Syllabus

• Basic knowledge of Double entry system of Accounting,
• Techniques of Analysis of Financial Statements,
• Responsibility & Social Accounting.
• Meaning & Objectives of Auditing, Social, Performance & Efficiency Audit,
• Elementary knowledge of Government Audit.
• Basic knowledge of Performance Budgeting, Zero-Base Budgeting.

Basic Knowledge of Double Entry System

DEFINITION – A system of recording financial transactions where every transaction affects at least two accounts ensuring that the accounting equation (Assets= Liability + Equity) remains balanced.

ACCOUNTING – Business transactions keeps on going continuously in every business. Due to inherent limitation of human mind it is impossible to remember every transaction therefore these transactions are recorded in writing. The art of recording these transactions is known as accounting.

Accounting is completed in following steps: Recording – Classifying – Summarizing – Presenting.

• Books used at various stages of Accounting

  1. Journal – Book of original entry.
  2. Cash book, Sale Book etc. (सहायक पुस्तकें)
  3. Ledger – Used for classification, Book of Principle entry
  4. Trial Balance.

Objectives of Accounting

• Calculation of Profit/Loss.
• To know financial position of organisation.
• No need to memorize every transaction
• Used as evidence in future
• Better financial management in future.

Accounting System Classification

ACCOUNTING SYSTEM CAN BE CLASSIFIED IN TWO MAJOR CATEGORIES

1. SINGLE ENTRY SYSTEM – According to this system business transactions affects only one account therefore all business transactions are recorded at one place only, in accounting books.

   E.g. Government Accounting

2. DOUBLE ENTRY SYSTEM – According to this system every business transaction affects at least two accounts therefore every transaction is recorded at two places in the accounting book.

   E.g. Salary paid – Cash AccountSalary Account

Types of Accounts in Accounting

THERE ARE 3 TYPES OF ACCOUNTS IN ACCOUNTING:

1. PERSONAL ACCOUNT – This category covers accounts related to human beings or institutions.

   E.g. Ram's Acc., Shyam's Acc.

2. REAL ACCOUNT – This category covers accounts related to goods or assets.

   E.g. Furniture a/c, Building a/c

3. NOMINAL ACCOUNT – It covers accounts which are not covered by above two categories.

   • It covers accounts related to income, expenses, profit, loss, etc. E.g. Wages a/c, salary a/c, rent a/c

Rules of Accounting

RULES OF ACCOUNTING – ALSO C/D GOLDEN RULES OF ACCOUNTING

	DEBIT	CREDIT
PERSONAL	RECIEVER	GIVER
REAL	WHAT COMES IN	WHAT GOES OUT
NOMINAL	EXPENSE/LOSS	INCOME/PROFIT

Condition that needs to be fulfilled for a transaction to be added in accounting:

1. Must be related to business.
2. Must have monetary value.

Analysis of Financial Statements

FINANCIAL STATEMENT – They are a set of documents that show company's financial status at a specific point of time.

• They include key data on what your company owns & owes and how much money it has made and spent.
• These statements are prepared in final step of accounting.
• They are also known as gist of accounting.
• Also known as final account because accounting process completes after preparation of these statements.
• Every business wants to know the result of business i.e. profit or loss & its financial position, therefore financial statements are prepared.

Main Financial Statements

FOUR MAIN FINANCIAL STATEMENTS:

• Balance Sheet
• Income statement
• Cash flow statement
• Statement of retained earnings

BALANCE SHEET – It is statement of financial position of business.

• It shows what a company owns & owes at end of a period.
• It this statement assets are recorded in one, side & liabilities on other & the total of both sides remains equal.
• It is prepared on particular point of time.

Why is Analysis of Financial Statements Done?

4. WHY IS ANALISIS OF FINALCIAL STATEMENTS DONE?

   • Financial statements provided info about P&L or asset-liabilities of the business but fails to provide info about productivity or performance in comparison with others.
   • Therefore, Analysis of financial statement is required.

TYPES OF FINANCIAL STATEMENT ANALYSIS

On the basis of information used	On the basis of functionality or nature
INTERNAL	VERTICAL
EXTERNAL	HORIZONTAL

• INTERNAL ANALYSIS –

  When information used for analysis is available only to internal people of the company (E.g. Manager, Owner etc) then such analysis is c/d internal analysis.

• EXTERNAL ANALYSIS –

  Analysis by outsiders on the basis of published information such as tax department, banks etc.

• VERTICAL ANALYSIS

  Analysis of data of one year for one company.

• HORIZONTAL ANALYSIS –

  Analysis of data of more than one company or more than one year.

Techniques of Financial Statement Analysis

TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS

1. Break even point
2. Ratio Analysis
3. Cash flow Analysis
4. Fund flow Analysis
5. Common size fin. Statement
6. Trend analysis
7. Comparative financial statement

Break Even Point

1. BREAK EVEN POINT

Break even point is a level of sale or products where all costs are met by sales price meaning no P&L at this point. Every unit sold beyond this point is profitable and sales below this level is loss making

• Cost can be divided into two parts.

(A) FIX COST -

• Means cost having no direct relation with quantum of sales of production.

• Meaning it remains constant irrespective of level of sales.

  E.g. Factory Rent

(B) VARIABLE COST – Cost which keeps on changing with change in quantity of goods produced or sold E.g. – Raw Material

BEP = FIX COST / (SALE PRICE PERCENT – VARIABLE CHANGE)

Ratio Analysis

2. RATIO ANALYSIS -

It is used to establish mathematical relationship b/w two numbers.

TYPES

On the basis of information used	On the basis of functionality
i. Profit & loss accounts ratio	i. Profitability ratio
ii. Balance sheet ratio	ii. Liquidity ratio
iii. Inter statement ratio	iii. Capital structure ratio
	iv. Activity ratio/Turnover ratio
	v. Market test ratio

Profitability Ratio

• PROFITABILITY RATIO – These ratio indicates profit earning capacity of the business.

These can be of two types

a) Profitability ratio based on sale

$$GROSS\mathrm{\_}PROFIT\mathrm{\_}RATIO=\left(\frac{GROSS\mathrm{\_}PROFIT}{NET\mathrm{\_}SALES}\right)\times 100$$$$NET\mathrm{\_}PROFIT\mathrm{\_}RATIO=\left(\frac{NET\mathrm{\_}PROFIT}{NET\mathrm{\_}SALES}\right)\times 100$$$$OPERATING\mathrm{\_}PROFIT\mathrm{\_}RATIO=\left(\frac{OPERATING\mathrm{\_}PROFIT}{NET\mathrm{\_}SALES}\right)\times 100$$$$OPERATING\mathrm{\_}EXPENSES\mathrm{\_}RATIO=\left(\frac{OPERATING\mathrm{\_}EXPENSES}{NET\mathrm{\_}SALES}\right)\times 100$$$$ADMIN\mathrm{\_}EXPENSES\mathrm{\_}RATIO=\left(\frac{ADMIN\mathrm{\_}EXPENSES}{NET\mathrm{\_}SALES}\right)\times 100$$

b) PROFITABILITY RATIO BASED ON CAPITAL/ INVESTMENT

$$RETURN\mathrm{\_}ON\mathrm{\_}INVESTMENT=\left(\frac{PBIT}{CAPITAL\mathrm{\_}EMPLOYED}\right)\times 100$$$$RETURN\mathrm{\_}ON\mathrm{\_}OWNERS\mathrm{\_}CAPITAL=\left(\frac{PAT}{OWNERS\mathrm{\_}CAPITAL}\right)\times 100$$$$RETURN\mathrm{\_}ON\mathrm{\_}EQUITY\mathrm{\_}SHAREHOLDERS\mathrm{\_}FUND=\left(\frac{PAT-PREFERENCE\mathrm{\_}DIVIDEND}{EQUITY\mathrm{\_}SHAREHOLDERS\mathrm{\_}FUND}\right)\times 100$$

Liquidity Ratio

• LIQUIDITY RATIO – Used to examine short term payment capacity or short term solvency of the business.

TYPE -

a) CURRENT RATIO – It indicates repayment capacity of liabilities arising within one year its ideal ratio 2:1

$$CURRENT\mathrm{\_}RATIO=\frac{CURRENT\mathrm{\_}ASSET}{CURRENT\mathrm{\_}LIABILITY}$$

b) QUICK RATIO/ACID TEST – If liabilities arise within very short period then capacity of their repayment can be examined by this ratio Ideal ratio = 1:1

$$QUICK\mathrm{\_}RATIO=\frac{QUICK\mathrm{\_}ASSET}{CURRENT\mathrm{\_}LIABILITY}$$$$QUICK\mathrm{\_}ASSETS=CURRENT\mathrm{\_}ASSETS-PREPAID\mathrm{\_}EXPENSES-STOCK$$

Activity Ratio

c) ACTIVITY RATIO – Calculated to examine efficiency of management

In these ratio assets etc. are compared with turnover

$$FIXED\mathrm{\_}ASSETS\mathrm{\_}TURNOVER\mathrm{\_}RATIO=\frac{TURNOVER}{AVG.FIXASSETS}$$$$CURRENT\mathrm{\_}ASSETS\mathrm{\_}TURNOVER\mathrm{\_}RATIO=\frac{TURNOVER}{CURRENT\mathrm{\_}ASSET}$$$$DEBTORS\mathrm{\_}TURNOVER\mathrm{\_}RATIO=\frac{CREDIT\mathrm{\_}SALE}{AVG.DEBTORS}$$$$CREDIT\mathrm{\_}TURNOVER\mathrm{\_}RATIO=\frac{CREDIT\mathrm{\_}PURCHASE}{AVG.CREDITORS}$$$$STOCK\mathrm{\_}TURNOVER\mathrm{\_}RATIO=\frac{COSTOFGOODSSOLD}{AVG.STOCK}$$

Capital Structure Ratio

d) Capital structure ratio

$$DEBT\mathrm{\_}EQUITY\mathrm{\_}RATIO=\frac{DEBT}{EQUITY}$$$$PROPRIETARY\mathrm{\_}RATIO=\frac{FIXED\mathrm{\_}ASSET}{EQUITY\mathrm{\_}SHARE\mathrm{\_}CAP}$$$$INTEREST\mathrm{\_}SERVICE\mathrm{\_}COVERAGE\mathrm{\_}RATIO=\frac{PBIT}{INTEREST}$$$$DEBT\mathrm{\_}SERVICE\mathrm{\_}COVERAGE\mathrm{\_}RATIO=\frac{PBIT}{INTEREST+EMI}$$

Market Test Ratio

e) Market Test Ratio

$$EPS\mathrm{\_}RATIO=\frac{PAT-PREFERENCE\mathrm{\_}DIVIDEND}{NO.OFEQUITY\mathrm{\_}SHARE}$$$$DPS=\frac{EQUITY\mathrm{\_}DIVIDEND}{NO.OFEQUITY\mathrm{\_}SHARE}$$$$P/E\mathrm{\_}RATIO=\left(\frac{EPS}{MARKET\mathrm{\_}PRICE\mathrm{\_}EARNING}\right)\times 100$$

Trend Analysis

3. TREND ANALYSIS -

This analysis indicates increasing or decreasing trend.

• It is a graphical analysis & it is used to compare data of multiple years. E.g. Data of population increase in 10 years.

Comparative Financial Statement

4. COMPARATIVE FINANCIAL STATEMENT -

• It is horizontal analysis. It is used to compare data of more than one company or data of more than one year.

Common Size Financial Statement

5. COMMON SIZE FINANCIAL STATEMENT

• It is type of vertical analysis.
• It is used to compare data of one year for one company. Any data from financial statement is considered as base & all remaining figures are presentable as percentage figure

EXPENSES	AMOUNT	%	INCOME	AMOUNT	%
PURCHASE	3L	50%	SALE	6L	100%
WAGES	3L	50%
	6L	100%
			6L

Cash Flow Analysis

6. CASH FLOW ANALYSIS

• Cash is an important asset for business therefore stringent control & detailed analysis is required for this purpose cash flow analysis is performed.
• If cash comes in – Inflow
• If cash goes out - Outflow
• There are three sources of cashflow
  • Operation Activity
  • Investing
  • Financing

Fund Flow Analysis

7. FUND FLOW ANALYSIS

• It is prepared to cover cash as well as non-cash transactions because cash flow analysis only cash transaction..
• This statement is used to analyse changes in assets and liabilities b/w two balance sheet dates (i.e. end of financial years)

Responsibility Accounting/Auditing

RESPONSIBILITY ACCOUNTING/AUDITING

It is method of management accounting in which all business activities are divided in different responsibility centres and to achieve these targets personal responsibility of an individual or small groups is fixed and after a period these targets are compared with actual results and remedial measures are taken in case of deviation.

There are mainly 4 types of responsibility centres:

1. Cost Centre
2. Profit Centre
3. Investment Centre
4. Revenue Centre

Objectives of Responsibility Accounting

OBJECTIVES OF RESPONSIBILITY ACCOUNTING :

Improving accountability, facilitating performance evaluation, aiding decision making & enhancing organizational control

LIMITATIONS –

• Potential conflicts b/w goals of different responsibilities centres
• Difficulty in accurately allocating cost
• Possibility of managers focusing solely on short term results rather than long term goals.

Social Accounting /Auditing

SOCIAL ACCOUNTING /AUDITING :

In treditionall theories, maximisastion of profit was considered as main objective of business, but in mordern theories profit along with social welfare is considered more important.

Meaning the business should align their economic objective with social objectives in such a menner that maximistation of both can be ensured.

SOCIAL ACCOUNTING /AUDITING :

The gusinessess damage the societies in many ways Ilike pollution, explotation of natural resources etc this is known as social cost of business. Therefore the business must perform soocial welfare activities for the society which is known as the social responsibility of the business.

Social accounting is a method of analyzing social cost of the business with their social welfare activities.

It is also known as non-financial accounting.

SOCIAL ACCOUNTING /AUDITING :

OBJECTIVES

• Enhance transparency by providing stakeholders with clear infromation.
• Foster accountablility for social & environmental impact.
• Promote sustainable development through long term considerations.
• Enhanse reputation & brand image of organization.

LIMITATION

Social impacts difficult to identify & measure, no universally accepted framework, can be costly, organisatio may report selectively.

Auditing

AUDITING

• Audit is an independent & unbiased examination under which a professional examines financial statements & other accounting records and expresses opinion through an audit report after the examination, in which he opines that whether the infromation given in financial statement is true/fair or not.

BENIFITS / OBJECTIVES OF AUDIT

• Independent & unbiased examination
• To find out mistakes, fraud, embezzlement
• To ensure compliance of law.
• To stop errors in future.
• To find out weak areas of business.
• To establish trust of outsiders.

Limitation of Audit

LIMITATION OF AUDIT

• Error may remain unchecked as audit is conducted on sample basis.
• Possibility of human error.
• Integrity of auditor may be influenced.
• Documents presented might be incomplete / manipulated.

AUDIT REPORT –

• Audit report is a medium by which auditor expressess his opinion.
• General the report is submitted to appointing authority.
• It can be follwing types.

1. Clean Reprot – If in opinion of auditor all info is true & fair.
2. Adverse Report – If info is not ture/fair.
3. Disclaimer - If info or documents required are not presented.
4. Qualified report - Only some error

Types of Audit

TYPES OF AUDIT

1. ON THE BASIS OF TIME
2. ON THE BASIS OF NATURE OF AUDITOR
3. ON THE BASIS OF FUNCTIONS

On the basis of time

1. ON THE BASIS OF TIME

• Final Audit – Audit after completion of financial year
• INTERNIM AUDIT – Audit b/w tow final audits.
• CONCURRENT AUDDIT - Audit conducted throughout the financial year. E.g. Bank Audit.

On the basis of Nature of Auditor

2. ON THE BASIS OF NATURE OF AUDITOR

• External Auditor – Also c/d statutory audit

  • Performed by independent & unbiased outside professional
  • Main objectives is to examine trueness & fairness.
  • It is generally mandated under law.
  • E.g. In India all companies are required to audit under company's act & share report to owner & stakeholder.

• Internal Auditor – Can be performed by employee pr example

  • Objective – Check compliance of internal rules or policies.
  • Report submitted to managers or board od directors
  • Generally this is voluntary.

On the Basis of Functions

3. ON THE BASIS OF FUNCTIONS

• Legal Audit – To check if legal or not
• Energy Audit – Energy Compliance of building etc check
• Management Audit
• Proprietary Audit
• Social Audit
• Performance/Efficiency audit

Social Audit

SOCIAL AUDIT

• It is the process of assessing and evaluating an organisation's performance in fulfilling its social responsibilities.
• Objectives – Measuring social impact, enhancing transparency, fostering stakeholder engagement.
• Limitations – Lack of standardized methodology, potential for manipulation, bias in reporting.

Performance Audit

PERFORMANCE AUDIT / EFFICIENC AUDIT

• Performance audit is also c/d efficiency cum performance audit (ECPA) or value for money (VFM) audit.
• It is the comprehensive review of the projects, programs, schemes etc. in terms of their goals and objectives.
• It is an independent assessment or examination of the extent to which a program or scheme operates economically, efficiently & effectively.
• Objectives – Assessing the effectiveness of resource utilisation identifying areas for improvement, enhancing performance.
• Limitation – Difficulty in quantifying qualitative aspect, challenges in comparing performance.

Government Audit

GOVERNMENT AUDIT

Govt. Sector can be classified into two categories.

1. Govt. Companies (PSU/PSE) – They are covered by companies act therefore they will have. a) Internal Audit b) External Audit (Statutory audit) c) CAG Audit

2. Govt. Departments – In case of govt. department generally tow audits are performed.

   a) Internal Audit – Performed by dept team or audit team est. by govt.

   • The objective of this audit is to examine compliance of rules/policies formulated by govt. E.g. Leave related rules, medical expenses. b) Audit by CAG – It is known as performance audit.

   • It is not performed to examine compliance of internal rules or errors.

   • Objective of this audit is to examine whether the tax payer's money is utilized with full efficiency and in rational manner. Meaning public money should be used to ensure maximum public welfare.

GOVERNMENT AUDIT

• CAG Audit is categorised in two categories

  i. Performance Audit ii. Regulatory Audit

• Every govt. department shares their expenditure details with regional AG office on regular basis and departmental account are reconciled with records maintained by CAG month end.

  Efficiency Audit – It is an examination in which we analyse efficiency of a department in utilizing allocated resources.

Audit performed by CAG is efficiency audit.

Performance Budgeting

PERFORMANCE BUDGETING

• Combined outcome budget of all ministries of govt is c/d performance budget.
• It is a budget generally used at the level of govt or ministry
• In this budget allocated resources are compared with expected physical outputs.
• In India, every dept or ministry prepares an outcome budget. In this they compare works performed wit allocated resources. The budget of the govt is based on these outcome budgets.

Zero Base Budgeting

ZERO BASE BUDGETING

• In this techniques every budget is started from zero base, meaning budget of previous year have no relation with current budget.
• In this method the rationality of money demanded for current year needs to be informed.
• This brings fiscal discipline in the government.