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UNIT-1 (AFM).ppt

  1. 1. UNIT I 1
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 16. STOCK Stock (Inventory) is a measure of something on hand – goods, spares and other items – in a business. 16
  17. 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. 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. 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. 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. 21. ACCOUNTING PRINCIPLES Accounting principles can be subdivided into two categories:  Accounting Concepts; and  Accounting Conventions. 21
  22. 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. 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. 24. ACCOUNTING PRINCIPLES Accounting Conventions • Convention of Consistency • Convention of Disclosure • Convention of Conservation 24
  25. 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. 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. 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. 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. 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. 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. 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. 32. Dual Aspect Concept continue… Thus, the dual aspect can be expressed as under Capital + Liabilities = Assets or Capital = Assets – Liabilities 32
  33. 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. 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. 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. 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. 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. 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. 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. 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. 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. 42. CLASSIFICATION OF ACCOUNTS ACCOUNTS PERSONAL ACCOUNTS IMPERSONAL ACCOUNTS REAL ACCOUNTS NOMINAL ACCOUNTS 42
  43. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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

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