ACCOUNTING FOR MANAGERS

MODULE:1 THE FOUNDATION

CONCEPTUAL FRAMEWORK OF FINANCIAL ACCOUNTING Why Accounting? – ‘’Short pencil is better than a long memory’’ What is Accounting? – The art of recording, classifying and summarizing in terms of money transactions and events of financial character and interpreting the results thereof. Meaning of an Account? – It is a summary of relevant transactions at one place relating to a particular head.

Types of Accounting Accounting Financial Accounting Cost Accounting Management Accounting Government Accounting Tax Accounting

Business Transactions and Events Recording: Journal Classification: Ledger Trial balance: Summary Interpretation: Balance Sheet;Profit & Loss Account;Cash Flow Statement Information to Users Accounting Process

Classification of Accounts Useful in this FY Cash Outflow Expense Useful in next FY also. Cash Outflow Asset Useful in this FY Cash Inflow Revenue Useful in Next FY also Cash Inflow Liability Owners Contribution Cash Inflow Capital

Principles of Accounting The rules and guidelines that companies must follow when reporting financial data are Principles. Principles which have logic are called concepts. Principles which we follow anyway are called conventions.

PRINCIPLES OF ACCOUNTING Business and Businessmen are two Separate Entities Separate Entity Concept Business Life is Unlimited Going Concern Concept Record only those items which can influence decisions. Materiality Concept Record only those items which can be expressed in money terms Money Measurement Recognize revenue only when it is earned i.e. when economic benefit and Risk is transferred. Principles of Realization

PRINCIPLES OF ACCOUNTING Every transaction has a double (or dual) effect on the position of a business as recorded in the accounts Duality Current year’s revenue should match current year’s expense. Matching It is the period for which books are balanced and the financial statements are prepared. Accounting period original monetary value of an economic item Historical Cost Principle “Expected losses are losses but expected gains are not gains". Conservatism

CLASSIFICATION OF ACCOUNTS TRADITIONAL APPROACH Personal Accounts Rule: Dr the Receiver & Cr Giver Real Accounts Dr what comes in & Cr what goes out. Nominal Accounts Dr Losses & expenses & Cr revenue & Income. MODERN METHOD Asset/Expenses: Cash Outflow Liability/Revenue: Cash Inflow Capital: Owners Contribution

JOURNAL ENTRIES AND LEDGERS What is a Journal Entry??? A journal entry, in accounting, is a logging of transactions into accounting journal items. The journal entry can consist of several items, each of which is either a debit or a credit. The total of the debits must equal the total of the credits or the journal entry is said to be "unbalanced". What is a Ledger The general ledger is the main accounting record of a business which uses double-entry bookkeeping. It will usually include accounts for such items as current assets, fixed assets, liabilities, revenue and expense items, gains and losses. Each General Ledger is divided into debits and credits sections. The left hand side lists debit transactions and the right hand side lists credit transactions. This gives a 'T' shape to each individual general ledger account.

Here are a few transactions which show how the entries are made in the Journal and Ledger Started Business with Cash Rs Building Purchased Rs Cash deposited in the Bank Rs.4000 Goods Purchased Rs.2000

JOURNAL ENTRY DateParticulars Ledger Folio (LF)Debit (Dr.)Credit (Cr.) Entry: Started business with Cash Rs Cash A/c Dr To. Capital A/c20000 Narration: Being Business Started CASH ACOUNT DEBITCREDIT DateParticulars Amount (Rs)DateParticulars Amount (Rs) To Capital A/c20000 CAPITAL ACCOUNT DEBITCREDIT DateParticulars Amount (Rs)DateParticulars Amount (Rs) By Cash A/c20000

JOURNAL ENTRY DateParticulars Ledger Folio (LF)Debit (Dr.)Credit (Cr.) Entry: Building Purchased Rs Building A/c Dr.8000 To Cash A/c8000 Narration: Being Building Purchased CASH ACCOUNT DEBITCREDIT DateParticulars Amount (Rs)DateParticulars Amount (Rs) To Capital A/c By Building A/c8000 BUILDING ACCOUNT DEBITCREDIT DateParticulars Amount (Rs)DateParticulars Amount (Rs) To Cash A/c8000

JOURNAL ENTRY DateParticulars Ledger Folio (LF)Debit (Dr.)Credit (Cr.) Entry: Cash Deposited in Bank Rs Bank A/c Dr.4000 To Cash A/c4000 Narration: Being Cash deposited in Bank BANK ACCOUNT DEBITCREDIT DateParticulars Amount (Rs)DateParticulars Amount (Rs) To Cash A/c4000 CASH ACCOUNT DEBITCREDIT DateParticulars Amount (Rs)DateParticulars Amount (Rs) To Capital A/c By Building A/c8000 By Bank A/c4000

JOURNAL ENTRY DateParticulars Ledger Folio (LF)Debit (Dr.)Credit (Cr.) Entry: Goods Purchased worth Rs Purchases A/c Dr.2000 To Cash A/c2000 Narration: Being purchases made PURCHASES ACCOUNT DEBITCREDIT DateParticulars Amount (Rs)DateParticulars Amount (Rs) To Cash A/c2000 CASH ACCOUNT DEBITCREDIT DateParticulars Amount (Rs)DateParticulars Amount (Rs) To Capital A/c By Building A/c8000 By Bank A/c4000 By Purchases2000

LEDGER BALANCING

BUILDING ACCOUNT DEBITCREDIT DateParticulars Amount (Rs)DateParticulars Amount (Rs) To Cash A/c By BALANCE8000 BANK ACCOUNT DEBITCREDIT DateParticulars Amount (Rs)DateParticulars Amount (Rs) To Cash A/c By BALANCE4000 CAPITAL ACCOUNT DEBITCREDIT DateParticulars Amount (Rs)DateParticulars Amount (Rs) To BALANCE By Cash A/c20000 PURCHASES ACCOUNT DEBITCREDIT DateParticulars Amount (Rs)DateParticulars Amount (Rs) To Cash A/c By BALANCE2000

TRIAL BALANCE Sr. NoParticularsDebitCredit 1CAPITAL A/c CASH A/c6000 3BANK A/c4000 4BUILDING A/c8000 5PURCHASES A/c Trial Balance Should always tally