Accounting For Managers(AFM)

18MBA13
Unit I
1. Need and types of accounting
2. Users of accounting.
3. Concepts and conventions of accounting
4. Relationships of accounting with other
disciplines
5. Capital and revenue expenditure and receipt
6. Accounting equation – Problems.
Books to Refer:
1. Financial Accounting: Narayana Swamy
2. Financial Accounting: S.N. Maheshwari and
S.K. Maheshwari
Introduction of Accounting
Accounting is as old as money itself.
Early stages of commercial activities were based
on “ BARTER SYSTEM” where recording was
not a necessity.
Industrial revolution of 19th century along with
rapid increase in population, paved way for
commercial activities, mass production and
credit sales.
Thus recording business transactions has
become an important feature.
Remarkable changes in accounting system is due
to changes of technologies, marketing along
with stiff competition etc.
Accounting though used in business, infact
accounting starts from household.
A Household used to maintain and record
transactions in a household diary:
a) What are the expenses in a month/ year
b) What are the source of income?
c) Where the money is spent frequently
d) How much inventory is to be stocked?
e) When to stock the inventory based on the
prices and supply
f) At the end of the year, whether there is a surplus or
deficit this will help for preparing budget
So by maintaining accounts, a house hold person will be able
to know:
a) What she owns
b) What she owes
c) What are her earnings
d) What are her expenses
e) Whether the family income is financially strong to meet
the contingencies in future
f) How much can be saved in order to plan for investment.
Etc…………………………………..
 Need and importance of accounting:
Aim of any business big or small : is to earn
“PROFIT”.
Various sources of money from business:
--- Sale of goods
---Interest on investments made
--- Dividend received etc.
Spending activities of a business:
--- Purchase of raw materials,
--- Payment of salary, rent etc.
All these activities takes place during normal
course of his business.
Why should we record the business transactions:
--- It is impossible to recall how we spent and how
much we earned.
--- If we note down, his expenditure and income, a
businessman can readily get the required
information.
--- Anxiousness of a businessman at the end of the
financial to find out how much he earned
( profit) or how much he suffered( loss) in
business.
Detailed recording of business transactions is
necessary to know:
1. What has happened to his investments?
2. What is the result of the business
transactions?
3. What are his earnings & expenses?
4. How much is receivables from customers to
whom goods have been sold on credit?
5. How amount is payable to suppliers on
account of credit purchases?
6. What are the nature and value of assets
possessed by the business concern?
7. What are the nature and value of liabilities of
the business concern?

These are several questions are answered with

the help of accounting.
Need for recording business transactions in a
clear and systematic manner is the basis which
gives rise to “BOOK KEEPING”
 BOOK KEEPING
Book keeping
Book keeping is that branch of knowledge which
Tells us how to keep a record of business of
transactions.
Transactions related to business and are
expressed in monetary value alone are
recorded.
Objectives of book keeping:
1. To have a permanent record of all the
business transactions
2. To keep a record of income and expenses to
calculate profit or loss earned.
3. To keep control on expenses in order to
maximize profit
4. To have important information for tax and
legal purpose.
5. To ascertain financial position of business..
6. Control over borrowings
7. Identify do’s and don’ts
8. Fixation of selling price
9. Management decision making
10. To check arithmetical accuracy of business.
Accounting
Book keeping does not present a clear financial
picture of the state of affairs of a business.
Accounting is considered as a system which
collects and process financial information of a
business. These information are reported to
the users to enable them to take appropriate
decisions.
Accounting: Definition
According to American Institute of Certified
Public Accountant ( AICPA) defined accounting
as follows:
Accounting is an art of recording, classifying ,
summarizing in a significant manner in terms
of money, transactions and events which are
in part, atleast of a financial character and
interpreting the results thereof”
Thus accounting, may be defined as the process
of recording, classifying, summarizing, analyzing,
and interpreting, the financial transactions and
communicating the results thereof to the
persons interested in such information.
 Booking Vs Accounting
Book keeping Accounting
1. Book keeping deals with recording the Accounting deals with recording, classifying,
financial transactions summarizing, analyzing and interpreting the
transactions to end users.

2. It is done by the book keeper It is maintained by the accountant

3. Book keeper works under accountant Accountant supervises the book keeper who
directs and review the work

4. The function of book keeper is clerical work The functions of accountant is an executive
work

5. No specialized and analytical knowledge specialized and analytical knowledge is

required required

6. Book keeper does not provide information Accounts hold complete information of
to the end users business so can provide information to the
end users.
Accounting cycle:
Accounting cycle is a complete sequence of
accounting process, that begins with the
recording of business transactions and ends
with the preparation of final accounts.
It is a series of steps for the collection,
processing, and reporting of financial
transactions.
1. Recording: this is the basic functions of
accounting, which ensures the transactions are
not only recorded, but are recorded in a “
CHRONOLOGICAL ORDER”
Recording is done in the book “ JOURNAL” which
may further subdivided into subsidiary books like :
a) Cash Journal
b) Purchase Journal( recording credit purchase)
c) Sales Journal ( Recording credit sales)
The number of subsidiary books maintained by the
business depends on the size of the firm.
2. Classifying:
Classification is concerned with the systematic
analysis of the recorded data, with a view to
group transactions or entries of one nature at
one place. The work of classification is done in
the book termed as “ LEDGER”
Ex: Separate account heads such as Purchases,
travelling expenses, interest etc…..
This will help in finding out the total expenditure
under each in the above heads.
3. Summarising:
This involves presenting the classified data in a
manner which is understandable and useful to
the internal and external end users of
accounting statements . This process leads to
the preparation of the following statements:
a) Trial Balance
b) Income statement
c) Balance sheet.
4.Analysing and interpreting:
The recorded financial data is analysed and
interpreted in a manner that the end users can
make a meaningful judgement about the financial
condition and profitability of the business.
Analysis: means methodological classification of
the data given in the financial statements. The
figures in the financial statement will not be
helpful unless they are put in a simplified manner.
5. Communicating:
The accounting information after being
meaningfully analysed and interpreted has to be
communicated in a proper manner to the end
users.
This is done with the distribution of accounting
reports in news papers and in the website of the
corporate.
END users of Accounting
1. Proprietors
2. Managers
3. Creditors
4. Investors
5. Prospective investors
6. Government
7. Employees
8. Citizens ………….
In analysis the entire transactions are
segregated as to what items comes under
current assets and what are fixed assets so
on…………
Interpretation:
Means explaining the meaning and significance
of data so simplified
 Branches of Accounting
1. Financial Accounting- Helps to ascertain the
profit earned or loss suffered in the business
2. Cost Accounting: to ascertain the cost
involved in producing goods or services.
3. Management Accounting: Supplies relevant
information to the management for decision
making.
Types of Accounting
a)Financial Accounting:
Financial accounting is related to the recording
of business transactions. They include income,
expenditure, inventory movement , assets,
liabilities, cash receipts or cash payments and so
on.
It helps in communicating the information of
the business to its end users such as
shareholders, employees etc.
Its main objective is to analyse financial
statements and to depict the financial position
of the business. In order to accomplish these
objectives, it is very essential to maintain a
systematic record of business transactions in
accounting books.
2. Cost Accounting:
Cost accounting is concerned with the
calculation of costs from the point at which
expenditure is incurred or committed to the
establishment of its ultimate relationship with
cost centres and cost units.
The main aim of cost accounting is to evaluate
the actual cost incurred by the business in
producing goods and services.
With the help of cost accounting a businessman
can decide the price of product and can
eliminate losses and wastages by controlling the
cost.
c) Management Accounting:
Management accounting helps in providing
accounting information to the management so
that effective decisions can be taken for carrying
out the business smoothly. It facilitates the
management in developing policies and
monitoring the functions of the business.
 Financial Accounting Vs Cost Accounting Vs Management
Accounting
Point of Financial Accounting Cost Accounting Management
difference Accounting

1. Objective Financial accounting records Cost accounting Management

all the transactions relating records all the point of accounting helps the
to finance expenditure involved management in
in the production designing plans and
policies

2. Periodicity It is prepared at the end of It is prepared weekly It provides

the financial year or monthly information when and
where required by the
management

3.Importance It is compulsory to prepare It is compulsory to It is not compulsory

final accounts in every prepare cost accounts to prepare
organisations only in some
undertakings
Point of difference Financial accounting Cost accounting Management
Accounting

4. Analysis of It discloses the financial It discloses the profits It prepares budget

reports position pf the company with regard to each and tax plans from the
as a whole process, product or reports provided by
service the financial and cost
accounting

5. Nature It mainly deals with the It makes use of the It deals with future
historical data historical data plans and policies
provided and outlines
it.

6. Scope An accountant prepares Cost accountant Management

the financial statement of ascertain the cost of a accountant formulates
the business like income product or service policies for effective
statement and balance performance and
sheet covers the cost and
financial accounting.
Double entry system:
There are numerous transactions in a business.
Each transactions when closely analysed
reveals 2 aspects:
1. Receiving aspect /incoming aspect / expense
or /loss aspect. = Debit aspect
2. Giving aspect / outgoing aspect/ income or
gain aspect = Credit aspect.
Basic principle of this double entry:
For every debit there is an equal and
corresponding credit and
For every credit there is an equal and
corresponding debit.

Double entry system was introduced by Lucco

Pacioli in 1494 A.D.
Features of double entry system:
1. Every business transactions affects two
accounts.
2. Each transactions has two aspects:
i.e DEBIT and CREDIT
3. It helps in preparation of trial balance to test
the arithmetic accuracy
4. Helps in presentation of final Accounts.
 Classification of accounts

Transactions of business are classified into 3.

1. Transactions relating to the persons( Personal
account)
2. Transactions relating to the properties and
assets( Real account)
3. Transactions relating to expenses and
revenues( Nominal Account)
Types of accounts
1. Personal account: Relates to persons
a) Natural persons: Accounts which relates to
individuals
Ex: Ram A/c, Mohan A/c , Sita A/c

b) Artificial persons: relates to firms or

institutions
Ex: ICICI Bank, PIM, VCE etc.
C ) Representative persons:
Accounts which represent a particular person or
group of person.
Ex: Outstanding salary, prepaid expenses,
Accrued income etc.
2. Real account:
Accounts relating to properties and assets which
are owned by the business.
Ex: Land, building, plant and machinery etc.

3. Nominal Account: They relate to income and

expenses , gains and losses.
Ex: Salary , interest paid, income received, rent
etc.,
• Identify the types of accounts:
• 1. Capital
• 2. Purchases(goods)
• 3. Sales(goods)
• 4. Cash ( Received)
• 5. Cash ( Paid)
• 6. Building, Furniture, Computer ( Purchased)
• 7. Land, Cell phone ( Sold)
• 8. ICICI Bank
• 9. Appollo Hospital
• 10. Salary, commission, Bank charges ( Paid)
• 11. Interest, Commission, dividend ( Received)
• 12. Purchase return
• 13. Sales return
• 14. Prepaid expenses
• 15. Incomes accrued
• 16. Income received in advance
• 17. Income paid in advance.
• 18. Outstanding or payment in due
• 19. Drawings
• 20. Income tax
• 21. Interest paid
• 22. Discount received.
• 23. Rent
• 24. Outstanding salary
• 25. Rent
• 26. Indian Bank
Identify the types of Accounts
1. Capital
2. Land purchased
3. Goods purchased
4. Carriage inwards paid
5. Cash received
6. Interest paid
7. Commission received
8. Advertisement expenses
9. Subscription received
10. Mobile charges ( post paid)
11. Repairs
12. Bad debts
13. Data card purchased
14. Laptop, pen drive purchased
15. Indian bank
16.Wages and salaries paid
17. Outstanding salary
18. Prepaid insurance premium
19. Interest accrued
Journal
A Journal is a book in which transactions are
originally recorded in the chronological order. i.e
the order in which they are occurred, according
to the principles of double entry system.

Journal is also called as a Book of Original Entry

or Prime Entry.
The books in which a transaction is recorded for
the first time from a source document are
called the Books of Original Entry or Prime Entry.

A Journal is a data wise record of all transactions

with details of the account debited and credited
and the amount of each transactions.
Format of Journal
Journalising:
The process of analyzing the business
transactions under the heads of debit and credit
and recorded in the book of Journal is called as
“Journalising”.
Types of entries:
a) Simple entry
b) Compound entry
c) Opening entry
a) Simple Entry:
In simple entry , only two accounts are affected.
One account is to be debited and another
account is credited with an equal amount.
b) Compound entry:
In compound entry more than two accounts are
affected. There are three types under this category.
i) Several accounts ( more than one) will have to
be debited and only one account to be
credited.
ii) Only one account is to be debited and several
accounts ( more than one accounts) to be
credited . i,ii are called as single Compound
entries
iii) Several accounts will have to be debited and
several accounts to be credited. This is called as
“ Double Compound Entry”
Note:
In all the compound entries , the sum of debits
will always be equal to the sum of credits.
c) Opening Entry:
i)At the beginning of each accounting period,
the business enterprises will have to record their
transactions in the new books of account.

ii) The accounts with balances in the previous

year, will have to be recorded with the help if an
entry – known as Opening entry.
In this opening entry:
a) All assets are to be debited
b) All the liabilities are to credited
c) The difference between assets and liabilities
will have to be credited as “ Capital
Accounts”.
Ledger:
In the Journal, each transaction was dealt
separately. They do not provide complete
information at a glance. The net results of
transactions relating to a particular account to
be collected at one place, a separate book is to
be maintained. This book is called as Ledger.
A ledger is a book, which contains all the
accounts in a summarized and classified form.
A ledger is a permanent record of all
transactions transferred from a Journal to other
books of original entry.
The ledger is also referred to as the “The book
of Final Entry”.
A ledger is T shaped Account.
The left hand side is called as Debit side, shortly
written in the corner as “ Dr”
The right hand side is called as credit side,
shortly written as “ Cr”.
Each has different name heads followed with
A/c.
Meaning and procedure of posting:
Business transactions are usually first recorded
in the books of original entry or Subsidiary
books. They are then transferred to the ledger.
This process of transferring from the books of
original entry in the concerned accounts to the
ledger is called as “ the posting”
The main object of “ Posting” is to make
classified and summarized record of various
transactions during a specified period on a
particular account. Net effect of transactions can
be made at a glance at ledger.

Ledger can be prepared periodically, say daily,

fortnightly, monthly, quarterly depending upon
the needs and requirements of the respective
business concerns.
Trial Balance
Trial balance is a statement, which shows debit
balances and credit balances of all the accounts
in the ledger. As per the rules of double entry ,
every debit must be equal to that of all credit
entries in the ledger. The total of debit balances
and credit balances should be equal.
In case, any difference arises, that is the total of
debit balances and credit balances do not tally,
the correctness of the balances brought forward
from the respective accounts must be checked
by preparing this statement. This process is
known as preparation of a Trial Balance.
The objectives of Trial balance
1. To check the arithmetical accuracy of the
ledger accounts
2. To locate the errors and rectify them.
3. To provide basis for the preparation of final
accounts.
4. To serve as a ready reckoner( it provides a
summary of all transactions during an
accounting period at one place).
Salient features of trial balance:
1. It is a statement ,not a account.It is simply a
list of balances of all accounts.
2. It is prepared on a particular date
3. It is one method to check the accuracy of the
transactions.
4. It can be prepared by a firm which follows
double entry system.
5. Some errors may be detected.
Rules to classify the debit and credit balances
1. Debit balances:
Assets
Drawings
Debtors
Losses
Expenses
Credit balances:
Liabilities
Capitals
Creditors
Gains and Incomes
From the following items classify them as debit
and credit balances
1. Salaries
2. Sales
3. Plant and Machinery
4. Commission paid
5. Purchases
6. Stock
7. Repairs
8.Sundry expenses
9. Return inwards( goods)
10. Return Outwards( goods)
11. Discount allowed
12.Rent and rates
13.Sundry debtors
14.Sundry creditors
15.Travelling expenses
16.Drawings
17. Investments
18. Capital
19. Cash at Bank
20. Carriage inwards.