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Financial Accounting for Managers

An Orientation
Prof. Anil Kshatriya
Need for Accounting
Business is a set of Planned, Organized and
Coordinated activities
Proper recording of these activities
In a systematic manner
To enable the managers to establish control and take
decisions.
Because the owners need to be informed about the
progress of their business
Origin of Book-Keeping
Kautilya, a 4th century B.C. royal
advisor and scholar, recognized the
importance of accounting methods in
economic enterprises in Arthashastra.

Luca Pacioli, an Italian Mathematician


published Summa de arithmetica,
geometria, proportioni et
proportionalit (Venice 1494), the first
formal description of the method of
book-keeping.
Meaning & Definition
The science of recording, classifying and
summarizing monetary transactions & events of
financial nature and interpreting the results thereof.

Measurement
Recording Decision
Classifying Summarizing Making
Analysis Reporting

Identification Communication
Objective
Management Decision support system
Investors Knowledge of the financial position
Employees Information about wages/welfare benefits
Government Regulation and Taxation
Suppliers Solvency and credibility
Consumers Pricing and Branding
Branches of Accounting
Financial Accounting:
- Recording and Reporting
- Internal as well as External Information
- Chartered Accountants
Cost Accounting:
- Classification and Allocation of Costs
- Strictly Internal and Confidential
- Cost Accountants
Management Accounting:
- MIS for Strategic Decision Making
- Only for Top level Executives
- CIMA (London, UK)
Forms of Organizations

1. Sole Proprietor Mom and Pop Stores (Kirana


Stores)
2. Partnership Firm Unlimited and LLP (KNV
Chartered Accountants LLP)
3. Joint Stock Company Private Ltd. (Manpasand
Beverages Pvt. Ltd.) and Public Ltd. (Infosys
Technologies Ltd.)
Fundamental Concepts
1. Business Entity Concept:

- This concept means that Business Enterprise has


separate identity apart from the owner.
- The concept helps to keep affairs of the business
free from influences of the owner.
- It also means that enterprise is liable to the owner
for capital investment made by owner.
2. Accounting Period Concept:

- As per this concept accounts should be prepared


periodically for measuring performance.
- In India Financial Year is followed from 1st April to
31st March of subsequent year.
- It helps in establishing control.
3. Money Measurement Concept:

- Only those transactions which can be measured in


monetary terms are recorded.
- Transactions, even if affecting results of business
materially, are not recorded if they are non-monetary
in nature.
- Example, Human Resources are called Assets but
are never reported in balance-sheet.
4. Dual Aspect Concept:

- Under this concept, every transaction has two


effects. One aspects deals with receiving of benefit
and the other with giving of benefit.
- Example, When you purchase machinery in cash,
value of total machinery goes up but cash balance
reduces.
- The Accounting Equation
Assets = Capital + Liability
5. Going Concern Concept:

- While maintaining the accounts it is presumed that


business will exist for a indefinite period of time.
- Thus expenses are classified as Capital
Expenditure and Revenue Expenditure
- This facilitates valuation Fixed Assets at historical
cost less Depreciation
6. Accrual Concept:
- Under this concept, transactions are recognized
when they occur and not when cash is paid/received.
- Financial statements prepared on accrual basis
show cash transactions as well as obligation to pay/
receive cash pertaining to that period.
- Example, In March goods worth Rs. 60,000 were
sold and cash of Rs. 50,000 was received. 10,000 was
promised to be paid in next month. Income for the
year will be ----?
Limitations
Historical in nature.
Gross representation of affairs of business.
Scope for manipulation.
Cannot provide information about operational
aspects.
Needs harmonization of standards.
Extrapolation of future position is difficult.
Quiz
Purpose of Accounting includes all except:
A. Interpretation of records
B. Classification of transactions
C. Summarizing and communication of events
D. Directing type of transactions to be done

Ans: D
Financial Statements do not consider:
A. Assets expressed in monetary terms
B. Assets expressed in non-monetary terms
C. Liabilities expressed in monetary terms
D. Liabilities as well as Assets expressed in non-
monetary terms

Ans: D
Quick Test! on Accounting Equation
(Assets = Capital + Liabilities)
An entrepreneur starts a small retail outlet with
cash of 2,00,000 and registers his business as
Quick-kart
It purchases furniture of 5,000 for cash
It purchases goods of 50,000 for cash
It purchases goods of 20,000 on credit
It sells above goods worth Rs. 40,000 on credit
for 60,000. And remaining goods worth Rs.
30,000 for cash of Rs. 40,000.
It pays Rs. 5000 as rent and 10,000 as salary.
The Business Game
Instructions
1) Form groups with 6 students in a group.
2) Now you are a start-up. Name your company. Appoint CFO
among of your company. Decide the initial capital investment
in the firm.
3) Ask each team member to suggest two transactions. No
transaction should be repeated within a group. [E.g.
Purchased assets worth Rs. 1,00,000].
4) Take notes. All members must record all transactions and
write the accounting effect. Help CFO to consolidate all
equations and prepare Balance Sheet of the firm.
5) Any 3 groups will be called to present their companys
Balance Sheet.