Management

Accounting –
I
 Accounting
• Accounting is called as the language of
business.
• American Institute of certified Public
Accountants(AICPA) defines Accounting
as:
– “the art of recording, classifying and
summarizing in a significant manner and it
terms of money, transactions and events which
are in part at least of a financial character and
interpreting the results thereof”.
• Modern definition of Accounting as per
Institute of Chartered Accountants of India
(ICAI):
– “ to provide quantitative information, primarily
financial in nature, about economic entities that
is intended to be useful in making economic
decisions.”
 Accounting Process
Identify the monetary events
(Select economic events and transaction)

Measure these events in financial terms

(Quantify in currency units - Rupees)

Classify these events / transactions

(Record in ledger / principal book)
Summarize these events / transactions
(Prepare Profit & Loss account and Balance Sheet)

Report these events in financial statements to users

(Communicating to interested parties)
 Book Keeping, Accounting and Accountancy

• Book Keeping is a process of

recording financial transactions
and events in a clear and
systematic manner. Accountancy
• Accounting is the art of recording,
classifying and summarizing in a Accounting
significant manner and it terms of
Book-
money, transactions and events
keeping
which are in part at least of a
financial character and
interpreting the results thereof.
• Accountancy is the systematic
knowledge of accounting.
 Accounting Cycle
Step – 1
Identification and Measurement

Step – 5 Step – 2

Preparing Financial Statement Recording of transactions

in journal

Step – 4 Step – 3
Preparing of Trial Posting from
Balance Journal to Ledger
Branches of Accounting

• Financial Accounting
• Cost Accounting
• Management Accounting
 Financial Accounting
• To maintain systematic records
• To ascertain the profit/loss and health of the
business
• To provide information for decision making
 Cost Accounting
• Classification and analysis of cost for cost
management
• Helps in controlling the costs and providing
necessary costing information to
management for decision making.
 Management Accounting

• Covers the generation of accounting

information for management decisions.
 Accounting Principles
• Accounting framework includes the
Generally accepted Accounting
principles (GAAP).
• Accounting Principles means rules of
action or conduct or the basis of
conduct or practice.
• Accounting principles are of two types:
o Accounting concepts
o Accounting conventions
 Accounting concepts
• Accounting concepts: Basic
assumptions or conditions upon
which the accounting is based.

• There are ten accounting concepts.

 Business entity concept
– A business entity is said to be different
and separate from its owner.
– The accounting books records the
transaction of the business entity only.

Money measurement concept

– Those transactions and events are
recorded in the books of accounts, which
can be expressed in terms of money.
 Going concern concept
– The enterprise will continue to
operate for a long period in future.

Cost concept
– Cost is defined as the expenditure
incurred for acquiring an asset or
services.
– The assets are recorded in the books
of account at their original purchase
price.
 Realisation concept
– Any change in the value of the asset
should only be recognized at the time
the firm realizes or disposes of the
asset.

Accrual concept
– It recognizes income when it is
earned rather than when it is
collected and those of expenses when
it is incurred rather than when they
are paid.
Periodicity concept/Accounting
period concept
– Acounting measures activities for a
specified period of time called the
accounting period.

Matching concept
– The revenue of that period is
matched with the expenses of that
period in order to find out the profit /
loss.
 Dual Aspect concept
– Every transaction has two aspects one is
receiving side and another is giving side.
– Double entry for each transaction.
– Every debit has an equal and corresponding
credit.
– This principle gives rise to the accounting
equation: Assets = Liabilities + Capital.

Objective evidence concept

– The accounting transactions should be
supported by business documents which can
be verified and are free from personal bias.
Accounting Conventions
• It consists of customs and
traditions, which act as the guide
to the accountants for the
preparation of financial statements.
 Consistency convention
– It states that once a accounting method is
adopt by an enterprise, it should not change
it without subsequent reasons.
– It helps in comparability of data of same
enterprise over the period or data of
different enterprise of same period or both.

Conservatism convention
– It states that should not recognize any
profit/gain till realized but provide for all
possible losses.
 Materiality convention
– Any transaction having significant
effect on the business is material.

Full disclosure convention

– All significant information relating to
the economic affair of the business
organization should be reported fully
in the financial statements.
 USERS OF ACCOUNTING
INFORMATION

• Management
• Shareholders and Investors
• Lenders
• Creditors
• Employees
• Customers
• Govt. and Regulatory Agencies
• General Public
• Others: Media, Consumer Organizations,
Researchers & Analysts
Double Entry system of
Booking Keeping
• In this system dual aspect of
business transactions are recorded
i.e.
•Receiving aspect
•Giving aspect
• Double Entry system gives rise to the
fundamental accounting equation :

Resources of the business =

Sources of the business

Or, Assets = Equities

Or, Assets = Liabilities + Capital

Or, Assets = Liabilities + Capital + Income -
Expenses
• Assets are the things, properties
and rights, which the firm owns for
the operation of the business.

• Capital is the money or money

worth invested by the proprietor
from the business.

• Liabilities are the amount owned

by the business to the outsiders.
1-22

Show the effect of the accounting

equation for the following
transactions:
1. Started business with cash Rs. 50, 000, Furniture
Rs. 40,000 and equipment worth Rs. 50,000.
2. Paid monthly rent of Rs. 10,000
3. Purchased goods on credit from Ram Rs. 1,75,000.
4. Sold goods on credit to Shyam Rs. 1,50,000
5. Cash sales Rs. 20,000.
6. Received cash from Shyam Rs. 1,50,000 .
7. Paid Rs. 175,000 to Ram.
 Solution
Transactions Assets Liabilities Capital Income Expenses

Started business with cash 50000+400 140000

Rs. 50, 000, Furniture Rs. 00+50000
40,000 and equipment
worth Rs. 50,000.

Rented a premise at a -10000 10000

monthly rent of Rs. 10,000

Purchased goods on credit 175000 175000

from Ram Rs. 1,75,000

Sold goods on credit to 150000 150000

Shyam Rs. 1,50,000

Cash sales Rs. 20,000 20000 20000

Received cash from Shyam 150000,

Rs. 1,50000 -150000

Paid Rs. 175,000 to Ram -175000 -175000

End balance 125000 0 140000 170000 185000

Show the effect of the accounting equation for
the following transactions:
• Anant commenced the business with cash of Rs. 300000
• Goods of Rs. 200000 purchased for cash
• Credit sales of goods to Aqua Soft Solution of Rs. 180000
• Paid rent of Rs. 1200
• Cash received from Aqua Soft Solution of his a/c= Rs.7500
• Deposited Rs.10,000 into bank
• Salary paid Rs. 2500
• Machinery of Rs. 50000 purchased for cash
• Credit purchased of goods from Fortune Electro worth Rs. 12500
• Cash sales of Rs.19000
From the following transactions find out which a/c are
affected and show the accounting equation in the books of
Poonam’s Firm.
• Purchase of goods costing Rs.2,000 from Impel
Marketing on credit.
• Sales of goods to VSN Global on credit costing Rs.3,000
• Cash purchase of goods of Rs. 4,000
• Cash sales of goods worth Rs. 6,000
• Paid cash to Impel Marketing Rs. 2,000
• Received cash from VSN Global Rs. 3,000
 Account
• An account is a statement where
similar transactions and events where
occur during a particular period are
accumulated and summarized.

• An account is a statement in ‘T’ form

showing the various changes which
have occurred in relation to a
particular item far a given period.
 Classification of an
Account
• British approach: On the basis the
accounts are necessary for the
business to keep the account are
classified into three types:
•Personal Account
•Real Account
•Nominal Account
 Personal Account
• The accounts relating to an
individual, firm, association or
companies.

• There are three types of personal

accounts:
– Natural persons’ account
– Artificial persons’ account
– Representative persons’ account
 • Natural persons’ account
Persons created by nature i.e. human beings.
E.g. Ram account, Shyam account

• Artificial persons’ account

Artificial persons created by Law. E.g.
Companies account, clubs account

• Representative persons’ account

Accounts, which represent expenses payables,
expenses paid in advance, income
receivables, incomes received in advance,
owners account. E.g. outstanding expenses
account, capital account, drawings account.
 Real Account
• The accounts relating to all tangible
and intangible assets and properties.
• There are two types of real account:
•Tangible real account – Assets that
can be seen and touched. E.g. cash
account, building account.

•Intangible real account - Accounts

that cannot be seen and touched. E.g.
goodwill account, trademark account.
 Nominal Account
• The accounts, which relates to
expenses, losses, incomes and
gains.

• Salaries account, rent account,

commission earned account,
dividend received account
 American approach
• on the basis, the accounts
maintained by a business house,
accounts are classified as
– Capital Account
– Asset Account
– Liabilities Account
– Expenses Account
– Incomes Account
 Debit and Credit
• Debit means left side of an
account and

• Credit means right side of an

account.
Rules of Debit and Credit
under British approach
Types of account Debit Credit

Personal Account The receiver The giver

 Real Account
      What comes in What goes out

 Nominal Account Expenses and Income and

losses gains
 Rules of Debit and
Credit under American
approach
Debit means Credit means

Increase in assets Decrease in assets

  Decrease in Liability Increase in Liability
Decrease in capital Increase in capital
Increase in expenditure Decrease in
expenditure
  Decrease in income Increase in income
Determine the nature of the accounts from the
following transactions.
• Salary paid
• Interest received
• Machinery purchased for cash
• Building sold
• Received cash from Rajul
• Proprietor introduced capital
• Dividend received
• Commission paid
• Furniture purchased
 State the rules of Debit and
Credit
• Capital was introduced in business in cash
• Salaries paid in cash
• Interest received in cash
• Machinery purchased for cash
• Building was sold for cash
• Received cash from Rajul
• Dividend received
• Commission paid in cash
• Furniture was purchased for cash
1. Ajit commenced the business with cash of
Rs.15,00,000
2. Goods of Rs. 40,000 purchased for cash
3. Credit sales of goods to Monoj of Rs.18000
4. Paid rent of Rs.1200
5. Cash received from Monoj on his account Rs.
7500
6. Deposited Rs. 10000 in Bank
7. Salaries paid for Rs. 2500
8. Machinery of Rs. 50,000 purchased for cash
9. Credit purchase of goods from Rohit worth Rs.
12500
10. Cash sales of Rs. 19,000