ADAD

1. UNIT I
1

2. 12B101 ACCOUNTING FOR MANAGERS
UNIT I BASIS OF ACCOUNTING, ACCOUNTING CONCEPTS AND
CONVENTIONS, PREPARATION OF FINAL ACCOUNTS
Assets, Liabilities – Income, Expenditure – Types and Rules of Accounts –
Classification of Accounts – Accounting Concepts – Types – Importance of Each
Concept – Basic Accounting Conventions – Important Accounting Standards, Trading
and Profit and Loss Account – Balance Sheet – Adjustment Entries – Final Accounts
(Problems)
2

3. Accounting - Definition
Accounting can be defined as the process of
identifying, measuring, recording and
communicating the economic events of an
organization to the interested users of the
information.
3

4. Users of Accounting Information
Different categories of users need different
kinds of information for making decisions.
These users can be divided into :
•Internal Users; and
•External Users.
4

5. ASSETS
These are economic resources of an
enterprise that can be usefully expressed in
monetary terms. Assets are things of value
used by the business in its operations.
 Fixed Assets
 Current Assets
5

6. ASSETS continue…
 Fixed Assets are assets held on a long-
term basis.
e.g. Land, Building, Machinery, Plant,
Furniture and Fixtures, etc.
6

7. ASSETS continue…
 Current Assets are assets held on a
short-term basis.
e.g. Debtors, Bills receivable,
Stock(Inventory), Cash and Bank
balances, etc.
7

8. LIABILITIES
These are obligations or debts that the
enterprise must pay in money or services at
some time in the future.
• Long-term liabilities
• Short-term liabilities
8

9. LIABILITIES continue..
 Long-term liabilities are those that are
usually payable after a period of one year.
e.g. A term loan from a financial institution,
debentures (bonds) issued by a company.
9

10. LIABILITIES continue..
 Short-term liabilities are obligations that
are payable within a period of one year.
e.g. Creditors, bills payable, overdraft from
a bank for a short period.
10

11. CAPITAL
Investment by the owner for use in the firm
is known as capital. Owner’s equity is the
ownership claim on total assets. It is equal
to total assets minus total liabilities.
11

12. REVENUES
These are the amounts the business earns
by selling its products or providing services
to customers. Other titles and sources of
revenue common to many businesses are:
sales, fees, commission, interest, dividends,
royalties, rent received, etc.
12

13. EXPENSES
These are costs incurred by a business in
the process of earning revenue. Generally,
expenses are measured by the cost of
assets consumed or services used during an
accounting period. The usual titles of
expenses are: depreciation, rent, wages,
salaries, interest, costs of heat, light and
water, telephone, etc.
13

14. PURCHASES
Purchases are total amount of goods
procured by a business on credit and for
cash, for use or sale. In a trading concern,
purchases are made of merchandise for
resale with or without processing.
In a manufacturing concern, raw materials
are purchased, processed further into
finished goods and then sold. Purchases
may be cash purchase or credit purchase.
14

15. SALES
Sales are total revenues from goods or
services sold or provided to customers.
Sales may be cash sales or credit sales.
15

16. STOCK
Stock (Inventory) is a measure of
something on hand – goods, spares and
other items – in a business.
16

17. STOCK: continue…
In a trading concern, the stock on hand is
the amount of goods which have not been
sold on the date on which the balance sheet
is prepared. This is also called closing
stock.
17

18. STOCK continue…
In a manufacturing concern, closing stock
comprises raw materials, semi-finished
goods and finished goods on hand on the
closing date.
Similarly, opening stock is the amount of
stock at the beginning of the accounting
year. 18

19. DEBTORS
Debtors are persons and/or other entities who
owe to an enterprise an amount for receiving
goods and services on credit.
The total amount standing against such persons
and/or entities on the closing date, is shown in the
Balance Sheet as Sundry Debtors on the asset
side.
19

20. CREDITORS
Creditors are persons and/or other entities who
have to be paid by an enterprise an amount for
providing the enterprise goods and services on
credit.
The total amount standing to the favour of such
persons and/or entities on the closing date, is
shown in the Balance Sheet as Sundry Creditors
on the liability side.
20

21. ACCOUNTING PRINCIPLES
Accounting principles can be subdivided into
two categories:
 Accounting Concepts; and
 Accounting Conventions.
21

22. ACCOUNTING PRINCIPLES
 Accounting Concepts
 Accounting Conventions
The term ‘concept’ is used to connote
accounting postulates, that is necessary
assumptions and conditions upon which
accounting is based. The term ‘convention’
is used to signify customs and traditions as
a guide to the presentation of accounting
statements. 22

23. ACCOUNTING PRINCIPLES
Accounting Concepts
• Business Entity Concept
• Money Measurement Concept
• Cost Concept
• Going Concern Concept
• Dual Aspect Concept
• Realization Concept
• Accounting Period Concept 23

24. ACCOUNTING PRINCIPLES
Accounting Conventions
• Convention of Consistency
• Convention of Disclosure
• Convention of Conservation
24

25. ACCOUNTING PRINCIPLES
Accounting Concepts
The term ‘concept’ is used to connote
accounting postulates, that is necessary
assumptions and conditions upon which
accounting is based.
25

26. Business Entity Concept
Business is treated as a separate entity or
unit apart from its owner and others. All the
transactions of the business are recorded in
the books of business from the point of view
of the business as an entity and even the
owner is treated as a creditor to the extent
of his/her capital.
26

27. Money Measurement Concept
In accounting, we record only those
transactions which are expressed in terms
of money. In other words, a fact which can
not be expressed in monetary terms, is not
recorded in the books of accounts.
27

28. Cost Concept
Transactions are entered in the books of
accounts at the amount actually involved.
Suppose a company purchases a car for
Rs.1,50,000/- the real value of which is
Rs.2,00,000/-, the purchase will be recorded
as Rs.1,50,000/- and not any more. This is
one of the most important concept and it
prevents arbitrary values being put on
transactions. 28

29. Going Concern Concept
It is persuaded that the business will exists
for a long time and transactions are
recorded from this point of view.
29

30. Dual Aspect Concept
Each transaction has two aspects, that is,
the receiving benefit by one party and the
giving benefit by the other. This principle is
the core of accountancy.
30

31. Dual Aspect Concept continue…
For example, the proprietor of a business
starts his business with Cash Rs.1,00,000/-,
Machinery of Rs.50,000/- and Building of
Rs.30,000/-, then this fact is recorded at
two places. That is Assets account (Cash,
Machinery & Building) and Capital accounts.
The capital of the business is equal to the
assets of the business.
31

32. Dual Aspect Concept continue…
Thus, the dual aspect can be expressed as
under
Capital + Liabilities = Assets
or
Capital = Assets – Liabilities
32

33. Realization Concept
Accounting is a historical record of
transactions. It records what has happened.
It does not anticipate events. This is of
great important in preventing business firms
from inflating their profits by recording sales
and income that are likely to accrue. 33

34. Accounting Period Concept
Strictly speaking, the net income can be
measured by comparing the assets of the
business existing at the time of its
liquidation. But as the life of the business is
assumed to be infinite, the measurement of
income according to the above concept is
not possible. So a twelve month period is
normally adopted for this purpose. This time
interval is called accounting period. 34

35. ACCOUNTING PRINCIPLES
Accounting Conventions
The term ‘convention’ is used to signify
customs and traditions as a guide to the
presentation of accounting statements.
35

36. Convention of Consistency
In order to enable the management to draw
important conclusions regarding the working
of the company over a few years, it is
essential that accounting practices and
methods remain unchanged from one
accounting period to another. The
comparison of one accounting period with
that of another is possible only when the
convention of consistency is followed. 36

37. Convention of Disclosure
This principle implies that accounts must be
honestly prepared and all material
information must be disclosed therein. The
contents of Balance Sheet and Profit and
Loss Account are prescribed by law. These
are designed to make disclosure of all
material facts compulsory.
37

38. Convention of Conservation
Financial statements are always drawn up
on rather a conservative basis. That is,
showing a position better than what it is,
not permitted. It is also not proper to show
a position worse than what it is. In other
words, secret reserves are not permitted.
38

39. THE ACCOUNTING CYCLE
Recording transactions in subsidiary books.
Classifying data by posting from subsidiary
books to the accounts.
Closing the books and preparation of final
accounts.
39

40. CLASSIFICATION OF ACCOUNTS
Every business deal with other “Person”, possesses
“Assets”, pay “Expenses” and receive “Income”.
So from the above, we can see every business
has to keep
• An account for each person
• An account for each asset and
• An account for each expense or income.
40

41. CLASSIFICATION OF ACCOUNTS
• Accounts in the names of persons are known as
“Personal Accounts”
• Accounts in the names of assets are known as
“Real Accounts”
• Accounts in respect of expenses and incomes
are known as “Nominal Accounts”
41

42. CLASSIFICATION OF ACCOUNTS
ACCOUNTS
PERSONAL
ACCOUNTS
IMPERSONAL
ACCOUNTS
REAL
ACCOUNTS
NOMINAL
ACCOUNTS
42

43. PERSONAL ACCOUNTS
Accounts in the name of persons are known as
personal accounts.
Eg: Babu A/C,
Babu & Co. A/C,
Outstanding Salaries A/C, etc.
43

44. REAL ACCOUNTS
These are accounts of assets or properties. Assets
may be tangible or intangible. Real accounts are
impersonal which are tangible or intangible in
nature.
Eg:- Cash a/c, Building a/c, etc are Real
Accounts related to things which we can
feel, see and touch.
Goodwill a/c, Patent a/c, etc Real Accounts
which are of intangible in nature. 44

45. NOMINAL ACCOUNTS
These accounts are impersonal, but invisible and
intangible. Nominal accounts are related to those
things which we can feel, but can not see and
touch. All “expenses and losses” and all “incomes
and gains” fall in this category.
E.g.:- Salaries A/C, Rent A/C, Wages A/C,
Interest Received A/C, Commission Received
A/C, Discount A/C, etc.
45

46. DEBIT AND CREDIT
Each accounts have two sides – the left side and
the right side. In accounting, the left side of an
account is called the “Debit Side” and the right
side of an account is called the “Credit Side”. The
entries made on the left side of an account is
called a “Debit Entry” and the entries made on the
right side of an account is called a “Credit Entry”.
46

47. RULES FOR DEBIT AND CREDIT
Personal Account
Debit the Receiver
Credit the Giver
Real Accounts
Debit what comes in
Credit what goes out
Nominal Accounts
Debit all Expenses and
Losses
Credit all Incomes and
Gains 47

48. ACCOUNTING STANDARDS
• AS 1. Disclosure of Accounting Policies
• AS 2. Valuation of Inventories
• AS 3. Cash Flow Statements
• 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
48

49. ACCOUNTING STANDARDS
Contd…
• AS 6. Depreciation Accounting
• AS 7. Construction Contracts
• AS 8. Accounting for Research and
• Development
• AS 9. Revenue Recognition
• AS 10. Accounting for Fixed Assets
49

50. ACCOUNTING STANDARDS
Contd…
• AS 11. Accounting for the Effects of
Changes in Foreign Exchange Rates
• AS 12. Accounting for Government
Grants
• AS 13. Accounting for Investments
• AS 14. Accounting for Amalgamation
• AS 15. Accounting for Retirement
Benefits in the financial Statements of
Employers
50

51. ACCOUNTING STANDARDS
Contd…
• AS 16. Borrowing Costs
• AS 17. Segment Reporting
• AS 18. Related Party Disclosure
• AS 19. Leases
• AS 20. Earning Per Share
51

52. THE FINAL ACCOUNTS TRADING ACCOUNT
A TRADER
TRADING ACCOUNT FOR YEAR ENDED 31 DECEMBER
£ £
Sales 5,400
Less Sales Returns 120
5,280
Less Cost of Goods Sold:
Purchases 2,800
Less Purchases Returns 50
Cost of Goods Sold 2,750
GROSS PROFIT 2,530
(This assumes all the goods purchased were sold)
52

53. THE FINAL ACCOUNTS TRADING ACCOUNT
It is normal for businesses to have goods in stock at
the beginning of the year and have stock left unsold
at the end of the year
Goods in stock at the beginning of the year is called:
• Opening Stock
Stock unsold at the end of the year is called:
These need to be included in the Trading Account so
Gross Profit is calculated on goods actually sold.
• Closing Stock
53

54. THE FINAL ACCOUNTS
A TRADER
TRADING ACCOUNT FOR YEAR ENDED 31 DECEMBER
£ £ £
Sales 5,400
Less Sales Returns 120
5,280
Less Cost of Goods Sold:
Opening Stock 500
Add Purchases 2,800
Less Purchases Returns 50 2,750
3,250
Less Closing Stock 250
Cost of Goods Sold 3,000
GROSS PROFIT 2,280
TRADING ACCOUNT
54

55. 2C – THE FINAL ACCOUNTS PROFIT AND LOSS ACCOUNT
The sole trader must pay all expenses out of Gross Profit
Gross Profit less Expenses = Net Profit
This is done by listing the expense account balances from the
Trial Balance in the Profit and Loss Account which is tacked
on to the end of the Trading Account after Gross Profit
£ £
GROSS PROFIT 2,280
Less Expenses:
Rent 200
Wages 800
Insurance 80
Heating and Lighting 250 1,330
NET PROFIT 950 55

56. THE FINAL ACCOUNTS BALANCE SHEET
The remaining items in the Balance Sheet, and any other
appropriate figures are then entered into the Balance
Sheet.
together with the Balance Sheet
make up the firm’s FINALACCOUNTS
The Trading and Profit and Loss Account
56

57. THE FINAL ACCOUNTS
Trading Account – where the Gross Profit is calculated
Turnover – Sales less Sales Returns (also called Net Sales)
Cost of Goods Sold – how much the goods sold, cost the
sole trader to buy in
Gross Profit – profit from trading before expenses are paid
Stock – goods not yet sold
Net Profit – profit from trading after expenses are paid
Final Accounts – Trading and Profit and Loss Account and
Balance Sheet 57