Overview & Module Objectives

Overview
As a Finance Consultant, you are expected to be an expert in the Accounting domain,
meaning without sufficient accounting knowledge/background it would be very difficult validate/Justify
the outcome of any given business transaction, which is one of very crucial and important deliverables
provided by an FICO consultant.

Module Objectives

 Understand Basic accounting concepts

 Understand its underlying principles
 Understand the flow of accounting in any given business transaction
 Understand financial statement/financial reporting
 Understand IFRS and GAAP’s.
 Agenda
• Why Accounting is required
• Definition of Accounting
• Users of Accounting information
• Basic Accounting Principles
• Basic Rules of Accounting
• Understanding Accounting Equation
• About Financial statements
• About IFRS/GAAP’s
• Check points
• Questions
 Why Accounting is required
Accounting is required to Know :-

• Whether business is making profit or Loss

• The financial position of the business (Assets and Liabilities)
• How much to pay and whom to pay (Vendors)
• How much to receive and from whom (Customers)
• From where is the money coming
• Where it is going
• What are the cost/Expenses
• What are the revenues/Incomes
• What decision to take and when to take such decision

The above are all the general question which everyone who is doing business will have and proper accounting will
help address all the above questions.
 Why Accounting is required

Accountants answer these questions

with three major financial statements

Income Balance
Statement Sheet

Statement of
Cash flows
 Agenda
• Why Accounting is required
• Definition of Accounting
• Users of Accounting information
• Basic Accounting Principles
• Basic Rules of Accounting
• Understanding Accounting
Equation
• About Financial statements
• About IFRS/GAAP’s
• Check points
• Questions
 Definition of Accounting
is a
Accounting system that Identifies
Identifies
Accounting

Records
Records

information
Relevant
Relevant that is Communicates
Communicates

Reliable
Reliable

to
tohelp
helpusers
usersmake
makebetter
better
decisions.
decisions.
Comparable
Comparable
 Definition of Accounting

 Identifying  Recording
Business Business
Activities Activities

Communicatin
g Business
Activities
 Agenda

Why Accounting is required

Definition of Accounting
Users of Accounting information
Basic Accounting Principles
Basic Rules of Accounting
Understanding Accounting Equation
About Financial statements
About IFRS/GAAP’s
Check points
Questions
 Users of Accounting Information

External Users Internal Users

• Lenders • Consumer Groups • Managers • Sales Staff

• Shareholders • External Auditors • Officers • Budget
• Customers • Internal Officers
• Governments Auditors • Controllers
 Agenda

Why Accounting is required

Definition of Accounting
Users of Accounting information
Basic Accounting Principles
Basic Rules of Accounting
Understanding Accounting Equation
About Financial statements
About IFRS/GAAP’s
Check points
Questions
 Basic Accounting Principles

Accounting principles can be subdivided into two categories:

· Accounting Concepts:
The term ‘concept’ is used to connote accounting
postulates, that is necessary assumptions and conditions
upon which accounting is based.
· Accounting Conventions
The term ‘convention’ is used to signify customs and
traditions as a guide to the presentation of accounting
statements.
 Basic Accounting Principles

Accounting concepts
• Business Entity Concept
• Money Measurement Concept
• Cost Concept
• Going Concern Concept
• Dual Aspect Concept
• Realization Concept
• Accounting Period Concept
 Basic Accounting Principles

Accounting Conventions
• Convention of Consistency
• Convention of Disclosure
• Convention of Conservation
 Agenda

Why Accounting is required

Definition of Accounting
Users of Accounting information
Basic Accounting Principles
Basic Rules of Accounting
Understanding Accounting Equation
About Financial statements
About IFRS/GAAP’s
Check points
Questions
 Basic Rules of Accounting

As per the definition of Accounting, we have understood what Recording refers

to, Now we will understand How to account for business transactions and what
are the driving factors for this.

The object which is used to capture the business transaction from accounting
perspective is called General Ledger Account or shortly we say as GL Account

At high level GL Accounts are classified into 3

Real Accounts - Real accounts are assets.
Personal Accounts - Personal accounts are liabilities and owners' equity and
represent people and entities that have invested in the business.
Nominal Accounts - Nominal accounts are revenue, expenses, gains, and losses .

Basically, there are 3 golden rules which guides for complete accounting
Real account: Debit what comes in and credit what goes out
Personal account: Debit who receives and Credit who gives.
Nominal account: Debit all expenses & losses and Credit all incomes & gains
 Basic Rules of Accounting
Now let's see how to apply this rules by an example

Asset Transaction Entries

• Cash paid to buy goods worth Rs. 2000
• Purchased machine worth Rs. 10000 in cash

Liabilities Transaction Entries

• Took Loan of Rs. 5000 from ICICI Bank
• Purchased goods worth Rs. 6000 on credit from A & Co.
• Owner contributed capital Rs. 10000
 Basic Rules of Accounting

Income Transaction Entries

• Sales of Rs. 5000 in cash
• Sales of Rs 4000 on credit to Mr. X

Expense Transaction Entries

• Paid fuel expenses Rs. 400 in cash
• Repaid loan of Rs. 5000 along with Interest expense of Rs. 500
 Basic Rules of Accounting
Lets Analyze this transaction

Date Particulars Nature of Account Type of Account Dr./Cr. Debit Credit

Goods Account Real Account Asset Dr 2000
Cash Account Real Account Asset Cr 2000
Machine Account Real Account Asset Dr 10000
Cash Account Real Account Asset Cr 10000
Cash Account Real Account Asset Dr 5000
ICICI Loan Account Personal Account Liability - Loan Cr 5000
Goods Account Real Account Asset Dr 6000
Mr. A Account Personal Account Liability - Vendor Cr 6000
Cash Account Real Account Asset Dr 10000
Capital Account Personal Account Liability - Equity Cr 10000
Cash Account Real Account Asset Dr 5000
Sales Account Nominal Account Revenue Cr 5000
Mr. X Account Personal Account Asset Dr 4000
Sales Account Nominal Account Revenue Cr 4000
Fuel Expense Account Nominal Account Expense Dr 400
Cash Account Real Account Asset Cr 400
ICICI Loan Account Personal Account Liability - Loan Dr 5000

Interest Expense Account Nominal Account Expense Dr 500

Cash Account Real Account Asset Cr 5500
 Basic Rules of Accounting

Postings to Ledger Accounts: Means transfer of entries from the Journal to

the appropriate Ledger Accounts.

Steps to post transactions from Journal to ledger account

1. If an account is getting debited in the journal entry, put the amount on

the debit side of the account while posting.
2. If an account is getting credited in the journal entry, put the amount on
the credit side of the account while postings

Balancing an account

3. Normally, every account will have 2 types of postings in it, Debit and
Credit
4. The accounts are balanced either on daily, or monthly or yearly basis to
draw financial reports.
5. Net balances are reported for preparation of financial
reports/statements.
 Basic Rules of Accounting

Date Particulars Debit Amount Date Particulars Credit Amount

To ICICI Loan Account 5000 By Goods Account 2000

To Capital Account 10000 By Machine Account 10000

To Sales Account 5000 By Fuel Account 400

By Loan Account 5000

By Interest Expense Account 500

By Balance C/F 2100

20000 20000

So you can see that the closing balance is Rs. 2100, and this will be reported
in the financial reports – Trial Balance
 Basic Rules of Accounting

Trial Balance
Description Debit Amount Credit Amount

Cash Account 2100

Machine Account 10000

Goods Account 8000

ICICI Loan Account 0

Mr. A Account 6000

Capital Account 10000

Sales Account 9000

Mr. X Account 4000

Fuel Expense Account 400

Interest Expense Account 500

25000 25000
 Agenda

Why Accounting is required

Definition of Accounting
Users of Accounting information
Basic Accounting Principles
Basic Rules of Accounting
Understanding Accounting Equation
About Financial statements
About IFRS/GAAP’s
Check points
Questions
 Accounting Equation

Assets
Assets = Liabilities
Liabilities + Equity
Equity

Liabilities &
Assets Equity
 Accounting Equation

Assets are resources with future benefits that are owned or controlled by a
company.
Liabilities are what a company owes its creditors in future products or services.
Equity refers to the claims of its owner(s).

 Forms of funds=Sources of funds

 What resources does the firm have? (Assets) = Where do those resources
come from? (Liabilities and Equity)
 A firm acquires assets by funds. Liabilities and equity are the sources of
funds to acquire those assets
 Accounting Equation - Assets

Cash
Cash

Accounts
Accounts Notes
Notes
Receivable
Receivable Receivable
Receivable
Resources
Resources
owned
owned oror
Vehicles
controlled
controlled
Vehicles Land
by
by aa Land

company
company
Store Buildings
Buildings
Store
Supplies
Supplies
Equipment
Equipment
Accounting Equation - Liabilities

Accounts
Accounts Notes
NotesPayable
Payable
Payable
Payable

Creditors’
Creditors’
claims
claims on
on
assets
assets
Taxes
Taxes Wages
Wages
Payable
Payable Payable
Payable
 Accounting Equation - Equity

Owner Owner
Owner
Owner
Investments Withdrawals
Withdrawals
Investments

Owner’s
Owner’s
claims
claims
on
on
assets
assets
Revenues
Revenues Expenses
Expenses
 Expanded Accounting Equation

Assets
Assets = Liabilities
Liabilities + Equity
Equity

_ Owner
Owner _
OwnerCapital
Owner Capital
Withdrawals
Withdrawals + Revenues
Revenues Expenses
Expenses
 Expanded Accounting Equation

• Revenues: gross increase in equity from a

company’s earnings activities.
• Expenses: the cost of assets or services used to
earn revenue. Expenses decrease owner’s
equity.
• Owner investments: the assets an owner puts
into the company.
• Owner withdrawals: the assets take away from
the company for personal use.
 Agenda

Why Accounting is required

Definition of Accounting
Users of Accounting information
Basic Accounting Principles
Basic Rules of Accounting
Understanding Accounting Equation
About Financial statements
About IFRS/GAAP’s
Check points
Questions
 About Financial statements

• Financial accounting generates the following general-purpose, external,

financial statements:
– Income statement (sometimes referred to as "results of operations" or "earnings
statement" or "profit and loss [P&L] statement")
– Balance sheet (sometimes referred to as "statement of financial position")
– Statement of cash flows (sometimes referred to as "cash flow statement")
– Statement of stockholders' equity
• Explanation:
– The income statement reports a company's profitability during a specified period of
time. The period of time could be one year, one month, three months, 13 weeks, or
any other time interval chosen by the company.
– The balance sheet is organized into three parts: (1) assets, (2) liabilities, and (3)
stockholders' equity at a specified date (typically, this date is the last day of an
accounting period).
– The statement of cash flows explains the change in a company's cash (and cash
equivalents) during the time interval indicated in the heading of the statement. The
change is divided into three parts: (1) operating activities, (2) investing activities, and
(3) financing activities
 Agenda

Why Accounting is required

Definition of Accounting
Users of Accounting information
Basic Accounting Principles
Basic Rules of Accounting
Understanding Accounting Equation
About Financial statements
About IFRS/GAAP’s
Check points
Questions
 About IFRS/GAAP’s
• IFRS Stands for International Financial Reporting Standards.
• GAAP Stands for Generally Accepted Accounting Principles
• IFRS is Global GAAP
• IFRS sets the norms for Financial reporting and guides the Global
organization on reporting their Financial statements, it lays down the
rules and principles based on which each item in the financial statement
is presented.
• IFRS apply to Individual company and consolidated financial statements.

• IFRS consist of the below:

– International Financial Reporting Standards
– International Accounting Standards and
– Interpretations originated by the International Financial Reporting Interpretations
Committee( IFRIC) and
– Interpretations issued by the former Standing Interpretations Committee ( SIC).
 Agenda

Why Accounting is required

Definition of Accounting
Users of Accounting information
Basic Accounting Principles
Basic Rules of Accounting
Understanding Accounting Equation
About Financial statements
About IFRS/GAAP’s
Check points
Questions
 Check Point

• What is Accounting?
• What are the basic concept, convention and
principles of accounting?
• What is GL Account?
• What are the 3 Golden principles of Accounting?
• What are Financial statement, what it contains
• What is IFRS and Local GAAP means – Define
them?
 Agenda

Why Accounting is required

Definition of Accounting
Users of Accounting information
Basic Accounting Principles
Basic Rules of Accounting
Understanding Accounting Equation
About Financial statements
About IFRS/GAAP’s
Check points
Questions
Questions