FINANCE TO NON- FINANCE

It’s an anecdote and the usual one, our FAR [Financial Accounting & Reporting] Professor announced that he would show us our Test papers on Wednesday. So I was just chatting with a friend (of non- commerce background) of mine about random college stuff and she was scared, tensed and also furious with me only because I was well acquainted with the basics and she wasn’t. The humour here is that she started dreaming about it, and the dream was evil, it was the finance monster. This happens with most of the students who are from a non- commerce background. But finance is a subject not to be scared of, you just have to develop an interest for it. Like you can think like this, you are here to pursue MBA thinking that after two years you’ll start earning a good amount from a job or you’ll start your own business. The whole thing revolves around money- how to get money, how to control it, how to spend, how to save it. This is where you can develop your interest in finance.

Finance teaches you the various money management concepts. There are three basic things to be considered:-

·         How does money flow in a business?

1.       Money comes in (sale of goods and services)

2.       Money goes out (purchase of goods and services)

3.       Money not spent stays in the business (retained earnings)

·         List of all the resources of money, one can think of

1.       Money introduced by owners (share capital/owners capital)

2.       Money made and retained (profit)

3.       Money borrowed from other people (bank loan)

4.       Assets

·         Cash flow and cash flow forecasting.

 We know that money and its control is important. But we must also know how to use the                available money in a proper way. This involves decision making. You must plan your business    activities.

So what do you understand by a business plan?

·         Where the business is now

·         Where the business sees itself after a few years.

·         A detailed plan of how you propose achieving the objectives set out above.

·         The financial forecasts of the results of these efforts.

In order to master this you need to be clear with a few basics, which again is not difficult and scary.

The three golden rules:-

Personal – Debit the receiver

                    Credit the giver

Example- Suppose Mr A Co. Ltd has deposited cash into your bank account.

So, here your bank account will get debit and Mr A Co. Ltd. a/c will get credit

Real – Debit what comes in

            Credit what goes out

Example- Purchased furniture in cash

Since furniture is coming into the business and cash is going out. Therefore you will debit furniture a/c and credit cash a/c.

Nominal – Debit all expenses and losses

                    Credit all income and gains

Example- Commission received

Since you are earning commission you credit the commission received a/c and debit the cash a/c.

Accounting Equation:-

This is the foundation of double-entry bookkeeping.it is established that:

Assets = Liabilities + Equity

The accounting equation shows the relationship between the economic resources of a business and the claims against those resources.

Balance sheet:-

The balance sheet provides a ‘snapshot’ of a firm’s financial position. Prepared at a point in time, the balance sheet shows what the firm owns (assets) and owes (liabilities owed to outsiders plus the residual interest owned to shareholder/owners)

Assets:-

An asset is something that a firm owns and has future economic benefits.

Liabilities:-

Liabilities are the obligations to pay or convey assets in the future based on past transaction.

Equity:-

It is the ownership interest of those who have invested in the company through the purchase of capital stock.

Retained Earnings:-

Any profits made by the business that are not drawn by the owners/partners and members in the form of dividend/ profit share, are obviously retained in the business. These retained surplus profits are referred to as retained earnings.

Financial Statements:-

It provides information about an enterprise’s financial position and financial performance. Financial statements present the financial effects of transactions and other events by grouping them into broad classes, or elements. There are four major financial statements:

1.       The balance sheet shows the financial position at a point in time

2.       The statement of profit and loss  reports the financial performance in a period

3.       The statement of changes in equity explains how equity changed as a result of net profit, dividends, return of capital and other transactions in a period.

4.       The statement of cash flows summarizes the cash inflows and outflows resulting from operating, investing and financing activities in a period.

Ending here, I hope that this cleared the confusion a bit and was informative. Yes Finance is a bit sophisticated subject but is not scary. You’ll enjoy as you learn more and will be eager to apply your knowledge in the practical world.