ACCOUNTING FOR MANAGERS

By
K.G. MURALIDHARA
Basics of Business Accounting
(Learner friendly approach)
 Meaning
•      Meaning: Accounting has rightly been termed as
the language of the business. Accounting is the very
basic of any business.
•      The basic function of a language is to serve as
means of communication accounting also serves this
function.
•      It communicates the result of business operations
to various parties who have some stake in the business
namely the proprietor, creditors, investors,
Government and other agencies.
 Why Accounting

•      Though accounting is generally associated with business but it is

not only business which makes use of accounting.
•      Persons like housewives, Government and other individuals also
make use of accounting for taking the relevant decisions.
•      For example, a housewife has to keep a record of the money
received and spent by her during a particular period.
•      She can record here receipts of money on one page of her
household diary, while payments for different items such as milk, food,
clothing, house, education etc, on some other page or pages of her
diary in a chronological order.
 Definition

     Definition: “Accounting is the art of

recording, classifying and summarizing in
significant manner and in terms of money,
transactions and events which are, in part,
at least of a financial character and
interpreting the results thereof”.
 Accounting:
The Language of Business
• Many words have similar, but not same,
meaning as in common English.
• Similar to English, some rules are definite
others are not.
• Rules continue to evolve.
 Functions of Accounting
•       Recording: This is the basic function of accounting.
It is essentially concerned with not only ensuring that all
business transactions of financial character are in fact
recorded but also that they are recorded in an orderly
manner.
•       Classifying: Classification is concerned with the
systematic analysis of the recorded data, with a view to
group transactions or entries of one nature at one
place. The work of classification is done in the book
termed as ‘Ledger’.
•      Summarizing: This involves presenting the
classified data in a manner, which is understandable
and useful to the internal as well as external end-users
of accounting statements. This leads to the preparation
of the following statements: i. Trial Balance; ii. Income
statement; ii. Balance sheet.
•      Dealing with financial transactions: Accounting
records only those transactions and events in terms of
money, which are of a financial character.
•      Analyzing and interpreting: The recorded
financial data is analyzed and interpreted in a
manner that the end users can make a
meaningful judgement about the financial
condition and profitability of business
operations.
•      Communicating: The accounting
information has to be Communicated to the
external world
 Scope of Accounting

•      Systematic Records: Accounting is done to

keep a systematic record of financial
transactions. In the absence of accounting there
would have been terrific burden on human
memory which in most cases would have been
impossible to bear.
•      Ascertain Profit/Loss: Accounting helps in
ascertaining the net profit earned or loss
suffered on account of carrying the business.
• 1.     Ascertain the financial position of business: The profit
and loss account gives the amount of profit or loss made
by the business during a particular period.
• 2.     Protect the business properties: Accounting provides
protection to business properties from unjustified and
unwarranted use.
• Facilitate rational decision making: Accounting these days
has taken upon itself the task of collection, analysis and
reporting of information at the required points of time to
the required levels of authority in order to facilitate
rational decision making
 Basic Concepts/GAAP
1. Money measurement.
2. Entity.
3. Going concern.
4. Cost.
5. Dual aspect.
6. Accounting period.
7. Conservatism.
8. Realization.
9. Matching.
10. Consistency.
11. Materiality.
 ACCOUNTING CONCEPTS
•      Money Measurement Concept: This concept states that
the accounting records only monetary aspects of a
transaction. Non-monetary aspects like love, affection, and
gratitude to employees do not have a place in accounting.
•      Going Concern Concept: According to this concept life of
the business is likely to continue for a fairly long period of
time.
•    Separate Entity Concept: In accounting business is
considered to have a separate legal existence from that of
proprietor(s). 
• Cost Concept: cost of acquisition of asset is recorded in
accounting records and this cost is the basis for all subsequent
transactions
•   Dual Aspect Concept: Each transaction has
two aspects namely debit and credit. Suppose if
a business is commenced with Rs.10,00,000, it
means that the capital is Rs.10,00,000 and cash
is also Rs.10,00,000.
•   Accounting Period Concept: According to
this concept, the life of the business is divided
into appropriate segments for studying the
results shown by the business after each
segment.
•   Periodic Matching of Revenue and Cost Concept: The
term matching means appropriate association of related
revenues and expenses. In order to ascertain profit/loss,
the revenues and expenditure should be known during a
particular period of time.
•   Realization Concept: According to this concept revenue
is recognized when a sale is made. Sale is considered to be
made at the point when the property in goods passes to
the buyer and he becomes legally liable to pay.
 Accounting Equation
• It is also termed as Balance Sheet equation. It
consists of Assets and Liabilities.
Owners’ equity = Assets- Liabilities
or
Assets = Owners’ equity + Liabilities
For example, a Company has Rs.1,60,000 cash
at bank and Fixed AssetsRs. 1,40,000.
Its liabilities are Rs.1,20,000 . Then
applying the above equation we get:
Owners’ equity = (1,60,000+1,40,000)-
1,20,000= Rs.1,80,000.
Liabilities Amount (Rs.) Assets Amount (Rs.)
Capital 1,80,000 Cash at Bank 1,40,000
Liabilities 1,20,000 Fixed assets 1,60,000
3,00,000 3,00,000

Let us suppose if stock

is purchased worth
Rs.40,000 ,
Capital 1,80,000 Fixed assets 1,60,000
Liabilities 1,20,000 Stock-in-Trade 40,000
(purchased for cash)
Cash at Bank 1,00,000
(1,40,000-40,000)
3,00,000 3,00,000
 ACCOUNTING CONVENTIONS
      Conservatism: In the initial stages of accounting,
certain anticipated profits, which were recorded, did not
materialize.
      Full disclosure: According to this convention,
accounting reports should disclose fully and fairly the
information which is of material interest to proprietors,
present and potential creditors and investors.
      Consistency: According to this convention accounting
practices should remain unchanged from one period to
another.
 Materiality: According to this convention the accountant
should attach importance to the material details and
ignore insignificant details.
 Accounting standards (Nut shell)
• *AS 1 Disclosure of Accounting Policies
• *AS 2 Valuation of Inventories
• *AS 3 Cash Flow Statement
• *AS 4 Contingencies and Events Occurring after the Balance Sheet
Date
• *AS 5 Net Profit or Loss for the period, Prior Period Items and
Changes in Accounting Policies
• * AS 6 Depreciation Accounting
• *AS 7 Construction Contracts (revised 2002)'''
• *AS 8 Accounting for Research and Development (AS-8 is no longer
in force since it was merged with AS-26)
• *AS 9 Revenue Recognition
• *AS 10 Accounting for Fixed Assets
• *AS 11 The Effects of Changes in Foreign Exchange
Rates (revised 2003),
• *AS 12 Accounting for Government Grants
• *AS 13 Accounting for Investments
• *AS 14 Accounting for Amalgamations
• *AS 15 Employee Benefits (revised 2005)
• *AS 16 Borrowing Costs
• *AS 17 Segment Reporting
• *AS 18 Related Party Disclosures
• *AS 19 Leases
• *AS 20 Earnings Per Share
• *AS 21 Consolidated Financial Statements
• AS 22 Accounting for Taxes on Income.
• *AS 23 Accounting for Investments in Associates in Consolidated
Financial Statements
• *AS 24 Discontinuing Operations
• *AS 25 Interim Financial Reporting
• *AS 26 Intangible Assets
• *AS 27 Financial Reporting of Interests in Joint Ventures
• '*AS 28 Impairment of Assets
• *AS 29 Provisions, Contingent` Liabilities and Contingent Assets
• *AS 30 Financial Instruments: Recognition and Measurement
and Limited Revisions to AS 2, AS 11 revised 2003), AS 21, AS 23,
AS 26, AS 27, AS 28 and AS 29
 International Financial Reporting Standards
• (IFRS) are designed as a common global language
for business affairs so that company accounts are
understandable and comparable across
international boundaries. They are a consequence
of growing international shareholding and trade
and are particularly important for companies that
have dealings in several countries. They are
progressively replacing the many different national
accounting standards. The rules to be followed by
accountants to maintain books of accounts which is
comparable, understandable, reliable and relevant
as per the users internal or external.
 Users of Accounting

Investors/Members

Government
Society

Users of
Debtors Creditors
Accounting

Solicitors/Auditors Bankers/Brokers

Employees
Unit-II
 Double Entry System of Book
Keeping
• For each transaction there will be two aspects.
One is debit aspect and the other is credit
aspect. Therefore, two entries are passed
namely for each debit entry there is a
correponding credit entry which is termed as
double entry system of book keeping.
 Rules of Double Entry
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 incomes and gains
 Journal
    The meaning of journal is recording transactions on a
daily basis.
•      It is very difficult to remember the various transactions
unless some records are kept.
•      Say for example a student is asked to furnish the
details of his expenditure out of pocket money, for a week
somehow he may give the account. Imagine if he is asked
to furnish for 6 months or one year what may be his
position? When this is the position for an individual what
may be the position to an organization where the
transactions are varied and multitudinous.
•      Obviously there is a need for maintaining records
pertaining to the day’s transactions.
Points to be noted while passing
Journal Entries
1. The business and proprietor (i.e., owner) of
the business must be considered as two
distinct (i.e., separate) entities (i.e., parties).
2. While writing the name of real account or a
nominal account, we have to add the word
‘Account’ after the name of the asset or
expenses or income.
3. After passing all the journal entries, the two
amount columns of the journal should be
totaled.
4.Whenever the proprietor of a business brings in
cash or any other thing in to the business, an
account called ‘Capital Account’ should be
opened in the name of the proprietor
5.Whenever the proprietor invests in the business
the sale proceeds of his private assets, or
recorded in the books of the business as
additional capital introduced by the proprietor.
6.Whenever the proprietor commences business
with loan borrowed from his wife, children or
friend, the two accounts that are required to be
taken in to the account
7.Whenever the proprietor of a business
withdraws cash goods or any other thing
from business for his personal or domestic
use, an account called the ‘Drawings
Account’ should be opened .
8. Whenever the personal expenses of the
proprietor, are paid by the firm, those
transactions should be recorded in the books
of the business.
9. It is preferable to split the goods account in to
(a) Purchase account, (b) Sales Account (c)
Purchase Returns/return outwards, (d) Sales
return/ returns inwards, (e) opening stock
account and (f) closing stock account.
10.Generally, purchases account, sales account,
purchase returns account and sales returns
account are treated as real accounts, and the
rules applicable to real accounts, are applied
to these accounts, while journalizing the
transactions.
11.If the name of supplier is mentioned, the purchase
should be considered as credit purchase.
12. Whenever goods are purchased from a party for
cash, the two accounts involved in that transaction
are (1) purchases account and (2) cash account
13. Whenever goods are purchased from party on
credit, the two accounts involved in the transaction
are (1) purchases account and (2) the supplier’s (i.e.,
seller’s) account
14.Whenever some investments or securities,
say, shares or debentures are sold the two
accounts involved are (1) Cash account (2)
investments account (and not sales account )
15. Cash discount allowed by the business to its
debtor at the time of receipt of money from the
debtor , for his prompt payment
16. Trade discount should not be separately
recorded at all either in the books of the seller
or in the books of the buyers.
 Ledger
•      After journalizing the various transactions of a
business concern the entries are to be posted into separate
set of accounts termed as ledger.
•      As said earlier each transaction has two aspects.
Ledger accounts are to be kept for each individual
accounts.
•      This ledger account is maintained in T form. On the
other hand it is divided into two parts namely the debit side
and credit side respectively.
• The left hand side is debit side and the right hand side is
credit side. The following is the format of a ledger account
 Trial Balance
•      A Trial Balance is a statement containing
ledger balances of the accounts.
•      It gives the arithmetic accuracy of the
books of accounts.
•      It is the statement through which final
accounts like manufacturing account, Trading
Account, Profit and Loss Account and a
statement termed as a Balance Sheet are
prepared to know the financial position as on a
particular date.
 Illustration
Journalise the following transactions, post the same in
relevant ledger accounts and balance the same.
2006
June 1. Anurag commenced business with Rs.20000
2. Paid into bank Rs.5000
3. Purchased Plant worth Rs.10000 from Modi&Co
4. Purchased goods worth Rs. 5000 from Anwar
6. Goods worth Rs.4000 sold to Abhishek
8Sold Goods worth Rs.2000 for cash
10 Goods returned by Abhishek Rs.50
15 Paid rent Rs.250
June 18. Withdrawn from bank for office use
Rs.2,500
20 Paid Salaries Rs.1800
25Withdrawn for personal use Rs. 250
26 Goods returned to Anwar Rs.100
27 Paid for office furniture Rs.1,500 by cheque
28 Received Rs.3,900 cash from Abhishek and
discount allowed Rs.50
29 Paid Anwar Rs.4800 and discount allowed by
him Rs.100
 Table Showing the Treatment of various adjustments in Final Accounts

Adjustment Trading P&L A/C Treatment in Balance Sheet

Closing Stock Credit side of Assets side of the Balance Sheet
Trading A/c
O/S Expenses Added to the To be shown under Liabilities
concerned side of the Balance Sheet
expenditure
Deducted from Assets side of the Balance Sheet
Prepaid Exps concerned
expenditure
Added to the Assets side of the Balance Sheet
O/S Incomes respective incomes
Deducted from the Liabilities side of the Balance
Income recd. in Adv concerned incomes Sheet

Bad Debts Dr side of P&L Deducted from S.Drs in B/S

Account
Dr side of P&L Deducted from S.Drs in B/S
Prov. For B/D
Account
Provision for
Dr side of P&L Deducted from S.Drs in B/S
discount on drs
Account
 Contd.,

Adjustment Trading P&L A/C Balance Sheet

Deducted from S.Crs on the
Res. For Discount on Cr. Side of the liabilities side of the
Crs P&L A/C Balance Sheet
Depreciation Debit side of P&L Deducted from concerned
A/c Asset
Appreciation Credit side of P&L Added to Concerned Asset
A/c
Added to the Capital A/c on
Dr. side of the the Liabilities side of the
Interest on Capital Balance Sheet
Profit and Loss
A/c

Deducted from capital on

Interest on Drawings Credit side of the the Liabilities side of the
P&L A/c Balance Sheet
 AS 3 Norms for Cash Flow Reporting –
Operating Activities
Presentation Form

Direct Method Indirect Method

• Major classesthe
Adjusting of gross cash receipts
net profit or loss& gross
for thecasheffects of
changes
payments during thebyperiod
calculated in inventory
adjusting andofoperating
the sales, cost sales
receivables
and other items and
in thepayables,
P/L Accountnon cash items like
depreciation,
• The adjustment provisions, deferred
could be w.r.t. changestaxes, unrealized
during the period
foreign exchange
in inventories, gains/losses
operating receivablesand
andallpayables;
the otheror items
for which
changes cash non-cash
in other effects are investing
items; or financing
and changes in items cash
for
flows
which the cash effects are investing/financing cash flows
• Most of the Indian companies use the indirect method
to state their cash flow from operations
 AS 3 Reporting Norms – Investing and
Financing Activities
• An enterprise should report separately major
classes of gross cash receipts and payments
except in the following cases where reporting
should be on net basis i.e.
– Receipts or payments on behalf of customers
where the cash flow reflects the activities of the
customer rather than those of the enterprise for
e.g. Rent collected on behalf of and paid to the
owners of property
– Receipts or payments for items in which the
turnover is Quick, amounts are large and
maturities are short. Eg: Short term borrowings
having maturity of less than or equal to 3 months
 AS6

Depreciation

Provides a manual for

depreciating the various assets
of the company.
 AS 10
 To provide guidelines for the valuation and
disclosure of certain information relating to
fixed assets owned by an enterprise, in the
books of accounts.
 Fixed assets should be shown in the balance
sheet either at their historical cost or at their
revalued figures.
 Cost consists of : Purchase price, duties and non
refundable taxes, and al the other attributable
costs for bringing the asset to working
condition, for its intended use.
 AS 17

• To establish principles for reporting financial

information about the different types of products
and services an enterprise produces and the
different geographical areas in which it operates.
Such information helps the users of financial
statements in a better understanding the
performance of the enterprise;
• Better assessing the risks and returns of the
enterprise;
• Making more informed judgements abhout the
enterprise as a whole.
 AS 20
 To prescribe the principles for the determination and
presentation of the earnings per share, which will facilitate
a comparison of performance among different enterprises
for the same period and among different accounting
periods for the same enterprise.
 The focus of this statement is on the denominator in the
earnings per share calculation.
 AS 20 requires an enterprise to clearly present the basic
and diluted earnings per share for all the reported
accounting periods, even if the amounts disclosed are
negative ( a loss per share)