Accounting for Managers

Zabiulla MBA, M.Phil, (Ph.D.) Dept. of Management Studies

August 10, 2011

Accounting for Managers

2

August 10, 2011

Accounting for Managers

3

Module 1 Introduction to Financial Accounting

Understanding Business Organisations 
What do business organisations do?

August 10, 2011

Accounting for Managers

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2011 Accounting for Managers 8 .‡ Types of business organisations ± Merchandising or trading ± Manufacturing ± Service ± Business organisations are ³cash machines´ August 10.

lenders. . managers etc.The Accounting Information System Inputs Business transactions and events Processing Outputs Accounting principles & procedures Financial statements and reports Users Investors.

2011 Accounting for Managers 10 .August 10.

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2011 Accounting for Managers 12 .Module 1 What is Accounting  Accounting is the language of business  Accounting provides information for making decisions  Accounting is an information system August 10.

at least of financial character and interpreting the results thereofµ.DEFINITION OF ACCOUNTING Art of recording. classifying and summarising in a significant manner in terms of money transactions and events which in part. ² American Institute of Certified Public Accountants August 10. 2011 Accounting for Managers 13 .

Module 1 Users of Accounting Information          Investors Lenders Security analysts and advisers Managers Employees and trade unions Suppliers and other trade creditors Customers Government and regulatory agencies The public Accounting for Managers 14 August 10. 2011 .

Performance reports Accounting for Managers 15 . Variances. Cash flow statement.Module 1 Major Branches of Accounting Financial Accounting For external users Historical information Standardised format Laws and conventions Summarised Income statement. Balance sheet. Accounting policies August 10. Budgets. 2011 Management Accounting For internal users Future-oriented Flexible format Context-specific More detailed Product cost statement. Standard costs.

Module 1 Assumptions Underlying Accounting Measurement  Accounting Entity  Business is distinct from owner  Going Concern  Business is a continuing enterprise  Periodicity  Business activities divided into periods  Money Measurement  Money is a stable measurement unit August 10. 2011 Accounting for Managers 16 .

Account  Account  An individual record of increases and decreases in an item that is likely to be of interest or importance Debit is left side of T account Credit is right side of T account Debits = Credits August 10. 2011 Accounting for Managers 17 .

2011 Accounting for Managers 18 E Q U I T Y E Q U I T Y Debit Credit .Debit & Credit ‡ Aspects of a business transaction  DEBIT  CREDIT ³For every debit there is an equal amount of creditµ ± Double entry system August 10.

Module 1 Classification of Accounts  Asset accounts  Examples: Land. Cash  Liability accounts  Examples: Creditors. Sales. 2011 Accounting for Managers 19 . Buildings. Dividends August 10. Equipment. Retained Earnings. Unearned Revenues. Wages Payable  Owners¶ equity accounts  Examples: Share Capital. Salaries Expense.

2011 Accounting for Managers 20 .Module 1 The Accounting Equation The equation. Assets = Liabilities + Equity can be rewritten as Assets = Liabilities + Capital + Revenues ± Expenses ± Dividends which can be rewritten as Assets + Expenses + Dividends = Liabilities + Capital + Revenues August 10.

CLASSIFICATION OF ACCCOUNTS ACCOUNTS PERSONAL REAL NOMINAL August 10. 2011 Accounting for Managers 21 .

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PERSONAL ACCOUNT ‡ Deals with the transactions relating to persons # Natural person # Artificial person # Representatives Debit the Receiver Credit the Giver August 10. 2011 Accounting for Managers 23 .

2011 Accounting for Managers 24 .REAL ACCOUNT ‡ Deals with properties and assets Debit what comes in Credit what goes out August 10.

incomes & gains Debit all expenses & losses Credit all incomes & gains August 10. losses.NOMINAL ACCOUNT ‡ Deals with the transactions relating to expenses. 2011 Accounting for Managers 25 .

2011 Accounting for Managers 26 . Real or Nominal) would you classify each of the following accounts: a) Salary A/c b) Salary outstanding A/c c) Rent A/c d) Insurance unexpired A/c e) Proprietor¶s A/c f) Bad debts A/c g) Furniture A/c h) Goodwill A/c i) Patents A/c j) Bank A/c August 10.1 State under what heading (Personal.Q.

2011 Accounting for Managers 27 . a liability a/c. or an owner¶s equity a/c: a) Salaries expense b) Bills payable c) Supplies d) Dividends e) Cash f) Debtors g) Prepaid insurance h) Interest income i) Salary payable August 10.2 State whether each of the following account is an asset a/c.Q.

2011 Accounting for Managers 28 . JOURNAL 3. FINAL ACCOUNTS 1. TRIAL BALANCE 2. LEDGER August 10.Accounting cycle 4.

JOURNAL (Book of original entry) ‡ Book containing a chronological record of business transactions is called a Journal. 2011 Accounting for Managers 29 . Book of original entry where the business transactions are recorded in the order in which they occur. Process of recording the transaction in a Journal is called Journalising .1. August 10.

to Ledger A/cs August 10. Month and the day of the transaction Exhibit: Journal Post Ref. 2011 Accounting for Managers 30 .Year. Debit Amount Amount Date Description Account to be Debited Account to be Credited Credit Narration Left blank till entries are tfd.

real or nominal. LEDGER ‡ Book which contains all accounts of the business enterprise whether personal. August 10. 2011 Accounting for Managers 31 . ‡ Gives the summary of the transactions ‡ Process of transferring the debit and credit items from the Journal to their respective accounts in the Ledger is called Posting.2.

Exhibit: Ledger A/c Name: A/c No: Dr Date Particulars JF Amount Date Particulars JF Cr Amount August 10. 2011 Accounting for Managers 32 .

3. Do Debits = Credits ? August 10. 2011 Accounting for Managers 33 . TRIAL BALANCE ‡ Statement which contains the balances of various ledger accounts. ‡ Check the arithmetical accuracy of the ledger accounts prepared. ‡ Serves as the basis for the preparation of Final Accounts of a business enterprise.

2011 Accounting for Managers 34 .Exhibit: Trial Balance Account Debit Credit August 10.

25. 5.000 ‡ 10 Goods purchased from Amrit Lal Rs.000 Paid into bank Rs.760 and discount allowed to him Rs. use Rs. 7. 200 Rent Rs. 40 ‡ 21 Withdrew from bank for private use Rs.000 ‡ 3 Purchase of furniture and payment by cheque Rs.000 ‡ 15 Goods returned by Arvind Walia Rs.500 35 .000 ‡ 2 Goods purchased for cash Rs.8.000 ‡ 5 Sold goods for cash Rs.000 Withdrew from bank for bus.000 ‡ 25 Paid telephone rent for one year Rs. 15. 200 ‡ 18 Cash received from Arvind Walia Rs.940 ‡ 30 Paid for Stationery Rs. 100 ‡ 28 Cash paid to Amrit Lal in full settlement of his account Rs.Q-3 ‡ Jan 2009 ‡ 1 Started business with cash Rs. 45. 4.000 August 10. 2011 Accounting for Managers Salaries to staff Rs. 1. 1.5.000 ‡ 12 Goods returned to Amrit Lal Rs. 5.500 ‡ 8 Sold goods to Arvind walia Rs. 2. 3. 1.

200 17 Paid telephone charges Rs. 4. Amount due from Suresh Rs. 100 16 Received cash from Rakesh Rs.500 20 Purchased govt. 4. 7.000. 1. Rs. Rs.000 22 Purchased goods worth Rs. Amount due from Ramesh Rs. for cash and supplied them to Ramesh & Co. 550. 2.000 Laibilities:: Amount due to Ram & Co. 5. securities Rs. 4. 250 18 Cash sales Rs.500 10 Deposited in bank Rs. Amount due to Shyam Sunder Rs. August 10. 10. 2. 1. 1. 5.000. less 20% trade discount and 5% cash discount from Malhotra & Co.000. Amount due to Ranjeet & Co. 16. 1.700 14 Paid for postage Rs. 2.000.500 1 Purchased goods from Ajay Kumar Rs. Cash at bank Rs. 2. 2011 Accounting for Managers 36 . at list price less 10% discount.000.Q-4 ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Jan 2007 1 Assets: Furniture Rs. Cash in hand Rs.450.000.500 3 Sold goods for cash Rs.800 13 Sold goods on credit to Mukesh Rs. 5. Stock Rs. 1. Machinery Rs.500 5 Paid to Himanshu by cheque Rs.500.

‡ 30 The horse bought on Jan 28 died. 100 ‡ 31 Allowed interest on capital @ 10% per annum for one year ‡ 31 Paid for salaries Rs.‡ 25 Cash purchases Rs. 1. a claim was made on the railway authorities fro the same. 2. 1. 500 were damaged in transit. 2011 Accounting for Managers 37 .500 ‡ 27 Goods worth Rs. ‡ 28 Suresh is declared insolvent and 50 paise in a rupee is received from him in full settlement ‡ 28 Bought a horse for Rs.600 and a carriage for Rs. and its carcase was sold fro Rs.500 and rent Rs. 16.200 for delivering goods to customers. 600 August 10.

2.000 11 Deposited cash into bank Rs. 3.890 ‡ 29 Paid rent by cheque Rs.Q-5 ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ March 2007 1 Vikas commenced business with a capital of Rs. 5.000 2 Bought machinery Rs. 30. 4. 6.500 3 Sold goods for cash to Giri Rs. 5. 2.000 18 Venkat settled his account by cheque and deposited with the bank Rs.000 14 Paid cash to Jai Simha Rs. 4.000 3 Bought goods for cash from Madan Lal Rs. 2.900 in full settlement of his account 16 Sold goods to Venkat Rs.000 4 Purchased goods from jai Simha Rs.000 10 Received interest from Mukund Rs.000 6 Cash sales Rs. 2011 Accounting for Managers 38 . 3. 500 August 10.

20. 800 for goods sold by him ‡ 15 Bough 100 shares in PQ & Co. 402 ‡ 20 Sold 40 shares of PQ & Co. at Rs. 4. 2011 Accounting for Managers 39 .000 ‡ 9 Purchased goods from Jain & Co. Ltd. 32.000 ‡ 8 Sold goods for Rs. 56. 80.000 ‡ 10 Received cash from travelling salesman Rs. 4. on credit for Rs.00.000 ‡ 7 Purchased goods Rs.000 & machinery Rs. at Rs.120 and paid brokerage Rs.Q-6 ‡ April 2007 ‡ 1 Started business by bringing in cash worth Rs.000 which were defective were returned to Jain & Co. 44. 80 August 10. and the balance amount due to them was settled by issuing a cheque in their favour ‡ 17 Paid for donations Rs.130 and paid brokerage Rs.000 out of which paid into bank Rs. 80 ‡ 16 Goods worth Rs.000 ‡ 6 Bought furniture for Rs. Ltd. 2.

600 ‡ 10 Bought one computer for Rs. 1.00.000 for cash ‡ 30 Withdrew from bank Rs. 2011 Accounting for Managers 40 .000 ‡ 6 Sold goods for cash Rs.000 respectively. rent. 50. 5. First installment paid by cheque.000 from Compaq company on credit. 2400. 8. salaries. 10. 2. for Rs. Lal & Co.000 ‡ 5 Bought goods for Rs.000 on credit ‡ 15 Paid telephone rent. 300 for private use ‡ 31 Bought one delivery van for Rs. 2. August 10. Payment to be made by monthly installment of Rs. 20. Rs. 18.000 Paid into bank Rs.000 from Delhi Motor Co. ‡ 13 Sold goods to M/s Ramya & Sons for Rs. 3. ‡ 26 Sold goods to M/s. for Rs.Q-7 ‡ July 2007 ‡ 2 Started business with Rs. 3.000 ‡ 3 Bought furniture for cash Rs. 1000. 1.00.000 each together with interest at 9%. advertisement.000 on credit ‡ 14 Bought goods M/s Mahindra & Co.000.

12.000 18 Purchased goods from Sohan for cash Rs.000 6 Sold goods for cash Rs.000 29 Withdrew cash from office for personal use Rs.000 16 Purchased goods from Sohan Rs. 15.000 10 Paid cash to kamlesh Rs. 750 27 Paid salary to Gopal Rs.000 5 Bough goods from Kamlesh Rs.000 8 Sold goods to Ram Rs.Q-8 ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ April 2007 1 Hari started business with cash Rs. 1. 2011 . 30.200 Accounting for Managers 41 August 10. 1. 6. 36.000 30 Wages paid Rs.000 20 Paid rent for the office Rs. 15. 7. 25. 8. 60.000 4 Purchased goods for cash Rs.000 2 Purchased furniture for cash Rs. 10. 4.000 14 Received cash from Ram 18.200 28 received cash from Ram Rs.000 26 Received commission Rs.

800 Purchased typewriter Rs. 400 9 Sold goods on credit to Mac & Co. 6. 200 Accounting for Managers 42 ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ August 10. 200 Purchased adding machine Rs. 975 31 Paid for electric charge Rs.000 3 Bought goods from Mohan on credit Rs. 50 20 Sold goods to Ray & Co.Q-9 ‡ ‡ ‡ ‡ ‡ August 2007 1 Sumit started business with cash Rs. 2.950 Discount allowed by them Rs. 600 6 paid for postage Rs.000 15 Paid to Mohan Rs. 560 26 Received cheque from Mac & Co in full settlement of amount due to them Rs. Rs.000 4 Purchased furniture Rs. 1. 10 Paid rent by cheque Rs.000 2 Paid into bank Rs. 10. 2011 . 1. 15 8 Sold goods for cash Rs. Rs.

Tax paid Rs. Rent received Rs. 990 & discount allowed Rs. 1. 2. Outstanding salaries Rs.000 Jan 22. Machinery sold Rs. 5.00.000 Accounting for Managers 43 August 10. 2.000 Jan 25.000 Jan 19. Depreciation on furniture Rs. 7. 50.200 Jan 23. 4.500 Jan 30.800 & discount received Rs. 3. Purchased goods for cash Rs. 10 Jan 26. Goods sold on credit to Suresh Rs. 10. Amount withdrawn by proprietor for his personal use Rs.000 Jan 6. Furniture purchased Rs. 1.000 Jan 31.000 Jan 28.000 Jan 3.2007 Akash commenced business with Rs.000 Jan 16. 2011 .Q-10 ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Jan1. 3. Salaries paid Rs. Goods sold for cash Rs. 200 Jan 27. 1.Purchased goods from Mohan on credit Rs. 1. 12. Amount paid to Suresh Rs. Amount received from Mohan Rs.000 Jan 12.000 Jan 10.

14 Paid cash for an advertisement that appeared in the local newspaper. Rs 2. 10 each in the company.400 17 Received Rs.000.200. 2011 Accounting for Managers 44 . Rs. Rs.Q-11 Ganesh left his job as carpenter and started Woodcraft Co. 240 29 Received partial payment from customers billed on July 23rd. Rs. Rs.200 for furnishing an office room 23 Billed customers for work done rather than on cash terms. Rs. 10.100 25 Paid wages to assistant. 700. 1. 4 Paid two months rent in advance for a shop.000 shares of Rs. 10 Received Rs.000 in a Bank in the name of the company in exchange for 1.500 August 10. 8. 7 Purchased supplies on credit. 1. 5 Purchased equipment for cash. Rs. Rs. 1. 11. 2.800 30 Declared and paid a dividend. Rs.600 for remodelling a kitchen. 4.500 28 Paid electricity charges. The transactions for July 2007 are as follows 1 Began business by depositing Rs. 13.

REQUIRED 1. Supplies (109). 3. Electricity expense (504) and Advertisement expense (506). 2011 Accounting for Managers 45 . Prepare Journal entries for the above transactions. Creditors (203). Debtors (110). Share capital (301). Prepare a trial balance August 10. Post the entries from the journal to the following ledger accounts: Equipment (105). Dividends (318). 2. Prepaid rent (116). Professional charges earned (402). Salaries expense (501). Cash (112).

Wrong posting of journal entries should be rectified by correcting entries. 2011 Accounting for Managers 46 . it must be corrected.Locating errors Error -? Debit  Credit Once an error is located. August 10.

August 10.  It is cleared when the balance in Suspense account gets cleared. 2011 Accounting for Managers 47 .Suspense Account  An account in which the difference in Trial Balance is recorded.  Opened after a Trial Balance is prepared.

Case Incident .

2011 .Module 1 Generally Accepted Accounting Principles and Accounting Standards       What is GAAP? Importance of GAAP Why does accounting practice differ? Accounting policies Need for accounting standards Standard-setting mechanism in India Accounting for Managers 49 August 10.

2011 50 .Module 1 Institutional Environment  Institute of Chartered Accountants of India  Department of Company Affairs  National Advisory Committee on Accounting Standards      Securities and Exchange Board of India Central Board of Direct Taxes Reserve Bank of India Comptroller and Auditor General of India International Organisations  International Accounting Standards Board  International Organization of Securities Commission Accounting for Managers August 10.

often strangers  Large business  Limited liability  Legal formalities for a limited company  The corporate organisation structure August 10.Module 1 Forms of Business Organisation  Sole proprietorship  Single individual  Partnership  A few individuals  Limited company  Numerous individuals. 2011 Accounting for Managers 51 .

Capital Markets.Module 1 Accounting. 2011 Accounting for Managers 52 . and Corporate Governance  The capital market: savers and entrepreneurs  The ³lemons principle´ and market breakdown  Signalling and capital market  Corporate governance  Accounting disciplines managerial actions August 10.

2011 Accounting for Managers 53 .Module 1 The Accounting Equation Economic Resources = Claims Assets = Liabilities + Owners¶ Equity August 10.

2011 .Module 1 Assets  Probable future economic benefits  What a business ³owns´  Examples      Cash Investments Buildings Plant and machinery Patents and copyrights Accounting for Managers 54 August 10.

statutory.Module 1 Liabilities  Probable future sacrifices of economic benefits  What a business ³owes´  Contractual. or constructive  Examples     Loans payable Warranty obligations Pensions payable Income tax payable Accounting for Managers 55 August 10. 2011 .

Module 1 Equity  Residual interest of owners  Examples       Share capital Share premium Revenues Expenses Dividends Retained profit August 10. 2011 Accounting for Managers 56 .

Module 1 Financial Statements  Profit and loss account  Statement of financial performance  Balance sheet  Statement of financial position  Statement of cash flows  Statement of cash receipts and cash payments August 10. 2011 Accounting for Managers 57 .

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