process of Recording, Classifying,
summarizing, Analyzing and Interpreting the financial transactions and
communicating the results thereof to the persons interested in such
information.

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 1 Recording : This is the basic function of Accounting. It is essentially
concerned with not only ensuring that all business transaction of financial
character are in fact recorded but also that they are recorded in an orderly
manner. Recording is done in the book called “journal”.

2 Classifying : Classification is concerned with the systematic analysis

of the recorded data, with view to group transactions or entries of one
nature at one place .The work of classification is done in the book called
“Ledger”.
3 Summarizing : This involves presenting the classified data in a
manner, which is understandable and useful to the internal as well as
external end –users of accounting statements. This process leads to
the preparation of the following statement :-
1. Trial Balance
2. Trading Account
3. Profit &Loss Account
4. Balance Sheet

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 4. Analyses and Interprets : This is the final function of
accounting. The recorded financial data is analyzed and interpreted
in a manner that the end-users can make a meaningful judgment
about the financial condition and profitability of the business
operations.

5. Deals with financial transactions : - Accounting records only

those transactions and events of money, which are of a financial
character.

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 Owners

Lenders
Managers

Business
Organisation

Competitors
Suppliers

Government

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Main Users of Financial Statements Relating to a Business Organisation
 System of Book Keeping

Book keeping is the art of recording business transactions in a regular

and systematic manner. This recording of transactions may be done
according to any of the following two systems:-
•Single Entry System
•Double Entry System

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 Accounting Equation

The system of Double entry system of book keeping can be

very well be explained by the “Accounting Equation” given
below :-

Capital + Liabilities = Assets

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 Accounting Principles: -
Accounting Principles may be defined as those
rules of action or conduct, which are adopted by
the accountant universally while recording
accounting transactions.

GAAP: Generally Accepted Accounting Principles

These principles can be classified into two

categories:-
• Accounting Concepts
• Accounting Conventions

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Accounting Concepts: - The term concepts include those
basic assumptions or conditions upon which the science
or accounting is based. The following are the important
accounting concepts:
(a)Separate Entity Concept
(b)Going Concern Concept
(c)Money Measurement Concept
(d)Cost Concept
(e)Dual Aspect Concept
(f)Accounting Period Concept
(g)Periodic matching of Cost and Revenues Concept
(h)Realization Concept

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 Accounting Conventions:- The term ‘convention’
includes those customs or traditions, which guide the
accountant while preparing the accounting statement.
The following are the important accounting
conventions:-
(a)Convention of Conservation
(b)Convention of Full Disclosure
(c)Convention of Consistency
(d)Convention of Materiality

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 Overview of Financial Statements

Profits & Loss a/c for the Year Ended March 31, 2008

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 Balance Sheet as on March 31, 2008

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 Cash Flow Statement for the Year Ended March 31,2008

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