COURSE TITLE-ACCOUNTING FOR MANAGERS

Total Hrs. /Semester: 75

Max. Marks: 100
Hrs. /W: 5 Total Credits: 4
COURSE OUTCOMES: On successful completion of the course, students will be
able to:
● It aims to fundamental accounting concepts the elements of financial
statements, and basic accounting vocabulary.
● It addresses uses of accounting equation in basic financial analysis and Its
objectives how the equation is related to the financial statements.
● It expresses the uses of financial reporting and auditing procedures.
● It gives the various cost management techniques.
SYLLABUS

UNIT- 1: Introduction to Financial, Cost and Management Accounting

Introduction to Accounting: Meaning and Importance, Classification of Accounts –

Accounting Cycle– Double entry system –Basic Accounting Concepts and
Conventions – Journal – Ledger – Trial Balance –Final Accounts: Construction of
Trading, Profit & Loss Account and Balance Sheet (With Adjustments).

UNIT-II: Financial Statement Analysis

Analysis and Interpretation of financial statements: Meaning, Importance and

Techniques– Methods of Depreciation, Ratio analysis, types of ratios, (Simple
Problems) Funds Flow Analysis, and Cash Flow Analysis (Simple Problems)

UNIT-III: Accounting for Capital Issues

Accounting for Issue, Allotment and Forfeiture of Shares, Accounting for Debentures
Issues – Conversion – Accounting Procedures for Declaring and Distributing
Dividends

UNIT-IV: Financial Reporting and Auditing

Financial reporting and Auditing Legal requirements relating to Accounting

Disclosure – IFRS–Board’s Report – Forensic Accounting, Window Dressing –

Sustainability Reporting.

UNIT- V: Cost Management

Meaning and Objectives of cost accounting – Classifying Costs -Cost sheet - Types of
Costing – Contract costing, Operating costing - Cost Behavior–– Marginal Costing –
 Cost-Volume-Profit Analysis

Reference Books:
1. Anthony, Robert N and James Reece, Accounting Principles, All
India Traveler Book Seller, ND.
2. Horngren, Charles T., Introduction to Management Accounting, PHI, NJ.
3. Maheswari SNN, Management Accounting and Financial Control, Mahavir Book
Depot.
4. Noore Carl L and Robert K. Joed Icke, Managerial Accounting, South
Western Pub. Co. Rober S. Kaplan and Anthony A. Atkinson, Advanced
Management Accounting
(PHI), New Delhi.
6. JackL. Smith, Robert M. Keith and William L. Stephens, Managerial Accounting,
McGraw-Hill.

UNIT- 1: Introduction to Financial, Cost and Management Accounting

Introduction to Accounting: Meaning and Importance, Classification of Accounts –

Accounting Cycle– Double entry system –Basic Accounting Concepts and Conventions –
Journal – Ledger – Trial Balance –Final Accounts: Construction of Trading, Profit & Loss
Account and Balance Sheet (With Adjustments). (15 topic)

 Meaning and Importance of Financial Accounting:

Financial accounting is a crucial aspect of business operations, providing a

comprehensive overview of a company's financial standing and performance. It entails the
process of recording, classifying, summarizing, and interpreting financial transactions to
present a clear picture of an organization's financial health.

Meaning of Financial Accounting:

Financial accounting serves as a formal language of business, communicating

financial information to both internal and external stakeholders. It provides a standardized
framework for recording and reporting financial activities, ensuring consistency and
comparability across different entities.

Definitions of Financial Accounting:

 “Financial accounting is the process of identifying, measuring, recording, and

communicating financial information about an organization to stakeholders”.
 The American Institute of Certified Public Accountants (AICPA) had defined
accounting as the “art of recording, classifying, and summarising in a significant
manner and in terms of money, transactions and events which are, in part at least, of
financial character, and interpreting the results thereof”.
 “Financial accounting is a set of accounting principles and practices that are used to
prepare financial statements that provide information about an organization's financial
position, performance, and cash flows”.
 “Financial accounting is a branch of accounting that deals with the recording,
classifying, summarizing, and interpreting of financial transactions to provide
information that is useful in making business decisions”
 “Financial accounting is a system of accounting that is used to prepare financial
statements that provide information about an organization's financial position,
performance, and cash flows”.

 Father of Financial Accounting:

 Luca Pacioli, an Italian mathematician and Franciscan friar from the 15th and 16th
centuries, is often referred to as the "father of accounting."

 Pacioli is best known for his book Summa de Arithmetica, Geometria, Proportioni et
Proportionalità, published in 1494. This comprehensive work included a section on
double-entry bookkeeping, which is the foundation of modern accounting. Pacioli's
work helped to standardize and spread the use of double-entry bookkeeping, and it is
still considered to be one of the most important works in the history of accounting.

 In addition to his work on double-entry bookkeeping, Pacioli also made significant

contributions to the fields of mathematics, geometry, and perspective. He was a friend
 and collaborator of Leonardo da Vinci, and he is believed to have taught mathematics
to da Vinci's apprentices.

Importance of Financial Accounting:

 Decision-Making: Financial statements, the primary output of financial accounting,

serve as essential tools for informed decision-making. Managers utilize financial data
to evaluate the company's performance, assess financial risks, and make strategic
decisions regarding resource allocation, investment opportunities, and operational
efficiency.
 Transparency and Accountability: Financial accounting promotes transparency by
providing accurate and verifiable financial information to stakeholders. This
transparency fosters accountability and enables investors, creditors, and other
interested parties to make informed judgments about the company's financial health.
 Performance Measurement: Financial accounting provides a standardized
framework for measuring and evaluating a company's financial performance over
time. This allows businesses to track their progress, identify areas for improvement,
and set realistic financial goals.
 Compliance and Regulations: Financial accounting adheres to established
accounting standards and regulatory requirements, ensuring that financial statements
are prepared in a consistent and compliant manner. This compliance fosters trust and
confidence among stakeholders and helps companies avoid legal and regulatory
issues.
 Taxation and Financial Reporting: Financial accounting serves as the foundation
for tax preparation and financial reporting. Accurate financial records are essential for
complying with tax laws and preparing accurate financial statements for external
parties.

Objectives of Accounting

To maintain a systematic record of business transactions

 Accounting is used to maintain a systematic record of all the financial transactions in

a book of accounts.
  For this, all the transactions are recorded in chronological order in Journal and then
posted to principal book i.e., Ledger.

To ascertain profit and loss

 Every businessman is keen to know the net results of business operations periodically.

 To check whether the business has earned profits or incurred losses, we prepare a
“Profit & Loss Account”.

To determine the financial position

 Another important objective is to determine the financial position of the business to

check the value of assets and liabilities.

 For this purpose, we prepare a “Balance Sheet”.

To provide information to various users

 Providing information to the various interested parties or stakeholders is one of the

most important objectives of accounting.

 It helps them in making good financial decisions.

To assist the management

 By analyzing financial data and providing interpretations in the form of reports,

accounting assists management in handling business operations effectively.

MAIN BRANCHES OF ACCOUNTING:

 (a) Financial accounting:

Financial Accounting is that branch of accounting which involves identifying,

measuring, recording, classifying, summarising the business transactions, i.e., it
involves the steps from Identifying, recording of transactions to Summarisation, and
communicating the financial data.

 (b) Cost accounting:

Cost Accounting is that branch of accounting which is concerned with the

process of ascertaining and controlling the cost of products or services.
  (c) Management accounting

Management accounting refers to that branch of accounting which is

concerned with presenting the accounting information in such a way that helps the
management in planning and controlling the operations of a business and in decision
making.

(d) Human resources accounting:

Human resource accounting (HRA) is a process of identifying, measuring, and

reporting investments made in the human resources of an organization. It is an extension of
standard accounting principles that aims to quantify the value of an organization's human
capital.

(e) Inflation accounting:

Inflation accounting is a method of accounting that adjusts financial statements for the effects
of inflation. When inflation is high, traditional accounting methods can distort the true
financial position of a company. Inflation accounting helps to correct these distortions by
adjusting the values of assets and liabilities to reflect their current purchasing power.

 Classification of Accounts:

Classification of Accounts Under the Traditional (or British) Approach

According to the traditional approach, accounts are classified into three types: real
accounts, nominal accounts, and personal accounts. Given that it is an old system
for classifying accounts, it is used rarely in practice.

Personal Accounts
Personal accounts are the accounts that are used to record transactions relating to
individual persons, firms, companies, or other organizations.

DEBIT THE RECIVER

CREDIT THE GIVER

Examples of such accounts include an individual's accounts (e.g., Mr. X's account),
the accounts held by modern enterprises, and city bank accounts.

Impersonal Accounts
Impersonal accounts are those that do not relate to persons. There are two types:

 Real Accounts (Or Permanent Accounts)

 Nominal Accounts (Or Temporary Accounts)

Real Accounts

Real accounts exist even after the end of accounting period. For the
next accounting period, these accounts start with a non-zero balance, which is
carried forward from the previous accounting period.

DEBIT WHAT COMES IN

CREDIT WHAT GOES OUT
Examples of such accounts include machinery accounts, land accounts, furniture
accounts, cash accounts, and accounts payable accounts.

Usually, real accounts are listed in the balance sheet of the business. For this
reason, they are sometimes referred to as balance sheet accounts.
Nominal Accounts

Nominal accounts are closed at the end of the accounting period. For the next
account period, these accounts start with a zero balance. Nominal accounts
typically cover issues such as income, gains, expenses, and losses.

DEBIT ALL EXPENSES AND LOSSSES

CREDIT ALL INCOMES AND GAINS
Normally, nominal accounts are used to accumulate income and expense data. In
turn, these data can be used to prepare income statements or trading and profit
and loss accounts.

For this reason, nominal accounts are sometimes referred to as income statement
accounts.

Examples of nominal accounts include sales, purchases, gains on asset sales,

wages paid, and rent paid.

Classification of Accounts Under the Modern (or American) Approach

The modern approach has become a standard for classifying accounts in many
developed countries.

The main types of accounts used under this approach are mostly self-explanatory.

 Asset accounts: Examples include land accounts, machinery

accounts, accounts receivable accounts, prepaid rent accounts, and
cash accounts.

 Liability accounts: Examples include loan accounts, accounts

payable accounts, wages payable accounts, salaries payable accounts,
and rent payable accounts.
  Revenue accounts: Examples include sales accounts, service revenue
accounts, rent revenue accounts, and interest revenue accounts.

 Expense accounts: Examples include wage expense accounts,

commission expense accounts, salary expense accounts, and rent
expense accounts.

 Capital/owner's equity accounts: An example is an individual

owner's account (e.g., Mr. X's account).

Accounting Cycle:
The accounting cycle is a series of eight steps that businesses follow to record and
process their financial transactions. It begins with the identification of a transaction and ends
with the preparation of financial statements. The eight steps are:

1. Identify transactions: The first step is to identify all of the financial transactions that
have occurred during the accounting period. This includes transactions such as sales,
purchases, payments, and receipts.

2. Record transactions in a journal: Once a transaction has been identified, it must be

recorded in a journal. A journal is a chronological record of all of the business's
transactions.

3. Post transactions to the general ledger: After a transaction has been recorded in a
journal, it must be posted to the general ledger. The general ledger is a permanent
record of all of the business's accounts.
4. Prepare an unadjusted trial balance: An unadjusted trial balance is a list of all of
the business's accounts and their balances at the end of the accounting period. The
purpose of an unadjusted trial balance is to ensure that all of the debits equal all of the
credits.

5. Make adjustments entries: Worksheet adjustments are adjustments to the unadjusted

trial balance that are necessary to ensure that the financial statements are accurate.
Worksheet adjustments are typically made to correct errors, to accrue expenses, to
defer revenue, and to recognize depreciation.

6. Prepare adjusted Trail balance : After worksheet adjustments have been prepared,
they must be posted to the Trail balance . This will update the balances of the affected
accounts.

7. Prepare financial statements: The financial statements are the final product of the
accounting cycle. The three main financial statements are the balance sheet, the
income statement, and the statement of cash flows.

8. Close the books: The final step in the accounting cycle is to close the books. This
involves transferring the balances of the revenue and expense accounts to the capital
account.

 Double entry system:

The double-entry system is a fundamental accounting method that records
financial transactions twice, once for each affected account. This ensures that every
transaction has a debit and a credit entry, and that the total debits always equal the
total credits. This system helps to ensure the accuracy and completeness of financial
records.

Double-entry bookkeeping, also known as double-entry accounting, is a

method of bookkeeping that relies on a two-sided accounting entry to maintain
financial information. Every entry to an account requires a corresponding and
opposite entry to a different account. The double-entry system has two equal and
corresponding sides known as debit and credit. A transaction in double-entry
bookkeeping always affects at least two accounts, always includes at least one debit
 and one credit, and always has total debits and total credits that are equal. The
purpose of double-entry bookkeeping is to allow the detection of financial errors and
fraud

benefits of double-entry system:

 Accuracy: The double-entry system helps to ensure that financial records are accurate
by requiring that every transaction be recorded twice.

 Completeness: The double-entry system helps to ensure that financial records are
complete by requiring that all transactions be recorded.

 Prevention of errors: The double-entry system helps to prevent errors by requiring

that debits equal credits.

 Ease of reconciliation: The double-entry system makes it easier to reconcile financial

statements by making it clear which accounts are affected by each transaction.

 Basic Accounting Concepts and Conventions or Accounting Principles:

Accounting concepts are the fundamental assumptions and principles that underlie the
accounting process. They provide a framework for recording, summarizing, and interpreting
financial information.

 Accounting concepts:

 Business Entity Concept: The concept of business entity says that a business is a
separate entity from its owners. Therefore, for the objective of accounting, the firm
and its owners are considered as 2 distinct persons. Hence, when an owner brings in
capital into the firm, it is considered as a liability of the business.
 Money Measurement Concept: The concept of money measurement associates to
such transactions of a business, which can be recorded in terms of money in the books
of accounts. The records are to be kept in monetary units alone and not in physical.
All the assets are consequently shown in monetary terms for accounting purposes.

 Going Concern Concept: Going concern concept says that a firm will take on its
business for an unlimited period of time and would not be converted into cash at any
pre-decided timeframe.
  Accounting Period Concept: Accounting period is the timeframe at the end of
which, the financial statements of a business are prepared, to evaluate its profits and
losses, and to learn the status of its assets and liabilities. This is required for the
smooth availability of data to the users of the accounting information in a convenient
manner.

 Cost Concept: Cost concept requires that all the assets must be recorded in the books
of accounts at the price at which they were bought, which involves the cost incurred
for transportation, installation and acquisition. The cost concept is traditional in nature
as a particular amount concerning the asset is paid on the date of purchase and does
not change year after year

Accounting Conventions:

 Conservatism: It tells the accountants to error on the side of caution when providing
the estimates for the assets and liabilities, which means that when there are two values
of a transaction available, then the always lower one should be referred to.
 Consistency: A company is forced to apply the similar accounting principles across
the different accounting cycles. Once this chooses a method it is urged to stick with it
in the future also, unless it finds a good reason to perform it in another way. In the
absence of these accounting conventions, the ability of investors to compare and
assess how the company performs becomes more challenging.
 Full Disclosure: Information that is considered potentially significant and relevant is
to be completely disclosed, regardless of whether it is detrimental to the company.
 Materiality: Similar to full disclosure, this convention also bound organizations to
put down their cards on the table, meaning they need to totally disclose all the
material facts about the company. The aim behind this materiality convention is that
any information that could influence the person’s decision by considering the
financial statement must be included.

Journal:
 In financial accounting, a journal is a chronological record of all financial transactions
of a business. It serves as the first step in the accounting process, capturing the essential
details of each transaction and providing a foundation for preparing financial statements.

Each journal entry, representing a single transaction, typically includes the following
information:

1. Date: The date on which the transaction occurred

2. Account: The specific accounting accounts affected by the transaction

3. Debit: The amount of money debited to an account. Debits typically increase asset or
expense accounts and decrease liability, equity, or revenue accounts.

4. Credit: The amount of money credited to an account. Credits typically decrease asset
or expense accounts and increase liability, equity, or revenue accounts.

5. Description: A brief explanation of the transaction

The double-entry bookkeeping system, a fundamental principle in accounting, ensures

that every transaction has equal debits and credits. This balance ensures the accuracy and
completeness of the accounting records.

Journal entries are typically recorded in a general journal, a chronological record of all
transactions. Specialized journals, such as sales journals and cash disbursements journals, can
also be used to record specific types of transactions more efficiently.

The journal serves as a crucial tool for accountants, providing a detailed record of all
financial activities and forming the basis for preparing financial statements like the balance
sheet, income statement, and statement of cash flows. These financial statements provide
valuable insights into the financial health and performance of a business.

Format:
  Ledger:

Ledger Format

The ledger consists of two columns prepared in a T format. The two sides of debit and credit
contain date, particulars, folio number and amount columns. The ledger format is as follows.

1. Date: In this column, the date on which the transaction was recorded is mentioned. The
year is written at the top, following the month and then the day.
2. Particulars: Every transaction affects at least two accounts. The name of the other
account which is affected by the transaction is recorded here.

3. Journal Folio or J.F.: Journal Folio shows the number of the page on which the Journal
account of that particular item is made and on the basis of which the particular transaction
has been made.

4. Amount: The amount involved in the transaction is mentioned here.

Ledger Account Example

Following are some examples of ledger accounts

 1. Accounts receivable

2. Cash

3. Depreciation

4. Accounts payable

5. Salaries and wages

6. Revenue

7. Debt

8. Inventory

9. Stockholders’ equity

10. Office expenses

Ledger Posting

The process of transferring entries from a journal to the respective ledger accounts is
known as ledger posting. For this process, first, the entries are recorded in journals and then
transferred to their respective ledger accounts.

In accounting, there are three main types of ledgers:

1. General ledger: The general ledger is the central accounting record that contains all
the financial transactions of a business. It is a summary of all the other ledgers and
provides a comprehensive overview of the company's financial position. The general
ledger is divided into different sections, such as assets, liabilities, equity, revenues,
and expenses. Each section contains a list of accounts related to that category.

2. Sales ledger (debtor's ledger): The sales ledger records all the transactions related to
credit sales, including the names of customers, the amounts they owe, and the dates
when payments are due. It helps businesses track their accounts receivable and
manage their credit customers.

3. Purchase ledger (creditor's ledger): The purchase ledger records all the transactions
related to credit purchases, including the names of suppliers, the amounts they are
owed, and the dates when payments are due. It helps businesses track their accounts
payable and manage their credit suppliers.
  Trial Balance:

In accounting, a trial balance is a list of all the general ledger accounts of a company,
with their respective debit and credit balances. It is a preparatory step in the accounting cycle,
performed after the completion of all journal entries and ledger updates. The trial balance
serves two primary purposes:

1. Verifying Accuracy: The trial balance aims to check whether the debits and credits in
the general ledger are equal, ensuring the accuracy of the accounting records. A
balanced trial balance indicates that the double-entry system has been applied
correctly and that the total debits and credits in the ledger are in agreement.

2. Identifying Errors: If the trial balance is not balanced, it signifies an error in the
accounting records. The accountant can then investigate the discrepancies and rectify
the errors to ensure the integrity of the financial statements.

The trial balance is typically presented in a two-column format, with the account names
listed on the left and their corresponding debit and credit balances on the right. The total of
the debit column is compared to the total of the credit column, and if they are equal, the trial
balance is considered balanced.

Objectives of Trail balance:

1. It summarizes the ledger accounts:

Ledger accounts are made to record all the transactions related to the
assets, liabilities, expenses, and income of the business with the help of a
journal. So, all the debit and credit side balances of ledgers are transferred to
the debit and credit side of the trial balance, respectively.

2. It helps in determining the arithmetical accuracy of the ledger accounts:

The aim of the trial balance is to check if all the ledger postings are done in a correct
and accurate manner. This can be assessed using the balances of both the debit and
credit side of the trial balance. Because if the total on both sides agrees or equates,
then it means that ledger postings are posted in an accurate manner. It also confirms
the rules of the double entry system that all the entries have a double effect.
3. It guides in preparing final accounts:
For every businessman, it is important to know the financial health of their business.
This can be ascertained by preparing financial accounts like Trading Account, Profit
and Loss Account, and Balance Sheet. So, there comes the role of Trial Balance.
Once, all the journal entries have been passed, ledger postings have been recorded,
and the trial balance matches, then all the financial accounts are prepared, thereby
that the balances in the trial balance become the base for recording all the accounting
data further in the final accounts.

4. It helps in allocating the errors:

It is important for the trial balance to tally, but if it does not tally, it implies that
certainly there are some errors in the books of accounts. So, it would help to first
make the businessman aware that maybe a few postings have not been well posted or
posted with the wrong amount or in the wrong account, and many other possible
errors could be there. So, once the errors are allocated, then corrections could be
done to remove the errors.

Different types of trail balance:

1. Balance Method:

While preparing the statement of trial balance under this method, all the ledger
accounts with the debit balances are carried forward to the debit side of the trial balance
and all the ledger accounts with the credit balances are carried forward to the credit side of
the trial balance. As the name suggests, it is a method related to the balances, so the
balances are available in the ledger account at the end after all the adjustments are carried
forward to the trial balance. Also, if any of the ledger accounts do not show any balance i.e.
the total on both the debit and the credit side is the same, then there is no need to carry it to
the trial balance. So, in the end, if the debit and credit side of the trial balance matches, it
can be said that the trial balance has been well prepared.
 2. Total Amount Method:

While preparing the statement of trial balance under this method, unlike the balance
method, not only balances rather the total amount on the debit side of the ledger account is
transferred to the debit side of the trial balance and the total amount on the credit side of the
ledger account is transferred to the credit side of the trial balance. Under this method, the
statement for trial balance can be prepared promptly after posting all the entries to ledger
accounts before any adjustments are made to them.

3. Total-cum-Balances method:

Under this method, two methods – ‘Balance Method’ and ‘Total Amount Method’ are
combined to prepare the statement of trial balance. It implies that in total, four columns are
prepared, two columns are for recording the debit and credit balances of ledger accounts
and two columns are for recording the debit and credit totals of various ledger accounts.
This method is rarely used and not so frequently used while making the statement for the
trial balance.

Format of Trial Balance according to the Balance Method:

 Final Accounts:
 In accounting, final accounts refer to the set of financial statements prepared at the end of
an accounting period, typically a year, to summarize a company's financial performance and
position. These statements provide essential information to stakeholders, including investors,
creditors, and management, to assess the company's financial health and make informed
decisions.

The primary components of final accounts include:

1. Trading Account: This statement summarizes the financial activities related to the
company's core business operations, including sales, cost of goods sold, and gross
profit.
2. Profit and Loss Account (Income Statement): This statement provides a
comprehensive overview of the company's financial performance over the accounting
period, detailing revenues, expenses, and net profit or loss.
3. Balance Sheet: This statement presents a snapshot of the company's financial
position at a specific point in time, showing its assets, liabilities, and equity.
4. Statement of Cash Flows: This statement summarizes the company's cash inflows
and outflows during the accounting period, categorized into operating, investing, and
financing activities.

The preparation of final accounts involves a series of steps, including:

1. Journalizing Transactions: Recording all financial transactions in the general

journal.
2. Posting to Ledger: Transferring journal entries to the respective accounts in the
general ledger.
3. Preparing Trial Balance: Verifying the accuracy of accounting records by ensuring
that total debits equal total credits.
4. Adjusting Entries: Making necessary adjustments to reflect accruals, deferrals, and
estimates.
5. Adjusted Trial Balance: Verifying the accuracy of accounting records after adjusting
entries.
6. Preparing Financial Statements: Creating the trading account, profit and loss
account, balance sheet, and statement of cash flows.
 7. Closing Entries: Transferring net profit or loss to the capital account and closing
temporary accounts.

Objectives of Final Account preparation

Final accounts are prepared with the following objectives:

1. To determine profit or loss incurred by a company in a given financial period

2. To determine the financial position of the company

3. To act as a source of information to convey the users of accounting information (owners,

creditors, investors and other stakeholders) about the solvency of the company.

Adjusting entries are modifications made to the accounting records at the end of an
accounting period to reflect unrecorded transactions, accruals, deferrals, and estimations.
These adjustments ensure that the financial statements accurately represent the company's
financial position and performance.

Types of Adjusting Entries:

1. Accrued Revenue: This type of adjustment recognizes revenue that has been earned
but not yet recorded. For instance, if a company has provided services to a client but
has not yet received payment, an accrued revenue adjustment would be made to
recognize the earned revenue.
2. Prepaid Expense: This type of adjustment recognizes an expense that has been paid
but not yet consumed. For example, if a company prepays rent for an office space, a
prepaid expense adjustment would be made to recognize the portion of the rent that
has expired.
3. Depreciation: This type of adjustment allocates the cost of a long-term asset, such as
equipment or property, over its useful life. Depreciation expense is recognized each
period to reflect the portion of the asset's value that has been used up.
4. Estimated Expenses: This type of adjustment recognizes expenses that are not yet
known with certainty but can be reasonably estimated. For instance, a company might
make an adjusting entry for estimated bad debt expense to account for potential losses
from uncollectible customer receivables.

Impact of Adjusting Entries:

Adjusting entries affect the financial statements in the following ways:

1. Balance Sheet: Adjusting entries can impact various balance sheet items, such as
assets (e.g., accounts receivable, prepaid expenses), liabilities (e.g., accrued
expenses), and equity (e.g., accumulated depreciation).
2. Income Statement: Adjusting entries can affect both revenue and expense accounts
in the income statement, influencing the calculation of net income or loss.
3. Statement of Cash Flows: Adjusting entries may not directly impact the cash flow
statement, but they indirectly affect the cash flow by influencing the balance sheet and
income statement accounts used to determine cash flows.

Example of Adjusting Entries:

Consider a company that provides consulting services. At the end of the accounting period,
the company has the following transactions that require adjusting entries:

1. Accrued Revenue: The company has provided consulting services to a client for
$1,000 but has not yet received payment.
2. Prepaid Expense: The company has prepaid $600 for rent for the upcoming month.
3. Depreciation: The company has purchased a computer for $5,000 with an estimated
useful life of five years and no salvage value.