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Accounting for Managers

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

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Accounting for Managers

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Accounting for Managers

Module 1 Introduction to Financial Accounting

Understanding Business Organisations


 What do business organisations do?

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Types of business organisations


Merchandising or trading Manufacturing Service Business organisations are cash machines

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The Accounting Information System


Inputs
Business transactions and events

Processing Outputs
Accounting principles & procedures Financial statements and reports

Users
Investors, lenders, managers etc.

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Module 1

What is Accounting
 Accounting is the language of business  Accounting provides information for making decisions  Accounting is an information system

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DEFINITION OF ACCOUNTING
Art of recording, classifying and summarising in a significant manner in terms of money transactions and events which in part, at least of financial character and interpreting the results thereof. American Institute of Certified Public Accountants
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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
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Major Branches of Accounting


Financial Accounting For external users Historical information Standardised format Laws and conventions Summarised Income statement; Balance sheet; Cash flow statement; Accounting policies
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Management Accounting For internal users Future-oriented Flexible format Context-specific More detailed Product cost statement; Standard costs; Budgets; Variances; Performance reports

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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

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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
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Debit & Credit


Aspects of a business transaction  DEBIT  CREDIT For every debit there is an equal amount of credit
Double entry system
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E Q U I T Y E Q U I T Y

Debit

Credit

Module 1

Classification of Accounts
 Asset accounts
 Examples: Land; Buildings; Equipment; Cash

 Liability accounts
 Examples: Creditors; Unearned Revenues; Wages Payable

 Owners equity accounts


 Examples: Share Capital; Retained Earnings; Sales; Salaries Expense; Dividends

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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
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CLASSIFICATION OF ACCCOUNTS

ACCOUNTS PERSONAL REAL NOMINAL

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PERSONAL ACCOUNT

Deals with the transactions relating to persons # Natural person # Artificial person # Representatives Debit the Receiver Credit the Giver

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REAL ACCOUNT

Deals with properties and assets

Debit what comes in Credit what goes out

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NOMINAL ACCOUNT

Deals with the transactions relating to expenses, losses, incomes & gains

Debit all expenses & losses Credit all incomes & gains
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Q- 1 State under what heading (Personal, 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) Proprietors A/c f) Bad debts A/c g) Furniture A/c h) Goodwill A/c i) Patents A/c j) Bank A/c
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Q- 2 State whether each of the following account is an asset a/c, a liability a/c, or an owners 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
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Accounting cycle
4. FINAL ACCOUNTS 1. JOURNAL

3. TRIAL BALANCE

2. LEDGER

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1. JOURNAL (Book of original entry)

Book containing a chronological record of


business transactions is called a Journal. 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 .

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Year, Month and the day of the transaction

Exhibit: Journal
Post Ref. Debit
Amount
Amount

Date

Description
Account to be Debited Account to be Credited

Credit

Narration

Left blank till entries are tfd. to Ledger A/cs

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2. LEDGER

Book which contains all accounts of the business enterprise whether personal, real or nominal. 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.

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Exhibit: Ledger
A/c Name: A/c No:

Dr Date Particulars JF Amount Date Particulars JF

Cr Amount

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3. 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.

Do Debits = Credits ?
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Exhibit: Trial Balance


Account Debit Credit

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Q-3
Jan 2009 1 Started business with cash Rs. 45,000 Paid into bank Rs. 25,000 2 Goods purchased for cash Rs. 15,000 3 Purchase of furniture and payment by cheque Rs. 5,000 5 Sold goods for cash Rs.8,500 8 Sold goods to Arvind walia Rs. 4,000 10 Goods purchased from Amrit Lal Rs. 7,000 12 Goods returned to Amrit Lal Rs. 1,000 15 Goods returned by Arvind Walia Rs. 200 18 Cash received from Arvind Walia Rs. 3,760 and discount allowed to him Rs. 40 21 Withdrew from bank for private use Rs. 1,000 Withdrew from bank for bus. use Rs.5,000 25 Paid telephone rent for one year Rs. 100 28 Cash paid to Amrit Lal in full settlement of his account Rs. 5,940 30 Paid for Stationery Rs. 200 Rent Rs. 1,000 August 10, 2011 Accounting for Managers Salaries to staff Rs. 2,500

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Q-4
Jan 2007 1 Assets: Furniture Rs. 5,000; Machinery Rs. 10,000; Stock Rs. 4,000; Cash in hand Rs. 550; Cash at bank Rs. 7,450; Amount due from Ramesh Rs. 1,000; Amount due from Suresh Rs. 2,000 Laibilities:: Amount due to Ram & Co. Rs. 4,500; Amount due to Ranjeet & Co. Rs. 2,000; Amount due to Shyam Sunder Rs. 1,500 1 Purchased goods from Ajay Kumar Rs. 4,500 3 Sold goods for cash Rs. 1,500 5 Paid to Himanshu by cheque Rs. 5,500 10 Deposited in bank Rs. 2,800 13 Sold goods on credit to Mukesh Rs. 1,700 14 Paid for postage Rs. 100 16 Received cash from Rakesh Rs. 2,200 17 Paid telephone charges Rs. 250 18 Cash sales Rs. 1,500 20 Purchased govt. securities Rs. 5,000 22 Purchased goods worth Rs. 16,000, less 20% trade discount and 5% cash discount from Malhotra & Co. for cash and supplied them to Ramesh & Co. at list price less 10% discount.

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25 Cash purchases Rs. 16,500 27 Goods worth Rs. 500 were damaged in transit; a claim was made on the railway authorities fro the same. 28 Suresh is declared insolvent and 50 paise in a rupee is received from him in full settlement 28 Bought a horse for Rs. 2,600 and a carriage for Rs. 1,200 for delivering goods to customers. 30 The horse bought on Jan 28 died, and its carcase was sold fro Rs. 100 31 Allowed interest on capital @ 10% per annum for one year 31 Paid for salaries Rs. 1,500 and rent Rs. 600
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Q-5
March 2007 1 Vikas commenced business with a capital of Rs. 30,000 2 Bought machinery Rs. 5,000 3 Bought goods for cash from Madan Lal Rs. 2,500 3 Sold goods for cash to Giri Rs. 4,000 4 Purchased goods from jai Simha Rs. 3,000 6 Cash sales Rs. 5,000 10 Received interest from Mukund Rs. 2,000 11 Deposited cash into bank Rs. 6,000 14 Paid cash to Jai Simha Rs. 2,900 in full settlement of his account 16 Sold goods to Venkat Rs. 4,000 18 Venkat settled his account by cheque and deposited with the bank Rs. 3,890 29 Paid rent by cheque Rs. 500

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Q-6
April 2007 1 Started business by bringing in cash worth Rs. 2,00,000 out of which paid into bank Rs. 80,000 6 Bought furniture for Rs. 20,000 & machinery Rs. 4,000 7 Purchased goods Rs. 56,000 8 Sold goods for Rs. 32,000 9 Purchased goods from Jain & Co. on credit for Rs. 44,000 10 Received cash from travelling salesman Rs. 800 for goods sold by him 15 Bough 100 shares in PQ & Co. Ltd. at Rs.120 and paid brokerage Rs. 80 16 Goods worth Rs. 4,000 which were defective were returned to Jain & Co. and the balance amount due to them was settled by issuing a cheque in their favour 17 Paid for donations Rs. 402 20 Sold 40 shares of PQ & Co. Ltd. at Rs.130 and paid brokerage Rs. 80

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Q-7
July 2007 2 Started business with Rs. 1,00,000 Paid into bank Rs. 50,000 3 Bought furniture for cash Rs. 5,000 5 Bought goods for Rs. 3,000 6 Sold goods for cash Rs. 600 10 Bought one computer for Rs. 18,000 from Compaq company on credit. 13 Sold goods to M/s Ramya & Sons for Rs. 10,000 on credit 14 Bought goods M/s Mahindra & Co. for Rs. 2,000 on credit 15 Paid telephone rent, advertisement, salaries, rent, Rs. 2400, 1000, 2,000, 1,000 respectively. 26 Sold goods to M/s. Lal & Co. for Rs. 8,000 for cash 30 Withdrew from bank Rs. 300 for private use 31 Bought one delivery van for Rs. 3,00,000 from Delhi Motor Co. Payment to be made by monthly installment of Rs. 20,000 each together with interest at 9%. First installment paid by cheque.

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Q-8
April 2007 1 Hari started business with cash Rs. 60,000 2 Purchased furniture for cash Rs. 10,000 4 Purchased goods for cash Rs. 25,000 5 Bough goods from Kamlesh Rs. 15,000 6 Sold goods for cash Rs. 36,000 8 Sold goods to Ram Rs. 30,000 10 Paid cash to kamlesh Rs. 15,000 14 Received cash from Ram 18,000 16 Purchased goods from Sohan Rs. 6,000 18 Purchased goods from Sohan for cash Rs. 8,000 20 Paid rent for the office Rs. 1,000 26 Received commission Rs. 750 27 Paid salary to Gopal Rs. 1,200 28 received cash from Ram Rs. 12,000 29 Withdrew cash from office for personal use Rs. 4,000 30 Wages paid Rs. 7,200
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Q-9
August 2007 1 Sumit started business with cash Rs. 10,000 2 Paid into bank Rs. 6,000 3 Bought goods from Mohan on credit Rs. 2,000 4 Purchased furniture Rs. 200 Purchased adding machine Rs. 800 Purchased typewriter Rs. 600 6 paid for postage Rs. 15 8 Sold goods for cash Rs. 400 9 Sold goods on credit to Mac & Co. Rs. 1,000 15 Paid to Mohan Rs. 1,950 Discount allowed by them Rs. 50 20 Sold goods to Ray & Co. Rs. 560 26 Received cheque from Mac & Co in full settlement of amount due to them Rs. 975 31 Paid for electric charge Rs. 10 Paid rent by cheque Rs. 200
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Q-10
Jan1,2007 Akash commenced business with Rs. 1,00,000 Jan 3, Purchased goods for cash Rs. 50,000 Jan 6,Purchased goods from Mohan on credit Rs. 1,000 Jan 10, Goods sold for cash Rs. 7,000 Jan 12, Goods sold on credit to Suresh Rs. 5,000 Jan 16, Furniture purchased Rs. 10,000 Jan 19, Machinery sold Rs. 12,000 Jan 22, Salaries paid Rs. 3,200 Jan 23, Rent received Rs. 2,000 Jan 25, Amount received from Mohan Rs. 990 & discount allowed Rs. 10 Jan 26, Amount paid to Suresh Rs. 4,800 & discount received Rs. 200 Jan 27, Depreciation on furniture Rs. 2,000 Jan 28, Outstanding salaries Rs. 1,500 Jan 30, Amount withdrawn by proprietor for his personal use Rs. 3,000 Jan 31,Tax paid Rs. 1,000
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Q-11 Ganesh left his job as carpenter and started Woodcraft Co. The transactions for July 2007 are as follows
1 Began business by depositing Rs. 10,000 in a Bank in the name of the company in exchange for 1,000 shares of Rs. 10 each in the company. 4 Paid two months rent in advance for a shop, Rs. 2,000. 5 Purchased equipment for cash, Rs. 1,200. 7 Purchased supplies on credit, Rs. 700. 10 Received Rs. 8,600 for remodelling a kitchen. 14 Paid cash for an advertisement that appeared in the local newspaper, Rs. 1,400 17 Received Rs. 11,200 for furnishing an office room 23 Billed customers for work done rather than on cash terms, Rs. 13,100 25 Paid wages to assistant, Rs. 1,500 28 Paid electricity charges, Rs. 240 29 Received partial payment from customers billed on July 23rd, Rs. 4,800 30 Declared and paid a dividend, Rs 2,500

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

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Locating errors
Error -?

Debit Credit

Once an error is located, it must be corrected. Wrong posting of journal entries should be rectified by correcting entries.

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Suspense Account
 An account in which the difference in Trial Balance is recorded.  Opened after a Trial Balance is prepared.  It is cleared when the balance in Suspense account gets cleared.

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Case Incident

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
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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
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Module 1

Forms of Business Organisation


 Sole proprietorship
 Single individual

 Partnership
 A few individuals

 Limited company
 Numerous individuals, often strangers  Large business  Limited liability

 Legal formalities for a limited company  The corporate organisation structure


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Module 1

Accounting, Capital Markets, and Corporate Governance


 The capital market: savers and entrepreneurs  The lemons principle and market breakdown  Signalling and capital market  Corporate governance
 Accounting disciplines managerial actions
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Module 1

The Accounting Equation

Economic Resources = Claims

Assets = Liabilities + Owners Equity


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Assets
 Probable future economic benefits  What a business owns  Examples
     Cash Investments Buildings Plant and machinery Patents and copyrights
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Liabilities
 Probable future sacrifices of economic benefits  What a business owes  Contractual, statutory, or constructive  Examples
    Loans payable Warranty obligations Pensions payable Income tax payable
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Equity
 Residual interest of owners  Examples
      Share capital Share premium Revenues Expenses Dividends Retained profit

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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

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