 Namaste to all of you, today we are going to start a new course on financial accounting. I am very much excited to meet you all and I am sure at your end also you are excited to take the new course on financial accounting. This is a brief introduction about myself. I am Varadraaj Bapad, I am a chartered accountant and cost accountant, currently I am a faculty in finance at IIT Mumbai and I have teaching interests mainly in the area of accounting as well as to an extent in economics. I also have various research interests including in accounting, bankruptcy prediction, financial disclosures, financial inclusion, portfolio management, green accounting and so on. I am also interested in yoga, Brahma Vidya as well as Bharatiya Sanskriti, these are about my Facebook pages. For a more detailed study, I have written a book on financial accounting, a managerial perspective. This mainly caters to those who are interested in the study of accounting but tries to consider those students who may not have a commerce or accounting background but today are interested in accounting education. Now the course is mainly going to discuss about financial accounting and financial statements. We also have one more course on cost accounting which we will discuss about the accounting issues related to cost. You will need to submit various assignments in during the course, we will be discussing about as and when the assignment becomes due. So now we will start in this PPT discussion on comparison between financial cost accounting and then we will also learn about financial statements. Now for those who do not have accounting as their basic background, as far as the commerce and accountancy students are concerned, anyway this course is going to be very much relevant. But even for others, assuming that you are engineers or you are pharmacists or for that matter you are art students or science students, this course is equally going to be important for you because when you join your career, whether it is a job or whether for doing some business, you are mainly being hired for your functional expertise. But as you move up the ladder, actually your management and financial expertise becomes more than more important. So accounting will be very much useful to you because it will help you to build your understanding of finances. It will also help you to analyze the performance of yourself as well as others which is very much important when you are in a managerial position. Now we will discuss a bit as to what is accounting. In simple terms, we can define accounting as a language of business where the performance is reported and evaluated in financial terms and if you are doing accounting properly, it leads to improvement in the efficiency which will ultimately maximize the profits. Accounting data is very much useful for planning, organizing and controlling of all business operations and even for non-business entities like government or NGOs. Now the knowledge of accounting is also useful for personal investment and tax planning decisions. Keep in mind that this course is not to make you an accountant. Those of you who have taken accounting as your basic area, you can learn more detailed accounting and can become accountants but this course is for everybody. So you may or may not be intending to be an accountant. You can be a doctor, you can be an engineer, you can be a manager, you can be a pharmacist but what this course enables you to is to understand some basic accounting and financial concepts. These terminologies are going to be helpful to you in any area because your performance is going to be evaluated in financial terms, whoever you are. And this course is mainly to make you understand those terminologies. Now there are three important streams of accounting. So we will discuss with trying to understand what are these streams. The first one is financial accounting, then there is cost accounting and there is management accounting. Now this particular course is on financial accounting. So we will be going into what is financial accounting more in details but right now we are just trying to differentiate the three main streams. So what financial accounting deals with is about recording of financial transactions. That is the first step, the next step is summarizing the transactions and the third step is reporting of the financial position. That is usually by preparing financial statements. Now briefly every business transaction needs to be recorded if it has some financial implication. Can you think of some business transactions? For example, you might purchase raw material, it is a business transaction, then you may do some processing, you may go for selling of a finished product. You may incur expenses on travelling, you may be charged by bank charges by the bank as an expense, you may receive interest. All of these are examples of business transactions and they need to be recorded. Even if you are a non-business entity, let us say you are an NGO or you are a government, then also these transactions are there. So business or non-business but any transaction which has a financial implication needs to be recorded. So the first step in financial accounting is recording of every transaction. Next step is about summarizing the transactions. Almost all of you would have your own bank account. So you will be entering into various transactions with bank. I think you would have also seen passbook or a bank statement. Now what does the bank statement give you? Bank statement or a passbook is a summary of your transactions with the bank. Now bank is having lakhs of customers and they are having variety of transactions. They are also having apart from customers various investment and loan related transactions. But what they are doing is they are summarizing only the transactions related to a particular account holder and then they give you a passbook. So the second step is summarizing the related transactions. In this case if as a customer of a bank you get a summary of your transactions, it becomes useful to you. You are not interested in other transactions of the bank. Neither bank is authorized to pass you on the information of other customers. So they will just summarize the transactions about you. That is the second step and in case of so in this example it was a personal transaction for a particular customer. Same way bank will summarize the transactions about loans at one place, transactions about their assets at one place, transactions about their salary expenditure at one place. So they would be summarizing the related transactions in the second step. Those of you you are aware of the terminology is used in accounting. Normally the first step is called as journalizing or recording the transactions in the journal. The second step is called as preparation of leisure accounts. Now I am not using that jargon here. So to make it simple I have just tried to put two steps as recording of transactions and the second step as summarizing of transactions. Now in the third step reporting is done because you already have summarized the transactions now. Now at the end of accounting period, it can be one year or it can be at the end of the month what we are interested in knowing the final balances. So you may be wanting to know your profits, you may be wanting to know how much cash you have, you may be wanting to know how much bank deposits you have. So you want to have a final summary of the balances which represent your financial position. So in the third step reporting is done by preparing various financial statements. Keep in mind that the whole exercise of financial accounting is mainly for preparation of financial statements which are intended for external users. So financial statements are passed on to outsiders of the business. Now who can be external users? As you are aware most of the people have to file income tax returns. So along with income tax returns if you are a businessman you will need to give your financial position. So one of the users of financial statements are taxation authorities or government authorities. There can be various other users for example if you approach a bank for a loan, bank will ask you to submit your financial statement or a balance sheet. So they are also your external users. In some cases customers ask for some statement sometimes for vendor registration that is you want to be a supplier to a particular company that company asks for your financial statement. So even your customers or your suppliers become the parties who are interested in your financial statements then employees might be interested. So a variety of external users are provided financial statements in case of many entities like listed companies those financial statements are put in public domain. So they are available for anybody who is interested in those financial statements. Internal users mind well are equally interested that can be management or that can be your board of directors or your owners. But in general financial statements are meant to be available for external users. That is why I have said that financial accounting is targeted to external users. I hope you are getting overall understanding as to the process or the steps of financial accounting. Now let us compare with second stream of accounting that is cost accounting. Now when it comes to cost accounting these are the three important steps. The first is recording of cost. Now you can see it very well matches with the financial accounting because there also the first step was recording of financial transactions. Now it says recording of cost. The next one is analysis of cost and the third one is preparation of cost statements. Now you may be wondering that the first step in financial accounting which is recording of financial transactions appears to be very similar. Now it is recording of cost. So is it the same thing? Many times yes because most of the financial transactions may give you some cost and almost all the costs are financial transactions. For example, if you go out let us say to a restaurant then you will incur some expenditure it will be a financial transaction it will also be a cost to you. You might be paying rent, rent is a financial transaction it is also a cost to you. You might be paying salaries again it is a financial transaction it is also a cost. So many times almost all costs are covered in financial transactions then do you need the step again? You have already recorded there in financial accounting then why do you need to record? Actually the answer is you need to record more because in cost accounting you are recording with lot of more details. For example, in financial accounting you may be just recording the salary here you are also recording the time consumed on what work that particular employee is doing you are also might be recording more details about the nature of work. So the recording of cost is actually more detailed recording it further leads to analyzing the costs under different heads. For example, say manufacturing cost, production cost, marketing cost, admin cost and so on. Based on this analysis finally you come out with various financial statements like a cost sheet. Keep in mind that cost accounting is primarily targeted to internal users. So this is a confidential data it is not given out to anybody it is mainly for internal users. So I hope you would have, I will just go back a bit. So now first we discussed financial accounting then we discussed cost accounting. We will not go into too much details of cost accounting because we are having a separate course on cost accounting where we will discuss further details about it. The third step in accounting or a third stream in accounting is known as management accounting. Now what is done in management accounting is it is a umbrella concept. Now you are recording both financial as well as other data you analyze the financial data with other data that leads to preparation of various statements which are mainly used for managerial decisions. Now this data again is a confidential it is maintained for decision making of various levels of management it is not given to outsiders. So it is targeted to primarily internal users. Now we have restated the streams so on one hand you have got financial accounting which is published normally in public domain for external users. On the other side you have got cost and management accounting many times it is together called as managerial accounting which gives you information on decision making and it is mainly for internal users. Now we will move to the next level. I hope you have understood the main streams of accounting. Now in financial accounting as you we have seen the final target is preparation of financial statements. Now let us look at these things that what do you mean by financial statements which are the important financial statements and what purposes these statements serve. Now the first thing what are the important statements? I think many of you might have heard about them or might have been aware about them. Do you think of different financial statements? I think most of you are right there is a balance sheet there is a profit and loss account there is a cash flow statement and there are more statements which are considered as financial statements. Any statement which gives you financial information in a summarized form is considered as a financial statement. What purpose do they serve? For example if you take balance sheet what do you get from balance sheet? If you want to know the financial statement of that entity that how well be that entity is, what assets they have, do they have any payables or liabilities all that information you will get from the balance sheet that is the purpose of balance sheet we are going to discuss in detail in coming slides as to what does the balance sheet give you. The next is profit and loss account as the name suggests it gives you profit or loss at the end of some year or a month it also gives you what were the major streams of income or revenue where have you spent all that money and finally what you are left fit in the form of profits at various levels that is what is provided by P and L account. We also have a statement known as cash flow statement because many times you are interested in knowing how much cash the business has generated and where it has spent what are the major sources of earning cash what are the major sources of spending cash or major sources of making investments and so on. So, that all is summarized in cash flow statement apart from that also there are some more statements like there can be fund flow statements, there are financial statements of subsidiary books, there are financial statements of a particular cash related transactions like say cash book. So, variety of financial statements are prepared and they can be in the category of financial statements. In this course we will mainly be talking about balance sheet, P and L account and cash flow statement in coming weeks. Now to put it in a very much of a layman language if you think of a company or for that matter any organization it needs some resources for doing the business. So, you have got resources resources are provided by somebody. So, there are also providers for resources. So, for any organization these resources and providers for resources need to always match. Now while doing the operations normally you follow a basic business model. So, you start with some money then you may have to do some procurement of raw material or procurement of essential items then these are consumed in your operations, you get finished goods they are delivered then you go for billing collect the money back. So, you are back to money. So, what circle we have is normally known as a money cycle it can also be called as a business cycle or as a value addition cycle because what we are trying is if you are starting with x amount of money it goes through the whole process you would like to have x plus amount of money. So, there should be some value addition in the form of generation of some extra cash this is a basic business model. Now it is supported by infrastructure and it is operated by people because there are people who are essentially running the whole system they are also the part of business model or business cycle. Now usually the costs are incurred in the beginning part when you go for procurement or consumption of your resources and as you deliver it to the customers you start recovering money and that generates what is known as revenue. Now a statement is prepared to compare the costs and revenue now what that statement will be I think most of you are guessing it right that is what is called as profit and loss account it compares your costs and revenue. Now if you want to be profitable normally you will need more revenues than the costs and if you are consistently profitable the business or the organization will become healthy and strong and it will also help you to last longer. Now this business model from this business model we will try to understand what is PNL and what is balance sheet. As we have just discussed a statement is prepared for comparing revenue and cost that is called as PNL account it gives you net result in the form of profit or loss. On the other side you make a statement which lists out your resources those resources are known as assets and there are providers for resources which are known as liabilities. Now your assets are further categorized as fixed asset so whatever infrastructure you have is known as fixed asset because infrastructure is of permanent nature it is not getting continuously consumed in your process it acts as a catalyzed catalysis catalyst it supports your process. Now there are assets which are continuously moving in your business cycle these assets are known as current assets. So we have got two major categories fixed assets and current assets that current those current assets are also sometimes known as working capital. Now can you think of any examples of fixed assets I think one very easy example which would have come to your mind is say land or building. So to run the business you will need some place in the form of building you will also thinking you might also have thought of fixed assets like say vehicles there can be computers within the computer you will need software. So hardware as well as software all these are examples of fixed assets. Now what could be the examples of current assets? Now current assets you can look at a money cycle and I think you will realize what could be the current assets. So when you do procurement you are purchasing raw material then whatever raw material remains in your hand as an inventory or as a stock that is one current asset then you might consume the raw material and generate finished goods some of the finished goods will be with you as a stock. Again the stock of finished goods is an example of current asset. The finished goods or whatever services you are providing are provided to the customers then customers may not pay you immediately there might be some balances which are to be collected from the customers. So those receivable balances are also your current assets whatever cash you have in hand or whatever cash you have got with banks with in the bank account all these are examples of your current assets. So fixed assets current assets these are the major examples of assets. Can you consider people as your assets? The answer is both yes and no because people or human assets are the most important assets for the business. This is the intellectual capital you have they are the people who are running the business. Unfortunately human assets are not permitted to be shown on the balance sheet. Can you think why they are not to be shown on balance sheet? Because human assets are not owned by the entity or by that business. They are just working there maybe as employees or as partners or owners but they are not the assets which are owned. So it is necessary that an item which is owned by that company or by that organization that can only be shown as an asset. Since people are not owned human assets are not shown as a part of balance sheet. That is why in the slide I have shown it but I have shown it below the balance sheet. Okay. So these all these assets together are the resources for the business. Along with resources you will need the providers for resources because resources cannot come for free. There would be somebody who have provided who have provided those. Then there are three four examples as you can see from the slide there is capital there are borrowings and there are current liabilities. Now what is a capital? Capital refers to the money which owners have put in. What are borrowings? Borrowing refers to the money which the lenders have given you. For example banks or financial institutions they have given you some amount of loan that is called as a borrowing. And what are current assets or current liabilities? The current liabilities are the monies which are being generated from the money cycle. For example if you have purchased something but not paid them then those outstanding balances or payables are an examples of current liabilities. So I think now at the first stage you would have seen what are the important items on asset side and on liability side of the balance sheet. So we will stop here and in the first session what we have discussed till now. First we understood what is accounting. Then we have tried to distinguish between financial accounting and management accounting. Financial accounting is mainly for external users and we are trying to record the cost and prepare statements. In cost accounting it is mainly for internal users we record costs and provide various financial statements. In the next part we discussed about financial statements. So we have discussed what is money cycle or business cycle and from business cycle how do you get P&L and balance sheet. In the next session we are going to continue this and go further into what is P&L and balance sheet. So I hope you have liked the first session. So please watch the second session as well. Namaste.