Accounting Fundamentals

Kamalesh Mandlik

Agenda
Need for Accounting - Why to do accounting? Understanding of Financial Statements
What is accounting?

Accounting Concepts
Rules of Accounting Detailed accounting entries

Need for Accounting Why to do Accounting ?

Stakeholders need to know financial status
Is business making or losing money? How much is business worth?

Statutory requirements

Users of Financial Statements

Financial Analysts Investment Bankers Creditors

Stock Exchanges
Individual Investors Credit Rating Agencies

Understanding Financial Statements

Financial Statements
Profit & Loss A/c (OR Income Statement) Balance Sheet

Profit & Loss A/c (OR Income Statement)

Contents Revenues generated Expenses Incurred

Operating Profit before Interest, Tax

and Depreciation Net Profit / Loss before tax Profit after tax
7

Balance Sheet
Contents Assets (Fixed & Current) Liabilities (Long-Term & Current)

Owners Equity

Ratio Analysis
Balance Sheet ratios Current ratio, Debt- Equity ratio etc. Profitability Ratios Operating Profit ratio, Net Profit ratio, EPS

Ratios including elements of both Statements

Return on Capital Employed (ROCE) Return on Net worth

Turnover ratios

Balance Sheet ratios

Current Ratio = Current Assets / Current Liabilities Higher the better Net Working Capital (NWC) = Current Assets less Current Liabilities Debt-Equity Ratio = Long term Debt / Equity capital Lower the better

10

Profitability Ratios
Operating Profit ratio
= Operating Profit / Sales Net Profit ratio = Net Profit / Sales Earnings per Share (EPS) = Profit after tax / No. of shares outstanding

11

Combination Ratios
Return on Capital Employed (ROCE)
= Operating Profit /(Fixed Assets + NWC) Return on Net worth = Profit after tax / Equity (Net worth)

12

Turnover ratios
Asset Turnover Ratio = Sales / Average Total Assets Higher the better Inventory Turnover

= COGS / Average Inventory

Should be optimal

13

Valuation of Shares
FCFE - Free cash flow to equity
= PAT + Depreciation WACC Weighted Avg Cost of capital = Cost of equity + Cost of debt Terminal value = Present value of Net assets (i.e.Assets Less Liabilities)

14

Question & Answers

What is accounting?
Involves recording, classifying, and summarizing of transactions

having financial character

16

Double Entry System of Accounting

An Italian monk Fra Luca Pacioli created this great & scientific system over 500 years ago.

Every time a transaction takes place

two accounts will be affected i.e. one is debited and other is credited.

17

Accounting systems
Involves Journals Book of original entry Sub ledgers

General Ledger (Trial Balance )

Financial Statements

18

Ledgers in ERP
General Ledger

Sub ledgers
Inventory Accounts Receivable

Accounts Payable
Payroll Fixed Assets Projects

19

The Accounting Equation

Assets = Liabilities + Owners Equity This is the basic equation of Accounting, which is satisfied by all transactions.

20

ACCOUNTING CONCEPTS
Accruals - Revenue and expenses for a given period considered whether received / paid or not. Matching - Revenue earned in a period is matched against expenses incurred.

Business Entity - Entity separate and distinct from its owners & others.
Consistency Dual Aspects - There are two sides to each transaction recorded.
21

ACCOUNTING CONCEPTS
continued Going Concern - Enterprise will continue in operation for the foreseeable future. Needs disclosure if not so. Materiality Significance compared to firms size

Money Measurement Items assessable in terms of money

Prudence - Do not anticipate profit but do provide for losses Realization Profits considered on Accrual basis

22

Detail Accounting Entries

Tomorrows session

Question & Answers

Thank you

25

Session 2
Detailed Accounting Entries

26

Covered in 2 Sections
General Accounting (Various transactions) Inventory Accounting with strong ERP focus

27

Steps
1 Decide if it is a event OR transaction ? 2 Determine 2 sided effect 3 Determine accounts affected

4 Whether they Increase/Decrease ?

5 Debited / Credited

28

Question & Answers

Thank you

30