Financial Accounting

ASSIGNMENT

Financial and Cost Accounting

Assignment No. 1.      Introduction to Financial Accounting:

All business organisations have a large number of transactions on a daily basis which needs to be recorded and kept safely and they should be handled effectively and safely. We should have a clear understanding of the finances and we should be quick in our calculations, if we want to excel in our business. As a manager, if we are allotted the task of managing the daily activities in an organisation, then we will have to deal with the accounting staff, bookkeepers, owners and subordinates on a daily basis. Accounting helps us to understand the day to day financial activities. It also helps us to analyse and take appropriate or right decisions.

Financial accounting is a very important branch or part of accounting that deals with recording, classifying and summarizing of financial transactions.

The meaning and definition of Accounting:

Accounting is an efficient system that expresses the various monetary transactions of a business organisation in a clear and crisp manner. It is generally referred to as the language of business.

The Definition of accounting:

According to the American Institute of Certified Public Accountants (AICPA), Accounting is “the art of recording, classifying and summarizing is a significant manner and in terms of money, transactions, and events which are, in part at least, of financial character, and interpreting the results thereof.”

The functions of Accounting:

• Recording and Classifying Data:

Recording and maintenance of proper accounts is the fundamental function of any accounting system. Business transactions that are maintained properly and correctly can be used any time by the desired parties taking business related decisions.

Classifying data in accounts refers to systematic arrangement of recorded transactions under various categories. For example, all cash transactions are posted in the cash account. Similarly, all the sales transactions are classified and posted in the sales account. The work of classification is done in the books known as ‘ledger.’ This makes the further tasks of summarizing and interpretation of data easy and quick.

• Summarizing

This function is concerned with making a summary of the classified data in such a way that it is understandable and useful to the users. It is performed by preparing the trial balance, income statement, and balance sheet. The data is segregated properly and can be explained very easily. Elements of similar nature are arranged in a proper format and can be traced easily.

• Analysing and Interpreting:

The financial statements’ data is presented in such a way, that it is suitable for analysing and drawing inferences. This function helps the users in making decisions. Different types of financial ratios are calculated to explain the financial statements.

• Communicating:

It is a way of conveying relevant data from a company’s financial statement to various stakeholders for making decisions. This data can be in the form of a balance sheet, profit and loss account, cash flow statement, fund flow statement, trial balance, etc. This data is then shared externally with the stakeholders with the help of annual reports. This data is also shared internally to the managers to make decisions.

• Controlling:

Accounting helps in finding or spotting the weak areas of an enterprise and it suggests the remedial actions to be taken. It helps in controlling the functional areas of an enterprise. It also helps in creating different budgets every year for different departments. These budgets are compared with the actual accounting data of the previous year or years to find out the difference. These differences are analysed in detail to overcome them. Similarly, historical accounting data can be compared with the current data to analyse the performance. Therefore, the managers can take proper decisions and control the expenses.

• Evaluating:

Accounting helps in evaluating the profit and loss of every department and the business organisation. This evaluation is done on a regular basis. Because of the evaluation, the organisation gets a continuous feedback on the improvement process. These evaluations in turn help in assigning the responsibilities of each department.

• Decision-Making:

Accounting helps the people internally and externally to make certain important decisions. For example, it helps the banks to decide the liquidity position and the profitability position, which can be used to decide whether to give the loan to the company or not. Another example is of the stakeholders. It helps them to decide whether to continue investing, or to get back the funds and invest in any other company that will give them higher returns.

• Forecasting:

Accounting data helps in proper forecasting, which enables the organization to take effective future decisions.

Three Main Branches of Accounting:

1. Financial Accounting
2. Cost Accounting
3. Management Accounting

Financial Accounting: It is a process of identifying, measuring, recording, classifying, summarizing, analysing, interpreting, and communicating the financial transactions and events to an entity or the outsider. The prime objective of financial accounting is to communicate the results of business operations for a given period.

Cost accounting: It records the cost elements in details and prepares statements and reports for ascertaining and controlling costs. The main objectives of cost accounting are as follows:

• To ascertain the cost of each activity, product or process.
• To control and reduce costs.
• To fix appropriate selling price for products.
• To ascertain profit from each product, unit, activity or process.
• To measure the efficiency of each department or profit center.
• To assist in various decision-making needs of managers.

Management Accounting:  Chartered Institute of Management Accountants (CIMA), ``Management accounting is the application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives in the making of rational decision with a view towards achieving these objectives. ``

Management Accounting helps in preparing the reports on a regular basis to help the department managers and the top management in decision-making.  These reports usually determine the level of sales generated, accounts payable, accounts receivables, raw materials, etc.