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Financial management

ADVANCED FINANCIAL
MANAGEMENT

Assignment- 1

Submitted By, Submitted To,


Darshan S
1st semester MBA
Yuvaraja’s college
MYSURU

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Financial management

Accounting
Definition and meaning of accounting:
The American institute of certified accountants has defined accounting as,

“the art of recording, classifying, summarising, in a significant manner, and in terms of money,
transactions and events which are, in part at least, of a financial character, and interpreting the
results thereof”.

The American Institute of public Accountants of Landon Defined accounting as,

The Art of recording,classifying and summarising, In a significant manner and in terms of money
,transactions and events which are ,in part at least,of a financial character, and interpreting the
result thereof”

From the above definition, accounting is:

1. Identifying and measuring business transaction in terms of money,


2. Recording, in terms of money, business transactions of financial character, soon after he
occurrence, in a book or books of original entry,
3. Classifying the entries found in the book or books of original entry into appropriate accounts
in the books of final entry,
4. Summarising, at the end of the accounting period,
5. Analysing and interpreting the financial statement and
6. Communicating the result of the interpretations of the financial statements to the end users
for making sound decision.

Essential features of Accounting:

Accounting has many essencial features. The essencial aspects or features of accounting are:

1. Identifying:
Identifying the business transactions from the source documents.

2. Recording:
The next function of accounting is to keep a systematic record of all business transactions,
which are identified in an orderly manner, soon after their occurrence in the journal or
subsidiary books.

3. Classifying:
This is concerned with the classification of the recorded business transactions to group the
transactions of similar type at one place. i.e., in ledger accounts. In order to verify the
arithmetical accuracy of the accounts, trial balance is prepared.

4. Summarising:
The classified information available from the trial balance are used to prepare profit and loss
account and balance sheet in a manner useful to the users of accounting information.

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5. Analysing:
It establishes the relationship between the items of the profit and loss account and the
balance sheet. The purpose of analysing is to identify the financial strength and weakness of
the business. It provides the basis for interpretation.

6. Interpreting:
It is concerned with explaining the meaning and significance of the relationship so
established by the analysis. Interpretation should be useful to the users, so as to enable
them to take correct decisions.

7. Communicating:

The results obtained from the summarised, analysed and interpreted information are communicated
to the interested parties.

Accounting principles
Meaning of accounting principles:

A principle is a rule of action or guide to action. So, accounting principles are broad guidelines or
rules of action followed in the preparation of accounts and in the presentation of financial
statements.

Classification of accounting principles:

Traditionally, accounting principles have been classified as,

I. Accounting concepts and


II. Accounting conventions.

I.Accounting concepts

The term concept means an idea or thought. So, accounting concepts are the fundamental ideas or
basic assumptions underlying the theory and practice of accounting.

Important accounting concepts:

 Money measurement concept


 Separate entity concept
 Going concern concept
 Cost concept
 Dual aspect concept
 Accounting period concept
 Objective evidence concept
 Realisation concept
 Accrual concept
 Matching concept

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1.Money measurement concept:

Money measurement concept means that, a record is made only of those transactions or
event which can be measured and expressed in terms of money.

2.Seperate entity concept:

It is also called as business entity concept or economic entity concept or accounting entity
concept. The business entity concept means that, every business undertaking, whether it is a joint
stock company or a partnership firm or a sole trading concern, is regarded as a distinct or entity
apart from the owners who own it.

3.Going concern concept:

The going concern concept means that, an enterprise is regarded as a going concern that is a
concern that will continue to operate for an indefinitely long period time.

4.Cost concept:

The cost concept means that an asset acquired by a concern is recorded in the books of
account at cost. The market price of the of the asset is ignored.

5.Dual aspect concept:

Dual aspect concept is the basis for Double Entry System of book-keeping. All business
transactions recorded in accounts have two aspects - receiving benefit and giving benefit. For
example, when a business acquires an asset (receiving of benefit) it must pay cash (giving of benefit).

6.Accounting period concept:

The users of financial statements need periodical reports to know the operational result and
the financial position of the business concern. Hence it becomes necessary to close the accounts at
regular intervals. Usually a period of 365 days or 52 weeks or 1 year is considered as the accounting
period.

7.Ojective evidence concept:

This concept means that the all accounting entries should be evidenced and supported by
source documents or business documents, such as invoices, vouchers, etc.

8.Revenue realisation concept:

According to this concept, revenue is considered as the income earned on the date when it is
realised. Unearned or unrealised revenue should not be taken into account. The realisation concept is
vital for determining income pertaining to an accounting period. It avoids the possibility of inflating
incomes and profits.

9.Accural concept:

The accrual concept is concerned with the recognition of revenues and expenses.

The accrual concept means that when a transaction has been entered into, its consequences will
certainly follows. So, all transactions must be brought into record, whether they settled in cash or not.

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10.Matching concept:

Matching the revenues earned during an accounting period with the cost associated with the
period to ascertain the result of the business concern is called the matching concept. It is the basis for
finding accurate profit for a period which can be safely distributed to the owners.

II.Accounting conventions

Accounting conventions are the customs or practices which have been in force for a long
period and which guide the accountants, while preparing the financial statements like profit or loss
account and the balance sheet.

Important accounting conventions:

The important accounting conventions are:

 Convention of materiality
 Convention of conservatism
 Convention of consistency
 Convention of full disclosure

1.Convention of materiality:

The Convention of materiality means that, a detailed record is made only of those business
transactions which are material to the users of accounting information.

2.Convention of conservatism:

The convention of conservatism means the convention of caution, prudence or the policy of
playing safe.

3.Convention of consistency:

The convention of consistency means that the accounting practices and methods should
remain consisted from one accounting year to another.

4.Convention of full disclosure:

The convention of full disclosure means that the material facts must be disclosed in the
financial statements with sufficient details.

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Financial management

FINANCIAL ACCOUNTING V/S MANAGEMENT ACCOUNT

Financial Accounting Management Accounting

The main objectives of financial accounting are to The main objective of managerial accounting is to
disclose the end results of the business, and the help management by providing information that is
financial condition of the business on a particular used to plan, set goals and evaluate these goals.
date.

Financial accounting produces information that is Managerial accounting produces information that is
used by external parties, such as shareholders and used within an organization, by managers and
lenders. employees.

Monetary information only Monetary information and non-monetary


information both can access

Pertains to the entire organization. Certain figures Pertains to individual departments in addition to
may be broken out for materially significant the entire organization.
business units.

Financial statement are prepared at end of the year The report are prepared as per the need and
of accounting period requirements of the organization

Financial accounts are reported in a specific format, Format is informal and is on a per
so that different organizations can be easily department/company basis as needed.
compared.

Rules in financial accounting are prescribed by Managerial accounting reports are only used
standards such as GAAP or IFRS. There are legal internally within the organization; so they are not
requirements for companies to follow financial subject to the legal requirements that financial
accounting standards. accounts are.

Defined - annually, semi-annually, quarterly, yearly. As needed - daily, weekly, monthly.

Internal and external parties Only internal management

Required to be published and audited by statutory Neither published nor audited by statutory
auditors auditors

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Financial accounting is the branch of accounting Management accounting is the branch of


which keeps track of all the financial information of accounting which records and reports both
the entity financial and non-financial information of an
entity

Financial statements or final accounts


Meaning of financial statement or final accounts:

Final accounts are the summaries of ledger accounts organised in such a manner as to show the
profit or loss of the business for the accounting yean and the financial position of the business at the
end of the accounting year.

The financial statement or final account includes:

1. The income statement or profit or loss account and


2. Position statement or balance sheet

Trading account and profit or loss account

In order to ascertain the profit or loss of the business, a business concern has to prepare an account
called “profit and loss account”. The profit and loss account, is usually, divided into trading account
and profit and loss account. These two accounts may be shown separately or they may be shown as
one account called “trading and profit and loss account”.

Trading account

Trading account is an account which shows the merely the result of trading, (that is buying and
selling of goods) called gross profit or gross loss.

Dr Trading account for the period ending…… Cr

Date Particulars Amount Date Particulars Amount


------ To, opening stock Xxx ----- By, sales Xxx
‘’ Purchase xxx Less: sales returns Xxx Xxx
Less: purchase xxx Xxx ‘’ closing stock Xxx
returns ‘’ profit and loss
‘’ Expenses account
incurred in (gross loss transferred Xxx
acquiring and to P/L account)
bringing the goods
purchased to the
business premises:
Cartage Xxx
Carriage Xxx
Import duty Xxx
Clearing charges Xxx

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Dock dues Xxx


Excise duty Xxx
Octroy Xxx Xxx
‘’ expenses
incurred in making
the gods ready for
sale:
Wages Xxx
Power Xxx
Other Xxx
manufacturing Xxx Xxx
expenses
‘’ P/L account
(gross profit Xxx
transferred to P/L
account)

Xxxx Xxxx

Profit and loss account

Dr profit and loss account for the period ending …. Cr

Particulars Amount Particulars Amount


To, trading account Xxx By, trading account Xxx
(gross loss transferred from (gross profit transferred from trading
trading account) account)
To, management and administration By, rent received Xxx
expenses: Xxx By, commission received Xxx
Salaries Xxx By, discount earned Xxx
Rent rates and taxes Xxx By, bad debts recovered Xxx
Office lightings and heating Xxx By, interest on drawings Xxx
Insurance Xxx By, capital account Xxx
Printing and stationaries Xxx (net loss transferred to capital
Postage and telegram Xxx account)
General charges Xxx
Telephone charges Xxx
Audit fees Xxx
Legal expenses Xxx
Bank charges Xxx
To, maintenance expenses Xxx
Repairs Xxx
Depressions Xxx
To, selling and distribution expenses
Advertisement Xxx
Travelling expenses Xxx
Cartage, carriage or freight outwards Xxx

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Commission paid Xxx


Bad debts Xxx
To, financial expenses
Cash discount allowed Xxx
Interest on loan taken Xxx
Interest on capital Xxx
To, miscellaneous expenses: Xxx
To, Capital account Xxx
(net profit transferred to capital
account)

xxxx xxxx

Balance sheet as at……

Liabilities Amount Assets Amount


1. Capital Xxx 1. fixed assets:
2. Fixed liabilities goodwill Xxx
Long term loans Xxx patents Xxx
Long term deposits Xxx copyrights Xxx
3. Current liabilities land and buildings Xxx
Income received in advance Xxx plant and machinery Xxx
Sundry creditors Xxx vehicles Xxx
Bills payable Xxx furniture and fixture Xxx
Bank overdraft Xxx loose tools Xxx
Short term loans Xxx 2. long term investments Xxx
3. current assets
short term investments Xxx
outstanding incomes Xxx
prepaid expenses Xxx
closing stock Xxx
sundry debtors Xxx
bills receivables Xxx
cash at bank Xxx
cash in hand Xxx

xxxx xxxx

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Usual adjustments in final accounts and their treatments:

Adjustments Treatments
1. closing stock  First, it should be entered on the
trading account. Secondly, on the asset
side of the balance sheet.
2. outstanding expenses  First it should be added to the
respective expenses on the debit side
of trading and P/L account. Secondly
the total amount of expenses should be
entered on the liabilities side of balance
sheet
3. prepaid expenses  Firstly, it should be deducted from the
respective expenses on the debit side
of the trading and P/L account.
Secondly, the total amount should be
entered in the assets side of balance
sheet
4. outstanding incomes  Firstly, added to the respective incomes
on the credit side of the P/L account.
Secondly, the total amount should be
entered on the assets side of the
balance sheet.
5. income received in advance or income  First, the amount should be deducted
received but not earned from the respective income accounts
on the credit side of the P/L account.
Secondly, the total should be entered
on the liabilities side of the balance
sheet.
6. bad debts  If the bad debts are written of during
the course of trading period and if the
bad debts are given in the trial balance,
then, the bad debts should be
appearing only in the P/L account on
the debit side. On the other hand, if the
bad debts are written off at the end of
the trading period as an adjustment,
then, the bad debts should be
appearing on both in the P/L account
on debit side and in the balance sheet
as deducted from sundry debtors.
7. provision for doubtful debts  If it is given in trial balance, the interest
has already been paid and recorded in
books of accounts and should be
entered on debit side of P/L account.
On other hand if it is given on
adjustments it means it has not been

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paid and has not yet been recorded in


the books of accounts.
8. Appreciation  If it is in trail balance, should be appear
on credit side of P/L account. On then
hand if the appreciation is given in
adjustments it should be taken into
both P/L account and balance sheet.

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