ACCOUNTING FOR MANAGERS-

MODULE - 1

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Topics:
1. Introduction to Accounting
2. Basic Accounting Terminologies
3. Generally Accepted Principles (G.A.A.P.)
4. Approaches to Accounting
5. Primary Book – Journal
6. Secondary Book – Ledger
7. Trial Balance
8. Sample Question and Common Doubts
What is Accounting?
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
of at least of a financial character and interpreting
results thereof.

In simple words, accounting is the systematic

recorded presentation of the financial transactions
of the business or enterprise.
Objectives of Accounting
•Calculation of Profits or Loss
•Maintaining proper record of transactions.
•Depiction of financial position.
•Providing effective control over business.
•Helpful to Management
•Making information available to various groups
Advantages of Accounting
•Replacing Memory.
•Documentary Evidence.
•Assessing financial status of the business.
•Assessing performance of the business.
•Detection and prevention of frauds.
•Helpful in Decision Making.
•Assisting in realization of debts.
Book Keeping

•Book-keeping is the initial step of accounting;

•Proper and systematic keeping of books of

accounts;

•Starts from Identification of Business transactions.

•It is different from Accounting!

Differences between Accounting
and Book-Keeping
Basis Book Keeping Accounting
Record, analyze
Prepare original and interpret the
Objective
books of accounts. business
transactions.
Scope Limited Wider
Restricted to Low All levels of
Level of Work
Level management
Doesn’t show the
Shows net result of
Result net results of
business.
business.
Process of Accounting
1. Identification of Economic Events
2. Classification of Business Transactions
3. Measurements in terms of Rupees
4. Recording the Business Transactions
5. Summarizing the Business Transactions
6. Analyzing and Interpreting the Business Transactions
7. Communication and Reporting
Accounting is both –
Science and Art.

Science Art

•Definite Principles and •Practical Application

Assumptions •Depending on day-to-
•Universal Application day affairs
•Systematic Method
•Rules and Equation
Basic Terminologies
Assets
The valuable things owned by the business are
known as Assets.
They are the economic resources of an enterprise
which can be expressed in monetary terms.

e.g. Land, Building, Furniture, Cash, Stock, etc.

Basic Terminologies
Liability
It refers to the amount which the firm owes to the
outsiders.

e.g. Creditors, Bills Payables, Loans, Debentures,

etc.
Basic Terminologies
Capital
•It refers to the amount invested by the proprietor in
the business enterprise.

•It is the amount with the help of which the goods

and assets are purchased in the business.
Basic Terminologies
Revenue Nature

Revenue Income Revenue Expenditure

Income from normal Any expenditure, the full

business process or by benefit of which is
selling finished goods. received during one
accounting period.
Basic Terminologies
Sundry Debtors
These represent the persons or parties who have
purchased goods on credit from us and not paid for
the goods sold to them, they still owe to the
business.
e.g. We sold goods to Mr. Bin worth Rs. 20,000. He
will continue to remain the debtor of the business
so far he does not make the full payment.
Basic Terminologies
Sundry Creditors
These represent the persons or parties who have
sold goods and materials to the business on credit.
They are the liabilities of the business.

e.g. Purchased raw materials from Mr. Obama

worth Rs. 5100 on credit, and he will remain the
creditors until the full payment is made.
Basic Terminologies
Drawings
The amount or goods withdrawn by the proprietor
for his private or personal use is known as drawings.

e.g. goods taken by the proprietor for domestic

use; using business premises for residential purpose,
etc.
G.A.A.P.
(Generally Accepted Accounting Principles)

It is generally accepted by accountants all over the

world as general guidelines for preparing the
accounting statements.

GAAPs and accounting standards are considered

as the theory base of accounting.
Generally Accepted Accounting Principles
Accounting or Business Entity

•Business is treated as a unit separate and distinct

from its owner(s);
•Accountant works for the business and not for the
businessman;
•Keeps business affairs free from the influence of the
personal affairs of the owner
e.g. expense on owner’s car and a company
vehicle, both are treated differently.
 Generally Accepted
Money Measurement Concept
Accounting Principles
•Only those transactions and events are recorded in
accounting which are capable in being expressed
in terms of money
•Qualitative transactions such as improvement in
behavior etc. are skipped from accounting point of
view.
e.g. Accounting doesnot record a fight between
the Production Manager and Sales Manager, but
the damages caused due to the fight will be
recorded as loss to the business.
 Generally Accepted
Going Concern
Accounting Principles
•Business activities will continue for a fairly long
period of time unless and until the business has
entered into a process of winding up or liquidation;
•Because of this concept, outside parties enter into
long term contracts, give loans and purchase the
shares and debentures of the enterprise.

e.g. Prepaid expenses are shown as Asset in the

Balance Sheet because the benefit of this will be
received in future.
 Generally Accepted
Accounting Period
Accounting Principles
•As a business is intended to continue indefinitely for
a long period, the true results of the business
operations can be ascertained only when the
business is completely wound up, but this will be of
little use to the proprietors, managers, investors.
•Entire life of the firm is divided into time intervals for
the measurement of the profits of the business.
For tax purposes, usually companies keep the
Accounting Year and Financial Year same i.e. April
1 of current year to March 31 of next year.
Generally Accepted Accounting Principles

Historical Cost or
Cost Principle Concept
•An Asset is ordinarily recorded in the books of
accounts at the price at which it is acquired since
the acquisition cost is related to the past, is referred
to as Historical Cost.
•In the current year, they are shown at Book Value
i.e. Cost less Depreciation
Generally Accepted Accounting Principles
Expenses Recognition
•Expenses refers to the portion of the cost outlay
which is consumed in the process of obtaining
revenue in an accounting period.
•Expenses give benefit over the current accounting
period i.e. revenue expenditure. E.g. purchase of
raw materials.
•Expenditure gives benefits over many accounting
periods to come i.e. capital expenditure. E.g.
purchase of machinery.
Generally Accepted Accounting Principles

Revenue Recognition
•Revenue is considered as earned at the time when
the title or the ownership of the goods has been
transferred to the purchaser and when he has
legally become liable to pay the amount.

e.g. If a firm gets an order of goods on January 1,

supplies it on January 20 and receives the Cash on
April 1, the revenue will be deemed to have been
earned on January 20 as the ownership of goods
was transferred on that day.
Generally Accepted Accounting Principles

Matching Concept
•expenses for an accounting period should be
matched against related incomes
•Essential part of accrual accounting
•The result of this matching is the net income or net
loss.
e.g. Revenues of year 2014-2015 will be matched
with the expenses of 2014-2015 only.
Generally Accepted Accounting Principles

Full, Fair and Adequate

Disclosure
•It implies that accounts must be honestly prepared
and all material information must be disclosed
therein
•It only implies that there is to be a sufficient
disclosure of information, which is of material
interest to proprietors, present and potential
creditors and investors.
Generally Accepted Accounting Principles

Dual Aspect
•Every transaction has a two fold effect and it is
referred to as Dual Aspect concept.
•One represented by the asset of the business and
the other by the claims against them. These two
aspects are always equal to each other.
In other words, Assets = Liability + Capital.
This concept forms the basis for the whole of
financial accounting!
Generally Accepted Accounting Principles

Verifiable Objectivity
•Accounting records must be supported by
documentary evidence or proof.
•Recording transactions are unbiased and not
affected by their personal judgment.

e.g. of source documents are Sales Bills, Purchase

Bills, Pay-in Slips, etc.
Generally Accepted Accounting Principles

Materiality
•Accounting should focus on material facts and
resources should not be wasted in recording and
analyzing immaterial and insignificant facts.
•It should be noted that an item material for one
concern should be immaterial for another and
similarly an item material in one year may be
immaterial in the next.
e.g.
Generally Accepted Accounting Principles

Consistency
•The accounting practices should remain the same
from one year to another.
•Once a firm has fixed a method of treating an item
it should do so for like items and also maintain the
same method thereafter, otherwise comparison of
one accounting period with another would not be
possible.
•Consistency however does not mean inflexibility.
Generally Accepted Accounting Principles

Conservatism
•It takes into consideration all prospective losses but
leaves all prospective profits.
•Based on quality of judgment and not mere
understatement of profits.
e.g. Provision for bad and doubtful debts, Valuation
of stock in trades at Market Price / Cost Price
whichever is less.
Double Entry System
•Recording dual aspects of business transactions in
terms of debit and credit is called double entry
system.. There is always a debit and an equal
amount of credit for every transaction.

•Because of the dual entry aspect of accounting

the balance sheet always matches.
Double entry system
For instance we can explain it with a example
When goods are purchased for cash there is
movement of goods from seller to buyer and
movement of cash from buyer to seller.

•Transaction:
Mr. X started business with capital Rs. 40000

oSolution:
It is a transaction because it changes a financial
position of Mr. x cash will increase by 40000 and capital
will increase by 40000
Characteristics of
Dual accounting system
•Every business transaction affects two or more
accounts.

•Every account is divided into two parts.

•Based upon accounting concepts and

conventions.

•Helps in preparing Trial Balance and Final

Accounts.
Concept of Debit and Credit
•We use the term debit and credit in order to show
the changes in value of these basic accounting
terms i.e. assets liability and income.
•Debit means decrease in proprietor’s equity
•Credit means increase in proprietor’s equity
•The word debit refers to debtor and credit refer to
the word creditor.
•The left hand side signifies debit and right hand
signifies credit. It is just a convention but not the
meaning of these two words.
 Traditional Approach
Individual living
Natural
being
Artificial / Companies,
Personal
Legal institutions etc
Debtors, Creditors
Groups /
share capital a/c
Representative
etc.
Types of
Account Tangible
Real
Intangible

Impersonal
Revenue, income
and gains
Nominal
Expenses and loss
Debit and Credit rule
of Traditional approach

Personal accounts
Debit the receiver
• Natural
Credit the giver
• Artificial
• Representative

Impersonal accounts Debit what comes in

• Real Credit what goes out
• Tangible
• Intangible

Debit all expenses or losses

• Nominal Credit all income or gain
Grounds Rules for Recording in
Primary Books of accounts

Assets = Liabilities + Capital

Rules:

• Increase in assets & decrease in liability “debit”

•Decrease in assets & increase in liability “credit”
•Expenses & losses – debit ; income & gains – credit.
ILLUSTRATION
•XYZ Ltd. purchased raw materials for ` 20,000 and paid
50% in cash and balance payable after one month

There are three aspects:

Purchases Expense Debit

Cash Asset Credit

Creditor Liability Credit

Journal Entry
Purchases A/c Dr. 200000
To Cash A/c Cr. 100000
To Creditors A/c Cr. 100000
Journal
•The word journal has been derived from the
French word ‘JOUR’ meaning ‘daily records’

• it is a book of prime records

•Recorded in chronological order

•Also known as book of original entry

•Each transaction are identified then debit credit

rules are followed to pass a journal entry
Format of journal

DATE PARTICULARS L.F AMOUNT (Dr.) AMOUNT (Cr.)

(A) (B) (C) (D) (E)

Can Place Image

Few Important Journal Entries:
1. Mr. Raja commences business with cash
Cash a/c Dr………
To Capital a/c……
2. He Purchase raw materials in cash
Purchases a/c Dr………
To cash a/c

3. Credit sales to Mr. Avinash

Mr. Avinash a/c Dr……
To Sales a/c
Ledger
•A Ledger is the principal book of accounting system.

•It contains all accounts where transactions from the

books of original entry are transferred.
•Enables to ascertain what are the revenues and
expenses and their values.

•Enables to ascertain what are the assets and liabilities

and their values.

•Facilitates in preparation of Trial Balance and Final

Accounts.
Format
Name of Account e.g. Mr. Ram A/c
Debit
J. J. Credit
Date Particulars Amount Date Particulars
F. F. Amount (`)
(`)
05.02.2004 Sales A/c 1 25000 27.02.2004 Cash A/c 5 5000
15.03.2004 Cash A/c 58 16000
Balance C/d 4000
Total 25000 Total 25000

01.04.2004 Balance b/d 4000

•The ledger page is actually a T-account in a more detailed format. It

has the account title and its corresponding account number on top. It
also has two sides, namely, the debit side and the credit side. Each T-
account or ledger account has the following columns.
Process
Step 1
Locate the account title used by the journal entry in the general ledger.
Step 2
Determine if the journal entry is a debit entry or a credit. If it is a debit
entry, it should be posted on the debit side of the located ledger
account. If it is credit entry, it should be posted on the credit side of the
located ledger account.
Step 3
Record the date of the journal entry in the date column.
Step 4
Write the corresponding name of Account in the Particulars Column.
Step 5
Write the amount of the journal entry in the amount column.
Step 6
In the folio column, write the page number of the general journal page
that contains the posted journal entry; same referencing in Journal Book.
Example
Pass Journal Entries and prepare Ledger Accounts:

1. Introduced Capital ` 10,000

2. Interest Paid ` 2,000

3. Paid to supplier against previous dues ` 1,000

4. Withdrew Cash ` 500 for personal use.

 Journal Capital A/c

Date Particulars L Debit Credit Date Particulars J Dr. Date Particulars J Cr.
F
Bal. c/d 10000 July 1 Cash A/c 10000
July 1 Cash A/c Dr. 10,000
To Capital A/c 10,000
Total 10000 Total 10000
(Being capital introduced )

July 5 Interest Paid A/c Dr. 2,000 Interest Paid A/c

To CashA/c 2,000
Date Particulars Dr. Date Particulars
J J Cr.

July 25 Supplier A/c Dr. 1,000 July 5 2000

Cash Bal. c/d 2000
To Cash A/c 1,000
Total 2000 Total
2000
July 30 Drawings A/c Dr. 500
To Cash A/c 500 Supplier A/c

Date Particulars J Dr. Date Particulars J Cr.

Cash A/c July 25 Cash 1000 Bal. b/d 2500

Bal. c/d 1500
Date Particulars J Dr. Date Particulars J Cr.
Total 2500 Total 2500
Drawings A/c
July 1 Capital 10000 July 5 Interest 2000
July 25 Supplier 1000
Date Particulars J Dr. Date Particulars J Cr.
July 30 Drawings 500
Bal. c/d 6500 July 30 Cash 500 Bal c/d 500

Total 10000 Total 10000 Total 2500 Total 2500

Trial Balance
•To verify accuracy of the postings, Trial Balance
prepared.

•It is prepared wherein the balances of all accounts

in the Ledger are incorporated.

•It contains the list of all ledger accounts including

cash account.

•Total of the debit and credit column of the amount

must be equal.
 Objectives and Functions
of Trial Balance
•Test of Arithmetical Accuracy

•Summarized information of ledger accounts.

•Basis for preparation of final accounts.

•Detection of errors and frauds

 Trial Balance of X Co.
Trial Balance Account
as on
Debits Credits
Account 1 xxxx.xx
•A basic rule of double-entry
Account 2 xxxx.xx
accounting is that for every credit
there must be an equal debit Account 3 xxxx.xx
amount. If debits do not equal .
credits, then an error has been made. .
The trial balance is a tool for .
detecting such errors. Account 4 xxxx.xx
Account 5 xxxx.xx
•The trial balance is calculated by
summing the balances of all the Account 6 xxxx.xx
ledger accounts. The account .
balances are used because the .
balance summarizes the net effect of .
all of the debits and credits in an
account.
Total xxxx.xx xxxx.xx
Steps to Prepare the Trial Balance
•For each ledger account — Cash, Accounts Payable, etc. — total your
credits and debits.
✓If the credit total is larger, subtract the debit total from the credit
total to get your ledger account total which goes in the credit
column of the trial balance.
✓If the debit total is larger, subtract the credit total from the debit
total to get your ledger account total which goes in the debit column
of the trial balance
✓Put the ledger account total in the credit or debit column of your
trial balance (as identified above).
•When you have debit or credit totals for each ledger account, add all of
your credit totals to get a Credit Grand Total.
•Add all of your debit totals to get a Debit Grand Total.

•This is your Trial Balance.

 Cash A/c Supplier A/c

Date Particulars J Dr. Date Particulars J Cr. Date Particulars J Dr. Date Particulars J Cr.

July 1 Capital 10000 July 5 Interest 2000 July 25 Cash 1000 July 5 Purchase 2500
July 25 Supplier 1000 Bal. c/d 1500
July 30 Drawings 500 Total 2500 Total 2500
Bal. c/d 6500
Purchases A/c
Total 10000 Total 10000
Date Particulars J Dr. Date Particulars J Cr.
Capital A/c
July 5 Supplier 2500 Bal C/d 2500
Date Particulars J Dr. Date Particulars J Cr.

Bal. c/d 10000 July 1 Cash A/c 10000 Total 2500 Total 2500

Trial Balance of Mr. X

Total 10000 Total 10000
As on March 31, 200X
Interest Paid A/c Debit Credit
Particulars
Amount Amount
Date Particulars J Dr. Date Particulars J Cr.
Cash A/c 6500
July 5 Cash 2000 Bal. c/d 2000
Capital A/c 10000
Total 2000 Total 2000 Interest Paid 2000
Drawings A/c Drawings A/c 500

Date Particulars J Dr. Date Particulars J Cr. S. Creditors 1500

Purchases 2500
July 30 Cash 500 Bal c/d 500

Total 500 Total 500 TOTAL 11500 11500