ACCOUNTING

FOR MANAGERS
For 5 Semester,NED University

Outline of the Course

Unit
Unit
Unit
Unit
Unit

I Financial Accounting
II Depreciation Accounting & Ratio Analysis
III Fund Flow and Cash Flow Analysis
IV Marginal Costing
V Cost Accounting

Problems vs. Theory 60: 40

 Accounting is a process of Identifying,

Measuring, Classifying, Recording and
communicating Financial Information.

Element

Concept of
Accounting

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

Summarizin
g

Presentation of accounting
information

Communicat Interpretation of results

ing

Book Keeping
is the art of
recording
business
transactions
in a
systematic
manner.

 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Amount withdrawn by proprietor for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

Transaction
Vs.
Event
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.

 Owners or Shareholders
Potential investors
Lenders
Creditors

Users of
Accounting
Information

Customers
Creditors
Management
Employees
Government
Stock exchanges
Need and Importance of Accounting

Results of operations
Solvency and liquidity
Financial position
Cash flows

The various parties

who are interested
in accounting
information..

1. Cash Transactions
2. Credit transaction
3. Barter transaction
4. Paper transaction
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

Types of
transaction
s
Criteria: Settlement
and Time

 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

Basic
Accounting
Terms

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

Accountin
g
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.

 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 and
Convention

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
Accounting
period concept
Cost or
Historical
Objective
Concept
Evidence
Concept
Revenue
recognition
concept
Accrual Concept

Business unit will have a perpetual existence and will not be

sold or liquidated
Prepare financialstatements at periodic intervals for taking
timely corrective action
Assets should be shown on the balance sheet at the cost of
purchase instead of current value
Accounting records will initiate from a source document and
that the information recorded is based on fact and not
personal opinion.
Realization is assumed to occur when the seller receives
cash or a claim to cash (receivable) in exchange for goods or
services.
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

 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.

Accounting
Convention
s

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
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 EQUIVALENCE

Assets = Owners Equity +

Outside Liabilities

A = OE + OL

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.

14

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
(Creditors)

XX

Inventories (Stock)

XX

XYZ

XYZ

VERTICAL FORM OF BS

SOURCES OF FUNDS

Amount (Rs.) py

Amount (Rs) cy

Share Capital

AA

Reserves & Surplus

AA

Secured Loans

AA

XX

Unsecured Loans

AA

XX

ABC

XYZ

APPLICATION OF FUNDS

XX

Amount (Rs.) py

Amount (Rs) cy

Fixed Assets Gross Block

- Depreciation

AA

XX

Investment

AA

XX

Current Assets Current Liabilities

AA

XX

Loans & Advances

AA

XX

Miscellaneous Expenditure

AA

XX

ABC

XYZ

A = OE + OL
Assets
Assetsare
areproperties
propertiesor
oreconomic
economic
resources
resourcesowned
ownedby
byaabusiness.
business. They
Theyare
are
expected
expectedto
toprovide
providefuture
futurebenefits
benefitsto
tothe
the
business.
business.

OE+OL

Liabilities
Liabilitiesare
are
obligations
obligationsof
ofthe
the
business.
business. They
They
are
areclaims
claims
against
againstthe
the
assets
assetsof
ofthe
the
business.
business.
Equity
Equityis
isthe
the
owners
ownersclaim
claimon
on
the
theassets
assetsof
ofthe
the
business.
business.ItItis
isthe
the
residual
residualinterest
interestin
in
the
theassets
assetsafter
after
deducting
deducting
liabilities.
liabilities.
17

A = OE + OL

LIABILITIES

Amount

ASSETS

Amount
XX

Capital

XX

Fixed Assets-Land, Bldg,

Loan taken

XX

Current Assets

Current Liabilities
Outstanding
Bank

Expenses

Overdraft

Accounts

Payable (Creditors)

Cash

XX

/ Bank B/s

Accounts

Receivable

(Debtors)

XX

Bills

XX

Inventories

XYZ

Receivable)
(Stock)

XX
XX
XX
XX

XYZ
18

A = OE + OL
SOURCES OF FUNDS

Amount
py

Share Capital

AA

Reserves & Surplus

AA

Amount
cy
XX

Secured Loans

XX

Unsecured Loans

XX
XX

APPLICATION OF FUNDS
Fixed Assets Gross Block
- Depreciation
Investment
Current Assets Current Liabilities
Loans & Advances
Miscellaneous Expenditure

Amount
(Rs) py

Amount
(Rs) cy

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) Owners Equity (equity)

20

Transaction Analysis

Owners of Scox Company contributed

Rs. 20,000 cash to start the business.
Assets

(1)

Cash
Supplies Equipment
20000

20000

0
20000

Liabilities
Accounts Notes
Payable Payable

0
=

Owners'
+ Equity
Owners'
Capital
20000

20000

20000
21

Purchased supplies paying Rs. 1,000 cash.

Transaction Analysis
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)

22

Transaction Analysis

Purchased supplies paying Rs. 1,000

cash.
Assets

(1)
(2)

Cash
Supplies Equipment
20000
-1000
1000

19000

1000
20000

Liabilities
Accounts Notes
Payable Payable

0
=

Owners'
+ Equity
Owner's'
Capital
20000

20000

20000

23

Transaction Analysis

Purchased equipment for Rs.15,000

cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)

24

Transaction Analysis

Purchased equipment for Rs. 15,000

cash.
Assets

(1)
(2)
(3)

Cash
Supplies Equipment
20000
-1000
1000
-15000
15000
4000

1000
20000

15000

Liabilities
Accounts
Notes
Payable Payable

0
=

Owners'
Equity
Owners'
Capital
20000

20000

20000

25

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)

26

Transaction Analysis

Purchased Supplies of Rs. 200 and

Equipment of Rs. 1,000 on account.
Assets

(1)
(2)
(3)
(4)

Cash
Supplies Equipment
20000
-1000
1000
-15000
15000
200
1000
4000
1200
16000
21200

Liabilities
Accounts
Notes
Payable Payable

1200
1200
=

Owners'
Equity
Owners'
Capital
20000

20000

21200

27

Transaction Analysis
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Assets

Bal.

1200
21200

Liabilities
Accounts Notes
Payable Payable
1200

Cash
Supplies Equipment
4000
1200
16000

4000

Owners'
+ Equity

16000

1200
=

Now lets look at transactions

involving revenues and expenses.

Owners'
Capital
20000

20000

21200

28

Transaction Analysis
Rendered consulting services receiving Rs. 3,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Revenues (equity)

29

Transaction Analysis

Rendered consulting services

receiving Rs. 3,000 cash.
Assets

Bal.
(5)

1200
24200

Accounts
Notes
Payable Payable
1200

Cash
Supplies Equipment
4000
1200
16000
3000

7000

Liabilities

16000

1200
=

Owner's
Equity
Owner's
Capital
20000
3000

23000

24200
30

Transaction Analysis

Paid salaries to employees, Rs. 800

cash.
The accounts involved are:
(1) Cash (asset)
(2) Salaries expense (equity)

31

Transaction Analysis
Paid salaries to employees, Rs. 800 cash.
Assets

Bal.
(5)
(6)

1200
23400

Accounts
Notes
Payable Payable
1200

Cash
Supplies Equipment
4000
1200
16000
3000
-800
6200

Liabilities

16000

1200
=

Owner's
Equity
Owner's
Capital
20000
3000
-800

22200

23400

32

Transaction Analysis
Borrowed Rs. 4,000 from SBI

The accounts involved are:

(1) Cash (asset)
(2) Notes payable (liability)

33

Transaction Analysis

Borrowed Rs. 4,000 from SBI

Assets

Bal.
(5)
(6)
(7)

Cash
Supplies Equipment
4000
1200
16000
3000
-800
4000
10200
1200
16000
27400

Liabilities
+
Accounts Notes
payable Payable
1200

1200
=

4000
4000

Owner's
Equity
Owner's
capital
20000
3000
-800
22200

27400
34

Financial
Statements
Prepare the Financial Statements reflecting the transactions
we have recorded.

35

Income Statement
Scox Company
Income Statement
For Month Ended March 31, 2001
Revenues:
Consulting revenue
Expenses:
Salaries expense
Net income

3000
800
2200

net
TheScoxs
net income
income is the
of
Rs. 2,200
difference
increases
between
Scoxs
equity
Revenues
and
byExpenses.
Rs. 2,200.

Scox Company
Statement of Changes in Owners' Equity
For Month Ended March 31, 2001
Owners' equity, 1st April 2000
Plus: Investment by owners
Net income
Owners' equity, 31st March 2002

0
20000
2200
22200
36

Balance Sheet
The
Thebalance
balancesheet
sheetreflects
reflects
Scoxs
Scoxsfinancial
financialposition
positionat
at
March
March31
312001
2001

Scox Company
Statement of Changes in Ow ners' Equity
For Month Ended March 31, 2001
Ow ners' equity
Investment by ow ners
Net income
Ow ners' equity, March 31 2001

0
20000
2200
22200

Scox Company
Balance Sheet
March 31, 2001
Liabilities & Ow ners' Equity
Accounts payable
1200
Notes payable
4000
Total liabilities
5200
Owners' equity
22200

Total liabilities
and owners'
equity

27400

Assets
Cash
Supplies
Equipment

10200
1200
16000

Total assets

27400

37

Classification of Accounts
1.English Approach
2.American Approach

English
Approach
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

 Natural personal account

Accounts of physical and naturally born person

Personal
Accounts

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.

 Accounts of Tangible assets

Physical evidence

Asset
Account

Accounts of Intangible assets

Do of have physical existence

Nominal
Account
Account of incomes and losses and expenses
and gains

An account of
things owned by a
concern and in and
with which the
business is carried
on.

Furniture account

Asset a/c
Representative
Outstanding wages account
personal a/c
Nominal
Stationary account
a/c
Natural
personal
Capital Account
account a/c
Nominal
account
Salaries account
a/c
Artificial personal
National Trading Co; account
account a/c
Representative
Prepaid insurance account
personal a/c
Nominal account
Interest account
a/c
Asset or
Sales account
Nominal a/c
Nominal account
Repair on machinery
a/c
Personal
Debtors account
account a/c
Asset
Bills receivable account
a/c
Asset
Provision for depreciation
a/c
Nominal
a/c
Rent account

Activity

Test your Progress

DOUBLE ENTRY SYSTEM

A = OE + OL
Debit = Credit
In
In the
the double-entry
double-entry accounting
accounting system,
system,
every
every transaction
transaction is
is recorded
recorded by
by equal
equal
amounts
amounts of
of debits
debits and
and credits.
credits.
43

ACCOUNTANTS LIFE

A = OE + OL
ASSETS

LIABILITIES

EQUITIES

Debit
Credit
for
for
Increase Decrease

Debit
Credit
for
for
Decrease Increase

Debit
Credit
for
for
Decrease Increase

ASSETS

Debit

Credit

LIABILITIES

Debit

Credit

EQUITIES

Debit

Credit

44

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.

Two accounts
Involved

Types of
accounts

Cash a/c
Capital a/c

Real a/c
Personal a/c

Rule of Debit and

Credit

Debit what comes

in
Credit giver of
Brought Goods from Vijay for Cash Rs. 1000
benefit
Two accounts
Types of
Rule of Debit and
Involved
accounts
Credit
Cash a/c
Goods
purchased a/c

Test your progress

Account to
debited

Account to be
credited

Cash

Capital

Account to
debited

Account to be
credited

Credit what goes

Goods
out
purchased
Debit what comes
Purchased Goods from Sujay for credit Rs. 300
in
Two accounts
Types of
Rule of Debit and
Account to
Involved
accounts
Credit
debited
Raghu a/c
Goods
purchased a/c

Real a/c
Real a/c

Personal a/c
Real a/c

Credit giver of
benefit
Debit what comes
in

Goods
purchased

Cash

Account to be
credited
Raghu

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
50

ACCOUNTANTS ROUTINE

Transaction

Source
documents

Balance Sheet
P & L A/c
Cash Flow

Prepare a trial
balance

Post to the
ledger

Analyze

Journal Entry
51

Thank You

Now, was that debits to

the left or credits to the
left?
I sure wish I had paid
more attention in class!