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ACCOUNTING 
FOR MANAGERS 
For I Semester, MBA-Pondicherry University
Outline of the Course… 
• Unit I – Financial Accounting 
• Unit II – Depreciation Accounting & Ratio Analysis 
• Unit III – Fund Flow and Cash Flow Analysis 
• Unit IV – Marginal Costing 
• Unit V – Cost Accounting 
• Problems vs. Theory – 60: 40
Concept of 
• Accounting is a process of Identifying, Accounting 
Measuring, Classifying, Recording and 
communicating Financial Information. 
Book Keeping is 
the art of recording 
business 
transactions in a 
systematic manner. 
Element Description 
Identifying Determining business transaction 
Measuring Expressing business transaction in terms of 
money 
Recording Entering money transactions in books 
Classifying Grouping of entries according to nature 
Summarizing Presentation of accounting information 
Communicating Interpretation of results
Transaction 
Vs. 
Event 
• Capital introduced by proprietor in business 
• Amount withdrawn by proprietor for personal 
use. 
• Appointed a salesman for business 
• Private income earned and retained by the 
proprietor with himself. 
• Promise to give loan to a friend 
• Received gift from mother-in-law 
• Purchase return 
• Discount allowed to a customer 
• An expense incurred, but not paid. 
• Sale of good on credit 
• Loss of goods by theft 
What is the 
difference? 
Every financial 
change that occurs 
in your business is a 
transaction. 
Event is not 
measurable in terms 
of money, but 
transaction is 
measurable in terms 
of money.
Users of 
Accounting 
Information 
• Owners or Shareholders 
• Potential investors 
• Lenders 
• Creditors 
• Customers 
• Creditors 
• Management 
• Employees 
• Government 
• Stock exchanges 
The various parties 
who are interested 
in accounting 
information.. 
Need and Importance of Accounting 
• Results of operations 
• Solvency and liquidity 
• Financial position 
• Cash flows
Types of 
transactions 
1. Cash Transactions 
2. Credit transaction 
3. Barter transaction 
4. Paper transaction 
Criteria: Settlement 
and Time 
Test your Progress? 
1. Antony commenced business with cash 
2. Took loan from a bank 
3. Salaries yet to paid to employees 
4. Returned goods to supplier Mr. Akbar 
5. Cash stone from office 
6. Sale of goods on credit to Mr. Amar 
7. Withdrew from bank account for personal use 
8. Sold goods to employee in settlement of his salary
Basic 
Accounting 
Terms 
• Business Entity 
• Proprietor or Owner 
• Equity 
• Capital 
• Net worth 
• Drawings 
• Assets 
• Liabilities 
• Debtors 
• Creditors 
• Inventory 
• Sales and Purchases 
• Debit & Credit 
• Turnover 
• Bills payable and Receivables
1. Accounting Concepts 
2. Accounting Convention 
Accounting Principles 
“A general law or rule adopted or professed as 
a guide to action; a settled ground on basis of 
conduct on practice” 
Accounting Concepts 
• Business Entity Concept 
• Business and owner are separate entities 
• Accounting view 
• Capital and drawings 
• Accurate financial position 
• Money Measurement Concept 
• Records only monetary transactions 
• Helps to know the value of business 
Accounting 
Concepts 
These concepts 
provide a 
foundation for 
accounting process. 
No enterprise can 
prepare its financial 
statements without 
considering these 
concepts.
Accounting 
Concepts 
• Going Concern Concept 
• Permanent continuity 
• Preparation of Financial statements 
• Distinction between capital and revenue items 
• Entering into long term contracts 
• Classification of assets 
• Accounting period concept 
• Knowing the performance of business 
• Convenient short periods 
• Calendar period and financial period 
• Cost or Historical Concept 
• Fixed assets at cost 
• Current assets at cost price or market price which ever is less 
• Valuation of fixed assets every year becomes difficult 
Accounting 
convention refers 
to custom tradition 
or practice, which 
has been in 
practice for a long 
time, which 
becomes the basis 
of preparing 
financial 
statements.
Accounting 
Concepts and 
Convention 
• Objective Evidence Concept 
• Entries based on source documents 
• Reduces scope of manipulations 
• Revenue recognition concept 
• Revenue is earned from sale of goods 
• Goods or services are transferred when legally liable to pay 
• No unrealized profits 
• Prevents inflated profits 
• Gives objectivity 
• Accrual Concept 
• Transactions are recorded whether they are settled in 
cash or not 
• Outstanding, Prepaid, Accrued, Incomes received in 
advance 
• Dual Aspect concept/ Accounting Equation 
Concept 
• Assets= Liabilities + Capital
Accounting Concepts 
• Accounting convention refers to custom tradition or practice, which has been in practice for a 
long time, which becomes the basis of preparing financial statements. 
Accounting Concept Description 
Going Concern 
Concept 
Business unit will have a perpetual existence and will not be sold or liquidated 
Accounting period 
concept 
Prepare financial statements at periodic intervals for taking timely corrective action 
Cost or Historical 
Concept 
Assets should be shown on the balance sheet at the cost of purchase instead of 
current value 
Objective Evidence 
Concept 
Accounting records will initiate from a source document and that the information 
recorded is based on fact and not personal opinion. 
Revenue recognition 
concept 
Realization is assumed to occur when the seller receives cash or a claim to cash 
(receivable) in exchange for goods or services. 
Accrual Concept Transactions are recorded even though actual receipts or payments of money may 
not have taken place. 
Dual aspect Concept This concept ensures that transaction are recorded in books at least in two accounts
Accounting 
Conventions 
Accounting 
convention refers 
to custom tradition 
or practice, which 
has been in 
practice for a long 
time, which 
becomes the basis 
of preparing 
financial 
statements. 
• Convention of Materiality 
• According to American Accounting Association, “An item 
should be regarded as material if there is reason to believe 
that knowledge of it would influence decision of informed 
investor.” 
• Convention of Conservatism 
• All anticipated losses should be recorded but all 
anticipated gains should be ignored. 
• It is a policy of playing safe 
• Convention of consistency 
• Accounting method should remain consistent year by year. 
• This facilitates comparison in both directions i.e. intra firm & 
inter firm. 
• Convention of Full disclosure 
• Information relating to the economic affairs of the 
enterprise should be completely disclosed which are of 
material interest to the users. 
• Proforma & contents of balance sheet & P&L a/c are 
prescribed by Companies Act. 
• It does not mean that leaking out the secrets of the 
business.
ACCOUNTING EQUIVALENCE 
Assets = Owner’s Equity + 
Outside Liabilities 
A = OE + OL
14 
DEFINITION: BS 
•Balance Sheet is defined as 
•a statement of the financial 
position 
•of an enterprise 
•as at a given date, which 
exhibits 
•assets, liabilities, capital, etc.
HORIZONTAL FORM OF BS 
LIABILITIES 
Amount 
(Rs) 
ASSETS 
Amount 
(Rs) 
Capital XX 
Fixed Assets-Land, 
Bldg, 
XX 
Loan taken XX Current Assets 
Current Liabilities •Cash / Bank B/s XX 
•Outstanding Expenses XX 
•Accounts Receivable 
(Debtors) 
XX 
•Bank Overdraft XX •Bills Receivable) XX 
•Accounts Payable 
XX •Inventories (Stock) XX 
(Creditors) 
XYZ XYZ
VERTICAL FORM OF BS 
SOURCES OF FUNDS Amount (Rs.) py Amount (Rs) cy 
Share Capital AA XX 
Reserves & Surplus AA 
Secured Loans AA XX 
Unsecured Loans AA XX 
ABC XYZ 
APPLICATION OF FUNDS Amount (Rs.) py Amount (Rs) cy 
Fixed Assets Gross Block 
AA XX 
- Depreciation 
Investment AA XX 
Current Assets – Current Liabilities AA XX 
Loans & Advances AA XX 
Miscellaneous Expenditure AA XX 
ABC XYZ
17 
A = OE + OL 
Assets are properties or economic 
resources owned by a business. They are 
expected to provide future benefits to the 
business. 
Liabilities are 
obligations of the 
business. They 
are claims 
against the 
assets of the 
business. 
Equity is the 
owner’s claim on 
the assets of the 
business. It is the 
residual interest in 
the assets after 
deducting 
liabilities.
18 
A = OE + OL 
LIABILITIES 
Amount 
ASSETS 
Amount 
Capital XX Fixed Assets-Land, Bldg, XX 
Loan taken XX Current Assets 
Current Liabilities Cash / Bank B/s XX 
Outstanding Expenses XX 
Accounts Receivable 
(Debtors) 
XX 
Bank Overdraft XX Bills Receivable) XX 
Accounts Payable (Creditors) XX Inventories (Stock) XX 
XYZ XYZ
A = OE + OL 
SOURCES OF FUNDS 
Amount 
py 
Amount 
cy 
Share Capital AA XX 
Reserves & Surplus AA 
Secured Loans XX 
Unsecured Loans XX 
XX 
APPLICATION OF FUNDS 
Amount 
(Rs) py 
Amount 
(Rs) cy 
Fixed Assets Gross Block 
- Depreciation 
Investment 
Current Assets – Current Liabilities 
Loans & Advances 
Miscellaneous Expenditure
20 
PROOF: A = OE + OL 
Owners of Scox Company contributed 
Rs. 20,000 cash to start the business. 
The accounts involved are: 
(1) Cash (asset) 
(2) Owner’s Equity (equity)
21 
Transaction Analysis 
Owners of Scox Company contributed 
Rs. 20,000 cash to start the business. 
Assets = Liabilities + 
Owners' 
Equity 
Cash Supplies Equipment 
Accounts 
Payable 
Notes 
Payable 
Owners' 
Capital 
(1) 20000 20000 
20000 0 0 0 0 20000 
20000 = 20000
22 
Purchased supplies paying Rs. 1,000 cash. 
Transaction Analysis 
The accounts involved are: 
(1) Cash (asset) 
(2) Supplies (asset)
23 
Transaction Analysis 
Purchased supplies paying Rs. 1,000 
cash. 
Assets = Liabilities + 
Owners' 
Equity 
Cash Supplies Equipment 
Accounts 
Payable 
Notes 
Payable 
Owner's' 
Capital 
(1) 20000 20000 
(2) -1000 1000 
19000 1000 0 0 0 20000 
20000 = 20000
24 
Transaction Analysis 
Purchased equipment for Rs.15,000 
cash. 
The accounts involved are: 
(1) Cash (asset) 
(2) Equipment (asset)
25 
Transaction Analysis 
Purchased equipment for Rs. 15,000 
cash. 
Assets = Liabilities + 
Owners' 
Equity 
Cash Supplies Equipment 
Accounts 
Payable 
Notes 
Payable 
Owners' 
Capital 
(1) 20000 20000 
(2) -1000 1000 
(3) -15000 15000 
4000 1000 15000 0 0 20000 
20000 = 20000
26 
Transaction Analysis 
Purchased Supplies of Rs. 200 and 
Equipment of Rs. 1,000 on account. 
The accounts involved are: 
(1) Supplies (asset) 
(2) Equipment (asset) 
(3) Accounts Payable (liability)
27 
Transaction Analysis 
Purchased Supplies of Rs. 200 and 
Equipment of Rs. 1,000 on account. 
Assets = Liabilities + 
Owners' 
Equity 
Cash Supplies Equipment 
Accounts 
Payable 
Notes 
Payable 
Owners' 
Capital 
(1) 20000 20000 
(2) -1000 1000 
(3) -15000 15000 
(4) 200 1000 1200 
4000 1200 16000 1200 0 20000 
21200 = 21200
28 
Transaction Analysis 
The balances so far appear below. Note that the 
Balance Sheet Equation is still in balance. 
Assets = Liabilities + 
Owners' 
Equity 
Cash Supplies Equipment 
Accounts 
Payable 
Notes 
Payable 
Owners' 
Capital 
Bal. 4000 1200 16000 1200 20000 
4000 1200 16000 1200 0 20000 
21200 = 21200 
Now let’s look at transactions 
involving revenues and expenses.
29 
Transaction Analysis 
Rendered consulting services receiving Rs. 3,000 cash. 
The accounts involved are: 
(1) Cash (asset) 
(2) Revenues (equity)
30 
Transaction Analysis 
Rendered consulting services 
receiving Rs. 3,000 cash. 
Assets = Liabilities + 
Owner's 
Equity 
Cash Supplies Equipment 
Accounts 
Payable 
Notes 
Payable 
Owner's 
Capital 
Bal. 4000 1200 16000 1200 20000 
(5) 3000 3000 
7000 1200 16000 1200 0 23000 
24200 = 24200
31 
Transaction Analysis 
Paid salaries to employees, Rs. 800 
cash. 
The accounts involved are: 
(1) Cash (asset) 
(2) Salaries expense (equity)
Transaction Analysis 
Paid salaries to employees, Rs. 800 cash. 
32 
Assets = Liabilities + 
Owner's 
Equity 
Cash Supplies Equipment 
Accounts 
Payable 
Notes 
Payable 
Owner's 
Capital 
Bal. 4000 1200 16000 1200 20000 
(5) 3000 3000 
(6) -800 -800 
6200 1200 16000 1200 0 22200 
23400 = 23400
33 
Transaction Analysis 
Borrowed Rs. 4,000 from SBI 
The accounts involved are: 
(1) Cash (asset) 
(2) Notes payable (liability)
34 
Transaction Analysis 
Borrowed Rs. 4,000 from SBI 
Assets = Liabilities + 
Owner's 
Equity 
Cash Supplies Equipment 
Accounts 
payable 
Notes 
Payable 
Owner's 
capital 
Bal. 4000 1200 16000 1200 20000 
(5) 3000 3000 
(6) -800 -800 
(7) 4000 4000 
10200 1200 16000 1200 4000 22200 
27400 = 27400
35 
Financial Statements 
Prepare the Financial Statements reflecting the transactions we 
have recorded.
36 
Scox’s net 
income is the 
difference 
Income Statement 
The net income 
of Rs. 2,200 
increases 
between 
Scox’s Revenues equity 
and 
by Expenses. 
Rs. 2,200. 
Scox Company 
Income Statement 
For Month Ended March 31, 2001 
Revenues: 
Consulting revenue 3000 
Expenses: 
Salaries expense 800 
Net income 2200 
Scox Company 
Statement of Changes in Owners' Equity 
For Month Ended March 31, 2001 
Owners' equity, 1st April 2000 0 
Plus: Investment by owners 20000 
Net income 2200 
Owners' equity, 31st March 2002 22200
Scox Company 
Statement of Changes in Owners' Equity 
For Month Ended March 31, 2001 
Owners' equity 0 
Investment by owners 20000 
Net income 2200 
Owners' equity, March 31 2001 22200 
37 
Balance Sheet 
The balance sheet reflects 
Scox’s financial position at 
Scox Company 
Balance Sheet 
March 31, 2001 
March 31 2001 
Liabilities & Owners' Equity Assets 
Accounts payable 1200 Cash 10200 
Notes payable 4000 Supplies 1200 
Total liabilities 5200 Equipment 16000 
Owners' equity 22200 
Total liabilities 
and owners' 
equity 27400 Total assets 27400
Classification of Accounts 
1. English Approach 
2.American Approach
English 
Approach 
Accounts 
Personal Asset Nominal 
Every Business 
concern deals with 
other persons. 
A business concern 
has certain 
properties or assets 
It may incur certain 
expenses and may 
earn certain 
incomes
Personal 
Accounts 
• Natural personal account 
• Accounts of physical and naturally born person 
• Artificial personal account 
• A person created by law 
• Representative personal account 
• They represent certain person behind them 
Persons with whom 
a business is carried 
out.
Asset 
Account 
An account of 
things owned by a 
concern and in and 
with which the 
business is carried 
on. 
• Accounts of Tangible assets 
• Physical evidence 
• Accounts of Intangible assets 
• Do of have physical existence 
Nominal 
Account 
Account of incomes and losses and expenses 
and gains
Activity 
Test your Progress 
 Furniture account 
 Outstanding wages account 
 Stationary account 
 Capital Account 
 Salaries account 
Nominal a/c 
Natural personal 
account a/c 
Nominal account a/c 
 National Trading Co; account 
 Prepaid insurance account 
 Interest account 
 Sales account 
 Repair on machinery 
 Debtors account 
 Bills receivable account 
 Provision for depreciation 
 Rent account 
Representative 
personal a/c 
Artificial personal account 
Asset or Nominal a/c 
Nominal account a/c 
a/c 
Representative 
personal a/c 
Asset a/c 
Nominal account a/c 
Personal account 
a/c 
Asset 
a/c 
Asset a/c 
Nominal a/c
43 
DOUBLE ENTRY SYSTEM 
A = OE + OL 
Debit = Credit 
In the double-entry accounting system, 
every transaction is recorded by equal 
amounts of debits and credits.
44 
ACCOUNTANT’S LIFE 
A = OE + OL 
ASSETS 
Debit 
for 
Increase 
Credit 
for 
Decrease 
EQUITIES 
Debit 
for 
Decrease 
Credit 
for 
Increase 
LIABILITIES 
Debit 
for 
Decrease 
Credit 
for 
Increase 
ASSETS 
Debit Credit 
+ - 
LIABILITIES 
- + 
EQUITIES 
Debit Credit 
- + 
Debit Credit
RULES OF DOUBLE 
ENTRY SYSTEM
Real 
Account 
• Rules of Accounting: 
•Debit what comes in 
• Credit what goes out 
These are asset 
accounts that 
appear in the 
Balance Sheet. 
They are referred to 
as Real Account (or 
Permanent 
Accounts) as these 
are owned by 
businesses and the 
balances in these 
accounts at the 
end of an 
accounting period 
will be carried over 
to the next period. 
Ex: Cash Account, 
Land Account, 
Building Account 
etc.
PERSONAL 
Account 
• Rules of Accounting: 
•Debit the Receiver 
• Credit the Giver 
These are accounts 
of parties with 
whom the business 
is a carried on.
Nominal 
Account 
• Rules of Accounting: 
•Debit all expenses and 
losses 
• Credit all income and 
gains 
These are accounts 
of expenses and 
losses which a 
business incurs and 
income & gains 
which a business 
earn in the course 
of business. Ex: Rent 
Account, Interest 
Account.
Activity 
• Mr. Ajay started business with Cash Rs. 100,000. • Test your progress 
Two accounts 
Types of 
Rule of Debit and Credit Account to 
Account to be 
Involved 
accounts 
debited 
credited 
Cash a/c 
Capital a/c 
Real a/c 
Personal a/c 
Debit what comes in 
Credit giver of benefit 
Cash Capital 
• Brought Goods from Vijay for Cash Rs. 1000 
Two accounts 
Types of 
Involved 
accounts 
Rule of Debit and Credit Account to 
debited 
Account to be 
credited 
Cash a/c 
Goods purchased 
a/c 
Real a/c 
Real a/c 
Credit what goes out 
Debit what comes in 
Goods 
purchased 
Cash 
• Purchased Goods from Sujay for credit Rs. 300 
Two accounts 
Types of 
Involved 
accounts 
Rule of Debit and Credit Account to 
debited 
Account to be 
credited 
Raghu a/c 
Goods purchased 
a/c 
Personal a/c 
Real a/c 
Credit giver of benefit 
Debit what comes in 
Goods 
purchased 
Raghu
50 
ACCOUNTING CYCLE 
1. Business Transaction 
2. Transaction is recorded in 
document (Voucher / Receipt) 
3. Analyze the transaction 
4. Journal Entry 
5. Ledger Accounts (or ‘T’ account) 
6. Trial Balance 
7. Balance Sheet, P&L A/c, Cash Flow 
Statement
51 
ACCOUNTANT’S ROUTINE 
Balance Sheet 
P & L A/c 
Cash Flow 
Prepare a trial 
balance 
Post to the 
ledger 
Journal Entry 
Source 
Transaction documents Analyze
Thank You Now, was that debits to 
the left or credits to the 
left? 
I sure wish I had paid 
more attention in class!

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Fundamentals of Accounting

  • 1. ACCOUNTING FOR MANAGERS For I Semester, MBA-Pondicherry University
  • 2. Outline of the Course… • Unit I – Financial Accounting • Unit II – Depreciation Accounting & Ratio Analysis • Unit III – Fund Flow and Cash Flow Analysis • Unit IV – Marginal Costing • Unit V – Cost Accounting • Problems vs. Theory – 60: 40
  • 3. Concept of • Accounting is a process of Identifying, Accounting Measuring, Classifying, Recording and communicating Financial Information. Book Keeping is the art of recording business transactions in a systematic manner. Element Description Identifying Determining business transaction Measuring Expressing business transaction in terms of money Recording Entering money transactions in books Classifying Grouping of entries according to nature Summarizing Presentation of accounting information Communicating Interpretation of results
  • 4. Transaction Vs. Event • Capital introduced by proprietor in business • Amount withdrawn by proprietor for personal use. • Appointed a salesman for business • Private income earned and retained by the proprietor with himself. • Promise to give loan to a friend • Received gift from mother-in-law • Purchase return • Discount allowed to a customer • An expense incurred, but not paid. • Sale of good on credit • Loss of goods by theft What is the difference? Every financial change that occurs in your business is a transaction. Event is not measurable in terms of money, but transaction is measurable in terms of money.
  • 5. Users of Accounting Information • Owners or Shareholders • Potential investors • Lenders • Creditors • Customers • Creditors • Management • Employees • Government • Stock exchanges The various parties who are interested in accounting information.. Need and Importance of Accounting • Results of operations • Solvency and liquidity • Financial position • Cash flows
  • 6. Types of transactions 1. Cash Transactions 2. Credit transaction 3. Barter transaction 4. Paper transaction Criteria: Settlement and Time Test your Progress? 1. Antony commenced business with cash 2. Took loan from a bank 3. Salaries yet to paid to employees 4. Returned goods to supplier Mr. Akbar 5. Cash stone from office 6. Sale of goods on credit to Mr. Amar 7. Withdrew from bank account for personal use 8. Sold goods to employee in settlement of his salary
  • 7. Basic Accounting Terms • Business Entity • Proprietor or Owner • Equity • Capital • Net worth • Drawings • Assets • Liabilities • Debtors • Creditors • Inventory • Sales and Purchases • Debit & Credit • Turnover • Bills payable and Receivables
  • 8. 1. Accounting Concepts 2. Accounting Convention Accounting Principles “A general law or rule adopted or professed as a guide to action; a settled ground on basis of conduct on practice” Accounting Concepts • Business Entity Concept • Business and owner are separate entities • Accounting view • Capital and drawings • Accurate financial position • Money Measurement Concept • Records only monetary transactions • Helps to know the value of business Accounting Concepts These concepts provide a foundation for accounting process. No enterprise can prepare its financial statements without considering these concepts.
  • 9. Accounting Concepts • Going Concern Concept • Permanent continuity • Preparation of Financial statements • Distinction between capital and revenue items • Entering into long term contracts • Classification of assets • Accounting period concept • Knowing the performance of business • Convenient short periods • Calendar period and financial period • Cost or Historical Concept • Fixed assets at cost • Current assets at cost price or market price which ever is less • Valuation of fixed assets every year becomes difficult Accounting convention refers to custom tradition or practice, which has been in practice for a long time, which becomes the basis of preparing financial statements.
  • 10. Accounting Concepts and Convention • Objective Evidence Concept • Entries based on source documents • Reduces scope of manipulations • Revenue recognition concept • Revenue is earned from sale of goods • Goods or services are transferred when legally liable to pay • No unrealized profits • Prevents inflated profits • Gives objectivity • Accrual Concept • Transactions are recorded whether they are settled in cash or not • Outstanding, Prepaid, Accrued, Incomes received in advance • Dual Aspect concept/ Accounting Equation Concept • Assets= Liabilities + Capital
  • 11. Accounting Concepts • Accounting convention refers to custom tradition or practice, which has been in practice for a long time, which becomes the basis of preparing financial statements. Accounting Concept Description Going Concern Concept Business unit will have a perpetual existence and will not be sold or liquidated Accounting period concept Prepare financial statements at periodic intervals for taking timely corrective action Cost or Historical Concept Assets should be shown on the balance sheet at the cost of purchase instead of current value Objective Evidence Concept Accounting records will initiate from a source document and that the information recorded is based on fact and not personal opinion. Revenue recognition concept Realization is assumed to occur when the seller receives cash or a claim to cash (receivable) in exchange for goods or services. Accrual Concept Transactions are recorded even though actual receipts or payments of money may not have taken place. Dual aspect Concept This concept ensures that transaction are recorded in books at least in two accounts
  • 12. Accounting Conventions Accounting convention refers to custom tradition or practice, which has been in practice for a long time, which becomes the basis of preparing financial statements. • Convention of Materiality • According to American Accounting Association, “An item should be regarded as material if there is reason to believe that knowledge of it would influence decision of informed investor.” • Convention of Conservatism • All anticipated losses should be recorded but all anticipated gains should be ignored. • It is a policy of playing safe • Convention of consistency • Accounting method should remain consistent year by year. • This facilitates comparison in both directions i.e. intra firm & inter firm. • Convention of Full disclosure • Information relating to the economic affairs of the enterprise should be completely disclosed which are of material interest to the users. • Proforma & contents of balance sheet & P&L a/c are prescribed by Companies Act. • It does not mean that leaking out the secrets of the business.
  • 13. ACCOUNTING EQUIVALENCE Assets = Owner’s Equity + Outside Liabilities A = OE + OL
  • 14. 14 DEFINITION: BS •Balance Sheet is defined as •a statement of the financial position •of an enterprise •as at a given date, which exhibits •assets, liabilities, capital, etc.
  • 15. HORIZONTAL FORM OF BS LIABILITIES Amount (Rs) ASSETS Amount (Rs) Capital XX Fixed Assets-Land, Bldg, XX Loan taken XX Current Assets Current Liabilities •Cash / Bank B/s XX •Outstanding Expenses XX •Accounts Receivable (Debtors) XX •Bank Overdraft XX •Bills Receivable) XX •Accounts Payable XX •Inventories (Stock) XX (Creditors) XYZ XYZ
  • 16. VERTICAL FORM OF BS SOURCES OF FUNDS Amount (Rs.) py Amount (Rs) cy Share Capital AA XX Reserves & Surplus AA Secured Loans AA XX Unsecured Loans AA XX ABC XYZ APPLICATION OF FUNDS Amount (Rs.) py Amount (Rs) cy Fixed Assets Gross Block AA XX - Depreciation Investment AA XX Current Assets – Current Liabilities AA XX Loans & Advances AA XX Miscellaneous Expenditure AA XX ABC XYZ
  • 17. 17 A = OE + OL Assets are properties or economic resources owned by a business. They are expected to provide future benefits to the business. Liabilities are obligations of the business. They are claims against the assets of the business. Equity is the owner’s claim on the assets of the business. It is the residual interest in the assets after deducting liabilities.
  • 18. 18 A = OE + OL LIABILITIES Amount ASSETS Amount Capital XX Fixed Assets-Land, Bldg, XX Loan taken XX Current Assets Current Liabilities Cash / Bank B/s XX Outstanding Expenses XX Accounts Receivable (Debtors) XX Bank Overdraft XX Bills Receivable) XX Accounts Payable (Creditors) XX Inventories (Stock) XX XYZ XYZ
  • 19. A = OE + OL SOURCES OF FUNDS Amount py Amount cy Share Capital AA XX Reserves & Surplus AA Secured Loans XX Unsecured Loans XX XX APPLICATION OF FUNDS Amount (Rs) py Amount (Rs) cy Fixed Assets Gross Block - Depreciation Investment Current Assets – Current Liabilities Loans & Advances Miscellaneous Expenditure
  • 20. 20 PROOF: A = OE + OL Owners of Scox Company contributed Rs. 20,000 cash to start the business. The accounts involved are: (1) Cash (asset) (2) Owner’s Equity (equity)
  • 21. 21 Transaction Analysis Owners of Scox Company contributed Rs. 20,000 cash to start the business. Assets = Liabilities + Owners' Equity Cash Supplies Equipment Accounts Payable Notes Payable Owners' Capital (1) 20000 20000 20000 0 0 0 0 20000 20000 = 20000
  • 22. 22 Purchased supplies paying Rs. 1,000 cash. Transaction Analysis The accounts involved are: (1) Cash (asset) (2) Supplies (asset)
  • 23. 23 Transaction Analysis Purchased supplies paying Rs. 1,000 cash. Assets = Liabilities + Owners' Equity Cash Supplies Equipment Accounts Payable Notes Payable Owner's' Capital (1) 20000 20000 (2) -1000 1000 19000 1000 0 0 0 20000 20000 = 20000
  • 24. 24 Transaction Analysis Purchased equipment for Rs.15,000 cash. The accounts involved are: (1) Cash (asset) (2) Equipment (asset)
  • 25. 25 Transaction Analysis Purchased equipment for Rs. 15,000 cash. Assets = Liabilities + Owners' Equity Cash Supplies Equipment Accounts Payable Notes Payable Owners' Capital (1) 20000 20000 (2) -1000 1000 (3) -15000 15000 4000 1000 15000 0 0 20000 20000 = 20000
  • 26. 26 Transaction Analysis Purchased Supplies of Rs. 200 and Equipment of Rs. 1,000 on account. The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability)
  • 27. 27 Transaction Analysis Purchased Supplies of Rs. 200 and Equipment of Rs. 1,000 on account. Assets = Liabilities + Owners' Equity Cash Supplies Equipment Accounts Payable Notes Payable Owners' Capital (1) 20000 20000 (2) -1000 1000 (3) -15000 15000 (4) 200 1000 1200 4000 1200 16000 1200 0 20000 21200 = 21200
  • 28. 28 Transaction Analysis The balances so far appear below. Note that the Balance Sheet Equation is still in balance. Assets = Liabilities + Owners' Equity Cash Supplies Equipment Accounts Payable Notes Payable Owners' Capital Bal. 4000 1200 16000 1200 20000 4000 1200 16000 1200 0 20000 21200 = 21200 Now let’s look at transactions involving revenues and expenses.
  • 29. 29 Transaction Analysis Rendered consulting services receiving Rs. 3,000 cash. The accounts involved are: (1) Cash (asset) (2) Revenues (equity)
  • 30. 30 Transaction Analysis Rendered consulting services receiving Rs. 3,000 cash. Assets = Liabilities + Owner's Equity Cash Supplies Equipment Accounts Payable Notes Payable Owner's Capital Bal. 4000 1200 16000 1200 20000 (5) 3000 3000 7000 1200 16000 1200 0 23000 24200 = 24200
  • 31. 31 Transaction Analysis Paid salaries to employees, Rs. 800 cash. The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity)
  • 32. Transaction Analysis Paid salaries to employees, Rs. 800 cash. 32 Assets = Liabilities + Owner's Equity Cash Supplies Equipment Accounts Payable Notes Payable Owner's Capital Bal. 4000 1200 16000 1200 20000 (5) 3000 3000 (6) -800 -800 6200 1200 16000 1200 0 22200 23400 = 23400
  • 33. 33 Transaction Analysis Borrowed Rs. 4,000 from SBI The accounts involved are: (1) Cash (asset) (2) Notes payable (liability)
  • 34. 34 Transaction Analysis Borrowed Rs. 4,000 from SBI Assets = Liabilities + Owner's Equity Cash Supplies Equipment Accounts payable Notes Payable Owner's capital Bal. 4000 1200 16000 1200 20000 (5) 3000 3000 (6) -800 -800 (7) 4000 4000 10200 1200 16000 1200 4000 22200 27400 = 27400
  • 35. 35 Financial Statements Prepare the Financial Statements reflecting the transactions we have recorded.
  • 36. 36 Scox’s net income is the difference Income Statement The net income of Rs. 2,200 increases between Scox’s Revenues equity and by Expenses. Rs. 2,200. Scox Company Income Statement For Month Ended March 31, 2001 Revenues: Consulting revenue 3000 Expenses: Salaries expense 800 Net income 2200 Scox Company Statement of Changes in Owners' Equity For Month Ended March 31, 2001 Owners' equity, 1st April 2000 0 Plus: Investment by owners 20000 Net income 2200 Owners' equity, 31st March 2002 22200
  • 37. Scox Company Statement of Changes in Owners' Equity For Month Ended March 31, 2001 Owners' equity 0 Investment by owners 20000 Net income 2200 Owners' equity, March 31 2001 22200 37 Balance Sheet The balance sheet reflects Scox’s financial position at Scox Company Balance Sheet March 31, 2001 March 31 2001 Liabilities & Owners' Equity Assets Accounts payable 1200 Cash 10200 Notes payable 4000 Supplies 1200 Total liabilities 5200 Equipment 16000 Owners' equity 22200 Total liabilities and owners' equity 27400 Total assets 27400
  • 38. Classification of Accounts 1. English Approach 2.American Approach
  • 39. English Approach Accounts Personal Asset Nominal Every Business concern deals with other persons. A business concern has certain properties or assets It may incur certain expenses and may earn certain incomes
  • 40. Personal Accounts • Natural personal account • Accounts of physical and naturally born person • Artificial personal account • A person created by law • Representative personal account • They represent certain person behind them Persons with whom a business is carried out.
  • 41. Asset Account An account of things owned by a concern and in and with which the business is carried on. • Accounts of Tangible assets • Physical evidence • Accounts of Intangible assets • Do of have physical existence Nominal Account Account of incomes and losses and expenses and gains
  • 42. Activity Test your Progress  Furniture account  Outstanding wages account  Stationary account  Capital Account  Salaries account Nominal a/c Natural personal account a/c Nominal account a/c  National Trading Co; account  Prepaid insurance account  Interest account  Sales account  Repair on machinery  Debtors account  Bills receivable account  Provision for depreciation  Rent account Representative personal a/c Artificial personal account Asset or Nominal a/c Nominal account a/c a/c Representative personal a/c Asset a/c Nominal account a/c Personal account a/c Asset a/c Asset a/c Nominal a/c
  • 43. 43 DOUBLE ENTRY SYSTEM A = OE + OL Debit = Credit In the double-entry accounting system, every transaction is recorded by equal amounts of debits and credits.
  • 44. 44 ACCOUNTANT’S LIFE A = OE + OL ASSETS Debit for Increase Credit for Decrease EQUITIES Debit for Decrease Credit for Increase LIABILITIES Debit for Decrease Credit for Increase ASSETS Debit Credit + - LIABILITIES - + EQUITIES Debit Credit - + Debit Credit
  • 45. RULES OF DOUBLE ENTRY SYSTEM
  • 46. Real Account • Rules of Accounting: •Debit what comes in • Credit what goes out These are asset accounts that appear in the Balance Sheet. They are referred to as Real Account (or Permanent Accounts) as these are owned by businesses and the balances in these accounts at the end of an accounting period will be carried over to the next period. Ex: Cash Account, Land Account, Building Account etc.
  • 47. PERSONAL Account • Rules of Accounting: •Debit the Receiver • Credit the Giver These are accounts of parties with whom the business is a carried on.
  • 48. Nominal Account • Rules of Accounting: •Debit all expenses and losses • Credit all income and gains These are accounts of expenses and losses which a business incurs and income & gains which a business earn in the course of business. Ex: Rent Account, Interest Account.
  • 49. Activity • Mr. Ajay started business with Cash Rs. 100,000. • Test your progress Two accounts Types of Rule of Debit and Credit Account to Account to be Involved accounts debited credited Cash a/c Capital a/c Real a/c Personal a/c Debit what comes in Credit giver of benefit Cash Capital • Brought Goods from Vijay for Cash Rs. 1000 Two accounts Types of Involved accounts Rule of Debit and Credit Account to debited Account to be credited Cash a/c Goods purchased a/c Real a/c Real a/c Credit what goes out Debit what comes in Goods purchased Cash • Purchased Goods from Sujay for credit Rs. 300 Two accounts Types of Involved accounts Rule of Debit and Credit Account to debited Account to be credited Raghu a/c Goods purchased a/c Personal a/c Real a/c Credit giver of benefit Debit what comes in Goods purchased Raghu
  • 50. 50 ACCOUNTING CYCLE 1. Business Transaction 2. Transaction is recorded in document (Voucher / Receipt) 3. Analyze the transaction 4. Journal Entry 5. Ledger Accounts (or ‘T’ account) 6. Trial Balance 7. Balance Sheet, P&L A/c, Cash Flow Statement
  • 51. 51 ACCOUNTANT’S ROUTINE Balance Sheet P & L A/c Cash Flow Prepare a trial balance Post to the ledger Journal Entry Source Transaction documents Analyze
  • 52. Thank You Now, was that debits to the left or credits to the left? I sure wish I had paid more attention in class!