ACCOUNTING

FOR
MANAGERS
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 BOOK KEEPING
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 Book keeping is the science and art of recording correctly

in the books of accounts all those business transactions
that result in the transfer of money or money’s worth.
 Need of Book Keeping
 Transactions are difficult to remember
 Operations are in hands of others
 Helps in costing, budgeting, forecasting, & planning
 Records are to be submitted to various agencies like
government
 PROCESS – BOOK KEEPING
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 IMPORTANCE OF BOOK
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KEEPING
 Prevention of frauds
 Information needs of various users
 Need for financial information
 Determination of amounts recoverable & payable
 Limitation of human memory
 Need of taxation authorities
 Requirement of exercising control
 Preparation of financial statements
 DEFINITION OF ACCOUNTING
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 The American Institute of Certified Public

Accountants has defined Accountancy as –
“the art of recording, classifying and summarizing
in a 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.”
 OBJECTIVES OF
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ACCOUNTING
 To facilitate rational decision making
 To ascertain the operational profit & loss
 To protect business properties
 To keep systematic records
 To ascertain the financial position of business
 To provide information to various parties
 To communicate the financial results
 To meet legal requirements
 To protect business assets.
 STEPS INVOLVED IN
ACCOUNTING
Identifying Transactions

Recording

Classifying

Summarising

Analysis &
Interpretation
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 DIFFERENCE
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Basis of Difference Book-Keeping Accounting

Stage It is the basis of accounting Starts where book keeping

ends

Scope Confines itself to recording, Extends to preparation of final

posting, balancing & accounts after adjustments
preparation of trial balance

Skill Clerical work Senior staff

Operation Records in orderly manner Provides information

Adjustments No adjustments Adjustments are incorporated

 BRANCHES OF ACCOUNTING
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 USERS OF ACCOUNTING
INFORMATION
INTERNAL EXTERNAL

DIRECT INTEREST INDIRECT INTEREST

• Investors •Researchers
• Creditors
•Employees • Public &
Others
•Tax Authorities
• Customers

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 IMPORTANCE OF ACCOUNTING
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• Replacing memory
• Maintaining proper record of business
• Calculation of profit or loss
• Depiction of the financial position
• Providing effective control over the business
• Making information available to various groups
• Documentary evidence
• Assisting the realization of debts
• Facilitating the sale of the business
• Preventing & detecting frauds
 LIMITATIONS OF ACCOUNTING
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• Incomplete information
• Inexactness
• Showing valueless assets
• Manipulation
• Ignorance about the present value of business
 Important Terminology
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• Business - Legally recognized organization designed to provide

goods or services.
• Business Transactions – any exchange of goods or services for
cash or credit with any other party.
• Proprietor - One who has legal title to something; an owner.
• Capital – amount invested by proprietor.
• Drawings – amount or benefit withdrawn by the owner from the
business for personal or domestic use.
• Debtor – person from whom amounts are due for goods sold or
services rendered.
• Creditor – person to whom amount is owed by the enterprise on
account of goods purchased or services rendered.
 Important Terminology
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• Receivable – amount which outsiders owe to business on revenue accounts
• Payable – amount which business owes to outsiders on revenue accounts
• Debit – left side of any account
• Credit – right side of any account
• Goods – all those articles which have been purchased by enterprise for sale.
• Purchases – purchase of raw material or purchase of finished goods for selling
• Purchase Return / Return Outward – part of goods purchased which is returned
to seller
•

•
 Important Terminology
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• Sales - sale of finished goods
• Cash Sale &Credit Sale

• Sales Return / Return Inward – part of goods sold returned by the

customer
• Stock/Inventory – goods left unsold at the end of accounting period
• Assets – economic resources owned by business. Types of assets
• Fixed Assets – purchased for long term use
• Tangible fixed assets – can be touched e.g. machinery
• Intangible fixed assets – cannot be touched e.g. goodwill
• Current Assets – assets held in form of cash, for conversion, for consumption in production
process.
• Fictitious assets – they don’t have physical form, no realizable value but are of recurring
nature. They are recurring payments that are shown as assets
 Important Terminology
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 Equity – All claims & rights against the assets of

business. It is of two types; owner’s equity &
outsider’s equity = Assets
 Liabilities – financial obligations to outsider’s
parties arising from events that have already
happened.
 Current Liabilities – fall due for payment in relatively
short period of time.
 Fixed liability – payable after a period of one year.
 Contingent liability – which may or may not become
payable in future
 Important Terminology
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 Expense/Cost – portion of expenditure which has been consumed

during the current accounting period to earn revenue.
 Expenditure – amount spent or liability incurred for the value
received.
 Revenue expenditure/expense – amount incurred for the purchase of
goods & services which are consumed during current period.
 Capital Expenditure – payment made for purchase of assets from which
the benefit will be derived in future.
 Loss – unwanted burden. It can be normal or abnormal. It is excess of
expenses on revenue.
 Profit – excess of revenue over expenses
 Revenue – flow of benefits to business generated out of resources controlled
by it.
 Important Terminology
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 Income – increase in net worth of the enterprise from

business or non business activities
 Gain – profit of an irregular nature e.g. profit on sale of
fixed assets
 Discount – reduction in prices of goods allowed by an
enterprise to its sellers
 Insolvent - Inability to pay one's debts
 Financial Statement - Formal record of the financial
activities
 ACCOUNTING PRINCIPLES
According to American Institute of Certified Public
Accountants, “Accounting Principle is a general law or rule
adopted or professed as a guide to action. It is a basis of conduct
or practice”

Accounting
Principles

Accounting Accounting
Concepts Conventions

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 ACCOUNTING CONCEPTS
1. Going Concern Concept – Indefinite Period
2. Dual Aspect Concept – for every debit there is a credit.
Assets = Liabilities + Capital
3. Cost Concept – Recoding at actual price rather than at market value
4. Separate Entity Concept – Separate from owner
5. Money Measurement Concept – Financial terms
6. Accounting Period Concept – Evaluated and measured at regular
intervals
7. Matching Concept – expenses should be matched to the revenues of
the appropriate accounting period.
8. Accrual Concept/Revenue realization concept – profit should be
20 considered only when realized.
 ACCOUNTING CONVENTIONS

1. Convention of Consistency – Accounting process should be

consistent (E.g.:- DEPRECIATION)
2. Convention of Full Disclosure – Honestly, Free form
Manipulation (E.g. SATYAM, Creative A/cing)
3. Convention of Conservatism – Sufficient provision for
unforeseen losses. (E.g.:- BAD DEBT RESERVES,
DEPRECIATION)
4. Convention of Materiality – Information which would change
the results of business if it would have been disclosed.
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 CLASSIFICATION OF ACCOUNTS

Types of Accounts

Personal Real Nominal

Natural Artificial Representative Tangible Intangible Expenses Incomes

& &
E.g.:- Creditor a/c,
E.g.:- Machinery, Losses Gains
Debtor a/c, Firm a/c,
Furniture, Goodwill,
Company’s a/ c etc.
Technical know how,
Royalty etc.
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 Types of Accounts
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 Personal A/c
 Natural Personal A/c – E.g. Abhishek’s Account
 Artificial Personal A/c – e.g. companies, Banks, Co-operative
Society
 Representative Personal A/c – e.g. outstanding expenses
 Real A/c
 Tangible real a/c – e.g. land building
 Intangible real a/c – e.g. goodwill
 Nominal a/c – e.g. rent account, interest received account
 ACCOUNTING EQUATION
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 Accounting equation is an accounting formula expressing

equivalence of the two expression of assets & liabilities.
 Its main components are assets, capital & outsider
liabilities
 In every business total assets = total liabilities
 Total liabilities = capital + outside liabilities
 Assets = capital + liabilities
 Every transaction affects the equation in such a way that
total assets are equal to aggregate of capital & liabilities.
 DOUBLE ENTRY SYSTEM
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Double entry system seeks to record every transaction

in money or money’s worth in its double aspect, the
receipt of a benefit by one account and the surrender
of a like benefit by another account. The former
entry being to the debit of the account and the latter
to the credit of the account surrendering.
Books of accounts to be prepared:
1. Journal, 2. Cash Book, 3. Subsidiary book, 4.
Ledger
 ACCOUNTING PROCEDURE
UNDER DOUBLE ENTRY
SYSTEM
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Source documents or identification of business transactions
 Underlying the documents
 Original record
 Journalizing
 Recording in subsidiary books
 Classification
 Posting in ledger
 Summary
 Balancing the ledger accounts
 Taking a trial balance
 Adjustments Entries
 Analysis & Interpretation
 Preparation of final accounts
 JOURNAL
According to Carter –
“The Journal or Daily Record as originally used was a book of
primary entry in which transactions were copied, in order of date, from a
Memorandum or Waste Book. The Entries, as they were copied, were classified
into debits and credits so as to facilitate their being correctly posted afterwards in
the ledger”.

SPECIMEN OF JOURNAL
Date Particulars Ledger Amount Amount
Folio (Rs.) (Rs.)
(1) (2) Dr. Cr.
(3) (4) (4)
Account to be Debited………..Dr.
To Account to be Credited

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 SIX GOLDEN RULES OF ACCOUNTING
(DEBIT & CREDIT)

Personal Real Nominal

Accounts Accounts Accounts
What Comes All Expenses
Debit The Receiver
In & Losses

Credit What Goes All Incomes

The giver
Out & Gains

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