Accounting for Managers - Brief Overview

Accounting for Managers
Look-back
Priya Sinha
Aditi Kashyap
Himanshu Chitlangia
Gunjan Gandhi
Nipun 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
Objective
Prepare 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
Result
Doesn’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 Terminologies
Assets
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 Principles
Accounting 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 owner
e.g. expense on owner’s car and a company
vehicle, both are treated differently.

Money 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.

Going 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.

Accounting 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.

Historical Cost or
Cost 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

Expenses 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.

Revenue 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.

Matching 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.

Full, 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.

Dual 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!

Verifiable 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.

Materiality
•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.

Consistency
•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.

Conservatism
•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 system
For instance we can explain it with a example
When 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 of
Dual 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 /
Representative
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 rule
of Traditional approach
Personal accounts
• Natural
• Artificial
• Representative
Impersonal accounts
• Real
• Tangible
• Intangible
• Nominal
Debit the receiver
Credit the giver
Debit what comes in
Credit what goes out
Debit all expenses or losses
Credit all income or gain

Modern Scientific approach/American
approach /accounting equation
approach:
Accounts
Asset
Account
Liabilities
account
Capital
account
Revenue
account
Expenditur
e 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
Expense
Asset
Liability
Debit
Credit
Credit
Journal Entry
Purchases 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. Avinash
Mr. 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 27.02.2004 Cash A/c 5 5000
15.03.2004 Cash A/c 58 16000
Balance C/d 4000
Total 25000 Total 25000
01.04.2004 Balance b/d 4000

Process
Step 1
Locate the account title used by the journal entry in the general ledger.
Step 2
Determine 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 3
Record the date of the journal entry in the date column.
Step 4
Write the corresponding name of Account in the Particulars Column.
Step 5
Write 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.

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 Particulars J Cr.
July 1 Capital 10000 July 5 Interest 2000
July 25 Supplier 1000
July 30 Drawings 500
Bal. c/d 6500
Capital A/c
Bal. c/d 10000 July 1 Cash A/c 10000
Interest Paid A/c
July 5 Cash 2000 Bal. c/d 2000
Supplier A/c
July 25 Cash 1000 Bal. b/d 2500
Bal. c/d 1500
Date Particulars L
F
Debit Credit
July 1 Cash A/c Dr.
To Capital A/c
(Being capital introduced )
10,000
10,000
July 5 Interest Paid A/c Dr.
To Cash A/c
2,000
2,000
July 25 Supplier A/c Dr.
To Cash A/c
1,000
1,000
July 30 Drawings A/c Dr.
To Cash A/c
500
500
Journal
Drawings A/c
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.

Cash A/c
July 1 Capital 10000 July 5 Interest 2000
July 25 Supplier 1000
July 30 Drawings 500
Bal. c/d 6500
Capital A/c
Bal. c/d 10000 July 1 Cash A/c 10000
Interest Paid A/c
July 5 Cash 2000 Bal. c/d 2000
Supplier A/c
July 25 Cash 1000 July 5 Purchase 2500
Bal. c/d 1500
Drawings A/c
July 30 Cash 500 Bal c/d 500
Total 500 Total 500
Trial Balance of Mr. X
As on March 31, 200X
Particulars
Debit
Amount
Credit
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
July 5 Supplier 2500 Bal C/d 2500

Thank You!

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