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UNIT I

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12B101 ACCOUNTING FOR MANAGERS

UNIT I BASIS OF ACCOUNTING, ACCOUNTING CONCEPTS AND


CONVENTIONS, PREPARATION OF FINAL ACCOUNTS

Assets, Liabilities Income, Expenditure Types and Rules of Accounts


Classification of Accounts Accounting Concepts Types Importance of Each
Concept Basic Accounting Conventions Important Accounting Standards, Trading
and Profit and Loss Account Balance Sheet Adjustment Entries Final Accounts
(Problems)

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Accounting - Definition

Accounting can be defined as the process of


identifying, measuring, recording and
communicating the economic events of an
organization to the interested users of the
information.

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Users of Accounting Information

Different categories of users need different


kinds of information for making decisions.
These users can be divided into :

Internal Users; and

External Users.
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ASSETS

These are economic resources of an


enterprise that can be usefully expressed in
monetary terms. Assets are things of value
used by the business in its operations.
Fixed Assets
Current Assets

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ASSETS continue

Fixed Assets are assets held on a long-


term basis.
e.g. Land, Building, Machinery, Plant,
Furniture and Fixtures, etc.

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ASSETS continue

Current Assets are assets held on a


short-term basis.
e.g. Debtors, Bills receivable,
Stock(Inventory), Cash and Bank
balances, etc.

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LIABILITIES

These are obligations or debts that the


enterprise must pay in money or services at
some time in the future.

Long-term liabilities

Short-term liabilities
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LIABILITIES continue..

Long-term liabilities are those that are


usually payable after a period of one year.

e.g. A term loan from a financial institution,


debentures (bonds) issued by a company.

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LIABILITIES continue..

Short-term liabilities are obligations that


are payable within a period of one year.

e.g. Creditors, bills payable, overdraft from


a bank for a short period.

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CAPITAL

Investment by the owner for use in the firm


is known as capital. Owners equity is the
ownership claim on total assets. It is equal
to total assets minus total liabilities.

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REVENUES

These are the amounts the business earns


by selling its products or providing services
to customers. Other titles and sources of
revenue common to many businesses are:
sales, fees, commission, interest, dividends,
royalties, rent received, etc.
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EXPENSES

These are costs incurred by a business in


the process of earning revenue. Generally,
expenses are measured by the cost of
assets consumed or services used during an
accounting period. The usual titles of
expenses are: depreciation, rent, wages,
salaries, interest, costs of heat, light and
water, telephone, etc.
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PURCHASES
Purchases are total amount of goods
procured by a business on credit and for
cash, for use or sale. In a trading concern,
purchases are made of merchandise for
resale with or without processing.
In a manufacturing concern, raw materials
are purchased, processed further into
finished goods and then sold. Purchases
may be cash purchase or credit purchase.
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SALES

Sales are total revenues from goods or


services sold or provided to customers.
Sales may be cash sales or credit sales.

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STOCK

Stock (Inventory) is a measure of


something on hand goods, spares and
other items in a business.

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STOCK: continue

In a trading concern, the stock on hand is


the amount of goods which have not been
sold on the date on which the balance sheet
is prepared. This is also called closing
stock.

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STOCK continue

In a manufacturing concern, closing stock


comprises raw materials, semi-finished
goods and finished goods on hand on the
closing date.

Similarly, opening stock is the amount of


stock at the beginning of the accounting
year. 18
DEBTORS

Debtors are persons and/or other entities who


owe to an enterprise an amount for receiving
goods and services on credit.

The total amount standing against such persons


and/or entities on the closing date, is shown in the
Balance Sheet as Sundry Debtors on the asset
side.
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CREDITORS

Creditors are persons and/or other entities who


have to be paid by an enterprise an amount for
providing the enterprise goods and services on
credit.

The total amount standing to the favour of such


persons and/or entities on the closing date, is
shown in the Balance Sheet as Sundry Creditors
on the liability side.
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ACCOUNTING PRINCIPLES

Accounting principles can be subdivided into


two categories:

Accounting Concepts; and

Accounting Conventions.

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ACCOUNTING PRINCIPLES
Accounting Concepts
Accounting Conventions
The term concept is used to connote
accounting postulates, that is necessary
assumptions and conditions upon which
accounting is based. The term convention
is used to signify customs and traditions as
a guide to the presentation of accounting
statements. 22
ACCOUNTING PRINCIPLES

Accounting Concepts
Business Entity Concept
Money Measurement Concept
Cost Concept
Going Concern Concept
Dual Aspect Concept
Realization Concept
Accounting Period Concept 23
ACCOUNTING PRINCIPLES

Accounting Conventions
Convention of Consistency
Convention of Disclosure
Convention of Conservation

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ACCOUNTING PRINCIPLES

Accounting Concepts
The term concept is used to connote
accounting postulates, that is necessary
assumptions and conditions upon which
accounting is based.

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Business Entity Concept

Business is treated as a separate entity or


unit apart from its owner and others. All the
transactions of the business are recorded in
the books of business from the point of view
of the business as an entity and even the
owner is treated as a creditor to the extent
of his/her capital.

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Money Measurement Concept

In accounting, we record only those


transactions which are expressed in terms
of money. In other words, a fact which can
not be expressed in monetary terms, is not
recorded in the books of accounts.

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Cost Concept

Transactions are entered in the books of


accounts at the amount actually involved.
Suppose a company purchases a car for
Rs.1,50,000/- the real value of which is
Rs.2,00,000/-, the purchase will be recorded
as Rs.1,50,000/- and not any more. This is
one of the most important concept and it
prevents arbitrary values being put on
transactions. 28
Going Concern Concept

It is persuaded that the business will exists


for a long time and transactions are
recorded from this point of view.

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Dual Aspect Concept

Each transaction has two aspects, that is,


the receiving benefit by one party and the
giving benefit by the other. This principle is
the core of accountancy.

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Dual Aspect Concept continue

For example, the proprietor of a business


starts his business with Cash Rs.1,00,000/-,
Machinery of Rs.50,000/- and Building of
Rs.30,000/-, then this fact is recorded at
two places. That is Assets account (Cash,
Machinery & Building) and Capital accounts.
The capital of the business is equal to the
assets of the business.
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Dual Aspect Concept continue

Thus, the dual aspect can be expressed as


under

Capital + Liabilities = Assets


or
Capital = Assets Liabilities
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Realization Concept

Accounting is a historical record of


transactions. It records what has happened.
It does not anticipate events. This is of
great important in preventing business firms
from inflating their profits by recording sales
and income that are likely to accrue. 33
Accounting Period Concept

Strictly speaking, the net income can be


measured by comparing the assets of the
business existing at the time of its
liquidation. But as the life of the business is
assumed to be infinite, the measurement of
income according to the above concept is
not possible. So a twelve month period is
normally adopted for this purpose. This time
interval is called accounting period. 34
ACCOUNTING PRINCIPLES

Accounting Conventions

The term convention is used to signify


customs and traditions as a guide to the
presentation of accounting statements.

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Convention of Consistency

In order to enable the management to draw


important conclusions regarding the working
of the company over a few years, it is
essential that accounting practices and
methods remain unchanged from one
accounting period to another. The
comparison of one accounting period with
that of another is possible only when the
convention of consistency is followed. 36
Convention of Disclosure

This principle implies that accounts must be


honestly prepared and all material
information must be disclosed therein. The
contents of Balance Sheet and Profit and
Loss Account are prescribed by law. These
are designed to make disclosure of all
material facts compulsory.

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Convention of Conservation

Financial statements are always drawn up


on rather a conservative basis. That is,
showing a position better than what it is,
not permitted. It is also not proper to show
a position worse than what it is. In other
words, secret reserves are not permitted.

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THE ACCOUNTING CYCLE

Recording transactions in subsidiary books.


Classifying data by posting from subsidiary
books to the accounts.
Closing the books and preparation of final
accounts.

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CLASSIFICATION OF ACCOUNTS

Every business deal with other Person, possesses


Assets, pay Expenses and receive Income.
So from the above, we can see every business
has to keep
An account for each person
An account for each asset and
An account for each expense or income.
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CLASSIFICATION OF ACCOUNTS

Accounts in the names of persons are known as


Personal Accounts
Accounts in the names of assets are known as
Real Accounts
Accounts in respect of expenses and incomes
are known as Nominal Accounts

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CLASSIFICATION OF ACCOUNTS

ACCOUNTS

PERSONAL IMPERSONAL
ACCOUNTS ACCOUNTS

REAL NOMINAL
ACCOUNTS ACCOUNTS
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PERSONAL ACCOUNTS

Accounts in the name of persons are known as


personal accounts.
Eg: Babu A/C,
Babu & Co. A/C,
Outstanding Salaries A/C, etc.

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REAL ACCOUNTS

These are accounts of assets or properties. Assets


may be tangible or intangible. Real accounts are
impersonal which are tangible or intangible in
nature.
Eg:- Cash a/c, Building a/c, etc are Real
Accounts related to things which we can
feel, see and touch.
Goodwill a/c, Patent a/c, etc Real Accounts
which are of intangible in nature. 44
NOMINAL ACCOUNTS

These accounts are impersonal, but invisible and


intangible. Nominal accounts are related to those
things which we can feel, but can not see and
touch. All expenses and losses and all incomes
and gains fall in this category.
E.g.:- Salaries A/C, Rent A/C, Wages A/C,
Interest Received A/C, Commission Received
A/C, Discount A/C, etc.

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DEBIT AND CREDIT

Each accounts have two sides the left side and


the right side. In accounting, the left side of an
account is called the Debit Side and the right
side of an account is called the Credit Side. The
entries made on the left side of an account is
called a Debit Entry and the entries made on the
right side of an account is called a Credit Entry.

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RULES FOR DEBIT AND CREDIT

Debit the Receiver


Personal Account
Credit the Giver

Debit what comes in


Real Accounts
Credit what goes out
Debit all Expenses and
Losses
Nominal Accounts
Credit all Incomes and
Gains 47
ACCOUNTING STANDARDS

AS 1. Disclosure of Accounting Policies


AS 2. Valuation of Inventories
AS 3. Cash Flow Statements
AS 4. Contingencies and Events
Occurring After the Balance Sheet Date
AS 5. Net Profit or Loss for the Period,
Prior Period Items and Changes in
Accounting Policies
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ACCOUNTING STANDARDS
Contd
AS 6. Depreciation Accounting
AS 7. Construction Contracts
AS 8. Accounting for Research and

Development
AS 9. Revenue Recognition
AS 10. Accounting for Fixed Assets

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ACCOUNTING STANDARDS
Contd
AS 11. Accounting for the Effects of
Changes in Foreign Exchange Rates
AS 12. Accounting for Government
Grants
AS 13. Accounting for Investments
AS 14. Accounting for Amalgamation
AS 15. Accounting for Retirement
Benefits in the financial Statements of
Employers
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ACCOUNTING STANDARDS
Contd
AS 16. Borrowing Costs
AS 17. Segment Reporting
AS 18. Related Party Disclosure
AS 19. Leases
AS 20. Earning Per Share

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THE FINAL ACCOUNTS TRADING ACCOUNT

A TRADER
TRADING ACCOUNT FOR YEAR ENDED 31 DECEMBER

Sales 5,400
Less Sales Returns 120
5,280
Less Cost of Goods Sold:
Purchases 2,800
Less Purchases Returns 50
Cost of Goods Sold 2,750
GROSS PROFIT 2,530

(This assumes all the goods purchased were sold)


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THE FINAL ACCOUNTS TRADING ACCOUNT

It is normal for businesses to have goods in stock at


the beginning of the year and have stock left unsold
at the end of the year

Goods in stock at the beginning of the year is called:


Opening Stock
Stock unsold at the end of the year is called:
Closing Stock

These need to be included in the Trading Account so


Gross Profit is calculated on goods actually sold.
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THE FINAL ACCOUNTS TRADING ACCOUNT

A TRADER
TRADING ACCOUNT FOR YEAR ENDED 31 DECEMBER

Sales 5,400
Less Sales Returns 120
5,280
Less Cost of Goods Sold:
Opening Stock 500
Add Purchases 2,800
Less Purchases Returns 50 2,750
3,250
Less Closing Stock 250
Cost of Goods Sold 3,000
GROSS PROFIT 2,28054
2C THE FINAL ACCOUNTS PROFIT AND LOSS ACCOUNT
The sole trader must pay all expenses out of Gross Profit
Gross Profit less Expenses = Net Profit
This is done by listing the expense account balances from the
Trial Balance in the Profit and Loss Account which is tacked
on to the end of the Trading Account after Gross Profit

GROSS PROFIT 2,280
Less Expenses:
Rent 200
Wages 800
Insurance 80
Heating and Lighting 250 1,330
NET PROFIT 950 55
THE FINAL ACCOUNTS BALANCE SHEET

The remaining items in the Balance Sheet, and any other


appropriate figures are then entered into the Balance
Sheet.

The Trading and Profit and Loss Account

together with the Balance Sheet

make up the firms FINAL ACCOUNTS

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THE FINAL ACCOUNTS

Trading Account where the Gross Profit is calculated


Turnover Sales less Sales Returns (also called Net Sales)
Cost of Goods Sold how much the goods sold, cost the
sole trader to buy in
Gross Profit profit from trading before expenses are paid
Stock goods not yet sold
Net Profit profit from trading after expenses are paid
Final Accounts Trading and Profit and Loss Account and
Balance Sheet 57

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