MS - 103

ACCOUNTING
FOR
MANAGERS
 UNIT - I
 Accounting –
Meaning, Scope, Uses & Types.

 Financial Accounting Concepts,

Conventions and Principles –
their implications on accounting
system

 Accounting Cycle. Classification of

ACCOUNTING - MEANING
• Accounting is the art of recording,
classifying and summarizing in a
significant manner and in terms of money,
transactions and events which are, in part
at least of a financial character and
interpreting the result thereof.
• - American Institute of Certified Public Accountants
(1961)
Cont….
• Recording is the basic function of accounting
Reco • Recording is done in a book called “Journal”
rding

• Entries of one nature/item/group in one place

Class
ifyin
• Classification is done in a book called “Ledger”
g

• Transactions during a period/year to understand

• Summarizing is done on a paper/pages called
Sum
mari- “Financial Statement- P/L A/C, Balance Sheet”
zing
Cont…
• Relationship b/w the various summarized items
Anal
yzin e.g. Ratio Analysis, Fund/Cash Flow Analysis
g

• Interpretation enable the end users to make a

Inter
preti meaningful judgment about the profitability etc.
ng

• It is concerned with the transmission of

Com
muni
interpreted information through accounting
ca- reports, graphs, diagram etc. to make decisions.
ting
ACCOUNTING- USES/FUNCTION
• 1. Measurement: Accounting measures past
performance of the business entity and depicts its
current financial position.

• 2. Forecasting: Accounting helps in forecasting

future performance and financial position of the
enterprise using past data.

• 3. Decision-Making: Accounting provides relevant

information to the users of accounts to aid rational
decision-making.
 Cont…
• 4. Control: Accounting also identifies
weakness of the operational system and
provides feedbacks regarding effectiveness of
measures adopted to check such weaknesses.

• 5. Government Regulation and Taxation:

Accounting provides necessary information to
the government to exercise control on the
entity as well as in collection of tax revenues.
Cont…
• 6. Comparison & Evaluation: Accounting
assesses performance achieved in relation to
targets (Actual v/s Budget) and discloses
information regarding accounting policies and
contingent liabilities which play an important
role in predicting, comparing and evaluating
the financial results.
USERS OF ACOUNTING INFORMATION

CUSTOMER
LENDERS SUPPLIERS
S

EMPLOYEE
USERS INVESTOR
S
S

GOVERNMENT PUBLIC MANAGEMENT

TYPES OF ACCOUNTING

FI N A N C
IA L
ACCOUN
TIN G

COST
TING
ACCOUN MA
NAG
ACC EM
OUN ENT
T-IN
G
Cont…

TAXATION
ACCOUNTING

INFLATION
ACCOUNTING

HUMAN RESOURCE
ACCOUNTING
DIFFERENCE BETWEEN FINANCIAL, COST
AND MANAGEMENT ACCOUNTING
BASIS FINANCIAL COST MANAGEMENT
Objective Record Ascertainment, To assist the
transactions and Allocation, management in
determine P/L and Accumulation of decision-making &
Financial Position Cost policy formation.
Nature Concerned with Concerned with Deals with projection
historical data both past and of data for the future
present

Principle Governed by Certain principles No set principle are

Followed GAAP followed for followed in it
recording costs
Data Used Qualitative aspects Quantitative aspect Use Qualitative and
are not recorded is recorded Quantitative concepts
PRINCIPLES OF ACCOUNTING
 An Accounting Principles denotes fundamental belief
or a general truth.

 “The word principles is used to mean a general law of

rules adopted or processed as a guide to action, a
settled ground or basis of conduct or practice.”
American Institute of Certified Public Accountant

 Inthis way, Accounting Principles are derived from

basic accounting concept and conventions.
CONCEPTS & CONVENTIONS
 Accounting Concepts define the assumptions on the
basis of which financial statement of a business
entity are prepared. They have universal
application.

 Accounting Conventions emerge out of accounting

practices adopted by various organizations over a
period of time. These conventions are derived by
usage and practice. Conventions need not have
universal application.
 Cont…
 CONCEPTS  CONVENTIONS
 Historical Cost  Matching
 Going Concern  Disclosure
 Business Entity  Materiality
 Accrual Concept  Realisation
 Verifiable Concept  Consistency
 Periodicity Concept  Conservatism
 Money Measurement
 Dual Aspect Concept
 ACCOUNTING CYCLE
 The accounting cycle is a process designed to
make financial accounting of business activities
easier for business owners.

 Today, most software fully automates the

accounting cycle which results in less human
effort and errors associated with manual
processing.

 The accounting cycle generally comprises a year

or other accounting period.
Accounting Cycle is a standard
8-step process that begins when
a transaction occurs and ends
with its inclusion in the
financial statements.
 Accounting
Cycle
Identify
Closing the
Transaction
Books
s

Financial Record in
Statement Journals

Adjusting Posting in
Entries ledger

Identify
Trial
Adjustment
Balance
s
 DOUBLE ENTRY SYSTEM
 Every business transaction has two-fold
effect and recording of both aspects of a
transaction is called double entry system
of book-keeping.

 According to the system every business

transaction affects at least two accounts in
opposite direction.
 Identify the two accounts involved in each
of the following transactions:
TRANSACTION ACCOUNT INVOLVED
Machinery Purchased Machinery A/C & Cash A/C

Cash deposited into Bank Bank A/C & Cash A/C

Salary paid (half cash & half by Salary A/C & Cash A/C &
cheque) Bank A/C
Commission received (in cash) Cash A/C & Commission A/C

Goods purchased from Pankaj Goods/Purchase A/C & Pankaj

Goods sold to Joy on cash discount Cash A/C & Sales/Goods A/C

Rent due Rent A/C & Landlord A/C

CLASSIFICATION OF ACCOUNTS

ACCOUNT

REAL NOMINAL PERSONAL

TANGIBLE INTANGIBLE NATURAL ARTIFICIAL

 REAL ACCOUNTS
 RealAccounts relates to properties (real things) of a
business enterprise, which can be tangible or
intangible.

 TANGIBLE: Accounts of properties having physical

existence like cash, building, machine, goods etc. is
called tangible real accounts.

 INTANGIBLE: Accounts of things which can not be

physically felt or touched but are capable of monetary
measurement such as accounts of goodwill, patent,
copy rights, trade marks etc.
 PERSONAL ACCOUNTS
 Accounts recording transactions with a person
or group of persons are called personal accounts.

 NATURAL PERSON(S): Account of individual

living beings- Gopal, Govind, Shyam, Mohan,
Krishna, Ram’s Capital etc.

 ARTIFICIAL (LEGAL): For dealing with other

persons, A business entity is treated to have
separate entity (person) in the eye of law. Eg.
Banks, Companies, Colleges, Clubs etc.
Cont…..
 GROUP/REPRESENTATIVE :
 Group personal accounts are accounts of natural

and legal persons grouped together such as

debtors account, creditors account, share capital
account etc.

 Outstanding salaries account, Outstanding

commission account etc. represent the person to
whom salary or commission is payable and not
yet paid are called representative persona
account.
 NOMINAL ACCOUNTS
 Theses accounts are opened in the books to
simply explain the nature of the transactions.
They do not really exist.

 Accounts relating to income, revenue, gain,

expenses and losses are termed as nominal
accounts. For example - Salary, Rent, Insurance,
Interest on Loan, Interest on Capital, Interest on
Drawings, Commission Paid/Received, Discount
Allowed/ Received, Bad Debts etc.
GOLDEN RULES
REAL ACCOUNT
• DEBIT - WHAT COMES IN
• CREDIT – WHAT GOES OUT

PERSONAL ACCOUNT
• DEBIT – THE RECEIVER
• CREDIT – THE GIVER

NOMINAL ACCOUNT
• DEBIT – ALL EXPENSES AND LOSSES
• CREDIT – ALL GAINS AND INCOMES
 FORMAT OF JOURNAL
DATE PARTICULARS LEDGER DEBIT CREDIT
FOLIO AMOUNT AMOUNT
2020 ---------- A/c Dr. 000
Dec.01 To ----------- A/c 000
(Being …………)
----------- A/c Dr. 000
To --------- A/c 000
To --------- A/c 000
(Being …………..)
----------- A/c Dr. 000
----------- A/c Dr. 000
To --------- A/c 000
(Being ………….)
 CAPITAL EXPENDITURE
Which has been incurred for the purpose of
obtaining long term advantage for the business

Which results in increasing in the

earning capacity of the business

Which is non
recurring in nature
REVENUE EXPENDITURE
To maintain the productivity or
earning capacity of business

To carry out operating activities

in the normal course of business
CLASSIFICATION OF CAPITAL AND
REVENUE EXPENDITURE
CAPITAL REVENUE
EXPENDITUR EXPENDITUR
E E

Generates enduring Normally it does not

benefits and helps in yield benefits beyond
revenue generation current accounting period

Debited to the Debited to the Trading

respective Asset and Profit & Loss
account Account.
 CAPITAL INCOME
An income which does not arises out of and in
the course of regular business transactions

Capital Receipts, Capital Profit and Capital

Income are synonymous terms

Capital Profit is transferred to the Capital

Reserves and shown in Balance sheet on
Liability side
 REVENUE INCOME
An income which arises out of and in the
course of regular business transactions

Revenue Receipts, Revenue Profit and

Revenue Income are synonymous terms

Revenue Profit is Credited to the Profit

and Loss Account.