Accounting for Managers - Brief Overview

Accounting for Managers

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Priya SinhaAditi Kashyap

Himanshu ChitlangiaGunjan GandhiNipun Jain

presented by:

Topics:

1. Introduction to Accounting

2. Basic Accounting Terminologies

3. Generally Accepted Principles (G.A.A.P.)

4. Approaches to Accounting

5. Primary Book – Journal

6. Secondary Book – Ledger

7. Trial Balance

8. Sample Question and Common Doubts

Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015

What is Accounting?Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part of at least of a financial character and interpreting results thereof.


In simple words, accounting is the systematic recorded presentation of the financial transactions of the business or enterprise.

Objectives of Accounting

•Calculation of Profits or Loss

•Maintaining proper record of transactions.

•Depiction of financial position.

•Providing effective control over business.

•Helpful to Management

•Making information available to various groups


Advantages of Accounting

•Replacing Memory.

•Documentary Evidence.

•Assessing financial status of the business.

•Assessing performance of the business.

•Detection and prevention of frauds.

•Helpful in Decision Making.

•Assisting in realization of debts.


Book Keeping

•Book-keeping is the initial step of accounting;

•Proper and systematic keeping of books of accounts;

•Starts from Identification of Business transactions.

•It is different from Accounting!


Differences between Accounting and Book-Keeping


Basis Book Keeping Accounting

ObjectivePrepare original

books of accounts.

Record, analyze and interpret the

business transactions.

Scope Limited Wider

Level of Work

Restricted to Low Level

All levels of management

ResultDoesn’t show the

net results of business.

Shows net result of business.

Process of Accounting

1. Identification of Economic Events

2. Classification of Business Transactions

3. Measurements in terms of Rupees

4. Recording the Business Transactions

5. Summarizing the Business Transactions

6. Analyzing and Interpreting the Business

Transactions

7. Communication and Reporting


Accounting is both – Science and Art.

Science

•Definite Principles and Assumptions•Universal Application•Systematic Method•Rules and Equation


Art

•Practical Application•Depending on day-to-day affairs

Basic TerminologiesAssets


The valuable things owned by the business are known as Assets.They are the economic resources of an enterprise which can be expressed in monetary terms.

e.g. Land, Building, Furniture, Cash, Stock, etc.

Basic Terminologies

Liability


It refers to the amount which the firm owes to the outsiders.

e.g. Creditors, Bills Payables, Loans, Debentures, etc.

Basic Terminologies

Capital


•It refers to the amount invested by the proprietor in the business enterprise.

•It is the amount with the help of which the goods and assets are purchased in the business.

Revenue Income

Income from normal business process or by selling finished goods.


Revenue Expenditure

Any expenditure, the full benefit of which is received during one accounting period.

Basic Terminologies

Revenue Nature

Basic Terminologies

Sundry Debtors


These represent the persons or parties who have purchased goods on credit from us and not paid for the goods sold to them, they still owe to the business.e.g. We sold goods to Mr. Bin Laden worth Rs. 20,000. He will continue to remain the debtor of the business so far he does not make the full payment.

Basic Terminologies

Sundry Creditors


These represent the persons or parties who have sold goods and materials to the business on credit. They are the liabilities of the business.

e.g. Purchased raw materials from Mr. Obama worth Rs. 5100 on credit, and he will remain the creditors until the full payment is made.

Basic Terminologies

Drawings


The amount or goods withdrawn by the proprietor for his private or personal use is known as drawings.

e.g. goods taken by the proprietor for domestic use; using business premises for residential purpose, etc.

G.A.A.P.(Generally Accepted Accounting Principles)


It is generally accepted by accountants all over the world as general guidelines for preparing the accounting statements.

GAAPs and accounting standards are considered as the theory base of accounting.

Generally Accepted Accounting PrinciplesAccounting or Business Entity


•Business is treated as a unit separate and distinct from its owner(s);•Accountant works for the business and not for the businessman;•Keeps business affairs free from the influence of the personal affairs of the ownere.g. expense on owner’s car and a company vehicle, both are treated differently.

Generally Accepted Accounting PrinciplesMoney Measurement Concept


•Only those transactions and events are recorded in accounting which are capable in being expressed in terms of money•Qualitative transactions such as improvement in behavior etc. are skipped from accounting point of view.

e.g. Accounting doesnot record a fight between the Production Manager and Sales Manager, but the damages caused due to the fight will be recorded as loss to the business.

Generally Accepted Accounting PrinciplesGoing Concern


•Business activities will continue for a fairly long period of time unless and until the business has entered into a process of winding up or liquidation;•Because of this concept, outside parties enter into long term contracts, give loans and purchase the shares and debentures of the enterprise.e.g. Prepaid expenses are shown as Asset in the Balance Sheet because the benefit of this will be received in future.

Generally Accepted Accounting PrinciplesAccounting Period


•As a business is intended to continue indefinitely for a long period, the true results of the business operations can be ascertained only when the business is completely wound up, but this will be of little use to the proprietors, managers, investors.•Entire life of the firm is divided into time intervals for the measurement of the profits of the business.For tax purposes, usually companies keep the Accounting Year and Financial Year same i.e. April 1 of current year to March 31 of next year.

Generally Accepted Accounting PrinciplesHistorical Cost orCost Principle Concept


•An Asset is ordinarily recorded in the books of accounts at the price at which it is acquired since the acquisition cost is related to the past, is referred to as Historical Cost.•In the current year, they are shown at Book Value i.e. Cost less Depreciation

Generally Accepted Accounting PrinciplesExpenses Recognition


•Expenses refers to the portion of the cost outlay which is consumed in the process of obtaining revenue in an accounting period.•Expenses give benefit over the current accounting period i.e. revenue expenditure. E.g. purchase of raw materials.•Expenditure gives benefits over many accounting periods to come i.e. capital expenditure. E.g. purchase of machinery.

Generally Accepted Accounting PrinciplesRevenue Recognition


•Revenue is considered as earned at the time when the title or the ownership of the goods has been transferred to the purchaser and when he has legally become liable to pay the amount.

e.g. If a firm gets an order of goods on January 1, supplies it on January 20 and receives the Cash on April 1, the revenue will be deemed to have been earned on January 20 as the ownership of goods was transferred on that day.

Generally Accepted Accounting PrinciplesMatching Concept


•expenses for an accounting period should be matched against related incomes•Essential part of accrual accounting•The result of this matching is the net income or net loss.e.g. Revenues of year 2014-2015 will be matched with the expenses of 2014-2015 only.

Generally Accepted Accounting PrinciplesFull, Fair and Adequate Disclosure


•It implies that accounts must be honestly prepared and all material information must be disclosed therein•It only implies that there is to be a sufficient disclosure of information, which is of material interest to proprietors, present and potential creditors and investors.

Generally Accepted Accounting PrinciplesDual Aspect


•Every transaction has a two fold effect and it is referred to as Dual Aspect concept.•One represented by the asset of the business and the other by the claims against them. These two aspects are always equal to each other.In other words, Assets = Liability + Capital. This concept forms the basis for the whole of financial accounting!

Generally Accepted Accounting PrinciplesVerifiable Objectivity


•Accounting records must be supported by documentary evidence or proof.• Recording transactions are unbiased and not affected by their personal judgment.

e.g. of source documents are Sales Bills, Purchase Bills, Pay-in Slips, etc.

Generally Accepted Accounting PrinciplesMateriality


•Accounting should focus on material facts and resources should not be wasted in recording and analyzing immaterial and insignificant facts.•It should be noted that an item material for one concern should be immaterial for another and similarly an item material in one year may be immaterial in the next.e.g.

Generally Accepted Accounting PrinciplesConsistency


•The accounting practices should remain the same from one year to another.•Once a firm has fixed a method of treating an item it should do so for like items and also maintain the same method thereafter, otherwise comparison of one accounting period with another would not be possible.•Consistency however does not mean inflexibility.

Generally Accepted Accounting PrinciplesConservatism


•It takes into consideration all prospective losses but leaves all prospective profits.•Based on quality of judgment and not mere understatement of profits.

e.g. Provision for bad and doubtful debts, Valuation of stock in trades at Market Price / Cost Price whichever is less.

Double Entry System

•Recording dual aspects of business transactions in terms of debit and credit is called double entry system.. There is always a debit and an equal amount of credit for every transaction.


•Because of the dual entry aspect of accounting the balance sheet always matches.

Double entry systemFor instance we can explain it with a exampleWhen goods are purchased for cash there is movement of goods from seller to buyer and movement of cash from buyer to seller.

•Transaction: Mr. X started business with capital Rs. 40000

oSolution: It is a transaction because it changes a financial position of Mr. x cash will increase by 40000 and capital will increase by 40000


Characteristics ofDual accounting system•Every business transaction affects two or more accounts.

•Every account is divided into two parts.

•Based upon accounting concepts and conventions.

•Helps in preparing Trial Balance and Final Accounts.


Concept of Debit and Credit•We use the term debit and credit in order to show the changes in value of these basic accounting terms i.e. assets liability and income.•Debit means decrease in proprietor’s equity•Credit means increase in proprietor’s equity•The word debit refers to debtor and credit refer to the word creditor.•The left hand side signifies debit and right hand signifies credit. It is just a convention but not the meaning of these two words.


Personal

Impersonal

Natural

Artificial / Legal

Groups / Representativ

e

Real

Nominal

Individual living being

Companies, institutions etc

Debtors, Creditors share capital a/c

etc.

Intangible

Tangible

Expenses and loss

Revenue, income and gains

Types of Account

Traditional Approach

Debit and Credit ruleof Traditional approach


Personal accounts• Natural• Artificial• Representative

Impersonal accounts• Real

• Tangible• Intangible

• Nominal

Debit the receiverCredit the giver

Debit what comes inCredit what goes out

Debit all expenses or lossesCredit all income or gain

Modern Scientific approach/American approach /accounting equation approach:


Accounts

Asset Account

Liabilities account

Capital account

Revenue account

Expenditure account

Grounds Rules for Recording in Primary Books of accounts


Assets=Liabilities

+ Capital

Rules:

• Increase in assets & decrease in liability “debit”•Decrease in assets & increase in liability “credit”•Expenses & losses – debit ; income & gains – credit.

ILLUSTRATION


• XYZ Ltd. purchased raw materials for ` 20,000 and paid 50% in cash and balance payable after one month

There are three aspects:

Purchases

Cash

Creditor

ExpenseAsset

Liability

Debit

Credit

Credit

Journal EntryPurchases A/c Dr. 200000

To Cash A/c Cr. 100000

To Creditors A/c Cr. 100000

Journal• The word journal has been derived from the French word ‘JOUR’ meaning ‘daily records’

• it is a book of prime records

•Recorded in chronological order

•Also known as book of original entry

•Each transaction are identified then debit credit rules are followed to pass a journal entry


Format of journal


DATE PARTICULARS L.F AMOUNT (Dr.) AMOUNT (Cr.)

(A) (B) (C) (D) (E)

Can Place Image

Few Important Journal Entries:1. Mr. Raja commences business with cash

Cash a/c Dr……… To Capital a/c……

2. He Purchase raw materials in cash Purchases a/c Dr………

To cash a/c

3. Credit sales to Mr. AvinashMr. Avinash a/c Dr……

To Sales a/c


Ledger•A Ledger is the principal book of accounting system.

•It contains all accounts where transactions from the books of original entry are transferred.•Enables to ascertain what are the revenues and expenses and their values.

•Enables to ascertain what are the assets and liabilities and their values.

•Facilitates in preparation of Trial Balance and Final Accounts.


Format

•The ledger page is actually a T-account in a more detailed format. It has the account title and its corresponding account number on top. It also has two sides, namely, the debit side and the credit side. Each T-account or ledger account has the following columns.


Name of Account e.g. Mr. Ram A/c

Date Particulars J.F.

Debit Amount

(`)Date Particulars J.F

.Credit

Amount (`)

05.02.2004 Sales A/c 1 25000 27.02.200

4 Cash A/c 5 5000

15.03.2004 Cash A/c 5

8 16000

Balance C/d 4000

Total 25000 Total 25000

01.04.2004 Balance b/d 4000

ProcessStep 1Locate the account title used by the journal entry in the general ledger.

Step 2Determine if the journal entry is a debit entry or a credit. If it is a debit entry, it should be posted on the debit side of the located ledger account. If it is credit entry, it should be posted on the credit side of the located ledger account.

Step 3Record the date of the journal entry in the date column.

Step 4Write the corresponding name of Account in the Particulars Column.

Step 5Write the amount of the journal entry in the amount column.

Step 6 In the folio column, write the page number of the general journal page that contains the posted journal entry; same referencing in Journal Book.Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015

Example

Pass Journal Entries and prepare Ledger Accounts:

1. Introduced Capital ` 10,000

2. Interest Paid ` 2,000

3. Paid to supplier against previous dues ` 1,000

4. Withdrew Cash ` 500 for personal use.


Cash A/c

Date Particulars J Dr. Date Particular

s J Cr.

July 1 Capital1000

0 July 5 Interest 2000

July 25 Supplier 1000

July 30

Drawings 500

Bal. c/d 6500

Total1000

0 Total 10000

Capital A/c


s J Cr.

Bal. c/d1000

0 July 1 Cash A/c 10000

Total1000

0 Total 10000

Interest Paid A/c


s J Cr.

July 5 Cash 2000 Bal. c/d 2000


Supplier A/c


s J Cr.

July 25 Cash 1000 Bal. b/d 2500

Bal. c/d 1500


Date Particulars LF

Debit Credit

July 1 Cash A/c Dr. To Capital A/c(Being capital introduced )

10,00010,000

July 5 Interest Paid A/c Dr. To Cash A/c

2,0002,000

July 25 Supplier A/c Dr. To Cash A/c

1,0001,000

July 30 Drawings A/c Dr. To Cash A/c

500500

Journal

Drawings A/c


s J Cr.

July 30 Cash 500 Bal c/d 500


Trial Balance• To verify accuracy of the postings, Trial Balance prepared.

•It is prepared wherein the balances of all accounts in the Ledger are incorporated.

•It contains the list of all ledger accounts including cash account.

•Total of the debit and credit column of the amount must be equal.


Objectives and Functions of Trial Balance

•Test of Arithmetical Accuracy

•Summarized information of ledger accounts.

•Basis for preparation of final accounts.

•Detection of errors and frauds


Trial Balance•A basic rule of double-entry accounting is that for every credit there must be an equal debit amount. If debits do not equal credits, then an error has been made. The trial balance is a tool for detecting such errors.

•The trial balance is calculated by summing the balances of all the ledger accounts. The account balances are used because the balance summarizes the net effect of all of the debits and credits in an account.


Account Debits Credits

Account 1 xxxx.xx

Account 2 xxxx.xx

Account 3 xxxx.xx

.

.

.

Account 4 xxxx.xx

Account 5 xxxx.xx

Account 6 xxxx.xx

.

.

.

Total xxxx.xx xxxx.xx

Trial Balance of X Co.as on ____

Steps to Prepare the Trial Balance•For each ledger account — Cash, Accounts Payable, etc. — total your credits and debits.

If the credit total is larger, subtract the debit total from the credit total to get your ledger account total which goes in the credit column of the trial balance.

If the debit total is larger, subtract the credit total from the debit total to get your ledger account total which goes in the debit column of the trial balance

Put the ledger account total in the credit or debit column of your trial balance (as identified above).

•When you have debit or credit totals for each ledger account, add all of your credit totals to get a Credit Grand Total.•Add all of your debit totals to get a Debit Grand Total.

•This is your Trial Balance.Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015

Cash A/c


s J Cr.

July 1 Capital1000

0 July 5 Interest 2000

July 25 Supplier 1000

July 30

Drawings 500

Bal. c/d 6500

Total1000

0 Total 10000Capital A/c


s J Cr.

Bal. c/d1000

0 July 1 Cash A/c 10000

Total1000

0 Total 10000

Interest Paid A/c


s J Cr.

July 5 Cash 2000 Bal. c/d 2000


Supplier A/c


s J Cr.

July 25 Cash 1000 July 5

Purchase 2500

Bal. c/d 1500


Drawings A/c


s J Cr.

July 30 Cash 500 Bal c/d 500

Total 500 Total 500

Trial Balance of Mr. XAs on March 31, 200X

ParticularsDebit

AmountCredit

Amount

Cash A/c 6500

Capital A/c 10000

Interest Paid 2000

Drawings A/c 500

S. Creditors 1500

Purchases 2500

TOTAL 11500 11500

Purchases A/c


s J Cr.

July 5Supplie

r 2500 Bal C/d 2500



Thank You!

Accounting for Managers - Brief Overview

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