MS1113 - Module 1 - Unit 2

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Module 1 - Introduction Overview of Accounting and Finance for Decision Making

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1.2 Basic Accounting Concepts
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Unit Table of Contents
Unit 1.2 Basic Accounting Concepts
Learning Objectives
Learning Outcome
1.2.1 Accounting Terminologies
1.2.2 Basic Accounting Concepts
1.2.3 Types of Accounting (Sub Fields of Accounting)
1.2.4 Conclusion
Summary
Activity
Activity Answer Key
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Learning Objectives:
• Learn the basic terms acronyms and abbreviation that accountants commonly use
• Understanding basic accounting concepts
• Comprehend the way in which financial accounting must be done
• Understand and appreciate the multifaceted dimensions involved in presenting a company’s
financial reports
Learning Outcome:
• Grasp the meanings of important accounting terms, their importance and necessity
• Learn the techniques of accounting in organisational context
• Understand the differences between different types of accounting
• Explore the important role of each concept and to grasp the effects of mis-accounting
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Accounting is the backbone of financial statements in a company. Its terms and concepts acts as the
brain. To create and audit accounts it is necessary that one must learn the various dimensions of
accounting. The terms include, their relevance and meaning. The terms also explain the importance of
their usage, and the right opportunity to use them. In this unit, we learn the vital accounting concepts
and their use to build the accounts and statements of any company. The money for business and
personal use are never allowed to intermingle, the time aspects involved along with money and most
importantly the transactions are tracked with respect to the time of their occurrence and yet recorded
only on due recognition.
1.2.1 Accounting Terminologies
Accounting is based on some generic concepts and conventions. In the accounting world there are
certain basic concepts and principles that the accountants practice religiously. They are considered as
a broad set of conventions that are meant to provide basic framework for financial reporting. The
significance of these concepts and principles lies in the fact that they are related to the entire financial
accounting process while they affect directly the way the financial statements are prepared.
Accountants need to apply their knowledge while creating financial statements, these concepts and
principles help them when they are misled and they provide a true and fair view of financial statements
that is being accomplished.
Look at these fundamental Accounting terms and begin to confer them to memory. That way, when one
begin the degree travel, the individual will feel like he is a stage ahead and talking the language. There
are certain basic accounting terms that are used in the business world. These terms have specific
meaning in Accounting. These are known as ACCOUNTING TERMINOLOGY.
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1.2.1.1 Business Transaction
A business transaction is an economic activity that is measured in terms of money which affects the
value of some of the assets, liabilities or capital.
For example: Mr. A commenced business with capital of $ 50, 000. He purchases goods worth $10, 000
by cash and later sells them for $15, 000. He also pays carriage expenses of $500.
In the above example the transactions are:
• Investment of $50, 000 in the business

• Purchase of goods for $10, 000
• Making sales of $15, 000
• Payment of carriage $500
Here we can easily note that all the actions have certain monetary value and they affect the assets and
capital of Mr. A`s business
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Types of Transaction
Fig 1.2.1: Types of Transactions
a. Exchange Transaction: It involves physical exchange of values such as purchasing, selling,

income and expenses.
b. Non-Exchange Transaction: Transactions that are not physical but they include a change in the
monetary value. For example, depreciation, goodwill, etc.
1.2.1.2 Event
Transactions recorded in the books are known as events.
1.2.1.3 Capital
It refers to the amount invested by the proprietors or the owners of the business in-order to carry out
the operations of the business. It is calculated by deducting liabilities from assets.
CAPITAL = ASSETS–
LIABILITIES
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1.2.1.4 Assets
Any resources or things that are held by a business which has future monetary value including the
amounts due from others is called an asset. In other words, anything which enables a business to get
cash or a benefit in the future is an asset.
ASSETS = CAPITAL –
LIABILITIES
Examples include Cash, Investments, Stock, Furniture, Machinery, Land and Building, Bills Receivable,
Debtors etc.
Fig 1.2.2: Assets
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a. Non-Current Assets
Assets which are held for continued use in the business for the purpose of producing goods and
services and are not meant for sale. They are long-term investments of the company, it is also
known as Fixed Assets. Examples Land and Building, Plant and Machinery, Patents, etc.
Fig 1.2.3: Fixed Assets
1. Tangible Assets: Tangible assets are those assets which can be seen and touched. In
other words, assets that have physical existence such as Land and Building, Plant and
Machinery, Computers etc.
2. Intangible Assets: Intangible assets are those assets which don’t have physical existence
and thus cannot be seen or felt. Examples of such assets are Patents, Goodwill, Copyright,
Trade Marks, Computer Software and Prepaid Expenses. Values of intangible assets are
calculated on the basis of benefit and facility that it provides to a business.
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b. Current Assets
Assets that are for sale and that can be easily converted into cash within one year of the business
are known as current assets or floating assets. Examples, Cash and Cash equivalents, Debtors,
Inventories, Raw Materials, Bills Receivables, Prepaid Expenses, Short-term Investments etc.
Prepaid Expenses are included in current assets even though they will never be realised in cash
as their benefits will be available against further payment.
c. Fictitious or Nominal Assets

These are the assets which cannot be realised into quick cash and whose benefits are derived
over a longer period of time, they are intangible too. Such assets include debit balance of P&L A/c
and are not written off. Advertising Expenses, Deferred Revenue expenditures, Accumulated
Losses, Miscellaneous Expenses, Preliminary Expenses etc.
d. Wasting Assets
Assets which are irreversible or with limited lifespan are known as wasting assets. Value of these
assets gradually decreases with their consumption. For example, Oil wells, Mines, Gas, Timber.
During the period of depreciation, the asset is called wasting asset.
1.2.1.5 Accounts Receivable (AR)
The measure of cash to be paid by clients or customers to a business after a product or service have
been conveyed or potentially utilised.
1.2.1.6 Accounting (ACCG)
An efficient method of recording and reporting financial transactions of a business or association in a

comprehensible format.
1.2.1.7 Accounts Payable (AP)
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The measure of cash that an entity must pay to their creditors (suppliers, and so on.) as a by-product of
products and/or benefits they have conveyed.
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1.2.1.8 Assets (Fixed and Current) (FA, CA)
Current assets (CA) are those that can be converted into cash within one year. Conventionally, this
could be money, stock or records receivable. Settled assets (FA) are the whole deal and will
presumably offer circumstances to an association for more than one year, such as a real estate, land or
major machinery.
1.2.1.9 Asset Classes
An Asset class is a gathering of securities that acts likewise in the commercial centre. The three
primary resource classes are equities or stocks, fixed income or bonds, and cash equivalents or money
market instruments.
1.2.1.10 Balance Sheet (BS)
A financial report that summarises a company's assets (what it possesses), liabilities (what it owes) and
proprietor or investor value at a given time.
1.2.1.11 Capital (CAP)
A money related resource or the estimation of a budgetary resource, for example, money or products.
Working capital is computed by taking the current resources that are subtracted from current liabilities.
It is fundamentally the cash or resources that an association can give something to do.
1.2.1.12 Cash Flow (CF)
The income or cost anticipated that would be produced through business exercises (deals, fabricating,
and so on.) over some undefined time frame.
1.2.1.13 Certified Public Accountant (CPA)
A designation given to an accountant who has passed an institutionalised CPA exam and who has got
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a government-ordered work involvement and instructive necessities to end up a CPA.
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1.2.1.14 Cost of Goods Sold (COGS)
The immediate costs identified from the creation of merchandise sold by a business. The equation for
figuring this will rely upon what is being delivered, however for instance this may incorporate the cost of
the raw materials (parts) and the measure of representative work utilised underway.
1.2.1.15 Credit (CR)
An accounting entry that may either diminish resources or increase liabilities and it includes the value
on organisation's accounting report, contingent upon the exchange. When using the double-entry
accounting method there will be two types of entries made for every transaction: credit and equal debit.
1.2.1.16 Debit (DR)
An accounting entry where there is either an expansion in resources or a decline in liabilities on an

organisation's monetary record.
1.2.1.17 Investments
It means deployment of funds into assets hoping that it will generate income or appreciate in future.
1.2.1.18 Diversification
The way of distributing or spreading the capital investments into varied assets to avoid over-exposure
that leads to risk.
1.2.1.19 Enrolled Agent (EA)
An expense proficient who represent the taxpayers in matters where they deal with the Internal
Revenue Service (IRS).
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1.2.1.20 Expenses (Fixed, Variable, Accrued, Operation) (FE, VE, AE, OE)
The settled, variable, accumulated or everyday costs that a business may bring through its activities.
Fig 1.2.4: Expenses
a. Fixed Expenses (FE): Expenses that will be incurred on a regular basis like maintenance
expenses, interest expenses for loans in the loan period, etc.
b. Variable Expenses (VE): Expenses that may change in a given time like labour costs.
c. Accrued Expense (AE): An incurred expense that must be paid. This can include expenses like
payment to be made to the suppliers of a manufacturing unit.
d. Operating Expenses (OE): The expenses incurred by a business because of carrying out the
regular operational activities—for instance, equipment, inventory costs and marketing expenses.
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1.2.1.21 Equity and Owner's Equity (OE)
In the broadest sense, equity is assets minus liabilities. A proprietor's equity is typically explained in
terms of the percentage of stock a person has and the ownership interest in the company. The
proprietors of the stock are known as investors.
1.2.1.22 Insolvency
A state of a registered entity, where, an individual or organisation can no longer meet financial
obligations with lender(s), when their debts are due.
1.2.1.23 Generally Accepted Accounting Principles (GAAP)
An arrangement of principles and rules created by the accounting industry for an organisation, that it
must be taken after the detailing of financial information. It is critical for all publicly traded companies to
follow the GAAP.
1.2.1.24 General Ledger (GL)
An entire record of the money related exchanges over the life of an organisation.
1.2.1.25 Trial Balance
A business record in which all ledgers are compiled into debit and credit sections with a specific end
goal to guarantee an organisation's accounting framework is right.
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1.2.1.26 Liabilities (Current and Long-Term) (CL, LTL)
A company's debts or financial obligations incurred during business operations. When a company
purchases goods on credit from A, the amount owing to A is known as liability.
LIABILITIES =
ASSETS –
EQUITY
Bank Overdraft, Bills payable, creditors, Unpaid Wages are also example of liabilities.
Fig 1.2.5: Liabilities
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a. External Liabilities: The amount which must be paid by a firm to outsiders are known as external
liabilities such as Creditors, Banks, Financial Institutions, etc.
b. Internal Liabilities: The amount which a firm must pay to the owners or proprietors, and
employees are known as internal liabilities. They are capitals, unpaid wages, accumulated profits,
etc.
c. Non-Current Liabilities: These refer to the long-term liabilities of a business entity. They fall due
for payment for more than one year. For example, Long-term loans and Debentures, Leases,
Bonds payable etc.
d. Current Liabilities: Current Liabilities refer to the liabilities that are payable within one year. They
are also known as short-term liabilities. Bank Overdrafts, Bills Payable, Creditors, Outstanding
Expenses and Short-term loans etc.
e. Contingent Liabilities: Liabilities that are outcomes of a certain unconditional events are known
as contingent liabilities. They are not actual liabilities on the date of Balance Sheet. For example,
Bills discounted but not matured, potential lawsuits, Product Warranty etc.
1.2.1.27 Limited Liability Company (LLC)
A LLC is a corporate structure where individuals can't be considered responsible for the organisation's
obligations or liabilities. This can shield entrepreneurs from losing as long as they can remember
investment funds if, for instance, somebody were to sue the organisation.
1.2.1.28 Net Income (NI)
An organisation's total earnings, also called net profit/net benefit. Net income is obtained by subtracting
(‘netting’) total expenses from total revenues.
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1.2.1.29 Profit and Loss Statement (P&L)
A financial statement that is utilised to condense an organisation's performance and financial position
by assessing incomes, expenses and costs amid a particular timeframe, for example, quarterly or every
year.
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1.2.1.30 Goods
It includes all the things that are purchased for sale or for producing finished products that are meant
for sale are known as goods.
1.2.1.31 Stock or Inventory
Stock refers to value of goods that are lying unsold at the end of accounting period. The stock that is
lying unsold at the beginning of accounting period is known as 'opening stock’ whereas stock at the end
of the year is known as `closing stock’. Stock is valued at cost price most of the times.
Fig 1.2.6: Types of Stocks
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a. Stock of Raw Material: Raw materials that are purchased for product manufacturing but still lying
unused. Iron sheets, cotton, wood etc.
b. Stock of Work-In-Progress: It means stock of partly, poor, semi-finished goods.
c. Stock of Finished Goods: Stock of those goods which are completely processed and ready for
sale but are underlying at the end of the accounting period. In case of cloth mills the value of
finished cloth will be considered as finished goods.
d. Calculation of Closing Stock: In order to ascertain the value of the closing stock, a complete list
of all the items in the store, together with their quantities is prepared. Separate list should be
prepared for raw materials, semi-finished goods and finished goods in the stores. Preparation of
such list is called `stock taking’.
Fig 1.2.7: Goods not to be Included in the List of Stocks
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1.2.1.32 Liquidity
The ease with which an asset can be converted quickly into cash. So as per this definition cash & cash
equivalents, accounts receivable, short term securities are the most liquid assets. The process of
converting an asset into cash is called liquidation.
1.21.33 Purchases
The term purchase is used only for the purchase of goods and services to accomplish the goals of a
business. It also means possession of asset, property, item or right for a predetermined price or cost. In
other words it can be explained as the exchange of goods and services for money. In case of a
manufacturing firm goods, mean acquiring raw materials for the purpose of conversion into finished
product and then for sales. In case of trading concern `goods’ are those things that are purchased for
resale. In both cases the purpose is to make profit by its resale. The term purchase includes both cash
purchase and credit purchases.
1.2.1.34 Purchase Returns
When purchased goods are returned to the suppliers, these goods are known as purchase returns or
return outwards.
1.2.1.35 Discount Received
The buyer of goods or services is given a certain portion of deduction in the price of goods or service by
the seller is known as discount received.
1.2.1.36 Purchase Discount
It is an offer made by the supplier of goods to the purchaser for deduction in payment amount, if the
payment is made within a certain period of time. It is usually 1% or 2% of the payment amount.
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1.2.1.37 Creditors
The term creditor refers to those persons or entities from whom goods have been purchased or service
procured on credit and payment has not been made to them. Some money is still owing to them. For
example, if a firm purchases goods worth of $50, 000 from Mr. A on credit, Mr. A is the creditor of the
firm as long as the full payment is made to him.
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1.2.1.38 Voucher
A voucher is a document which provides the authorisation to pay on the basis of which the business
transactions are recorded in the books of accounts. Voucher is prepared for every transaction and it
clearly mentions the accounts to be debited or credited for the transaction. The forms of vouchers differ
for every organisation
1.2.1.39 Bills Payable
A bill of exchange becomes bills payable for the person who accepts it (drawee) and returns it to the
drawer. Bills payable is the bills of exchange which are accepted in favour of creditors. The amount
specified in such a bill is payable at a future rate.
1.2.1.40 Trade Payables
Trade payables are the amount payable on account of goods purchased or services taken in the normal
course of a business. It is included in both Sundry Creditors and Bills Payables.
1.2.1.41 Sales
Sales mean the transfer of title or ownership of goods or services to customers for a price. Sales
include both Cash and Credit sales. For example, If Mr. A sells Computer to Mr. B, the ownership of
Computer will be transferred from Mr. A to Mr. B and Mr. A is entitled to receive the agreed price of
Computer from Mr. B.
1.2.1.42 Sales Return
Sometimes customers might return the goods sold to them. These are termed as sales returns or return
inwards.
1.2.1.43 Discount Allowed
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When a seller of goods or services allows or grants a payment discount to a buyer is known as discount
allowed.
1.2.1.44 Debtors
It represents persons or entities to whom goods have been sold or services rendered on credit and
payment has not been received from them. They owe amount to the business. For example, Goods
worth of $10, 000 has been sold to Mr. Y on credit, he will continue to remain the debtor of the business
if he makes the full payment.
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1.2.1.45 Bills Receivable
A bill of exchange becomes bill receivable for the person who draws it (drawer) and gets it back, after
its acceptance from the drawee. Thus, bill receivable is a term for bills of exchange drawn on debtors.
1.2.1.46 Trade Receivables
Trade receivables refer to the amount receivable on account of sale of goods or services rendered by
the company in normal course of business.
1.2.1.47 Profit
It is the excess of total revenues over total expenses that are incurred by a business enterprise for an
accounting period. Profit increases the investment of the owners.
1.2.1.48 Loss
It refers to the result of a business for a period when total expenses exceed the total revenues. For
example, if revenues are $800 and expenses are $1, 000, the loss will be $200. It also refers to some
fact or activity against which the firm receives no benefit. Thefts of goods, loss due to fire are some
examples.
1.2.1.49 Expenses
Expense is the cost incurred in production and sale of goods and services
Fig 1.2.8: Expenses
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1.2.1.50 Expenditure
Any transfer of cash or property or incurrence of a liability aimed at acquiring assets, goods or services
is called expenditure. It means that any type of payment for a benefit is termed as expenditure.
Fig 1.2.9: Expenditure
a. Capital Expenditure: Any expenditure incurred on acquiring or increasing the value of a fixed
asset is termed as capital expenditure. The amount spent on the purchase or erection of Building,
Plant etc. is capital expenditure. They yield benefits over a long period and hence written in
assets.
b. Revenue Expenditure: Expenditure incurred in-order to gain revenue or benefits which are
received during one accounting period are known as revenue expenditure. They are debited to
trading and profit & loss account. Such expenditure does not result in an earning capacity of the
business but only helps in maintaining the earning capacity.
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1.2.1.51 Revenue
Revenue means recurring or regular income from any source. It includes the amount received from sale
of goods and from service provided to customers. The amount of capital introduced by the proprietors
or borrowing loan is not revenue.
1.2.1.52 Entry
When a transaction or event is recorded in the books of accounts, it is called entry.
1.2.1.53 Bad Debts
It is the cash amount that has become irredeemable from a debtor. It is a business loss and is debited
to profit & loss account as an expense.
1.2.1.54 Insolvent
A person or an enterprise that cannot pay one’s debts due to debts being far higher than the assets that
back the debt.
1.2.1.55 Stores
The term `stores’ is used to denote the materials held by an enterprise for utilisation of the business
and not for sale.
1.2.1.56 Entity
An entity or business entity means an economic unit which is formed for earning income by providing
service or selling goods.
1.2.1.57 Turnover
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Turnover means total sales made in a period.
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1.2.1.58 Income
Amount earned from transfer of merchandise or offering of a service is called 'Revenue' and the cost of
goods sold are called 'Expense’. Surplus of revenue over expenses is called 'Income’.
INCOME =
REVENUE –
EXPENSE
For example, the goods costing $4, 000 are sold for $5, 000. The sale amounting to $5, 000 is the
revenue, the cost amounting to $4, 000 is expense and the difference between the two i.e. $1, 000 is the
income.
1.2.1.59 Drawing
Any cash or goods withdrawn by the owner for self-utility or any private payments made out of business
funds are called drawings.
1.2.1.60 Shares
Total Capital of a company is broken down into smaller units of denominations called 'shares’. For
example, if the total capital of a company is $1, 00, 000, divided into 10, 000 units of $10 each, each unit
of $10 will be called a share.
1.2.1.61 Debentures
Debentures are written acknowledgement of a debt taken by a company as these are issued under the
seal of the company. It contains the terms of the repayment of the principal sum at a specified date and
the terms of payment of interest at a fixed per cent.
1.2.1.62 Depreciation
It refers to reduction in value of fixed or tangible assets over passage of time, due in wear and tear.
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1.2.1.63 Goodwill
It is a long-term intangible asset that add to the company's value but cannot be identified or valued easily.
The company's brand name, solid customer base, good customer relations, any patents or proprietary
technology represent goodwill.
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1.2.2 Basic Accounting concepts
Accounting ideas frame the underlying foundations of understanding records and in establishing the
framework for working with accounts. The accounting concepts show us the essential distinction
between different kinds of records accessible, how are they to be made and exhibited. Additionally,
these are the essentials to build up an organisation's accounting work.
Accounts for any company are important because it frames the face or the index for the company. It
provides the first and foremost measure of its performance. Some broad accounting concepts are
mentioned below:
Fig 1.2.10: Accounting Concepts
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a. Accruals Concept
In business, there may be many parallel procedures occurring at once. Be that as it may, not all
these procedures will be represented at indistinguishable timeframe from it happens. The income
for a business is for the most part perceived when it is earned, and costs are perceived when
resources are expended continuously not on its buy quickly. This idea underlines that business
may perceive deals, benefits and misfortunes in sums that fluctuate from what might be perceived
in view of the money got from clients or when money is paid to providers and representatives.
Auditors generally accept and approve the financial statements that are prepared using accrual
concepts.
b. Conservatism Concept
Accountants generally are conservative and they recognise money when it comes to transactions.
Prepare for the worst is this concept in nutshell. As a general practice, incomes are just perceived
when there is a sensible sureness that they will be acknowledged, though costs will be perceived
as and when there is a sensible probability that they will be brought about. This idea tends to
result in more traditionalist money related proclamations that predicts a fair future, the prospects
for higher fortunes are more.
c. Consistency Concept
Consistency in accounting practices is a key to maintain hassle free records and to avoid
confusion. Once a business chooses to use a specific accounting method, it must maintain it
throughout going forward in the future too. This is important to reliably compare the financial
statements prepared in multiple periods.
d. Economic Entity Concept

Economic entity concept sees money for business and money for personal use as two different
concepts. The exchanges for business are kept separate from those exchanges that the
proprietors make for their own purposes. By doing as such, there is no blending in the money
related explanations of business.
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e. Going Concern Concept

While making financial statements there is an unsaid assumption that we make that the fortune of
the business remains good and will remain in operation in future periods. Under this suspicion,
income and cost acknowledgment might be conceded or postponed to a future period when the
organisation is as yet running. On the off chance that this may not be the situation every one of
the costs will be quickened and perceived in the present time frame.
f. Matching Concept
The basics in the balance sheet of any company explains that the assets side must necessarily
match up to the sum of liabilities and equity. In order to keep this equation going it is essential to
perceive the costs identified with an income in indistinguishable period from and when the
incomes is perceived. By doing this, there is no conceded or postponed cost acknowledgment
into later revealing periods. This would be simple for any individual survey the records. This would
be a one stage arrangement.
g. Materiality Concept
All Transactions need to be recorded especially when not doing so might alter the decisions made
by a reader of a company's financial statements. This will prompt moderately little size exchanges
being recorded, so the money related articulations thoroughly speak to the monetary outcomes,
budgetary position, and money streams of a business.
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1.2.3 Types of Accounting (Sub Fields of Accounting)
Management now-a-days requires various types of information to perform its functions more efficiently.
To meet the increasing requirement of management, various specialised branches of accounting have
come into existence such as Financial Accounting, Cost Accounting and management accounting.
Fig 1.2.11: Types of Accounting
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1.2.3.1 Financial Accounting
The need of this branch of accounting is to record the business transactions in a systematic manner, to
ascertain the profit or loss of the accounting period by preparing a profit & loss account and to present
the financial position of the business by preparing a balance sheet. This branch of accounting provides
information required by the management and various other interested parties.
There are three reports that are created using this accounting process:
• The income statement, it describes the profits or losses, expenses over a given period.
• The balance sheet shows the firm’s assets and their liabilities at a specific point of time.
• Cash flow statement analyses the flow of cash from the firm.
Table 1.2.1: Uses and Limitations of Financial Accounting
Uses of Financial Uses of Financial Limitations of Financial

Accounting to Outsiders Accounting to Insiders Accounting
To buy and sell shares of the To analyse the profitability of It is impossible to control
company. the company. costs.
For lending loans to the entity. To decide the amount of cash Difficult to fix a constant
flow required by the company price.
to support its operations.
To have transactions with the To make decisions regarding Accounting principles

company. expansion and growth. cannot be evaluated.
For imposing tax by the To make decisions regarding Can be manipulated.

government investments and diversification.
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1.2.3.2 Cost Accounting
Cost accounting is used to ascertain the total cost and per unit cost of goods and services, produced
and rendered by a business. By estimating costs in advance, it helps the management in exercising
control over costs. It collects information about the costs incurred by a company's activities,
assigning selected costs to products and services and other object`s cost, and evaluating the efficiency
of cost usage. It involves budgeting standard cost or actual cost of operations, classifications, recording
the appropriate allocation of expenditure.
Table 1.2.2: Uses and Limitations of Cost Accounting
Uses of Cost Accounting Limitations of Cost Accounting
It identifies inefficiencies in the firm It provides a base for decision making but not
accurate solution
Provides necessary information for improving Costs vary from time to time
cost control
To meet the requirements of the firm through It does not follow a uniform procedure
effective and efficient budgets
It determines selling price of the product Need to adhere to more formalities to avail
cost system benefits
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1.2.3.3 Management Accounting
Management Accounting or Managerial Accounting is used to represent the accounting information in

such a way to assist the management in planning and controlling the operations of a business. The
accountants use various techniques and concepts to make the accounting data more useful for
managerial decision making.
Concepts to make the accounting data more useful for managerial decision making. These techniques
include ratio analysis, budgetary control, fund flow statement, cash flow statement etc. Managers use
the accounting information in order to inform themselves before they decide any matters within their
organisations, which aid their management and the performance of control functions.
Table 1.2.3: Uses and Limitations of Management Accounting
Uses of Management Accounting Limitations of Management Accounting
It evaluates the performance management Due to its historical nature it does not provide
from time to time. the required information to the management
for planning, control and decision-making.
It analyses different variables in order to Change in value of assets and properties are
provide clear data not recorded as per their realised value at the
time of acquisition.
It is futuristic. No provision for cost control.
It facilitates management control. No evaluation of business plans and

procedures and at times it provides
incomplete cost information.
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1.2.4 Conclusion
This unit has covered the meaning of key accounting terms, their importance and necessity. With this
the participant would have learnt the techniques of accounting in organisational context and understand
the differences between different types of accounting. The unit also covered how important each
concept plays a role in today’s organisational context and grasp the effects of mis- accounting in the
corporate world.
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Summary
• Accounting is based on some generic concepts and conventions like Business Transactions,
Assets, Purchases and much more.
• Basic accounting terminologies are discussed in this unit.
• The definition of commonly used vocabulary like Vouchers, Trade payable, Debtors and
Expenditure in the accounting system.
• The accounting concepts directly influence the way the financial statements are prepared.
• The difference between fixed, variable, accrued and operating incomes are explained.
• The difference between financial and cost accounting, financial and management accounting,
management and cost accounting are discussed.
• Current assets are the ones that can be liquidated (converted into cash) within 1 year period
(current period of financial statements).
• Revenue is the recurring or regular income from any source.
• Current assets are ones that can be liquidated (converted into cash) within 1 year period (current
period of financial statements).
• The accounts receivable is the total cash credits that has been given out from the company or the
deferred revenue that they are yet to receive.
• Sales are the transfer of title or ownership of goods or services to customers for a price.
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Activity
Classify the following into ASSETS, LIABILITIES, EXPENSES and REVENUES
• Debtors
• Creditors
• Sales
• Bank balance
• Bank Overdraft
• Salary to employees
• Discounts Allowed
• Cost of goods sold
• Purchase
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Activity Answer Key
• Assets
Bank
Balance
Debtors
• Liabilities
Creditors
Bank Overdraft
• Expenses
Salary to Employees
Discounts allowed
Cost of goods sold
Purchase
• Revenue
Sales
1 of 2 03/11/2022, 14:51

MS1113 - Module 1 - Unit 2

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Module 1 - Introduction Overview of Accounting and Finance for Decision Making

Unit Table of Contents

Unit 1.2 Basic Accounting Concepts

1.2.1 Accounting Terminologies

1.2.2 Basic Accounting Concepts

1.2.3 Types of Accounting (Sub Fields of Accounting)

Activity Answer Key

Module 1 - Introduction Overview of Accounting and Finance for Decision Making

Module 1 - Introduction Overview of Accounting and Finance for Decision Making

1.2.1 Accounting Terminologies

Module 1 - Introduction Overview of Accounting and Finance for Decision Making

1.2.1.1 Business Transaction

In the above example the transactions are:

• Investment of $50, 000 in the business

Module 1 - Introduction Overview of Accounting and Finance for Decision Making

Fig 1.2.1: Types of Transactions

a. Exchange Transaction: It involves physical exchange of values such as purchasing, selling,

Transactions recorded in the books are known as events.

Module 1 - Introduction Overview of Accounting and Finance for Decision Making

Fig 1.2.2: Assets

Module 1 - Introduction Overview of Accounting and Finance for Decision Making

Fig 1.2.3: Fixed Assets

Module 1 - Introduction Overview of Accounting and Finance for Decision Making

c. Fictitious or Nominal Assets

1.2.1.5 Accounts Receivable (AR)

1.2.1.6 Accounting (ACCG)

An efficient method of recording and reporting financial transactions of a business or association in a

1.2.1.7 Accounts Payable (AP)

Module 1 - Introduction Overview of Accounting and Finance for Decision Making

1.2.1.8 Assets (Fixed and Current) (FA, CA)

1.2.1.9 Asset Classes

1.2.1.10 Balance Sheet (BS)

1.2.1.11 Capital (CAP)

1.2.1.12 Cash Flow (CF)

1.2.1.13 Certified Public Accountant (CPA)

a government-ordered work involvement and instructive necessities to end up a CPA.

Module 1 - Introduction Overview of Accounting and Finance for Decision Making

1.2.1.14 Cost of Goods Sold (COGS)

1.2.1.15 Credit (CR)

1.2.1.16 Debit (DR)

An accounting entry where there is either an expansion in resources or a decline in liabilities on an

1.2.1.19 Enrolled Agent (EA)

Module 1 - Introduction Overview of Accounting and Finance for Decision Making

Fig 1.2.4: Expenses

Module 1 - Introduction Overview of Accounting and Finance for Decision Making

1.2.1.21 Equity and Owner's Equity (OE)

1.2.1.23 Generally Accepted Accounting Principles (GAAP)

1.2.1.24 General Ledger (GL)

1.2.1.25 Trial Balance

Module 1 - Introduction Overview of Accounting and Finance for Decision Making

1.2.1.26 Liabilities (Current and Long-Term) (CL, LTL)

Fig 1.2.5: Liabilities

Module 1 - Introduction Overview of Accounting and Finance for Decision Making

1.2.1.27 Limited Liability Company (LLC)

1.2.1.28 Net Income (NI)

1.2.1.29 Profit and Loss Statement (P&L)

Module 1 - Introduction Overview of Accounting and Finance for Decision Making

1.2.1.31 Stock or Inventory

Fig 1.2.6: Types of Stocks

Module 1 - Introduction Overview of Accounting and Finance for Decision Making

b. Stock of Work-In-Progress: It means stock of partly, poor, semi-finished goods.

Fig 1.2.7: Goods not to be Included in the List of Stocks