Financial Accounting

Management

Chapter 1

Financial Accounting:
An Overview

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 Learning Objectives
 Meaning of accounting
 Evolution of accounting
 Difference between accounting & book-keeping
 Accounting as an information system
 Identifying the different users of accounting
information
 Process of Accounting
 Limitations of financial accounting
 Elaboration of the three principal financial
statements

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 Meaning of Accounting
 Accounting is the science of recording, classifying, &
summarizing in a significant manner & in terms of money,
transactions and events which are of a financial character
and interpreting the results thereof to permit informed
judgments and decisions by users of the information.

 Although earlier accounting was recognized as a system of

analyzing & maintaining the records of business
transactions.

 But now accounting has acquired a role which highlights

its social importance.

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 Evolution of Accounting
 Originated in the fourteenth century by a
Franciscan Luca Pacioli.
 Accounting earlier used in trade and
commerce faced its first challenge in the era
of industrial revolution.
 Accounting easily adapted and
accommodated the demands of modern
manufacturing industry.
 The adaptability and versatility of the
accounting methodology has been its
inherent strength.
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 Difference Between Accounting &
Book-Keeping
 Book-keeping is a small part of accounting process

 Book-keeping is only concerned with recording

transactions and keeping records

 Accounting aims at designing an information

system

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 Accounting as an information System

Accou
nting

Commu
nication Information
Information Needs
of Data Decision
Makers

Process Recordi
ing of ng of
Data Data

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Users of Accounting Information
Users
With
Direct
Financial
Interest

Users
With
Indirect
Financial
Interest

Managemen
t

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 Users of Accounting Information
(Elaborated)
Management
Users With Direct Fin. Interest
Users With Indirect Fin. Interest
●
Directors, Managers, Officers, Dept. Heads,
●
To Assess Profitability, Liquidity & Solvency,
Controlling Function
●
Shareholders, Creditors, Employees, Suppliers
●
For Investment & Credit Decisions, Pay-Off and
Supply Continuity Decisions
●
Customers, Taxation Authorities, Financial Analysts, Brokers,
Underwriters, Labour Unions, General Public, Press, NGOs
●
Assessing Taxes, Protecting Investors & Public, Measuring Social and
Environmental Responsibility, Negotiating Labor Agreements
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 Process of Accounting

Reporting & Securing

( P/ L Account,
Bal ance Sheet,
Cash Fl ow Statement)

Proc e s sing & Clas s ifying

(Led ger)

Re c ording/Book-Ke e ping
(Journalizing)

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 Limitations of Financial Accounting
• Financial accounting does not provide detailed cost information
• Financial accounting does not set up a proper system of
controlling materials and supplies
• Recording & accounting for wages & labour is not carried out for
different jobs, processes, products & departments
• In financial accounting it is difficult to analyze costs according to
controllability
• Financial accounting does not possess an adequate system of
standards to evaluate the performance of departments & their
employees
• Financial accounting contains historical cost whereas for better
management current cost accounting is also needed
• Financial accounting does not provide information to analyze the
losses due to various vital factors like idle plant capacity

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 The Three Principal Financial Statements –
The End Products Of Finl. Accounting

• Profit & Loss Account

• Balance Sheet

• Cash Flow Statement

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 Profit & Loss Account

• Also known as Income Statement

• P/L presents results of operations of a business
enterprise over a period of time
• It presents the sources and amounts of revenues
earned & streams & amounts of different
expenses
• If the revenues are more and expenses are less
there is a net income or net profit
• If the revenues are less and the expenses are
more the enterprise has incurred net loss

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 Balance Sheet
• Also known as Statement of Financial Position

• It shows the financial position of a business

enterprise on a certain date

• B/S indicates the investing & financing activities

of a business enterprise at a point of time &
shows a firm’s assets, liabilities and
shareholders’ equity usually at the last day of
the year

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 Cash Flow Statement
• It summarizes the flow of cash inflows and
outflows of the firm over a period of time

• It focuses on the items which bring about

change in the cash balance of a business
enterprise between two balance sheet dates

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