FINANCIAL AND MANAGEMENT ACCOUNTING

PGDBM/TERM-1

By : Ms. Palka Chhillar

Objective of the Bridge Course
• To support the students in the better
understanding of the
underlying fundamental concepts of the
subject
• To prepare the students for the efficient &
effective application of the concepts in the
real world situations.
Pedagogy
In each bridge course session, first the students will be
familiarized with the brief theoretical background of the
topic followed by solving of worksheets.
At the end of every week, students will be responsible for
reading one or more articles relevant to the accounting
topics we are studying taken from the business press.
You will be asked to solve relevant exercises/self-study
problems /worksheet at home.
10 marks have been allocated for tutorials
Students / group of students can give a request to discuss
any topic apart from the curriculum by intimating one day
in advance
 The emphasis here is on ‘EFFORT’ and not on
‘ANSWERS’ to the exercises. Working toward the
“correct” answer is not the point; working to understand
the concepts and the underlying accounting issues is
what it’s all about.
The Need for Accounting
Managers, investors, and other internal groups
want the answers to two important questions:

Where does
the organization
How well did stand?
the organization
perform?
Financial Accounting &
Management Accounting
Financial accountancy (or financial accounting) is the field of
accountancy concerned with the preparation of financial statements for
decision makers, such as stockholders, suppliers, banks, employees,
government agencies, owners, and other stakeholders.

Management accounting or managerial accounting is concerned

with the provisions and use of accounting information to managers
within organizations, to provide them with the basis to make
informed business decisions that will allow them to be better
equipped in their management and control functions.
ACCOUNTING CONCEPTS
In order to make the accounting language convey the
same meaning to all people & to make it more
meaningful, most of the accountants have agreed on a
number of concepts which are usually followed for
preparing the financial statements. These concepts
provide a foundation for accounting process. No
enterprise can prepare its financial statements
without considering these concepts.
1.BUSINESS ENTITY CONCEPT
Business is treated as separate & distinct from its
members
Separate set of books are prepared.
Proprietor is treated as creditor of the business.
For other business of proprietor different books are
prepared
2.GOING CONCERN CONCEPT
Business will continue for a long period.
As per this concept, fixed assets are recorded at their
original cost & depreciation is charged on these assets.
Because of this concept, outside parties enter into long
term contracts with the enterprise.
3.MONEY MEASUREMENT
CONCEPT
Transactions of monetary nature are recorded.
Transactions of qualitative nature, even though of great
importance to business are not considered.

4.HISTORICAL COST CONCEPT

Assets are recorded at their original price.
This cost serves the basis for further accounting
treatment of the asset.
Acquisition cost relates to the past i.e. it is known as
historical cost.
JUSTIFICATION FOR HISTORICAL COST CONCEPT
 This cost is objectively verifiable.
 Justified by going concern concept.
 Current values are difficult to determine.
 Difficult to keep track of up down of the market price.

5.DUAL ASPECT CONCEPT

 Every transaction recorded in books affects at least two
accounts.
 If one is debited then the other one is credited with same
amount.
 This system of recording is known as “DOUBLE ENTRY
SYSTEM”.
 ASSETS = LIABILITIES + CAPITAL
ACCOUNTING PERIOD CONCEPT
 Entire life of the firm is divided into time intervals for ascertaining the
profits/losses are known as accounting periods.
 Accounting period is of two types- financial year(1 st Apr to 31 st March) &
calendar year(1 st Jan to 31 st Dec).

MATCHING CONCEPT
 All the revenue of a particular period will be matched with the cost of that
period for determining the net profits of that period.
 Accordingly, for matching costs with revenue, first revenue should be
recognised & then costs incurred for generating that revenue should be
recognised.

 Following points must be considered while matching costs with revenue-:

 Outstanding expenses though not paid in cash are shown in the P&L a/c.
 Prepaid expenses are not shown in the P&L a/c.
 Closing stock should be carried over to the next period as opening stock.
 Income receivable should be added in the revenue & income received in
advance should be deducted from revenue.
REVENUE RECOGNITION/REALISATION
CONCEPT
 Revenue means the addition to the capital as a result of
business operations.
 Revenue is recorded when earned and costs are recorded
when incurred
 Revenue is realised on three basis-:
 Basis of cash
 Basis of sale
 Basis of production

ACCRUAL CONCEPT
 In this concept revenue is recorded when sales are made or
services are rendered & it is immaterial whether cash is
received or not.
 Same with the expenses i.e. they are recorded in the
accounting period in which they assist in earning the
revenues whether the cash is paid for them or not.
ACCOUNTING CONVENTIONS
An accounting convention may be defined as a custom or
generally accepted practice which is adopted either by
general agreement or common consent among
accountants.

1. Convention of Full Disclosure

Information relating to the economic affairs of the
enterprise should be completely disclosed which are
of material interest to the users.
2. Convention of Materiality
According to American Accounting Association , “ An

item should be regarded as material if there is reason to

believe that knowledge of it would influence decision of
informed investor.”
It is an exception to the convention of full disclosure.

Items having an insignificant effect to the user need not

to be disclosed.
3. Convention of Consistency
Accounting method should remain consistent year by
year.
This facilitates comparison in both directions i.e. intra
firm & inter firm.
This does not mean that a firm cannot change the
accounting methods according to the changed
circumstances of the business.
4.Convention of Conservatism/
Prudence
All anticipated losses should be recorded but all

anticipated gains should be ignored.

It is a policy of playing safe.

Provisions is made for all losses even though the

amount cannot be determined with certainty .

Accrual Basis and Cash Basis
The accrual basis of accounting
recognizes revenues and expenses
when they occur regardless of when
cash is received or disbursed.

The cash basis of accounting recognizes

revenue and expense when cash is
received and disbursed.
DOUBLE ENTRY BOOK KEEPING &
SINGLE ENTRY BOOK KEEPING
Single entry bookkeeping means that all transactions are
entered only once on to the accounts system. For instance,
buying a vehicle for £15,000 would be entered as a payment in
a cashbook

Double entry bookkeeping means that all transactions are

entered twice on to the accounts system. For instance, buying
a vehicle for £15,000 would be entered as a decrease in the
cash account, and as an increase in the ‘vehicle’ account.
Few Important Terms
1. Assets: - Assets are the economic resources owned or
controlled by a company, resulting from past
transactions. Assets can be classified into two categories
namely Current assets & Noncurrent Assets
Current assets are the assets the company plans to
turn into cash or use to generate revenue in the next
fiscal year.
Noncurrent assets, or long term assets, are assets
that will last for more than a year.
2. Liabilities are obligations the company has incurred
to obtain the assets it has acquired.
Current liabilities are liabilities the company will
settle-pay off-in the next fiscal year.
Noncurrent liabilities or long-term liabilities are
liabilities that will take longer than a year to settle.
3.Owners’ Equity : The owners’ equity of a corporation
is called shareholders’ equity
Paid-in capital
Retained Earnings
4. Revenues: Revenues are increases in ownership
claims arising from the delivery of goods or services.

5. Expenses are decreases in ownership claims arising

from delivering goods or services or using up assets

6. Business Transactions : A transaction is any event

that affects the financial position of an organization
and requires recording
Debtor: A debtor is a person or enterprise that owes
money to another party.

Creditor : A Creditor is a person, bank, or other

enterprise that has lent money or extended credit to
another party.

Example : If Company X borrowed money from its

bank, Company X is the debtor and the bank is the
creditor. If Supplier A sold merchandise to Retailer B,
then Supplier A is the creditor and Retailer B is the
debtor.