Accounting for Managers

Module 1
Introduction to Accountancy
1

Module 1
(7 Hours)

Principle of double entry book keeping:

Importance
&
scope
of
accounting,
Accounting
concepts,
conventions,
GAAPS
&
accounting
standards.
Accounting
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Definition And Meaning Of Accounting

The American Institute of Certified Public

Accountants (1941) defines Accounting is the art of
recording, classifying and summarising in significant
manner and in terms of money, transactions and events
which are in part, at least of a financial character and
interpreting the results thereof.
Accounting As An Information Cycle
Input

Process

Output
3

Accountancy, Accounting And Book-keeping

IMPORTANCE OF ACCOUNTING
1. Facilitates to replace memory and comply with
legal requirements
2. Facilitates to ascertain net result of operations
and also to know the financial position
3. Facilitates the users to take effective decisions
4. It is helpful in a comparative study
5. It assists the management
6. It facilitates to have control over assets
7. It facilitates the settlement of tax liability
8. It facilitates raising of loans
9. It acts as a legal evidence
10. It facilitates ascertainment of value of business.
5

SCOPE OF ACCOUNTING

Identifying
Measuring
Recording
Classifying
Summarising
Analysing
Interpreting

Communication
6

Accounting Principles

Accounting principles are a body of doctrines

commonly associated with the theory and
procedures and as a guide for selection of
conventions or procedures where alternatives exist.
These principles are classified into two categories:
1. Accounting Concepts
2. Accounting Conventions

TYPES OF ACCOUNTING
Accounting

Financial
Accounting

Cost
Accounting

Management
Accounting

Social
Responsibility
Accounting

ACCOUNTING CONCEPTS
Concept means a general notion, a theory or belief
held by person or group of persons. The term
concepts includes those basic assumptions or
conditions upon which the science of accounting is
based.
1.
2.
3.
4.
5.
6.
7.

Business entity concept

Money measurement concept
Cost concept
Going concern concept
Dual aspect concept
Realisation concept
Accrual concept
9

ACCOUNTING CONVENTIONS
A convention means a custom or an established usage
formed or adopted by an agreement. The term conventions
includes those customs or traditions which guide the
accountant while preparing the accounting statements.
1.
2.
3.
4.

Convention of consistency
Convention of full disclosure
Convention of conservatism
Convention of materiality

10

Accounting Standards
The Accounting standards bring uniformity in the preparation
and presentation of financial statements and aids in
comparison of different financial statements of companies in
the same or different industries.
Procedure for framing Accounting Standards
The International Accounting Standards are issued by the
IASC
These Standards are received by ICAI assigned to ASB
The Accounting standards are issued under the authority of
the council of ICAI.
So far the ASB of ICAI has issued 28 Accounting standards
as shown below:
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Accounting
Standard
AS-1

Title

Mandatory for
Accounting period
beginning on or after

Disclosure of Accounting Policies

1.4.1991

AS2(Revised)

Valuation of inventories

1.4.1999

AS3(Revised)

Cash Flow Statements

1.4.2001

AS4(Revised)

Contingencies and Events occurring

after Balance Sheet Date

1.4.1995

AS5(Revised)

Net Profit or Loss, prior period items

and changes in Accounting policies

1.4.1996

AS6(Revised)

Depreciation Accounting

1.4.1995

AS7(Revised)

Accounting for construction contracts

1.4.2003

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AS-8

Accounting for Research and

Development

1.4.1991

AS-9

Revenue Recognition

1.4.1991

AS-10

Accounting of Fixed Assets

1.4.1991

Accounting for the effect of changes in

foreign exchange rates

1.4.1995

AS-12

Accounting for Government Grants

1.4.1994

AS-13

Accounting for Investments

1.4.1995

AS-14

Accounting for Amalgamations

1.4.1994

AS-15

Accounting for retirement benefits in

the financial statements of employers

1.4.1995

AS-16

Borrowing costs

1.4.2000

AS-17

Segment reporting

1.4.2001

AS-11(Revised)

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AS-18

Related Party Disclosures

1.4.2001

AS-19

Leases

1.4.2001

AS-20

Consolidated Financial Statements

1.4.2001

AS-21

Earnings per share

1.4.2001

AS-22

Accounting for taxes on income

1.4.2001

AS-23

Accounting for investments in consolidated finance

statements

1.4.2002

AS-24

Discounting operations

1.4.2004

AS-25

Interim financial reporting

1.4.2002

AS-26

Intangible assets

1.4.2003

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AS-27

Financial reporting of interest in joint ventures

1.4.2002

AS-28

Impairment of Assets

1.4.2004

AS-29

Provisions, Contingent Liabilities and

Contingent Assets

1-4-2004

15

Accounting equations
Meaning:
The statement of equality between debits and credits is known as
accounting equations. In other words ,statement regarding equality of
assets with its corresponding liability is termed as accounting
equations.

Constituents of accounting equations:

Assets: valuable things owned by the business is termed as
assets. Cost of acquiring , installation and development o0f these
in the value of assets is regular feature.

Liabilities: proprietors and creditors claim against business is

termed as liabilities. Creditors for goods loan, expenses and
proprietor's claim is termed as liability . In case of accounting
equation the term liability is restricted to outsiders claim.

Capital: proprietors claim towards business is known as capital.

It includes cash introduced as capital + reserve + income +
profit + interest on capital drawings losses interest16
on drawings expenses.

Accounting equations
Capitals + liabilities

Proprietors' capitals + liabilities

Loans
Bank overdraft
Creditors
Bills payable
Outstanding expenses
Income received in advance

Assets

Properties and assets

Buildings
Land
Machinery
Furniture
Stock in trade
Debtors
Bills receivable
Bank cash

Every business every time has some assets and liabilities. These are always
equal. So balance sheet showing the assets and liabilities is always in the form
of an equation:

Assets = Capital + Liabilities

17

Accounting Equations
An accounting equation is a statement of equality between the resources
and the sources that finance the resources.
Resources = Sources of finances-------------- (1)
Resources means Assets & Sources of finances means Equity. If we substitute
the above synonyms, the equation will be as under:
Total Assets = Total Equities------------ (2)
Equities means borrowed funds, which may be funds borrowed from internal
sources and those that can be from external sources. These are also called
internal equities and external equities. In that case the above equation may also be
written as under:
Assets = Internal Equity + External Equity-----------(3)
It is a known fact that Internal Equity means Capital and External Equity
means Liability. So the above equation can be written as
Assets = Capital + Liabilities---------------(4)
OR
Assets Liabilities = Capital--------------(5)
OR
Assets Capital = Liabilities------------(6)
Equations 4,5,6 are accounting equations
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USERS OF FINANCIAL STATEMENTS

1.
2.
3.
4.
5.
6.
7.
8.

Creditors (short term & long term)

Investors (present & potential)
Management
Employees
Tax Authorities
Customers
Government and their agencies
Public

19

Double Entry System Of Book-keeping

The main principle involved in Double Entry system is the duality transactions
i.e., for every debit, there is an equal and opposite credit.
Total Debits = Total Credits

Principles Of Double Entry System

Classifications of accounts under double entry system

1. Traditional classification

Personal Accounts
Names of individuals,
firms, companies and
other entities

Real Accounts
Assets And Liabilities

Nominal Accounts
Expenses, losses and
incomes and gains
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Assets: Resources, things or rights or value owned by a business

Liability: Claims of others against a business / Assets owned by the business to
the
outsiders
Expenses:An expenditure in return for which a benefit is received.
Loss:
An expenditure in return for which no benefit is received.
Income: Refers to the earnings of a business for the expenses incurred
Profit:
Refers to the earnings of a business for no expenses incurred or
proportionally meagre expenses incurred

Rules for debit and credit under traditional classification

Type of Account

Debit

Credit

Personal Account

The receiver

The giver

Real Account

What comes in

What goes out

All expenses and losses

All incomes and gains

Nominal Account

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2. Classification based on accounting equation

Asset
Accounts

Liabilities
Accounts

Capital
Accounts

Revenue
Accounts

Expenditure
Accounts

Rules of debit and credit for classification based on accounting equation

Type of Account

Debit

Credit

Asset Accounts

Increase

Decrease

Liabilities Accounts

Decrease

Increase

Capital Accounts

Decrease

Increase

Revenue Accounts

Decrease

Increase

Expenditure Accounts

Increase

Decrease

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End of the Module

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