B.A (HONS.

) BUSINESS ECONOMICS

SEMESTER 1
DSC - 2: ACCOUNTING FOR MANGERS
ACCOUNTING FOR MANAGERS
 WHAT IS ACCOUNTING?
• It is an information system that reports
– on the economic activities and
– financial condition of a business or organisation

• There needs to be a system or set of rules so

– we are able to compare entities to each other
Primary Objectives of studying this paper:
• Develop the ability
– to read,
– analyze and
– interpret
– financial statements

• Understand how financial accounting statements are

constructed

• Provide you with tools for economic decision making

– Where to find information
– How the information got there
 HOW ACCOUNTING CAN HELP YOU?

• Help you understand and present the financial position of

the business

• Help you prepare a budget and keep on target

• Realise how much cash you have and if there is enough to

pay bills

• Uncover places where costs can be cut

 ACCOUNTING IS THE LANGUAGE OF BUSINESS

• It will help you succeed in business

• It is the means that business information is communicated

to the stakeholders in the business

–Stakeholders are individuals and organisations that need

information about a business.

–They include lenders, government agencies, employees,

news reporters and others.
SEMESTER I: ACCOUNTING FOR MANGERS:
COURSE OVERVIEW:

Unit 1: Financial Accounting

Unit 2: Analysis and Interpretation of Financial Statements

Unit 3: Cost and Management Accounting

Unit 4: Planning and Control

 UNIT 1:
FINANCIAL ACCOUNTING
 TOPICS TO BE COVERED IN UNIT 1:
Meaning of Financial Accounting

Functions

Limitations of Financial Accounting

Users of Financial Accounting Information

Basis of Accounting: Cash and Accrual

Principles of Financial Accounting (GAAP)

Overview of International Financial Reporting Standards (IFRS) and Ind AS

Overview of Process of Financial Accounting: Journalizing, Ledger Posting and Preparation of Trial
Balance.
Preparation of final Accounts (with adjustments) of a Sole Proprietor: Trading and Profit and Loss
Account and Balance Sheet
• Accounting - a process of
– identifying,
– recording,
– summarising, and
– Reporting
– economic information to
– decision makers in the form of financial statements

• Financial accounting - focuses on the specific needs of

decision makers external to the organisation, such as
stockholders, suppliers, banks, and government
agencies
Accounting can be defined
as an information system
that provides reports to stakeholders
about the economic activities and
condition of a business.

Who are stakeholders? – anyone or any entity that has an interest in the
economic performance and well-being of a business

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 Accounting can be defined as an information system that
provides reports to stakeholders about the economic activities
and condition of a business.

Who are stakeholders? – anyone or any entity that has an interest in the
economic performance and well-being of a business
Bankers and other creditors – need to ensure that the business has the ability to
repay loans, and on a timely basis
Suppliers – need to ensure their customer (the business) will be around to purchase
their supplies and then be able to pay for them
Customers – are interested in the business to determine if they will always be around
to provide a constant flow of goods and services
Government – need to ensure that the business pays the correct amount of taxes

Employees and Management– need to ensure that the business is doing well so
that they will have a job
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 The Nature of Accounting

• The accounting system is a series of

steps performed to analyse, record,
quantify, accumulate, summarise,
classify, report and interpret economic
events and their effects on an
organisation and to prepare the financial
statements.
 The Nature of Accounting
• Accounting systems are designed to
meet the needs of the decisions makers
who use the financial information

• Every business has some sort of

accounting system.

– These accounting systems may be very complex or very

simple, but the real value of any accounting system lies in the
information that the system provides.
 Accounting as an Aid to Decision
Making/Information System

• Accounting information is useful to

anyone who makes decisions that have
economic results

– Managers want to know if a new product will be profitable.

– Owners want to know which employees are productive.
– Investors want to know if a company is a good investment.
– Creditors want to know if they should extend credit, how much to
extend, and for how long.
– Government regulators want to know if financial statements conform to
requirements.
 Accounting as an Aid to
Decision Making
• Fundamental relationships in the
decision-making process:

Accountant’s
Financial
Event analysis & Users
Statements
recording
 BRANCHES OF ACCOUNTING
Financial accounting is primarily concerned with the
recording & reporting of economic data and activities for a
business to external parties.
Managerial accounting uses both financial accounting and
estimated data to aid management in running day-to-day
operations and in planning future operations.
Accountants employed by a business firm or a not-for-profit
organization are said to be employed in private accounting.
E.g. CFO, Controller, or Financial Analyst of Pepsico

Accountants and their staff who provide services to the

public (i.e. individuals and corporations) on a fee basis are
said to be employed in public accounting. E.g. Price
Waterhouse Coopers, Ernst & Young, KPMG, Deloitte
 FINANCIAL ACCOUNTING

• Branch of accounting associated with

preparing reports for external users

• i.e. the bank, shareholders

 MANAGERIAL ACCOUNTING

• Accounting to guide management in making

decisions about the business

• For example: break even analysis

 OBJECTIVES OF FINANCIAL ACCOUNTING

• To report the financial condition of a

business at a point in time

• To report changes in the financial

condition of a business over a period of
time
Objectives continued…..
• First, record the economic events affecting a
business.

• Second, summarize the impact of these events in a

report called financial statements
– Generally Accepted Accounting Principles (GAAP)
 WHO’S WHO IN ACCOUNTING

• Bookkeepers-record each transaction

• Accountants-prepare financial statements

• Auditors-review the company’s books and look for

errors and discrepancies (could be internal or
external)

• Controller-in charge of the accounting department

 WHO’S WHO IN ACCOUNTING
• CPAs-certified public accountants

• Typically work for an accounting firm called public

accounting

• Once a year come in and do an audit of the books of

the company and do the related tax returns

• CPAs also work for private companies

 Financial and Management Accounting
• The major distinction between financial and
management accounting is the users of the information.

– Financial accounting serves external users.

– Management accounting serves internal users, such as top

executives, management and administrators within
organisations.
 Financial Accounting
The primary questions about an
organisation’s success that decision
makers want to know are:
• What is the financial picture of the
organisation on a given day?
• How well did the organisation do during
a given period?
 Financial Accounting
Accountants answer these primary questions with
three major financial statements:

• Balance Sheet - financial picture on a given day

• Income Statement - performance over a given period

• Statement of Cash Flows - cash position on a

particular day and flows
 Financial Accounting
• Annual report - a document prepared
by management and distributed to
current and potential investors to
inform them about the company’s past
performance and future prospects.

– The annual report is one of the most common sources of

financial information used by investors and managers.
 Financial Accounting
• The annual report usually includes:
– a letter from corporate management
– a discussion and analysis of recent economic events by
management
– footnotes that explain many elements of the financial
statements in more detail
– the report of the independent auditors
– a statement of management’s responsibility for preparation of
the financial statements
– other corporate information
 Financial Accounting
• Financial accounting is the language that
translates economic events into uniform and
comprehensive information, understandable
by OUTSIDE observers.

• Unfortunately, this language has become

extremely complex and heterogeneous…

• This is naturally a bad thing for the outside

observers.
 Users of Accounting Information

Different categories of users need different

kinds of information for making decisions.

These users can be divided into :

• Internal Users; and

• External Users.
 Internal Users

• These are the persons who manage the

business, i.e. management at the top, middle,
and lower levels.

• Their requirements of information are different

because they make different types of decisions.
 Internal Users continue…

• The top level is more concerned with planning;

the middle level is concerned equally with
planning and control; and the lower level is
concerned more with controlling operations.

• Information is supplied on different aspects, e.g.

cash resources, sales estimates, results of
operations, financial position, etc.
 External Users

All persons other than internal users come in

the group of external users. External users
can be divided into two groups:
·       those having direct interest; and
·       those having indirect interest

……in a business organisation.

 External Users continue…

Main sources of information for external

users are
• annual reports of business organisations,
which state the financial position and
performance and give the auditor’s report,
director’s report and other information.
 External Users continue…

• Investors and creditors are the external users having

direct interest.

• Tax authorities, regulatory agencies, customers, labour

unions, trade associations, stock exchanges, potentials
investors, etc are indirectly interested in the company’s
financial strength, its ability to meet short-term and
long-term obligations, its future earning power, etc for
making various decisions.
BASIC ACCOUNTING
TERMINOLGIES
 ASSETS

These are economic resources of an

enterprise that can be usefully expressed in
monetary terms.
Assets are things of value used by the
business in its operations.
·        Fixed Assets  
·       Current Assets
 ASSETS continue…

·    Fixed Assets are assets held on a long-

term basis.
e.g. Land, Building, Machinery, Plant,
Furniture and Fixtures, etc.
 ASSETS continue…

·   Current Assets are assets held on a short-

term basis.
e.g. Debtors, Bills receivable,
Stock(Inventory), Cash and Bank balances,
etc.
 LIABILITIES

These are obligations or debts that the

enterprise must pay in money or services at
some time in the future.

• Long-term liabilities

• Short-term liabilities
 LIABILITIES continue..

· Long-term liabilities are those that are usually

payable after a period of one year.

e.g. A term loan from a financial institution,

debentures (bonds) issued by a company.
 LIABILITIES continue..

· Short-term liabilities are obligations that

are payable within a period of one year.

e.g. Creditors, bills payable, overdraft from

a bank for a short period.
 CAPITAL

• Investment by the owner for use in the firm is

known as capital.

• Owner’s equity is the ownership claim on total

assets.

• It is equal to total assets minus total liabilities.

 REVENUES

• These are the amounts the business earns by

selling its products or providing services to
customers.

• Other titles and sources of revenue common to

many businesses are: sales, fees, commission,
interest, dividends, royalties, rent received, etc.
 EXPENSES

• These are costs incurred by a business in the process of

earning revenue.

• Generally, expenses are measured by the cost of assets

consumed or services used during an accounting period.

• The usual titles of expenses are: depreciation, rent, wages,

salaries, interest, costs of heat, light and water, telephone,
etc.
 PURCHASES
• Purchases are total amount of goods procured by a
business on credit and for cash, for use or sale.
• In a trading concern, purchases are made of
merchandise for resale with or without processing.
• In a manufacturing concern, raw materials are
purchased, processed further into finished goods
and then sold.
• Purchases may be cash purchase or credit
purchase.
 SALES

• Sales are total revenues from goods or

services sold or provided to customers.

• Sales may be cash sales or credit sales.

 STOCK

Stock (Inventory) is a measure of something

on hand – goods, spares and other items –
in a business.

It is called stock on hand.

 STOCK: continue…

In a trading concern, the stock on hand is

the amount of goods which have not been
sold on the date on which the balance sheet
is prepared. This is also called closing
stock.
 STOCK continue…

In a manufacturing concern, closing stock

comprises raw materials, semi-finished
goods and finished goods on hand on the
closing date.

Similarly, opening stock is the amount of

stock at the beginning of the accounting
year.
 DEBTORS

Debtors are persons and/or other entities who owe

to an enterprise an amount for receiving goods and
services on credit.

The total amount standing against such persons

and/or entities on the closing date, is shown in the
Balance Sheet as Sundry Debtors on the asset side.
 CREDITORS

Creditors are persons and/or other entities who

have to be paid by an enterprise an amount for
providing the enterprise goods and services on
credit.

The total amount standing to the favour of such

persons and/or entities on the closing date, is
shown in the Balance Sheet as Sundry Creditors on
the liability side.
 ACCOUNTING PRINCIPLES

Accounting principles can be subdivided into

two categories:

·        Accounting Concepts; and

·        Accounting Conventions.

 ACCOUNTING PRINCIPLES

Accounting principles can be subdivided into

two categories:

·        Accounting Concepts; and

·        Accounting Conventions.

 ACCOUNTING PRINCIPLES
·        Accounting Concepts
·        Accounting Conventions

• The term ‘concept’ is used to connote accounting

postulates, that is necessary assumptions and conditions
upon which accounting is based.

• The term ‘convention’ is used to signify customs and

traditions as a guide to the presentation of accounting
statements.
 ACCOUNTING PRINCIPLES

Accounting Concepts
• Business Entity Concept
• Money Measurement Concept
• Cost Concept
• Going Concern Concept
• Dual Aspect Concept
• Realization Concept
• Accounting Period Concept
 ACCOUNTING PRINCIPLES

Accounting Conventions
• Convention of Consistency
• Convention of Disclosure
• Convention of Conservation
 ACCOUNTING PRINCIPLES

Accounting Concepts
The term ‘concept’ is used to connote
accounting postulates, that is necessary
assumptions and conditions upon which
accounting is based.
 Business Entity Concept

• Business is treated as a separate entity or unit

different from its owner and others
• All the transactions of the business are recorded
in the books of business from the point of
view of the business as an entity
• and even the owner is treated as a creditor
to the extent of his/her capital
 Money Measurement Concept

• In accounting, we record only those

transactions which are expressed in terms
of money.

• In other words, a fact which can not be

expressed in monetary terms, is not
recorded in the books of accounts.
 Cost Concept

• Transactions are entered in the books of accounts at the

amount actually involved. Suppose a company
purchases a car for Rs.1,50,000/- the real value of
which is Rs.2,00,000/-, the purchase will be recorded as
Rs.1,50,000/- and not any more.

• This is one of the most important concept and it

prevents arbitrary values being put on transactions.
 Going Concern Concept

• It preseumes that the business will exists

for a long time and transactions are
recorded from this point of view.

• Idea of perpetual succession

 Dual Aspect Concept

• Each transaction has two aspects, that is,

the receiving benefit by one party and the
giving benefit by the other.

• This principle is the core of accountancy.

 Dual Aspect Concept continue…

For example, the proprietor of a business starts

his business with Cash Rs.1,00,000/-, Machinery
of Rs.50,000/- and Building of Rs.30,000/-, then
this fact is recorded at two places. That is Assets
account (Cash, Machinery & Building) and
Capital accounts. The capital of the business is
equal to the assets of the business.
 Dual Aspect Concept continue…

Thus, the dual aspect can be expressed as

under
 
Capital + Liabilities = Assets
or
Capital = Assets – Liabilities
 BASIS IN ACCOUNTING

• CASH BASIS

• ACCRUAL BASIS
 CASH BASIS
• Under cash accounting, income and expenses are recorded when payment
is received or made

• If a business incurs a large expense to provide a service before it has

received the payment for the service, the business’s financial statements
may communicate a distorted financial condition of the business.

• Similarly, significant distortion on the financial condition of a business is

reflected on the financial statements if it has received a large payment but
has not yet delivered the product or provided the service.

• Cash basis accounting requires less effort in bookkeeping but it is not in

accordance with the Generally Accepted Accounting Principles (GAAP)
 ACCRUAL BASIS
• Accrual accounting’s primary focus is on two
types of business events.
– First,
• from an asset perspective, an accrual is recorded when a service has
been performed or a product has been delivered by a company but
the payment has not yet been received.

• From a liability perspective, an accrual is recorded when a service or

product has been received, but the payment has not yet been made.

– Second, a deferral is recorded when payment is received before a

service is performed or product has been delivered.
 Realization Concept

• Accounting is a historical record of transactions.

• It records what has happened.

• It does not anticipate events.

• This is of great important in preventing business firms from

inflating their profits by recording sales and income that are likely
to accrue.
 Realization Concept

• Accounting is a historical record of transactions.

• It records what has happened.

• It does not anticipate events.

• This is of great important in preventing business firms from

inflating their profits by recording sales and income that are likely
to accrue.
 Realization Concept
• Realization concept in accounting, also known as revenue recognition
principle, refers to the application of
accruals concept towards the recognition of revenue (income).

• Under this principle, revenue is recognized by the seller when it is ear

ned irrespective of whether cash from the transaction has been receive
d or not
 Realization Concept
• In case of sale of goods, revenue must be recognized when the
seller transfers the risks and rewards associated with the
ownership of the goods to the buyer. This is generally deemed
to occur when the goods are actually transferred to the buyer.
 Realization Concept
Example

Motors PLC is a car dealer. It receives orders from customers in advance

against 20% down payment. Motors PLC delivers the cars to the respective
customers within 30 days upon which it receives the remaining 80% of the list
price.

In accordance with the revenue realization principle, Motors PLC must not
recognize any revenue until the cars are delivered to the respective customers
as that is the point when the risks and rewards incidental to the ownership of
the cars are transferred to the buyers.
Importance of Realization Concept
• Application of the realization principle ensures that the
reported performance of an entity, as evidenced from the
income statement, reflects the true extent of revenue earned
during a period rather than the cash inflows generated during a
period which can otherwise be gauged from the cash flow
statement

• Recognition of revenue on cash basis may not present a

consistent basis for evaluating the performance of a company
over several accounting periods due to the potential volatility
in cash flows.
 Revenue Recognition
• Recognition, as defined in the IASB Framework, means
incorporating an item that meets the definition of revenue
(in the income statement when it meets the following
criteria:

– There is a contract

– it is probable that any future economic benefit associated

with the item of revenue will flow to the entity, and

– the amount of revenue can be measured with reliability

 Revenue Recognition: Sale of goods
Revenue arising from the sale of goods should be recognised when
all of the following criteria have been satisfied: [IAS 18.14]

• the seller has transferred to the buyer the significant risks and
rewards of ownership the seller retains neither continuing
managerial involvement to the degree usually associated with
ownership nor effective control over the goods sold

• the amount of revenue can be measured reliably

• it is probable that the economic benefits associated with the

transaction will flow to the seller, and the costs incurred or to be
incurred in respect of the transaction can be measured reliably
 Revenue Recognition: Rendering of services

• For revenue arising from the rendering of services, provided that all of the
following criteria are met, revenue should be recognised by reference to
the stage of completion of the transaction at the balance sheet [IAS 18.20]

• the amount of revenue can be measured reliably;

• it is probable that the economic benefits will flow to the seller;
• the stage of completion at the balance sheet date can be measured
reliably;
• and the costs incurred, or to be incurred, in respect of the transaction
can be measured reliably.

• When the above criteria are not met, revenue arising from the rendering
of services should be recognised only to the extent of the expenses
recognised that are recoverable (a "cost-recovery approach". [IAS 18.26]
 Accounting Period Concept

• Strictly speaking, the net income can be measured by

comparing the assets of the business existing at the
time of its liquidation.
• But as the life of the business is assumed to be infinite,
the measurement of income according to the above
concept is not possible.
• So a twelve month period is normally adopted for this
purpose.
• This time interval is called accounting period.
 Matching Concept

• Matching Principle requires that expenses incurred by an

organization must be charged to the income statement in the
accounting period in which the revenue, to which those
expenses relate, is earned.

• Results in the presentation of a more balanced and consistent

view of the financial performance of an organization than
would result from the use of cash basis of accounting
 Matching Concept: EXAMPLE

• Cost of Goods Sold

The cost incurred in the manufacture or procurement of

inventory is charged to the income statement of the
accounting period in which the inventory is sold.

Therefore, any inventory remaining unsold at the end of

an accounting period is excluded from the computation
of cost of goods sold.
 ACCOUNTING PRINCIPLES

Accounting Conventions

The term ‘convention’ is used to signify

customs and traditions as a guide to the
presentation of accounting statements.
 Convention of Consistency

• In order to enable the management to draw important

conclusions regarding the working of the company over
a few years, it is essential that accounting practices and
methods remain unchanged from one accounting period
to another.

• The comparison of one accounting period with that of

another is possible only when the convention of
consistency is followed.
 Convention of Disclosure

• This principle implies that accounts must be honestly

prepared and all material information must be disclosed
therein

• The contents of Balance Sheet and Profit and Loss

Account are prescribed by law

• These are designed to make disclosure of all material

facts compulsory
 QUALITATIVE ATTRIBUTES OF ACCOUNTING
INFORMATION
• UNDERSTANDABILITY

• RELIABILITY
– NEUTRALITY
– FAITHFUL REPRESENTATION
– COMPLETENESS

• RELEVANCE
– TIMELINESS
– SUBSTANCE OVER FORM

• COMPARABILITY
 TIMELINESS
• Timeliness principle in accounting refers to the need for accounting
information to be presented to the users in time to fulfill their decision
making needs.

• Importance
– Timeliness of accounting information is highly desirable since
information that is presented timely is generally m¯ore relevant to
users while conversely, delay in provision of information tends to
render it less relevant to the decision making needs of the users.

– Timeliness principle is therefore closely related to the

relevance principle.

• Timeliness is important to protect the

users of accounting information from basing their decisions on outdate
d information
 SUBSTANCE OVER FORM
• Substance over form is an accounting concept which means that the
economic substance of transactions and events must be recorded in the
financial statements rather than just their legal form
– in order to present a true and fair view of the affairs of the entity.

• Substance over form concept entails

– the use of judgment on the part of the preparers of the financial
statements
• in order for them to derive the business sense from the
transactions and events and to present them in a manner that
best reflects their true essence
– Whereas legal aspects of transactions and events are of great
importance, they may have to be disregarded at times in order to
provide more useful and relevant information to the users of financial
statements.
SUBSTANCE OVER FORM: EXAMPLE
• An entity may agree to sell inventory to someone and buy back the same inventory after a
specified time at an inflated price that is planned to compensate the seller for the time value of
money.

• On paper, the sale and buy back may be deemed as two different transactions which should be
dealt with as such for accounting purposes i.e. recording the sale and (subsequently) purchase.

• However, the economic reality of the transactions is that no sale has in fact
occurred.
• The sale and buy back, when considered in the context of both transactions, is actually a
financing arrangement in which the seller has obtained a loan which is to be repaid with interest
(via inflated price).

– Inventory acts as the security for the loan which will be returned to the 'seller' upon
repayment. So instead of recognizing sale, the entity should recognize a liability for loan
obtained which shall be reversed when the loan is repaid.

– The excess of loan received and the amount that is to be paid (i.e. inflated price) is recognized
as finance cost in the income statement.
 Convention of Conservatism
• Financial statements are always drawn up on rather a conservative
basis.

• That is, showing a position better than what it is, not permitted.

• It is also not proper to show a position worse than what it is.

o In other words, secret reserves are not permitted

• EXAMPLE: Inventory is recorded at the lower of cost or net realizable

value (NRV) rather than the expected selling price.
o This ensures profit on the sale of inventory is only realized when the
actual sale takes place
 FUNCTIONS OF ACCOUNTING

• Keeping systematic records

• Protecting properties of the business
• Communicating the results
• Meeting legal requirements
 Keeping systematic records

The first function of accounting is to keep a

systematic record of financial transactions, to
post them to the ledger accounts and ultimately
prepare final statements.
Protecting properties of the business

The second important function is to protect the

property of the business. The system accounting
is designed in such a way that it protects its
assets from an unjustified and unwarranted use.
 Meeting legal requirements

The fourth and the last function of accounting is

to meet the legal requirements under the
Companies Act, Income Tax Act, Sales Tax Act
and so on.
 THE ACCOUNTING CYCLE

• Recording transactions in books of original

entry
• Classifying data by posting from
subsidiary books to the accounts.
• Closing the books and preparation of final
accounts.
 CLASSIFICATION OF ACCOUNTS

• Accounts in the names of persons are known as

“Personal Accounts”
• Accounts in the names of assets are known as
“Real Accounts”
• Accounts in respect of expenses and incomes
are known as “Nominal Accounts”
CLASSIFICATION OF ACCOUNTS

ACCOUNTS

PERSONAL IMPERSONAL
ACCOUNTS ACCOUNTS

REAL NOMINAL
ACCOUNTS ACCOUNTS
 PERSONAL ACCOUNTS

Accounts in the name of persons are known as

personal accounts.
Eg: Brian A/C,
Brian & Co. A/C,
Outstanding Salaries A/C, etc.
 PERSONAL ACCOUNTS

Personal accounts may be further classified into three categories:

• Natural Personal Account

• An account related to any individual like David, George, Ram, or Shyam is
called as a Natural Personal Account.

• Artificial Personal Account

• An account related to any artificial person like M/s ABC Ltd, M/s General
Trading, M/s Reliance Industries, etc., is called as an Artificial Personal
Account.

• Representative Personal Account

• Representative personal account represents a group of account. If there are a
number of accounts of similar nature, it is better to group them like salary
payable account, rent payable account, insurance prepaid account, interest
receivable account, capital account and drawing account, etc.
 REAL ACCOUNTS

These are accounts of assets or properties. Assets

may be tangible or intangible. Real accounts are
impersonal which are tangible or intangible in
nature.
Eg:- Cash a/c, Building a/c, etc are Real Accounts
related to things which we can feel, see and touch.
Goodwill a/c, Patent a/c, etc Real Accounts
which are of intangible in nature.
 REAL ACCOUNTS

There are two type of assets:

Tangible assets are touchable assets such as plant,

machinery, furniture, stock, cash, etc.

Intangible assets are non-touchable assets such as

goodwill, patent, copyrights, etc.
 NOMINAL ACCOUNTS

These accounts are impersonal, but invisible and

intangible. Nominal accounts are related to those
things which we can feel, but can not see and
touch. All “expenses and losses” and all “incomes
and gains” fall in this category.
Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest
Received A/C, Commission Received A/C,
Discount A/C, etc.
 CLASSIFY THE FOLLOWING TO
REAL/NOMINAL/PERSONAL
• Insurance
• Bank Charges
• Bank Loan
• Telephones
• Cleaning
• Creditors
• Donations Received
• Debtors
• Electricity and Gas
• Fixtures and Fittings at Cost
 CLASSIFY THE FOLLOWING TO
REAL/NOMINAL/PERSONAL
• Fundraising Income

• Interest Earned
• Interest Paid
• Motor Vehicles at Cost
• Postage
• Premises at Cost
• Printing
 CLASSIFY THE FOLLOWING TO
REAL/NOMINAL/PERSONAL
• Bad Debts
• Purchases
• Rent Received
• Repairs and Renewals
• Salaries
• Sales
• Sponsorship Receipts
• Stationery
• Stock
• Government Grant Received
• Bank A/c
 DEBIT AND CREDIT

• Each accounts have two sides – the left side and the
right side.

• In accounting, the left side of an account is called the

“Debit Side” and the right side of an account is called
the “Credit Side”

• The entries made on the left side of an account is called

a “Debit Entry” and the entries made on the right side
of an account is called a “Credit Entry”.
RULES OF DEBIT AND CREDIT
RULES OF DEBIT AND CREDIT
RULES OF DEBIT AND CREDIT
 SAMPLE PROBLEMS
Walter’s Consulting and Cleaning Company
• Walter invested equipment valued at $20,000 into his company and $45,000
cash.
• Walter paid $550 cash for supplies.
• Walter paid $22,000 cash for equipment.
• Walter’s Consulting and Cleaning Company paid $15,000 in cash for equipment
and paid $3,000 cash for additional supplies.
• Walter purchased $400 of supplies on credit from a supplier.
• Walter performed consulting services of $6,000. The customer paid with cash.
• Walter’s Consulting and Cleaning Company paid $440 cash for employee salary.
Walter’s Consulting and Cleaning Company completed consulting services of
$2,500. The customer is billed for these services.
• Walter paid $400 cash to settle the accounts payable created in transaction 5.
• Walter withdrew $1,000 cash from the company for
personal use.

• Walter paid $2,000 cash for 12 months of

insurance.

• Walter’s Consulting and Cleaning Company

provided consulting services of $2,000 and cleaning
services of $200. The customer is billed $2,200 for
these services.
 Accounting standards

• Accounting Standards (AS) are written policy documents

issued by expert accounting body or by government or
other regulatory body covering the aspects of recognition,
measurement, presentation and disclosure of accounting
transactions in the financial statements.
 Accounting standards: Purpose

• To reduce the accounting alternatives in the

preparation of financial statements within the bounds
of rationality

• To ensure comparability of financial statements of

different enterprises.
Accounting standards: Issues Dealt

1.Recognition of events and transactions in the financial statements

2.Measurement of these transactions and events,

3.Presentation of these transactions and events in the financial

statements in a manner that is meaningful and understandable to
the reader, and

4.Disclosure requirements which should be there to enable the

public at large and the stakeholders and the potential investors in
particular, to get an insight into what these financial statements
are trying to reflect and thereby facilitating them to take prudent
and informed business decisions.
 Accounting standards: Importance

• Users of the financial statements need an assurance

• that the entities preparing their financial
statements follow the accepted standards
• while presenting their financial information
in the financial statements
 Accounting standards:
Standard setting process

• The Institute of Chartered Accountants of India (ICAI) constitutied the Accounting

Standards Board (ASB) in 1977

• The ASB considers the International Accounting Standards (IASs)/International

Financial Reporting Standards (IFRSs) while framing Indian Accounting Standards
(ASs) and try to integrate them, in the light of the applicable laws, customs, usages
and business environment in the country.

• The composition of ASB includes, representatives of industries (namely,

ASSOCHAM, CII, FICCI), regulators, academicians, government departments etc.

• Although ASB is a body constituted by the Council of the ICAI,

• ASB is independent in the formulation of accounting standards and
• Council of the ICAI is not empowered to make any modifications in the draft
accounting standards formulated by ASB without consulting with the ASB
 Accounting standards:
Standard setting process
 Accounting standards: Benefits

•Standardisation of alternative accounting treatments

•Requirements for additional disclosures

•Comparability of financial statements

 Accounting standards: Limitations

• Difficulties in making choice between different

treatments

• Lack of flexibility

• Restricted scope
 Convergence with IFRS in India
• Convergence means, alignment of the standards of different standard setters with a
certain rate of compromise, by adopting the requirements of the standards either fully or
partially.

• Convergence with IFRS implies to achieve harmony with IFRS and to design and maintain
national accounting standards in a way that they comply with the International
Accounting Standards.

• The Ministry of Corporate Affairs (MCA) was designated as the nodal Ministry for
converging Indian GAAP with IFRS/Ind AS.

• The Institute of Chartered Accountants of India (ICAI) announced its decision to adopt
IFRS in India with effect from 1 April, 2011.
International Accounting Standard
• The London based group namely the International Accounting Standards Committee (IASC), responsible for
developing International Accounting Standards, was established in June, 1973.

• It is presently known as International Accounting Standards Board (IASB)

• The IASC comprises the professional accountancy bodies of over 75 countries (including the Institute of
Chartered Accountants of India).

• Primarily, the IASC was established, in the public interest, to formulate and publish, International Accounting
Standards to be followed in the presentation of audited financial statements

• International Accounting Standards (IAS) were issued to promote acceptance and observance of
International Accounting Standards worldwide

• The members of IASC assumed the responsibility to support the standards promulgated by IASC and to
propagate those standards in their respective countries
International Accounting Standards..contd.
• Between 1973 and 2001, the International Accounting Standards Committee (IASC) released International
Accounting Standards.

• Between 1997 and 1999, the IASC restructured their organisation, which resulted in formation of
International Accounting Standards Board (IASB).

• These changes came into effect on 1st April, 2001.

• Subsequently, IASB issued statements about current and future standards: IASB publishes its Standards in a
series of pronouncements called International Financial Reporting Standards (IFRS).

• However, IASB has not rejected the standards issued by the IASC. Those pronouncements continue to be
designated as “International Accounting Standards” (IAS).

• The IASB approved IASB Resolution on IASC Standards at their meeting in April, 2001, in which it confirmed
the status of all IASC Standards and SIC Interpretations in effect as on 1st April, 2001.
 IFRS
• The term IFRS comprises IFRS issued by IASB; IAS issued by International Accounting Standards
Committee (IASC); and Interpretations issued by the Standard Interpretations Committee (SIC) and
the International Financial reporting Interpretations Committee (IFRIC) of the IASB.

• International Financial Reporting Standards (IFRSs) are considered a "principles-based" set of

standards.

• In fact, they establish broad rules rather than dictating specific treatments.

• Every major nation is moving toward adopting them to some extent. Large number of authorities
requires public companies to use IFRS for stock-exchange listing purposes, and in addition, banks,
insurance companies and stock exchanges may use them for their statutorily required reports.
 STRUCTURE OF IFRS
IFRS are principle based set of standards that establish broad rules and also dictate specific
treatments.

International Financial Reporting Standards comprises of:-

• International Financial Reporting Standards (IFRS):- Standards issued after 2001

• International Accounting Standards (IAS):- Standards issued before 2001
• Interpretations Originated from the International Financial Reporting Interpretations Committee
(IFRIC):- Issued after 2001
• Standing Interpretations Committee (SIC):- Issued before 2001
 IFRS
• Companies needed to adopt the international standards.

• This requirement affected about thousands of enterprises, including their subsidiaries, equity
investors and joint venture partners

• The increased use of IFRS is not limited to public-company listing requirements or statutory
reporting.

• Many lenders and regulatory and government bodies are looking to IFRS to fulfil local financial
reporting obligations related to financing or licensing.
Need for Convergence towards Global Standards
• Change in the global economic scenario

• Emergence of trans-national corporations in search of money, not only for fuelling

growth, but to sustain on going activities has necessitated raising of capital from all
parts of the world, cutting across frontiers.

• Each country has its own set of rules and regulations for accounting and financial
reporting.

• Diverse rules and regulations will require that the enterprise is in a position to
understand the differences between the rules governing financial reporting in the
foreign country as compared to its own country of origin.
 Need for Convergence towards Global
Standards
• Accounting standards and principle need to be robust so that the larger society develops
degree of confidence in the financial statements

• International analysts and investors would like to compare financial statements based on
similar accounting standards,

• Growing support for an internationally accepted set of accounting standards for cross-border
filings

• The harmonization of financial reporting around the world will help to raise confidence of
investors generally in the information they are using to make their decisions and assess their
risks.
 Need for Convergence towards Global
Standards
• Having a multiplicity of accounting standards around the world is against the public interest

• If accounting for the same events and information produces different reported numbers, depending
on the system of standards that are being used, then it is self-evident that accounting will be
increasingly discredited in the eyes of those using the numbers.
• It creates confusion, encourages error and facilitates fraud.

• The cure for these ills is to have a single set of global standards, of the highest quality, set in the
interest of public.

• Global Standards facilitate cross border flow of money, global listing in different bourses and
comparability of financial statements
 Benefits of Convergence
• It improves the ability of investors to compare investments on a global basis and thus lowers their risk of
errors of judgment.

• It facilitates accounting and reporting for companies with global operations and eliminates some costly
requirements say reinstatement of financial statements.

• It has the potential to create a new standard of accountability and greater transparency, which are values of
great significance to all market participants including regulators.

• It reduces operational challenges for accounting firms and focuses their value and expertise around an
increasingly unified set of standards.

• It creates an unprecedented opportunity for standard setters and other stakeholders to improve the
reporting model.

• For the companies with joint listings in both domestic and foreign country, the convergence is very much
significant.
 Adoption of IFRS in India
• In 2014 Budget speech, the then Finance Minister Arun Jaitley announced
the implementation of Ind AS in India

• Indian Accounting Standards converged with the IFRS (known as Ind AS)
• MCA

• Timelines
 IND-AS
• IND AS are standards that have been harmonized
with the IFRS to make reporting by Indian companies
more globally accessible
– Indian accounting standards converged with IFRS – Ind AS

• Since Indian companies have a far wider global reach

now as compared to earlier, the need to converge
reporting standards with international standards was
felt,
– which led to the introduction of IND AS.
 IND-AS
• The Ministry of Corporate Affairs (MCA), in 2015, had notified the
Companies (Indian Accounting Standards (IND AS)) Rules 2015, which
stipulated the adoption and applicability of IND AS in a phased manner
beginning from the Accounting period 2016-17.
– The MCA has since issued three Amendment Rules, one each in year 2016,
2017, and 2018 to amend the 2015 rules.

• These standards became effective from financial year 2016-17 and in

Phase I, were applicable to all listed companies and companies having
net worth exceeding Rs.500 crores

• Any company could voluntarily comply with Ind AS for accounting

periods beginning on or after 1 April 2015
 Ind AS in Companies Act, 2013
• The Indian Accounting Standards (Ind AS), as notified
under section 133 of the Companies Act 2013,
– have been formulated keeping the Indian economic & legal
environment in view and
– with a view to converge with IFRS Standards, as issued by and
copyright of which is held by the IFRS Foundation

• Notwithstanding anything contained in the above para,

Ind AS notified under the Companies Act 2013 are
– governed by the provisions of Indian Copyright Act, 1957 and
– the copyright in Ind AS vests in Government of India
 Ind AS: Current Position
• Notification of 39 Ind AS standards by the Ministry of Corporate Affairs
starting February 2015
• Ind AS: IFRS converged standards fills up significant gaps that exist in the
current accounting guidance, and India can claim to have financial reporting
standards that are contemporary and virtually at par with the leading global
standards.
• Will improve India’s place in global rankings on corporate governance and
transparency in financial reporting.
• Around 150 countries have already adopted IFRS in their economy.
• In India, MCA announced full convergence of IFRS by 2018 through IND AS