Accounting For Managers: Module - 1

Accounting for Managers

MODULE - 1
Introduction
An account (in bookkeeping) refers to assets, liabilities, income, expenses, and equity, as
represented by individual ledger pages, to which changes in value are chronologically recorded with
debit and credit entries. These entries, referred to as postings, become part of a book of final entry or
ledger. Examples of common financial accounts are cash, accounts receivable, mortgages, loans,
PP&E, common stock, sales, services, wages, and payroll.
Definition of Accounting
Accounting can be defined as “The art of recording, classifying, summarizing and presenting the
financial aspect of business dealings and interpreting the results thereof”.
According to American Accounting Association (AAA)

“Accounting is the process of identifying, measuring and communicating economic information to
permit informed judgments and decisions by the users of such information”.
According to H.Chakravorty: Accountancy is the science of recording, classifying and summarizing

transactions so that relation with outsiders is exactly determined and result of operation during a
particular period can be calculated, and the financial position as the end of the period may be shown.
Accounting operates within a broad socio-economic environment, and so, the knowledge required of
the accountant cannot be sharply compartmentalized. It is therefore, difficult to discuss one area
without relating to other areas of knowledge. We place a great emphasis on the conceptual
knowledge. The accountant should not only know but he should understand. From the above it is
clear that to define accounting as such, is rather difficult. Many accountants have defined Accounting
in very many languages.
Accounting involves the following functions or activities

Accounting covers the following activities:
1. Identifying the transactions and events
Accounting identifies transactions and events of a specific firm. A transaction is an exchange in
which each participant receives or gives value. An event is a happening of consequence to a firm.
E.g. use of raw materials for production.
2. Measuring the identified transactions and events
Accounting measures the transaction and events in terms of a common measurement unit that is the
ruling currency of a country.
3. Recording
It is concerned with the recording of identified and measured financial transactions in an orderly
manner.
4. Classifying
It is concerned with the classification of the recorded transactions so as to group the transactions of
similar type at one place. Example: Maintaining ledger for each type of Account.
5. Summarizing
It is concerned with the summarization of the classified transactions in a manner useful to the users.
Example: Preparing P&L A/c, B/S, Cash Flow & Fund Flow Statements.
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Suhas D, Assistant Professor, Jain Institute of Technology, Davangere
6. Analyzing
It is concerned with the establishment of relationship between the various items or group of items
taken from P&L A/c & B/S or both.
7. Interpreting
It is concerned with the explaining the meaning and significance of the relationship so established by
the analysis. The accountants should interpret the statements in a manner useful to the users, so as to
enable the users to make reasoned decisions out of alternative course of action.
8. Communicating
It is concerned with the transmission of summarized, analyzed and interpreted information to the
users to enable them to make reasoned decisions.
Objectives of Accounting
The broad objects of Accounting may be briefly stated follows:
1. To maintain the cash accounts through the Cash Book and to find out the Cash balance on any
particular day.
2. To maintain various other Journals for recording day-to –day non –cash transactions.
3. To maintain various Ledger Accounts to find out the exact amounts of incomes and expenses or
gain and losses or receivables and payables.
4. To furnish information regarding Purchases and Sales, both Cash and Credit.
5. To find out the net profit or net loss or surplus or deficit for any particular period.
6. To find out the total capital on a particular date.
7. To find out the positions of assets on a particular date.
Importance of Accounting
1. Facilitate to replace memory
Accounting facilitates replace human memory by maintaining complete record of financial
transactions.
2. Facilitates to comply with legal requirements
Accounting facilitates to comply with legal requirements which require an Enterprise to maintain
books of accounts. For e.g. Sec 209 of the Companies Act 1956, requires a company to maintain
proper books of accounts on accrual basis.
3. Facilitate to ascertain net results of operations
Accounting facilitates to ascertain net result of operations by preparing Income Statement or P&L
A/c.
4. Facilitates to ascertain financial position
Accounting facilitates to ascertain financial position by preparing Balance Sheet.
5. Facilitates the users to take decisions
Accounting facilitates the users to take decisions by communicating accounting information to them.
6. Facilitates to comparative study
Accounting facilitates a comparative study in the following four ways:
(i) Comparison of actual figures with standard or budgeted figures for the same period and the same
firm.
(ii) Comparison of actual figures of one period with those of another period for the same firm
(iii)Comparison of actual figures of one firm with those of another standard firm belonging to the
same industry.
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(iv) Comparison of actual figures of one firm with those of industry to industry to whom the firm
belong.
7. Assists the management
Accounting assists the management in planning and controlling business activities and in taking
decision.
8. Facilitates control over assets
Accounting facilitates control over assets by providing information regarding Cash balance, Bank
balance, Debtors, Fixed Assets, and Stock etc.
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Need for accounting
 Creating records
 Creating evidence
 Decision-making
 Control
 Prevention of frauds and losses
 Determination of tax liability
 Sanctioning of loans
 Planning
 Known the financial position
Scope/branch/types of accounting
Financial accounting: financial accounting is the original form of accounting. It is mainly limited to
the preparation of financial statements.
Cost accounting: it is basically concerned with the estimation of costs. Management is interested to
know the costs of the different products they make for the purpose of determining the price.
Management accounting: it is accounting for the management; management wants information to
discharge its functions in forecasting, budgeting, control over costs and strategy formation.
Generally accepted accounting principles (GAAP)

Accounting principles may be defined as those rules of action or conduct, which are adopted by the
accountants, universally, while recording the transactions.
Accounting principles are divided into two categories:
1. Accounting concepts
2. Accounting conventions
Accounting concepts
Business entity concept: this concept is also known as separate entity concept. It means accountings
are kept only for the transactions of the business and not for those of owner.
Money measurement concept: it means those transactions or events which can be expressed and
measured in terms of money.
Going concern concept: it means an enterprise is considered as a going concern that will continue to
operate for year, fairly long time.
Cost concept: cost concept is applied to fixed assets only. Current assets are not affected by this
concept.
Accounting period concept: it means accounting usually maintained for a year that is 365 days.
Matching concept: it means the matching of expenses again revenues, this to determined the profit
or loss.
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Objective evidence concept: all the transactions of the business should be supported by proper
documentary evidences such as bills, receipts, invoices etc.
Accrual concept: it is considers the recognition of both the revenues as well as expenses.
Dual-aspect concept: every business has a two-fold aspect i.e. receiving of a benefit and giving of a
benefit.
Accounting conventions
Convention of conservatism: a safe policy is adopted in preparing the financial statements of a
concern. It means convention of caution or the policy of playing safe, provide for all possible losses
but anticipated no profits.
Convention of consistency: it means accounting practices should remain unchanged from one
accounting year to another.
Convention of disclosure: it means all accounting statements should be honest, and should be fully
disclosed in the financial statements of a concern. Since statements are meant for the use of various
parties.
Convention of materiality: only the significant information which is material in nature is disclosed
in the financial statements.
Accounting Standard
Meaning
Accounting standard is a selected set of accounting policies or broad guidelines regarding the
principles and methods to be chosen out of several alternatives. Standards conform to applicable
laws, customs, and usage and business environment.
Objective
The main objective of accounting standards is to harmonize the diverse accounting policies and
practices at present in use in India.
Importance or Advantages of setting Accounting standards
Reduction in variations:
Standards reduce to a reasonable extent or eliminate altogether confusing variances in the accounting
treatment used to prepare financial statements.
Disclosure beyond that required by law;
There are certain areas where important information is not statutorily required to be disclosed.
Standards may call for disclosure beyond that required by law.
Facilitates comparison:
The application of accounting standards would to a limited extent, facilitate comparison of financial
statements of companies situated in different parts of the world and also of different companies
situated in the same industry.
Accounting Equation
The accounting equation shows the relationship between the economic resources belonging to a
business and the claims against those resources.
Economic resources are termed as assets. Claims are termed as liabilities and owners ‘claims or
owners ‘equity.
Assets = Liabilities + Owners’ equity
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Users of Accounting Information
Investors
Investors are the owners of the firm. So, they need information to decide which investments to buy
retain or sell as well as the timing of the purchases or sales of those investments. They also need
information to assess mgt. performance and the ability of the firm to pay dividends.
Lenders
Lenders, such as banks and debenture-holders, need to know about the financial Stability of a
business that approaches them for funds. They are interested in information that enables them to
determine whether their loans, and the related interest, will be paid when due.
Security Analysis and Advisers
Investors and creditors seek the assistance of information specialists in assessing prospective returns.
Equity and bond analysts, stock holders and credit rating agencies offer a wide array of information
services. Information specialists serve the need of investors by providing them with skilled analyses
and interpretation of financial reports.
Management
Management wants information for planning and controlling their operations to making special
decisions for formulating major plans and policies.
Employees and Trade Unions
Employees are interested in information about the enterprise as well as its general operations,
stability and profitability. Employees have an interest in the financial affairs of; the enterprise since it
is the main source of their income. Trade unions are required for wage negotiations.
Suppliers and Other Trade Creditors
They are keen to obtain information that enables them to determine whether amounts owed to them
will be paid when due.
Customer
They are interested in the financial affairs of an enterprise to decide how much business to do with it,
and to assess its ability to service the product or to honor warranty agreements.
Govt. & Regulatory Agencies
They also require information in order to regulate the business practices of enterprises, determine
taxation policies and provide a basis for national income.
A number of regulatory agencies like SEBI, Insurance Regulatory Authority and Stock Exchanges
have a legitimate interest in financial reports of publicly held enterprises to ensure efficient operation
of capital markets.
General Public
Financial statements assist the public by providing information about the trends and recent
developments in the prosperity of an enterprise and the range of its activities.
Accounting systems
There are two systems of book keeping:
1. Single entry system of book keeping: it refers to any system of book keeping under which is
not a complete double entry.
2. Double entry system: it is a complete two effects, one is receiving benefit and equal to
giving benefit.
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Rules for double entry system
 Personal account: it records the dealing of a business with persons or firm etc.
 Real account: account of proprietor, assets, things owned a concern
 Nominal account: accounts of expenses or loss and income or gain.
Personal account: Debit the receiver

Credit the giver
Real account: Debit what comes in
Credit what goes out
Nominal account: Debit all expenses and losses
Credit all income and gains
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Preparation of books of original records
Module - 2
Meaning
It is a statement of the various dealings which occur between a customer and the firm. It can also be
expressed as a clear and concise record of the transactions relating to a person or a firm or a property
(asset) or a liability or an expense or an income.
Classification of Accounts
1. Personal Accounts
2. Real Accounts
3. Nominal Accounts
Personal Accounts
Accounts related to an individual person, firm, company and bank is called personal accounts. The
proprietor being an individual his Capital A/c and his Drawing A/c are also known as Personal
Accounts.
Real Accounts
Assets or properties or trading goods related to a firm is called Real Accounts.
E.g. Furniture A/c, Purchase A/c, Sales A/c. etc.
Nominal Accounts
Any expenses incurred or incomes received other than a real account is called Nominal Accounts.
E.g. Salary for the staff, Rent paid, Commission received etc.
Debit & Credit Aspects
One aspect will be either the Receiving Aspects or Incoming Aspects. This is termed as Debit
Aspect. Another aspect will be Giving Aspects or Outgoing Aspects or Income Aspects. This is
termed as Credit Aspect.
Golden Rules of Accounts:

1. Personal A/c Debit the Receiver
Credit the Giver
2. Real A/c Debit what Comes in
Credit what goes out
3. Nominal A/c Debit all expenses & losses
Credit all income & gains
Accounting cycle
After identifying and measuring the financial transaction, the accounting cycle begins. An accounting
cycle is a complete sequence beginning with the recording of the transactions and ending with the
preparation of the final accounts.
Steps/Process involved in accounting cycle:
1. Business transactions are created.
2. Analyze and record the transaction
3. Post the information from the journal to the ledger
4. Prepare a trail balance
5. Journalize adjusting entries
6. Post adjustments from the journal to ledger
7. Prepare an adjusted trial balance
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8. Journalize closing entries
9. Post closing entries from the journal to the ledger
10. Prepare a post-closing trail balance
11. Prepare the financial statements.
Journal
A daily record of events or business is called journal. It is called the book of original or prime entry.
A brief explanation of the transaction is given within the brackets is called narration.
The recording of a transaction in the journal is called journalizing. The record of a business
transaction in journal is called a journal entry.
One simply knows that “left hand side is Debit” and “right hand side is Credit”.
Compound journal entry

When a transaction involves more than two accounts, then either a person pass separate entries or a
combined entry because it involves more than two accounts.
Book of original entry

All the transaction is recorded in the journal and that too in a chronological order. That is why the
journal is known as the book of original entry.
Procedures to enter Journal Entries

1. Find out, which two accounts belongs to a particular transaction.
2. Then find these two accounts belonging to which category i.e. Personal or Real or
Nominal A/cs.
3. Then see rules of the category and match with accounts.
4. Write the journal entry with date, amount in both sides and narration.
Ledger
When the transactions are recorded from the primary books of accounts on permanent basis under
double entry system in a summarized and classified form in different accounts and the same is posted
in separate pages, it is called a Ledger.
Ledger is a secondary book of entry. The journal entries are posted to the ledger at the end of each
period. Ledger is a book containing various accounts. In this book, separate account is opened for
each and every transactions of different nature.
Procedures to post entries from Journal book to Ledger book

1. List out the no. of accounts in the journal book.
2. Open separate ledger account for each account.
3. Debit side of the entry in the journal book will come under credit side of the ledger and vice-versa
4. In debit side of the ledger book while entering the entry, add “TO”. In credit side, add “BY”.
5. Balance the amount in both the sides.
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Trial Balance
It is a statement, prepared with the debit and credit balances of ledger accounts to test the
arithmetical accuracy of the books.
Trial Balance is a statement of ledger balances. In this statement four columns are provided for
recording the serial number, name of accounts, debit balances and a credit balances. The total of such
balances must be equal.
Rules
Debit : All assets, expenses & losses
Credit : All liabilities, incomes & gains
Objectives and functions of trial balance

1. Check the arithmetical accuracy
2. Help locate accounting errors
3. Summarize the financial transactions
4. To provide the basis for preparing final accounts.
Subsidiary book
It may be defined as a book of prime entry in which transactions of a particular category are
recorded.
A subsidiary book is prepared when the transactions of similar nature are large. It is prepared as a
substitute for journal. By preparing this book, entries are minimized. Example: Sales Book, Purchase
Book etc.
Types of Subsidiary Books

1. Purchase book
2. Sales book
3. Purchases Return book
4. Sales Return book
1. Purchase book
This book is kept with the object of recording credit purchases of goods for resale. Each inward
invoice after it has been entered as to calculations and also to the quantity, quality and price of the
goods received is numbered consecutively and then entered in the purchase books.
Purchase Book Postings: Each personal a/c is credited with its respective amount and the monthly
total of this book is debited to purchases a/c in the Ledger.
2. Sales book
The object of this book is to record credit sales. An outward invoice is made out for credit sale and
checked as to quantity, quality and price of the goods before the letter is sent out to the customer.
Sales Book Posting: Each personal a/c debited with its respective amount and the monthly total of
the book is credited to sales a/c in the ledger.
3. Purchase Returns Book
In this book they record returns outward, that is, return of goods bought. A debit note is made out
with a carbon duplicate and sent to the party to whom the goods are returned.
Purchase Returns Book Postings: Each individual personal a/c is debited with its respective
amount and the monthly total of the book is credited to returns outward a/c in the ledger.
4. Sales Returns Book
Return inwards, that is, return of goods sold by us, are recorded in this book. On receipt of goods,
credit notes with carbon duplicates are made out and sent to those customers who have returned us
the goods.
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Sales Returns Book Posting: Each personal a/c gets the individual credit and the returns inwards
accounts get the debit with the monthly total of the book.
Debit note: It is a note sent by one party to another informing him that his account is debited in the
sender’s book.
Credit note: It is a note sent by one party to another informing him that his account is credited in the
sender’s book.
Cash Book
It is a book in which all transactions relating to cash receipts and cash payments are recorded. It starts
with the cash or bank balances at the beginning of the period.
A cash book is a special journal which is used for recording all cash receipts and cash payments. A
cash book is a book of original entry since transactions are recorded for the first time from the source
documents. The cash book is a ledger in the sense that it is designed in the form of a cash a/c and
records cash receipts on the debit side and cash payments on the credit side.
Types of Cash Book
1. Single Column Cash Book
2. Cash Book with Discount Column
3. Cash Book with Bank & Discount Column
4. Petty Cash Book
5. Single Column Cash Book
Single column cash book has one amount column on each side. All cash receipts are recorded on the
debit side and all cash payments are recorded on the credit side.
Trade discount: it is reduction granted by a supplier from the list price of goods or services on
business considerations other than for promote payment.
Cash discount: a reduction granted by a supplier from the invoice price in consideration of
immediate payment or payment within a stipulated period.
Contra entry: it means ‘the other side’. If both debit and credit aspects of a transaction are recorded
in the cash book itself such entries are called Contra entries.
Three Column Cash Book

Three column cash book has three amount columns (one for cash, one for bank and one for discount)
on each side. All cash receipts, deposits into bank and discount allowed are recorded on debit side
and all cash payments, withdrawals from bank and discount received are recorded on the credit side.
Depreciation
“Depreciation is the gradual and permanent decrease in the value of an asset from any cause”.
Depreciation is the measure of wearing out of a fixed asset. All fixed assets are expected to be less
efficient as time goes on.
“Depreciation refers to the process of estimating and recording the periodic charges to expense due to
expiration of the usefulness of a capital asset”.
Decreasing the value of assets is called deprecation.
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Features of depreciation
1. It is related to depreciable fixed assets only.
2. It is a fall in the book value of depreciable fixed asset.
3. All tangible assets except land have a limited useful life.
4. Depreciation is not a process of valuation.
5. It is a continuous decrease in the book value of an asset.
Types of Depreciation
1. Straight line or fixed percentage or equal installment method
2. Written down value or balanced method
3. Annuity method
4. Sinking fund method or depreciation fund method
5. Depletion method
6. Machine hour rate method
Straight line method

It is the simplest method of charging depreciation. In this, the depreciation is charged evenly every
year throughout the effective life of the assets.
Written down value method

Under this method, depreciation, according to a fixed percentage calculated upon the original cost
and written down value of an asset is written off during each accounting period over the expected
useful life of the asset.
Under this method, the rate of depreciation remains constant year after year whereas the amount of
depreciation goes on decreasing.
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Preparation of Financial Statements
Module - 3
A Final account consists of two statements i.e. (I) Income Statement or Trading, profit & Loss A/c
and (ii) Balance Sheet.
Where, Income statement shows the net results of the firm.
Balance sheet shows the financial position of the business.
As these two statements provide the final result of any business, they are called final accounts.
Income statement consists of both

Trading A/c and
Profit & Loss A/c
Trading A/c
The object of this account is to arrive at the results of trading operation.I.e.to find out that the
organization has derived profit or loss out of buying & selling operation.
Profit & Loss A/c

This account is prepared to ascertain the net profit/loss of the business during an accounting period.
The P&L a/c can be defined as a statement that summarizes the revenues and expenses of an
accounting period so as to reflect the changes in various critical areas of firm‘s operations.
Problems on financial statements
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Analysis of Financial Statement
Module-4
Introduction to Financial Analysis
Analysis means methodical classification of the data given in the financial statements.
Interpretation means explaining the meaning and significance of the data so simplified.
Financial Analysis is the process of identifying the financial strengths and weakness of the firm by
properly establishing relationships between the items of the balance sheet and the profit and loss
account.
Meaning of financial statement analysis
Analysis and interpretation of financial statements, refers to the process of determining financial
strengths and weakness of firm by establishing strategic relationship between the items of balance
sheet, profit and loss account and other operative data.
Analysis of financial statements is the systematic numerical calculation of the relationship between
one fact with the other to measure the profitability, operational, efficiency, solvency and the growth
potential of the business.
Objectives of financial statement analysis

1. Measuring short-term solvency
2. Measuring long-term solvency
3. Measuring profitability
4. Comparison of inter-firm position
5. Forecasting, budgeting and deciding future line of action
Tools/Techniques of financial statement analysis

The various tools used for the analysis of the financial statements of a firm are:
1. Comparative statements
2. Common-size statements
3. Trend analysis
4. Ratio analysis
5. Fund flow statements
6. Cash flow statements
Comparative Financial Statements

Comparative statements are statements of the financial position at different periods of time.
According to A.F. Foulke “Comparative financial statements are statements of the financial position
of a business so designed as to provide time prospective to the consideration of various elements of
financial position embodied in such statements”.
A simple method for financial analysis is Comparative Financial Statements. Comparative financial
statements will contain items at least for two periods. Changes – increases and decreases – in income
statement and balance sheet over period are shown. Comparative Financial Statements can be
prepared for more than two periods or on more than two dates.
Common Size Financial Statements

The common-size statements, balance sheet and income statements are shown in analytical
percentages. The figures are shown as percentages of total assets, total liabilities and total sales.
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Comparative Financial Statements can be prepared for more than two periods or on more than two
dates. However, it becomes very cumbersome to study the trend with more than two period’s data.
Trend percentages are more useful in such cases.
Common size financial statements are those in which figures reported are converted into percentages
to some common base. In the income statement, the sale figure is assumed to be 100 and all figures
are expressed as a percentage of sales. Similarly, in the Balance Sheet, the total of assets or liabilities
is taken as 100 and all figures are expressed as a percentage of this total.
Trend Analysis
Trend analysis is also trend as intra-firm comparison, wherein financial statements of the same
enterprise for two or more years are compared. Trend analysis is also named as index analysis,
horizontal analysis, because each accounting variable is placed horizontally.
Trend percentages are immensely useful in making a comparative study of financial statements for
several years.
The method of calculating trend percentages involves the calculation of percentage relationship that
each item bears to the same item in the base year.
Any year may be taken as the base year. It is usually the earliest year. Each item of base year is taken
as 100 and on that basis the percentage for each item of the years is calculated. These percentages
can also be taken as Index Numbers showing relative changes in the financial data resulting with the
passage of time.
Ratios for Financial Statement Analysis

Ratio analysis is a simple arithmetical expression of the relationship of one number to another. It may
be defined as the indicated quotient of two mathematical expressions.
Ratio analysis is a technique of analysis and interpretation of financial statement. It is a study of
relationship among the various financial factors in a business.
A ratio gives the mathematical relationship between one variable and another. Ratios are well known
and most widely used tools for financial analysis.
Objectives of ratio analysis

1. Measuring the profitability
2. Judging the operational efficiency of business
3. Assessing the solvency of the business
4. Measuring short and long term financial position of the company
5. Facilitating comparative analysis of the performance.
Types of ratios
1. Liquidity ratio
2. Leverage ratio
3. Profitability ratios
4. Turnover ratios
Cash Flow Statement

Meaning
Cash flow statement is a statement, which describes the inflows and outflows of cash and cash
equivalents in an enterprise during a specific period of time. Such statement takes into account the
receipts and disbursements of cash. A cash flow statement summarizes the causes of changes in cash
position of a business enterprise between two dates.
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Classification of Cash Flows
The cash flow is classified into three main categories as:
1. Cash flow from operating activities
2. Cash flow from investing activities
3. Cash flow from financing activities
1. Cash Flow from Operating Activities

Operating activities are the principal revenue – producing activities of the enterprise and other
activities that are not investing or financing activities. Cash flow from operating activities is
principally derived from the principal revenue-producing activities of the enterprise.
Cash inflows from operating activities include receipts from customers for sales or goods and
services (including collection from debtors).
Cash outflows from operating activities include payments to suppliers for purchase of materials
and for services, payments to employees for services and payments to governments for tax duties.
2. Cash Flow from Investing Activities

Investing activities are the acquisition and disposal of long-term assets and other investments not
included in cash equivalents. It involves making and collecting of loans and acquiring and disposing
of debt and equity instruments and fixed assets.
The cash inflows from investing activities are receipts from collection of loans, receipts from sales
of shares, debt or similar instruments of other enterprises, receipts from sales of fixed assets, and
interest and dividends received on loans and investments.
Cash outflows from investing activities are disbursements of loans, payments to acquire shares,
debt or similar instruments of other enterprises, and payments (including advance and down
payments) to acquire fixed assets.
3. Cash Flow from Financing Activities

Financing activities are the activities that result in change in the size and consumption of the owner’s
capital (including preference share capital in case of a company) and borrowings of the enterprise.
Cash inflows from financing activities are proceeds from issuing shares or other similar
instruments, debentures, mortgages, bonds and other short or long-term borrowings.
Cash outflows from financing activities are the payments of dividends, payments to acquire or
redeem shares or other similar instruments of the enterprise, repayments of amounts borrowed,
principal payments to creditors who have extended long-term credit, and interest paid.
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Accounting Standards and IFRS:
Module-5
Accounting standards
The uniform, definite and universally accepted accounting rules developed by international
accounting standards committee (IASC) are known as accounting standard.
Accounting standards are defined as the policy documents issued by a recognized expert accounting
body relating to various aspects of measurement, treatment and disclosure of accounting transactions
and events.
Objectives/Needs of accounting standard

1. Uniform standard presentation of accounts
2. Removal of ambiguity and confusion
3. Prevention of accounting scandals
4. Globalization of business
5. Internationalization of finance institutions
Benefits of accounting standards

1. Reduction in variations
2. Disclosure beyond that required by law
3. Facilitates comparison
Indian accounting standards

The Institute of Chartered Accountants of India, recognizing the need to harmonize the diverse
accounting policies and practices at present in use in India, constituted an Accounting Standards
Board (ASB) on April 1977.
The main function of the ASB is to formulate accounting standards so that such standards will be
established by council of ICAI.
International Financial Reporting Standards [IFRS]

IFRS established by the IASB, are increasingly recognized as a mature and rigorous set of rules for
the preparation of the financial statements of many large and multinational companies and are
accepted by most security market authorities.
IFRS are also used as basis for national accounting requirements or as an international benchmark for
countries which develop their own requirements.
Needs for IFRS

1. Level of confidence
2. Risk evaluation
3. Merger and takeover activity
4. Investments
The Accounting standards bring uniformity in the preparation and presentation of financial
statements and aids in comparison of different Procedure for framing Accounting Standards
The International Accounting Standards are issued by the IASC; These Standards are received by
ICAI assigned to ASB. The Accounting standards are issued under the authority of the council of
ICAI. So far the ASB of ICAI has issued 28 Accounting standards as shown below
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IFRS vs. Indian Accounting Standards
The International Financial Reporting Standards refer to the reporting standards of finance as set by
the international accounting standards. Both IFRS and Indian Accounting Standards have different
accounting standards. However, with the growing market trend, the need of a common set of
accounting standards was felt by all. Hence, IFRS is to be followed. However, with the differences in
the standards existing between both the bodies, a careful handling is to be carried out. Following are
few changes that will be made in case IFRS is issued and made compulsory:
IAS-1: Disclosure of accounting principles
IFRS-/IAS-1: Adoption of international financial reporting standards/presentation of financial
statements.
IAS-3: cash flow statements
IAS-7: cash flow statements
IAS-4: events after the balance sheet date
IAS-10: events recorded after the balance sheet date
IAS-5: changes in accounting policies and accounting errors
IAS-8: prior period changes and accounting policies and errors changes
IAS-6 and AS-10: Depreciation and fixed assets
IAS-16: plants, property and equipment‘s
IAS-9: revenue recognition
IAS-18: revenue
The above mentioned standards were some of the examples to the changes in accounting standards of
both the bodies. Not only that, IFRS deals with the balance sheet in the reverse manner as ours. The
first emphasis is laid on to the assets in the order of liquidity. The next recorded details are that of the
liabilities starting with the borrowings. Then finally the next recorded details are that of the equity
capital which is completely opposite according to the Indian Accounting standards.
IFRS and Proposed changes in Indian Accounting Standards
As by IFRS/IAS Position under IAS/IFRS after considering recent

ICAI changes
AS – 1 IAS – 1 Disclosure of accounting policies
AS – 2 IAS – 2 Valuation of inventories
AS – 3 IAS – 3 Cash flow statements

AS – 4 IAS – 10 Contingencies and events occurring after the balance
sheet data
AS – 5 IAS – 8 Prior period items and changes in accounting policies
AS – 6 No corresponding Depreciation accounting IAS – 16 effect to be given

IAS prospectively.
AS – 7 IAS – 11 Construction contract

AS – 9 IAS – 18 Revenue recognition
17
AS – 10 IAS – 16 Accounting for fixed assets
AS – 11 IAS – 21 Effects of changes in foreign exchange rates
AS – 12 IAS – 20 Government grants
AS – 14 IAS – 22 Accounting for amalgamations
AS – 15 IAS – 19 Employee benefits
AS – 16 IAS – 23 Borrowing costs
AS – 17 IAS – 14 Segment reporting
AS – 18 IAS – 24 Related party disclosures
AS – 19 IAS – 17 Leases
AS – 20 IAS – 33 Earnings per share (EPS)
AS – 21 IAS – 21 Consolidated financial statements
AS – 22 IAS – 12 Accounting for taxes on income
AS – 23 IAS – 28 Accounting for associate in consolidated financial

statement
AS – 25 IAS – 34 Interim financial reporting
AS – 26 IAS – 38 Intangible assets
AS – 27 IAS – 31 Financial reporting of interests in joint ventures
AS – 28 IAS – 36 Impairment of assets
AS – 29 IAS – 37 Provisions, contingent assets, and contingent liabilities
18
Emerging issues in Accounting
Module-VI
Corporate Governance
Corporate governance is the set of processes, customs, policies, laws and institutions affecting the
way a corporation is directed, administered or controlled.
According to Cadbury committee “corporate governance is defined as the system by which

companies are directed and controlled”.
Corporate governance is a system by which companies are run, and the means by which they are
responsive to their shareholders, employees and society.
Corporate governance refers to the system of structures, rights, duties, and obligations by which
corporations are directed and controlled. The governance structure specifies the distribution of rights
and responsibilities among different participants in the corporation (such as the board of directors,
managers, shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules
and procedures for making decisions in corporate affairs. Governance provides the structure through
which corporations set and pursue their objectives, while reflecting the context of the social,
regulatory and market environment. Governance is a mechanism for monitoring the actions, policies
and decisions of corporations. Governance involves the alignment of interests among the
stakeholders.
Features of corporate governance

1. Represents the framework under which business decision are taken
2. Depends on the rules and practices
3. Key part of the contract
4. Assurance to well-functioning of markets
Need of corporate governance

1. Impact of globalization
2. Economic changes
3. Change in the structure of shareholding
4. Financial reporting and transparency
5. Shareholders’ net worth and net wealth
Constituents of corporate governance

1. Board of directors
2. Shareholders
3. Management
Parties to corporate governance

Parties involved in corporate governance include the regulatory body (e.g. the Chief Executive
Officer, the board of directors, management and shareholders). Other stakeholders who take part
include suppliers, employees, creditors, customers and the community at large.
19
In A Board Culture of Corporate Governance business author Gabrielle O'Donovan defines corporate
governance as 'an internal system encompassing policies, processes and people, which serves the
needs of shareholders and other stakeholders, by directing and controlling management activities
with good business savvy, objectivity and integrity. Sound corporate governance is reliant on
external marketplace commitment and legislation, plus a healthy board culture which safeguards
policies and processes'.
Issues involving corporate governance principles include

1. Oversight of the preparation of the entity's financial statements
2. Internal controls and the independence of the entity's auditors
3. Review of the compensation arrangements for the chief executive officer and other senior
executives
Importance of corporate governance

1. Creation and enhancement of corporation’s competitive advantage
2. Enabling corporation to perform efficiently by preventing fraud and malpractices
3. Providing protection to shareholders interest
4. Enhancing the valuation of an enterprise
5. Ensuring compliance of laws and regulations
Clause 49 of the listing agreement

The companies listed on the stock exchanges are required to comply with the regulations of the SEBI
which derives its powers from the SEBI Act, 1992. Clause 49 of the listing agreement is one such
tool through which compliance is ensured.
The objective of clause 49 of the listing agreement is to promote the core principles of corporate
governance, fairness, transparency, accountability, and responsibility.
Suggested list of mandatory items to be included in clause 49 on corporate governance in

the annual report of companies
1. A brief statement on company’s philosophy on code of governance
2. Board of directors
3. Audit committee
4. Remuneration committee
5. Shareholders committee
6. General body meetings
7. Disclosures
8. Means of communication
9. General shareholder information
Non-Mandatory requirements
1. Chairman of the board
2. Remuneration committee
3. Shareholder right
4. Audit qualifications
5. Training of board members
6. Mechanism for evaluating non-executive directors
20
Human Resource Accounting
Human resource accounting is the measurement of costs and value of the people for the organization.
According to American accounting association committee, “Human resource accounting is the

process of identification and measuring data about human resource, and communicating this
information to interested parties”.
Human Resource Accounting (HRA) means to measure the cost and value of the people (i.e. of
employees and managers) in the organization. It measures the cost incurred to recruit, hire, train and
develop employees and managers. HRA also finds out the present economic value of its employees
and managers. After measuring the cost and value of its employees and managers, the organization
prepares a report. This report is called HRA Report. It is shown to the top level management. It can
also be shown to the employees, managers and outside investors.
What is Human Resource Accounting?

Human Resource Accounting is the process of identifying and measuring data about Human
Resources and communicating this information to the interested parties. It is an attempt to identify
and report the Investments made in Human Resources of an organization that are currently not
accounted for in the Conventional Accounting Practices.
Objectives of HRA
1. HRA helps in determining the return on investment on human resources.
2. It helps in knowing whether the human resources have been properly utilized or not.
3. It provides quantitative information on human resources which will help the managers as
well as investors in making decisions.
4. To communicate the worth of human resources to the organization and the society at large.
Methods of Human Resource Accounting
1. Historical cost method

2. Replacement cost method
3. Opportunity cost method
4. Capitalization of salary method
5. Economic valuation method
6. Reward valuation method
7. Expected realizable value method
8. Present value of future earning method
9. Discounted net present value of future earnings
Advantages of HRA
1. Improvement in internal management decisions
2. Motivation of employees for production purposes
3. Saving of time in meetings of the executive
4. Impact on investors decisions
5. Improvement in decision making process
6. Decision about further recruitment
Disadvantage of HRA
1. Non-availability of standard
2. Opposition of trade unions
21
3. Expenditure on HRA
4. Category of asset
5. Uncertainty about continuance of employee’s
Forensic accounting
The term forensic is actually an adjective meaning to be used in a court of law, public discussion, or
debate.
“Forensic accounting is the application of accounting principles, theories, and discipline to facts or
hypotheses at issue in a legal dispute it encompasses every branch of accounting knowledge”.
Forensic accounting involves the analysis of monies, financial transactions, financial statements etc.
Forensic accounting is defined as “The science that deals with the relation and application of finance,
accounting, tax and auditing knowledge to analysis, investigate, test and examine matter in civil laws
which to render an expert opinion”
Need of forensic accounting

1. Corporate investigations
2. Litigation support
3. Criminal matters
4. Insurance claims
5. Government/Regulation.
Detection techniques used in forensic accounting

1. Critical point auditing
2. Propriety audit
Steps in forensic accounting

1. Meeting with the client
2. Performing a conflict
3. Carry-out preliminary investigative
4. Developing detailed action plan
5. Obtaining relevant evidence
6. Perform analysis
7. Prepare reports
8. Chart and graphics
Importance of the forensic accounting

1. It trace-out fraud and criminal transactions from financial records of the public and private
organizations.
2. It takes a more practical, doubtful approach in investigating the books of accounting.
3. It applies specialized knowledge and explicit skills to pause upon the evidence of economic
transactions.
4. It is expected to think much beyond their normal ability that is needed to success in any
particular field.
22
Window dressing
Window dressing is presenting companies accounts in a manner which enhances the financial
position of the company.
“Window dressing is the year-end practice of adjusting portfolio weighting to meet compliance
restrictions on industry weighting and bond credit quality”.
Window dressing is the year-end practice used by financial institutions and investors to clean up their
financial reports.
Reasons for window dressing

1. To show a stronger market position that is warranted
2. To influence share price
3. To reduce liability for taxation
4. To hide liquidity problems
5. To encourage investors
6. To hide poor management decisions
Nature of Window Dressing

1. Inflate the sales from the current year by advancing the sales from the following year.
2. Alter the other income’ figure by playing with non-operational figures like sale of fixed assets.
3. Fiddle with the method and rate of depreciation. (A switch may be effected from the written down
value method to the straight line method or vice versa.)
4. Change the method of stock valuation from, say, direct costing to absorption, to minimize the cost
of goods sold.
5. Capitalize certain expenses like research and development costs and product promotion cost that
are ordinarily written off in the profit and loss account.
6. Defer certain discretionary expenditures (like repairs, advertising, research and development) to
the following year.
7. Make inadequate provision for certain known liabilities (gratuity etc.) and treat certain liabilities as
contingent liabilities
8. Make extra provisions during prosperous years and written them back in lean years.
9. Use totally unacceptable accounting practices.
10. Revalue assets to create the impression of substantial reserves.
Sustainability Reporting
A sustainability report is a report published by a company or organization about the economic,
environmental and social impacts caused by its everyday activities. A sustainability report presents
the organization’s values and governance model, and demonstrates the link between its strategy and
its commitment to a sustainable global economy.
Sustainability reporting can help organizations to measure, understand and communicate their
economic, environmental, and social and governance performance.
Process of sustainability reporting

1. Input
2. Processing
3. Output
23
Fundamentals of Taxation
Module-7
Income Tax
Income tax is a direct tax. It is levied and collected by central government. It is an important source
of income of the central government.
Income tax department is one that directs, control and supervision of central board of direct taxes
(CBDT) which is under the finance ministry of the government of India.
Income tax is a tax of income, levied on the previous year’s total income of an assessee (person) at
the rates applicable during the current year.
Feature of income tax

1. Income tax is levied on the income of a person.
2. Income tax is a direct tax.
3. Income tax is payable by every person.
4. Income tax is levied on previous year’s income.
5. Income tax is levied on the total taxable income.
6. Income tax is levied at the rates applicable during the current year.
7. Income tax is levied as per slab system.
Heads of income
1. Income under the head salary.
2. Income from house property.
3. Profit and gain of business or profession.
4. Capital gains.
5. Income from other sources.
Income from salary

Under section 15, the following incomes are chargeable under the head salaries
Any salary due from an employer or former employer to an assessee in the previous year, whether
paid or not;
Any salary paid or allowed to him in the previous year by or on behalf of an employer or a former
employer, though not due or before it became due to him.
Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer of
former employer, if not charged to income tax for any earlier previous year.
Definitions: Under section 17 of the Act the following have been defined.
Salary
Perquisites
Profits in lieu of salary
Salary [Sec. 17(1)]: Salary includes

Wages
Any annuity or pension
Any gratuity
Any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages.
Any advance of salary, but not advance for purchasing a car, cycle, scooter or a house; etc
24
Any payment received by an employee in respect of any period of leave not availed of by him.
Difference forms of salary

1. Advance salary.
2. Arrear salary.
3. Leave salary.
4. Salary in lieu of notice period.
5. Salary to a partner.
6. Fees and commission.
7. Bonus.
8. Gratuity.
9. Pension.
10. Annuity.
Deductions: The income chargeable under the head salaries shall be computed after making the
following deductions from gross salary
Deduction for entertainment allowance
Deduction in respect of professional tax
Entertainment Allowance [sec. 16(ii)]
Entertainment allowance is not eligible for exemption but it only qualifies for deduction. Therefore,
entertainment allowance is first included in gross salary and then deduction is allowed under section
16(ii). This deduction is available only in case of government employees and not in case of other
employees. The deduction allowable in the case of government employees is to the extent of least of
the following: -
Rs. 5,000; or
1/5 of salary; or
Actual entertainment allowance received for the previous year.
Salary for the purpose of entertainment allowance deduction means only basic salary.
Professional Tax [sec. 16(iii)]
Deduction is allowed in respect of any sum paid by the assessee on account of a tax on employment.
In case, if the professional tax is paid by the employer on behalf of the employee, the amount so paid
should be included in gross salary as a perquisite and then deduction under section 16(iii) can be
claimed.
Death-cum-retirement Gratuity: [Sec. 10(10)]
In case of Government employees: Any death cum retirement gratuity received by government
employees is fully exempt from tax.
In case of non-government employees covered by the payment of gratuity Act,
1972: Any gratuity received by a non-government employee who is covered by the payment of
gratuity act of 1972, is exempt from tax to the extent of least of the
following:
(a) Rs. 3,50,000; or
(b) 15 days salary (last drawn salary *15/26)
based on last drawn salary for each completed year of service or part of the year in excess of 6
months; or Salary for this purpose means basic salary and dearness allowance
In case of non-government employees who are not covered by the payment of gratuity Act of
1972
Any gratuity received by any other employee on retirement, death, termination or resignation is
exempt from tax to the extent of the least of the following;
(a) Rs. 3,50,000; or
25
(b) Half month‘s salary (on the basis of last 10 months average immediately preceding the month in
which any such event occurs) for each completed year of service (fraction to be ignored); or
(c) Gratuity actually received.
Salary for this purpose means basic salary, dearness allowance-if provided in terms of
employment and commission as a percentage of turnover achieved by the employee.
Note:
(a)Gratuity received during the period of service is always taxable
(b)Where gratuity is received by an employee from 2 or more employers in the same previous year
then the aggregate amount of gratuity exempt form tax cannot exceed the above limits prescribed.
(c) In case where the employee has received gratuity in any earlier year from his former employer
and also receives gratuity from another employer in a later year, the limit of Rs. 3,50,000 will be
reduced by the amount of gratuity exempt from tax in any earlier year.
Commuted Pension [Sec 10(10A)]
Uncommuted pension refers to the pension periodically received by the employee. Commuted
pension means lump sum amount taken by commuting the pension or part of the pension. Where an
employee commutes, under pension rules, part of pension, the remaining portion will periodically
received.
Uncommuted pension is taxable as salary u/s 15 in the hands of both government and non-
government employees.
Any commuted pension received by a government employee is wholly exempt from tax. CBDT has
clarified by circular number 623-dated 6-1-92 that judges of the High court’s and Supreme courts are
also entitled to the exemption.
A non-government employee can avail exemption to the following extent
(1) If the employee is in receipt of gratuity, 1/3 of the full value of the pension.
(2) If the employee is not in receipt of gratuity, ½ of the full value of the pension.
Leave Salary [sec. 10(10AA)]
Government employee: Any amount received as cash equivalent of leave in respect of period of
earned leave to his credit at the time of retirement whether on superannuation or otherwise, is exempt
from tax
Non-Government Employees: Leave salary is exempt from tax to the extent of least of the
following;
Cash equivalent of the leave (on the basis of average of last 10 months‘salary) to the credit of the
employee at the time of retirement (calculated at 30 days credit for each completed year of service);
or
10months‘ salary (on the basis of average of 10 months‘ salary); or
The amount specified by the government --- Rs. 3,00,000
Leave encashment actually received.
Even in the case of voluntary retirement by way of resignation, leave salary received qualifies for
exemption.
Salary for this purpose means basic salary, dearness allowance if provided in terms of
employment and commission as a percentage of turnover achieved by the employee.
Note:
1. Leave salary received during the period of service is taxable
2. Where leave salary is received by an employee from 2 or more employers in the same previous
year then the aggregate amount of leave salary exempt from tax cannot exceed the limits prescribed.
3. In case where the employee has received cash equivalent of earned leave in any earlier year from
his former employer and also receives leave salary from another employer in a later year, the limit of
Rs. 3,00,000 will be reduced by the amount of gratuity exempt from tax in any earlier year.
26
Allowances
The various allowances, which are allowed from the employer to the employees, are classified under
three categories
Fully taxable Allowances
Partly taxable allowances or allowances exempted up to specified limit.
Fully exempted allowances.
Fully Taxable Allowances.
(1)Dearness allowance or dearness pay
(2)Medical allowances
(3)Tiffin allowance
(4)Servant allowance
(5)Non-practicing allowance
(6)Warden allowance and proctor allowance
(7)Deputation allowance
(8)Overtime allowance
Income from House Property

Basis of Charge: The annual value of property consisting of any building or lands appurtenant
thereto of which the assessee is the owner shall be chargeable to income tax under this head.
However, the said excludes the property used by the Assessee for the purpose of any business or
profession carried on by him and profits of which are chargeable to income tax under the head profits
and gains of business or profession.
House Rent Allowance [sec. 10(13A)]

House rent allowance granted to an Assessee by his employer is exempt from tax to the extent of
least of the following
(a) Excess of rent paid over 10% of salary, or
(b) If the accommodation is situated in Mumbai, Kolkata, Chennai and Delhi
50% of salary
If the accommodation is situated at any other places- 40% of salary
(c) Actual HRA received for the relevant period
Exemption is not available to an Assessee who lives in his own house; or in a house for which he
does not pay any rent.
Salary for this purpose means basic salary, dearness allowance if provided in terms of employment
and commission as a percentage of turnover achieved by the employee calculated on due basis for the
relevant period.
Relevant period means the period during which the said accommodation was occupied by the
Assessee during the previous year.
(2) Any allowance granted to an employee working in any transport system to meet his personal
expenses during his duty performed in the course of running of such transport form one place to
another place is exempt from tax to the extent of 70% of such allowance or Rs. 6,000 per month,
whichever is less
(3) Transport allowance: any transport allowance granted to an employee to meet his expenditure
for the purpose of commuting between the place of his residence and place of his duty to the extent
of Rs. 800 per month. The same is exempted from tax up to Rs. 1,600 per month if it is given to an
employee who is blind and/or physically handicapped.
(4) Children Education Allowance: It is exempt from tax up to Rs. 100 per month per child up to a
maximum of 2 children.
27
(5) Children Hostel Allowance: It is exempt from tax up to Rs. 300 per month per child up to a
maximum of 2 children
Fully Exempted Allowances:
(1) Foreign allowance
(2) Sumptuary allowance to High court and Supreme Court judges
(3) Allowances from U.N.O
Incomes from “Profits And Gains Of Business Or Profession” [Section 28]

(1) Profits and gains of any business or profession carried on by assesses at any time during previous
year.
(2) Compensation or other payment due to or received by any person –
(a) Managing whole or substantially whole of affairs of an Indian company or any other
company in India at or in connection with the termination of his management or modification of the
terms and conditions relating thereto;
(b) On termination or modification of contract of his agency in India;.
(c)For vesting the management of any property or business in Government or any corporation
owned or controlled by the Government.
(3) Income derived by trade, professional or other similar association from specific services rendered
to its members. This clause is an exception to general rule that income from mutual activity is not
chargeable to tax.
(4) Profits on sale of import license; or Profits on transfer of Duty Entitlement Pass Book (DEPB) or
Duty Free Replenishment Certificate (DFRC) under EXIM Policy;
(5) Cash assistance against exports from Government of India and Duty Drawback;
(6) Value of any benefit or perquisite, whether convertible into money or not arising from exercise of
business or profession;
(7) Interest, salary, bonus, commission or remuneration due to or received by partner from the firm.
Such income is taxable in hands of partners to the extent it is allowed as deduction in hands of firm.
Any amount not allowed as deduction to firm under Section 40(b), is not taxable in the hands of
partner.
(8) Any sum received or receivable, in cash or in kind, under an agreement for
(a) Non-competition i.e. not carrying out any activity in relation to any business; or
(b) Exclusivity i.e. not sharing any know-how, patent, copyright, trademark, license,
franchise or any other business or commercial right of similar nature or information or
technique likely to assist in the manufacture or processing of goods or provision of services.
Exceptions: However, sum received for transfer of business, or transfer of right to
manufacture, produce or process any article/thing, which is chargeable under Capital Gains‘
is not taxable under this Section.
(9) Any sum (including bonus) received under Key man Insurance Policy.
Income from Capital Gains (Chargeability u/s 45)

Profits or gains arising from the transfer of a capital asset is chargeable to tax in the year in which
transfer take place under the head "Capital Gains".
Definitions
Transfer: Sec. 2(47): Transfer in relation to a capital asset includes sale, Exchange, or
relinquishment of the asset or extinguishment of any rights therein or the compulsory acquisition
thereof under any law or conversion of the asset by the owner in stock-in- trade of a business carried
on by him or the maturity or redemption of a zero coupon bond.
28
Capital Asset: Sec. 2(14): Capital Asset means property of any kind (Fixed, Circulating, movable,
immovable, tangible or intangible) whether or not connected with business or profession.
Exclusions
a. Stock-in-trade
b. Personal effects of the assessee
c. Agricultural land in a rural area
d. 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defense Bonds, 1980 issued by the
Central Government
e. Special Bearer Bonds, 1991 issued by the Central Government.
f. Gold Deposit Bonds issued under Gold Deposit Scheme 1999
Short-term capital asset: Sec. 2(42A): means a capital asset held by an assessee for not more than
thirty six months immediately preceding the date of its transfer. However, in the following cases, an
asset, held for not more than twelve months, is treated as short- term capital asset
a. Quoted or unquoted equity or preference shares in a company Circular No. 495 dated 22.9.1987
explaining amendments by Finance Act, 1987 whereby unquoted shares of a private limited company
also if held more than 12 months falls in the category of LTCG. Also Refer the Judgment in 120 TTJ
699 for unquoted shares held for less than 36 months.
b. Quoted Securities
Income from Other Sources

This is a residuary head of income and sweeps all such taxable income, profits and gains which are
not chargeable to income tax under any of the first four heads specified above. It is important to note
that where there is a specified head for the income in question and a specified section providing for
the head, such income cannot be assessed under this
According to section 56(2), in a particular, the following incomes shall be chargeable to income tax
under the head income from other sources.
Dividend, Lottery, crossword Puzzles, etc.
Interest on securities, Hire of machinery, plant, etc. Hire of machinery, plant and buildings nor
separately.
Gift. Where any sum of money, the aggregate value of which exceeds Rs. 50,000, is received without
consideration, by an individual or a HUF, in any previous year form any person or persons on or after
01-04-2006, the value of whole of the aggregate value of such sum.
Perquisites
Perquisites are the benefit or amenities in cash or in money or money’s worth which provided by
the employer to the employee whether free of cost or at a concessional rate. Perquisites are taxable
under the head salaries must fulfill the following conditions.
1. Perquisites must be provided by the employer directly. Or indirectly to the employee of his
employment.
2. It must directly be related with the employment.
3. It must give during the course of employment.
4. It must be legal origin.
Types of Perquisites
1. General Perquisites (taxable in the hands of every employee).
2. Specific Perquisites (taxable in the hands of specified employees).
3. Tax-free Perquisites.
29
General Perquisites
1. Rent free accommodation.
2. Concession rent free accommodation.
3. Payment of employee’s obligation.
4. Payment of employee’s life insurance and annuity premium.
5. Value of any specified security or sweat equity shares.
6. Contribution to an approved superannuation fund.
7. Prescribed fringe benefits.
Specific Perquisites
1. Director employee.
2. Employees having substantial interest in the employer company.
3. Employee having more than Rs 50,000 as monetary salaries income.
4. Taxable in the hands of specific employees are
a) Household servants.
b) Free gas. Electricity and water.
c) Free education.
d) Medical facility.
Tax free Perquisites

1. Medical facilities.
2. Recreation facilities.
3. Conference.
4. Tour and travel facility.
5. Accommodation in a remote area.
6. Refreshment facility.
7. Telephone or mobile phone facility.
8. Lunch or dinner.
9. Perquisites given in foreign country.
10. Interest free loan and etc..
Deduction u/s 80c

1. Life insurance premium.
2. Deferred annuity.
3. Provident fund.
4. Unit linked insurance plan or mutual fund.
5. Accrued interest(house loan)
6. Annuity plan of LIC (Jeevan Akshay, Jeevan-dhara etc...)
7. Payment to words the cost of the purchase or construction of a residential house.
8. Subscription to NSC 8th issue.
9. Any tuition fee to any university, school or colleges.
10. Subscription to equity share or debenture of infrastructure sector made by an Indian public
company.
11. Any sum deposited as a term deposit in a scheme framed and notified by the central
government for this purpose.
12. Any subscription to such notified bonds issued by NABARD.
30
13. Any sum deposited in an account under the senior citizen savings scheme rules.
14. Any sum deposited as 5 year time deposit in an account under post office time deposit rules.
Income tax rates

1. For individual.
2. For resident women.
3. For senior citizen.
31

Accounting For Managers: Module - 1

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Accounting For Managers: Module - 1

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Accounting for Managers

Accounting for Managers

According to American Accounting Association (AAA)

According to H.Chakravorty: Accountancy is the science of recording, classifying and summarizing

Accounting involves the following functions or activities

Generally accepted accounting principles (GAAP)

Personal account: Debit the receiver

Golden Rules of Accounts:

Compound journal entry

Book of original entry

Procedures to enter Journal Entries

Procedures to post entries from Journal book to Ledger book

Objectives and functions of trial balance

Types of Subsidiary Books

Three Column Cash Book

Straight line method

Written down value method

Income statement consists of both

Profit & Loss A/c

Problems on financial statements

Objectives of financial statement analysis

Tools/Techniques of financial statement analysis

Comparative Financial Statements

Common Size Financial Statements

Ratios for Financial Statement Analysis

Objectives of ratio analysis

Cash Flow Statement

1. Cash Flow from Operating Activities

2. Cash Flow from Investing Activities

3. Cash Flow from Financing Activities

Objectives/Needs of accounting standard

Benefits of accounting standards

Indian accounting standards

International Financial Reporting Standards [IFRS]

Needs for IFRS

IFRS and Proposed changes in Indian Accounting Standards

As by IFRS/IAS Position under IAS/IFRS after considering recent

AS – 2 IAS – 2 Valuation of inventories

AS – 3 IAS – 3 Cash flow statements

AS – 6 No corresponding Depreciation accounting IAS – 16 effect to be given

AS – 7 IAS – 11 Construction contract

AS – 11 IAS – 21 Effects of changes in foreign exchange rates

AS – 12 IAS – 20 Government grants

AS – 14 IAS – 22 Accounting for amalgamations

AS – 15 IAS – 19 Employee benefits

AS – 16 IAS – 23 Borrowing costs

AS – 17 IAS – 14 Segment reporting

AS – 18 IAS – 24 Related party disclosures

AS – 21 IAS – 21 Consolidated financial statements

AS – 22 IAS – 12 Accounting for taxes on income

AS – 23 IAS – 28 Accounting for associate in consolidated financial

AS – 26 IAS – 38 Intangible assets

AS – 27 IAS – 31 Financial reporting of interests in joint ventures

AS – 28 IAS – 36 Impairment of assets

AS – 29 IAS – 37 Provisions, contingent assets, and contingent liabilities

According to Cadbury committee “corporate governance is defined as the system by which

Features of corporate governance

Need of corporate governance

Constituents of corporate governance

Parties to corporate governance

Issues involving corporate governance principles include

Importance of corporate governance

Clause 49 of the listing agreement