FOR HR Managers

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Accounting involves: the recognition, measurement, and disclosure of financial information about economic entities to interested persons.

Financial accounting is concerned with the classification, recording, analysis, and interpretation of the overall financial position and operating results of an organization and providing such information to owners, managers and third parties. It includes the processes and decisions that culminate in the preparation of financial statements.

Actually there are a number of accounting concepts and principles based on which we prepare our accounts These generally accepted accounting principles lay down accepted assumptions and guidelines and are commonly referred to as accounting concepts

Investors
Need information about the profitability, dividend yield and price earnings ratio in order to assess the quality and the price of shares of a company

Lenders
Need information about the profitability and solvency of the business in order to determine the risk and interest rate of loans

Management
Need information for planning, policy making and evaluation

Suppliers and trade creditors

Need information about the liquidity of business in order to access the ability to repay the amounts owed to them

Government
Need information about various businesses for statistics and formulation of economic plan

Customers
Interested in long-tem stability of the business and continuance of the supply of particular products

Employees
Interested in the stability of the business to provide employment, fringe benefits and promotion opportunities

Public
Need information about the trends and recent development

Companies may use different methods of valuation, cost calculation and recognizing profit The balance sheet does not reflect the true worth of the company Financial statements can only show partial information about the financial position of an enterprise, instead of the whole picture
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Business entity Money Measurement/stable monetary unit Going Concern Historical Cost Prudence/conservatism Materiality

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Objectivity Consistency Accruals/matching Realization Uniformity Disclosure Relevance

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Meaning
The business and its owner(s) are two separate existence entity Any private and personal incomes and expenses of the owner(s) should not be treated as the incomes and expenses of the business

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Meaning
All transactions of the business are recorded in terms of money It provides a common unit of measurement

Examples
Market conditions, technological changes and the efficiency of management would not be disclosed in the accounts

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Meaning
The business will continue in operational existence for the foreseeable future Financial statements should be prepared on a going concern basis unless management either intends to liquidate the enterprise or to cease trading, or has no realistic alternative but to do so Possible losses form the closure of business will not be anticipated in the accounts Prepayments, depreciation provisions may be carried forward in the expectation of proper matching against the revenues of future periods Fixed assets are recorded at historical cost
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Example

Meaning
Assets should be shown on the balance sheet at the cost of purchase instead of current value

Example
The cost of fixed assets is recorded at the date of acquisition cost. The acquisition cost includes all expenditure made to prepare the asset for its intended use. It included the invoice price of the assets, freight charges, insurance or installation costs
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Meaning
Revenues and profits are not anticipated. Only realized profits with reasonable certainty are recognized in the profit and loss account However, provision is made for all known expenses and losses whether the amount is known for certain or just an estimation This treatment minimizes the reported profits and the valuation of assets
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Meaning
Immaterial amounts may be aggregated with the amounts of a similar nature or function and need not be presented separately Materiality depends on the size and nature of the item

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Meaning
The accounting information should be free from bias and capable of independent verification The information should be based upon verifiable evidence such as invoices or contracts

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Meaning
Companies should choose the most suitable accounting methods and treatments, and consistently apply them in every period Changes are permitted only when the new method is considered better and can reflect the true and fair view of the financial position of the company The change and its effect on profits should be disclosed in the financial statements

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Meaning
Revenues are recognized when they are earned, but not when cash is received Expenses are recognized as they are incurred, but not when cash is paid The net income for the period is determined by subtracting expenses incurred from revenues earned

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Meaning Revenues should be recognized when the major economic activities have been completed Sales are recognized when the goods are sold and delivered to customers or services are rendered

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The realization concept develops rules for the recognition of revenue The concept provides that revenues are recognized when it is earned, and not when money is received A receipt in advance for the supply of goods should be treated as prepaid income under current liabilities Since revenue is a principal component in the measurement of profit, the timing of its recognition has a direct effect on the profit

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The uncertain profits should not be estimated, whereas reported profits must be verifiable Revenue is recognized when
1. 2.

3.

The major earning process has substantially been completed Further cost for the completion of the earning process are very slight or can be accurately ascertained, and The buyer has admitted his liability to pay for the goods or services provided and the ultimate collection is relatively certain
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Meaning
Financial statements should be prepared to reflect a true and fair view of the financial position and performance of the enterprise All material and relevant information must be disclosed in the financial statements

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Meaning
Different companies within the same industry should adopt the same accounting methods and treatments for like transactions The practice enables inter-company comparisons of their financial positions

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Meaning
Financial statements should be prepared to meet the objectives of the users Relevant information which can satisfy the needs of most users is selected and recorded in the financial statement

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Four basic financial statements:

Balance Sheet Income Statement Statement of Cash Flows Statement of Retained Earnings

Published by public companies in their annual reports (called 10K's) Remember to read notes/footnotes

Often contain important information

Presents the financial position of a company at a given point in time Comprised of three parts: Assets, Liabilities, and (Ownership/Stockholder's) Equity Remember the important basic equation:

Assets = Liabilities + Equity

Assets are the economic resources of the company Consists of Cash, Inventory, and Equipment Examples: For a farm, Inventory might be the farmer's crops; Equipment could consist of things like a barn or a tractor

Companies normally obtain resources by incurring debt, getting new investors, or through re-investing operating earnings Liabilities are the debts owed by the company Equity is comprised of the claims that investors have on the company's resources after all debts have been paid off

net worth of the company

When companies incur debt, they make a promise to pay over a certain time period

Payment schedule is independent of the operating performance of the company

When companies make stock offerings (equity), they don't promise to pay investors over a certain period

Offer a return on investment contingent on operating performance

No guarantee, so riskier but unlimited upside

Presents the results of operations over a period of time Composed of Revenues, Expenses, and Net Income

Revenue: source of income normally arising from the sales of goods and services and is recorded when it occurs

Expenses: costs incurred over a period of time to generate the revenues earned over that same period of time

Example: Wages When a company incurs an expense outside of its normal operations, it is considered a loss
Example: Destruction of a building in a fire

A purchase is only considered an asset if it also provides future economic benefit outside of the current period.
Paying for wages vs. Paying for equipment

Net Income: Revenue, less Expenses

Positive Net Income indicates the company generated a profit (net profit) Negative Net Income indicates the company suffered a net loss

Retained earnings is the amount the company reinvests in itself

Remember that this is one of the ways to purchase new assets (aside from incurring debt and raising new equity)

Reconciliation of the Retained Earnings account from beginning to the end of year Net Income increases the Retained Earnings account, while Net Losses and dividend payments decrease it

Does not provide any new information not already available But it does tell you what management is doing with the company's earnings

Is management more focused on reinvesting earnings within the company? Or is it distributing profits to shareholders?
Investors can use this knowledge to align their investment style with the strategy of a company's management

Provides a detailed summary of all the cash in- and outflows during a time period Three sections-- Cash flows from:

Operating activities- includes transactions involved in calculating net income Investing Activities- activities outside of the normal scope of business, such as sale or purchase of assets Financing Activities- Involves items classified as liabilities or equity on the balance sheet
Examples: Dividends or payment of debt

Gets all its information from other 3 statements

Net income from the Income Statement shown in cash flows from operating activities Dividends from Retained Earnings Statement shown in financing activities Investments, Accounts Payable, and other asset and liability accounts from the Balance Sheet are shown in all three sections

Estimates of the income and expenditure of a bu siness or a part of a business over a time period Used extensively in planning Helps establish efficient use of resources Help monitor cash flow and identify departures from plans Maintains a focus and discipline for those involved

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Flexible Budgets budgets that take account of changing business conditions Operating Budgets based on the daily operations of a business Objectives Based Budgets - Budgets driven by objectives set by the firm Capital Budgets Plans of the relationship between capital spending and liquidity (cash) in the business

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Variance the difference between planned values and actual values

Positive variance actual figures less than planned Negative variance actual figures above planned

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Various budgeting models continue to be commonly used and fall predominantly into categories of
Line-item, Or "Traditional," Budgeting; Performance Budgeting; Program And Planning ("Programming") Budgeting (Ppb); Zero-based budgeting (ZBB);

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Line-item budgeting is still the most widely used approach in many organizations, including schools, because of its simplicity and its control orientation. It is referred to as the "historical" approach because administrators and chief executives often base their expenditure requests on historical expenditure and revenue data. One important aspect of line-item budgeting is that it offers flexibility in the amount of control established over the use of resources, depending on the level of expenditure detail (e.g., fund, function, object) incorporated into the document.
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A different focus is seen in performance budgeting models. In a strict performance budgeting environment, budgeted expenditures are based on a standard cost of inputs multiplied by the number of units of an activity to be provided in that time period. The total budget for an organization is the sum of all the standard unit costs multiplied by the units expected to be provided.

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Program budgeting refers to a variety of different budgeting systems that base expenditures primarily on programs of work and secondarily on objects. It is considered a transitional form between traditional line-item and performance approaches, and it may be called modified program budgeting. In contrast to other approaches, a full program budget bases expenditures solely on programs of work regardless of objects or organizational units. As these two variations attest, program budgeting is flexible enough to be applied in a variety of ways, depending on organizational needs and administrative capabilities.
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The basic tenet of zero-based budgeting (ZBB) is that program activities and services must be justified annually during the budget development process. The budget is prepared by dividing all of a government's operations into decision units at relatively low levels of the organization. Individual decision units are then aggregated into decision packages on the basis of program activities, program goals, organizational units, and so forth. Costs of goods or services are attached to each decision package on the basis of the level of production or service to be provided to produce defined outputs or outcomes. Decision units are then ranked by their importance in reaching organizational goals and objectives. Therefore, when the proposed budget is presented, it contains a series of budget decisions that are tied to the attainment of the entity's goals and objectives.
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In accounting, reconciliation refers to a process that compares two sets of records (usually the balances of two accounts) to make sure they are in agreement. It is used to ensure that the money leaving an account matches the actual money spent, which is DEBIT and CREDIT; this is done by making sure the balances match at the end of a particular accounting period.

The process of analyzing two related records and, if differences exist between them, finding the ca use and bringing the two records into agreement. Balance sheets accounts reconciliations are one of the oldest and most important accounting processes that helps ensure the accuracy, completeness of transactions and proper segregation of duties. A critical element of the reconciliation is to resolve differences; differences should be identified, investigated, explained and a corrective action must be taken. 50

System Changeover: when banks changes their software, packages or upgrade such without proper and adequate analysis, planning and effective changeover, there is no doubt the fallout of such exercise will be serious reconciliation issues High downtime of link and system malfunctions Inadequate monitoring and supervision Fraudulent minds: When you have staff who have criminal tendencies, the only way out is to take proper references. Lazy staff and dereliction of duty Poor archiving system Inadequate manpower Lack of training/poorly trained staff

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Obtain the balance per the General Ledger Obtain the balance per department schedule.
If the balance per the General Ledger and the department sc hedule do not equal, go to step 3.

3. 4. 5.

6. 7.

Obtain detail activity per general ledger since account was last reconciled. Obtain detail activity per department schedules since account was last reconciled. Compare the two records and find the items which cause the difference between them. These are called reconciling items. Research the adjusting items and take the necessary action (s). Have the reconciliation approved.
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Reconciliation bothers on every aspect of the companys operations, units and departments and considering the risks and grave implications of bad books, it is our collective responsibility to ensure our books are clean.