Accounting for Managers - Brief Overview
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Transcript of Accounting for Managers - Brief Overview
Accounting for Managers
Look-back
Priya SinhaAditi Kashyap
Himanshu ChitlangiaGunjan GandhiNipun Jain
presented by:
Topics:
1. Introduction to Accounting
2. Basic Accounting Terminologies
3. Generally Accepted Principles (G.A.A.P.)
4. Approaches to Accounting
5. Primary Book – Journal
6. Secondary Book – Ledger
7. Trial Balance
8. Sample Question and Common Doubts
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
What is Accounting?Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part of at least of a financial character and interpreting results thereof.
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
In simple words, accounting is the systematic recorded presentation of the financial transactions of the business or enterprise.
Objectives of Accounting
•Calculation of Profits or Loss
•Maintaining proper record of transactions.
•Depiction of financial position.
•Providing effective control over business.
•Helpful to Management
•Making information available to various groups
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Advantages of Accounting
•Replacing Memory.
•Documentary Evidence.
•Assessing financial status of the business.
•Assessing performance of the business.
•Detection and prevention of frauds.
•Helpful in Decision Making.
•Assisting in realization of debts.
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Book Keeping
•Book-keeping is the initial step of accounting;
•Proper and systematic keeping of books of accounts;
•Starts from Identification of Business transactions.
•It is different from Accounting!
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Differences between Accounting and Book-Keeping
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Basis Book Keeping Accounting
ObjectivePrepare original
books of accounts.
Record, analyze and interpret the
business transactions.
Scope Limited Wider
Level of Work
Restricted to Low Level
All levels of management
ResultDoesn’t show the
net results of business.
Shows net result of business.
Process of Accounting
1. Identification of Economic Events
2. Classification of Business Transactions
3. Measurements in terms of Rupees
4. Recording the Business Transactions
5. Summarizing the Business Transactions
6. Analyzing and Interpreting the Business
Transactions
7. Communication and Reporting
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Accounting is both – Science and Art.
Science
•Definite Principles and Assumptions•Universal Application•Systematic Method•Rules and Equation
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Art
•Practical Application•Depending on day-to-day affairs
Basic TerminologiesAssets
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
The valuable things owned by the business are known as Assets.They are the economic resources of an enterprise which can be expressed in monetary terms.
e.g. Land, Building, Furniture, Cash, Stock, etc.
Basic Terminologies
Liability
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
It refers to the amount which the firm owes to the outsiders.
e.g. Creditors, Bills Payables, Loans, Debentures, etc.
Basic Terminologies
Capital
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
•It refers to the amount invested by the proprietor in the business enterprise.
•It is the amount with the help of which the goods and assets are purchased in the business.
Revenue Income
Income from normal business process or by selling finished goods.
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Revenue Expenditure
Any expenditure, the full benefit of which is received during one accounting period.
Basic Terminologies
Revenue Nature
Basic Terminologies
Sundry Debtors
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
These represent the persons or parties who have purchased goods on credit from us and not paid for the goods sold to them, they still owe to the business.e.g. We sold goods to Mr. Bin Laden worth Rs. 20,000. He will continue to remain the debtor of the business so far he does not make the full payment.
Basic Terminologies
Sundry Creditors
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
These represent the persons or parties who have sold goods and materials to the business on credit. They are the liabilities of the business.
e.g. Purchased raw materials from Mr. Obama worth Rs. 5100 on credit, and he will remain the creditors until the full payment is made.
Basic Terminologies
Drawings
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
The amount or goods withdrawn by the proprietor for his private or personal use is known as drawings.
e.g. goods taken by the proprietor for domestic use; using business premises for residential purpose, etc.
G.A.A.P.(Generally Accepted Accounting Principles)
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
It is generally accepted by accountants all over the world as general guidelines for preparing the accounting statements.
GAAPs and accounting standards are considered as the theory base of accounting.
Generally Accepted Accounting PrinciplesAccounting or Business Entity
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
•Business is treated as a unit separate and distinct from its owner(s);•Accountant works for the business and not for the businessman;•Keeps business affairs free from the influence of the personal affairs of the ownere.g. expense on owner’s car and a company vehicle, both are treated differently.
Generally Accepted Accounting PrinciplesMoney Measurement Concept
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
•Only those transactions and events are recorded in accounting which are capable in being expressed in terms of money•Qualitative transactions such as improvement in behavior etc. are skipped from accounting point of view.
e.g. Accounting doesnot record a fight between the Production Manager and Sales Manager, but the damages caused due to the fight will be recorded as loss to the business.
Generally Accepted Accounting PrinciplesGoing Concern
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
•Business activities will continue for a fairly long period of time unless and until the business has entered into a process of winding up or liquidation;•Because of this concept, outside parties enter into long term contracts, give loans and purchase the shares and debentures of the enterprise.e.g. Prepaid expenses are shown as Asset in the Balance Sheet because the benefit of this will be received in future.
Generally Accepted Accounting PrinciplesAccounting Period
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
•As a business is intended to continue indefinitely for a long period, the true results of the business operations can be ascertained only when the business is completely wound up, but this will be of little use to the proprietors, managers, investors.•Entire life of the firm is divided into time intervals for the measurement of the profits of the business.For tax purposes, usually companies keep the Accounting Year and Financial Year same i.e. April 1 of current year to March 31 of next year.
Generally Accepted Accounting PrinciplesHistorical Cost orCost Principle Concept
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
•An Asset is ordinarily recorded in the books of accounts at the price at which it is acquired since the acquisition cost is related to the past, is referred to as Historical Cost.•In the current year, they are shown at Book Value i.e. Cost less Depreciation
Generally Accepted Accounting PrinciplesExpenses Recognition
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
•Expenses refers to the portion of the cost outlay which is consumed in the process of obtaining revenue in an accounting period.•Expenses give benefit over the current accounting period i.e. revenue expenditure. E.g. purchase of raw materials.•Expenditure gives benefits over many accounting periods to come i.e. capital expenditure. E.g. purchase of machinery.
Generally Accepted Accounting PrinciplesRevenue Recognition
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
•Revenue is considered as earned at the time when the title or the ownership of the goods has been transferred to the purchaser and when he has legally become liable to pay the amount.
e.g. If a firm gets an order of goods on January 1, supplies it on January 20 and receives the Cash on April 1, the revenue will be deemed to have been earned on January 20 as the ownership of goods was transferred on that day.
Generally Accepted Accounting PrinciplesMatching Concept
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
•expenses for an accounting period should be matched against related incomes•Essential part of accrual accounting•The result of this matching is the net income or net loss.e.g. Revenues of year 2014-2015 will be matched with the expenses of 2014-2015 only.
Generally Accepted Accounting PrinciplesFull, Fair and Adequate Disclosure
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
•It implies that accounts must be honestly prepared and all material information must be disclosed therein•It only implies that there is to be a sufficient disclosure of information, which is of material interest to proprietors, present and potential creditors and investors.
Generally Accepted Accounting PrinciplesDual Aspect
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
•Every transaction has a two fold effect and it is referred to as Dual Aspect concept.•One represented by the asset of the business and the other by the claims against them. These two aspects are always equal to each other.In other words, Assets = Liability + Capital. This concept forms the basis for the whole of financial accounting!
Generally Accepted Accounting PrinciplesVerifiable Objectivity
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
•Accounting records must be supported by documentary evidence or proof.• Recording transactions are unbiased and not affected by their personal judgment.
e.g. of source documents are Sales Bills, Purchase Bills, Pay-in Slips, etc.
Generally Accepted Accounting PrinciplesMateriality
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
•Accounting should focus on material facts and resources should not be wasted in recording and analyzing immaterial and insignificant facts.•It should be noted that an item material for one concern should be immaterial for another and similarly an item material in one year may be immaterial in the next.e.g.
Generally Accepted Accounting PrinciplesConsistency
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
•The accounting practices should remain the same from one year to another.•Once a firm has fixed a method of treating an item it should do so for like items and also maintain the same method thereafter, otherwise comparison of one accounting period with another would not be possible.•Consistency however does not mean inflexibility.
Generally Accepted Accounting PrinciplesConservatism
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
•It takes into consideration all prospective losses but leaves all prospective profits.•Based on quality of judgment and not mere understatement of profits.
e.g. Provision for bad and doubtful debts, Valuation of stock in trades at Market Price / Cost Price whichever is less.
Double Entry System
•Recording dual aspects of business transactions in terms of debit and credit is called double entry system.. There is always a debit and an equal amount of credit for every transaction.
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
•Because of the dual entry aspect of accounting the balance sheet always matches.
Double entry systemFor instance we can explain it with a exampleWhen goods are purchased for cash there is movement of goods from seller to buyer and movement of cash from buyer to seller.
•Transaction: Mr. X started business with capital Rs. 40000
oSolution: It is a transaction because it changes a financial position of Mr. x cash will increase by 40000 and capital will increase by 40000
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Characteristics ofDual accounting system•Every business transaction affects two or more accounts.
•Every account is divided into two parts.
•Based upon accounting concepts and conventions.
•Helps in preparing Trial Balance and Final Accounts.
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Concept of Debit and Credit•We use the term debit and credit in order to show the changes in value of these basic accounting terms i.e. assets liability and income.•Debit means decrease in proprietor’s equity•Credit means increase in proprietor’s equity•The word debit refers to debtor and credit refer to the word creditor.•The left hand side signifies debit and right hand signifies credit. It is just a convention but not the meaning of these two words.
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Personal
Impersonal
Natural
Artificial / Legal
Groups / Representativ
e
Real
Nominal
Individual living being
Companies, institutions etc
Debtors, Creditors share capital a/c
etc.
Intangible
Tangible
Expenses and loss
Revenue, income and gains
Types of Account
Traditional Approach
Debit and Credit ruleof Traditional approach
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Personal accounts• Natural• Artificial• Representative
Impersonal accounts• Real
• Tangible• Intangible
• Nominal
Debit the receiverCredit the giver
Debit what comes inCredit what goes out
Debit all expenses or lossesCredit all income or gain
Modern Scientific approach/American approach /accounting equation approach:
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Accounts
Asset Account
Liabilities account
Capital account
Revenue account
Expenditure account
Grounds Rules for Recording in Primary Books of accounts
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Assets=Liabilities
+ Capital
Rules:
• Increase in assets & decrease in liability “debit”•Decrease in assets & increase in liability “credit”•Expenses & losses – debit ; income & gains – credit.
ILLUSTRATION
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
• XYZ Ltd. purchased raw materials for ` 20,000 and paid 50% in cash and balance payable after one month
There are three aspects:
Purchases
Cash
Creditor
ExpenseAsset
Liability
Debit
Credit
Credit
Journal EntryPurchases A/c Dr. 200000
To Cash A/c Cr. 100000
To Creditors A/c Cr. 100000
Journal• The word journal has been derived from the French word ‘JOUR’ meaning ‘daily records’
• it is a book of prime records
•Recorded in chronological order
•Also known as book of original entry
•Each transaction are identified then debit credit rules are followed to pass a journal entry
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Format of journal
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
DATE PARTICULARS L.F AMOUNT (Dr.) AMOUNT (Cr.)
(A) (B) (C) (D) (E)
Can Place Image
Few Important Journal Entries:1. Mr. Raja commences business with cash
Cash a/c Dr……… To Capital a/c……
2. He Purchase raw materials in cash Purchases a/c Dr………
To cash a/c
3. Credit sales to Mr. AvinashMr. Avinash a/c Dr……
To Sales a/c
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Ledger•A Ledger is the principal book of accounting system.
•It contains all accounts where transactions from the books of original entry are transferred.•Enables to ascertain what are the revenues and expenses and their values.
•Enables to ascertain what are the assets and liabilities and their values.
•Facilitates in preparation of Trial Balance and Final Accounts.
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Format
•The ledger page is actually a T-account in a more detailed format. It has the account title and its corresponding account number on top. It also has two sides, namely, the debit side and the credit side. Each T-account or ledger account has the following columns.
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Name of Account e.g. Mr. Ram A/c
Date Particulars J.F.
Debit Amount
(`)Date Particulars J.F
.Credit
Amount (`)
05.02.2004 Sales A/c 1 25000 27.02.200
4 Cash A/c 5 5000
15.03.2004 Cash A/c 5
8 16000
Balance C/d 4000
Total 25000 Total 25000
01.04.2004 Balance b/d 4000
ProcessStep 1Locate the account title used by the journal entry in the general ledger.
Step 2Determine if the journal entry is a debit entry or a credit. If it is a debit entry, it should be posted on the debit side of the located ledger account. If it is credit entry, it should be posted on the credit side of the located ledger account.
Step 3Record the date of the journal entry in the date column.
Step 4Write the corresponding name of Account in the Particulars Column.
Step 5Write the amount of the journal entry in the amount column.
Step 6 In the folio column, write the page number of the general journal page that contains the posted journal entry; same referencing in Journal Book.Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Example
Pass Journal Entries and prepare Ledger Accounts:
1. Introduced Capital ` 10,000
2. Interest Paid ` 2,000
3. Paid to supplier against previous dues ` 1,000
4. Withdrew Cash ` 500 for personal use.
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Cash A/c
Date Particulars J Dr. Date Particular
s J Cr.
July 1 Capital1000
0 July 5 Interest 2000
July 25 Supplier 1000
July 30
Drawings 500
Bal. c/d 6500
Total1000
0 Total 10000
Capital A/c
Date Particulars J Dr. Date Particular
s J Cr.
Bal. c/d1000
0 July 1 Cash A/c 10000
Total1000
0 Total 10000
Interest Paid A/c
Date Particulars J Dr. Date Particular
s J Cr.
July 5 Cash 2000 Bal. c/d 2000
Total 2000 Total 2000
Supplier A/c
Date Particulars J Dr. Date Particular
s J Cr.
July 25 Cash 1000 Bal. b/d 2500
Bal. c/d 1500
Total 2500 Total 2500
Date Particulars LF
Debit Credit
July 1 Cash A/c Dr. To Capital A/c(Being capital introduced )
10,00010,000
July 5 Interest Paid A/c Dr. To Cash A/c
2,0002,000
July 25 Supplier A/c Dr. To Cash A/c
1,0001,000
July 30 Drawings A/c Dr. To Cash A/c
500500
Journal
Drawings A/c
Date Particulars J Dr. Date Particular
s J Cr.
July 30 Cash 500 Bal c/d 500
Total 2500 Total 2500
Trial Balance• To verify accuracy of the postings, Trial Balance prepared.
•It is prepared wherein the balances of all accounts in the Ledger are incorporated.
•It contains the list of all ledger accounts including cash account.
•Total of the debit and credit column of the amount must be equal.
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Objectives and Functions of Trial Balance
•Test of Arithmetical Accuracy
•Summarized information of ledger accounts.
•Basis for preparation of final accounts.
•Detection of errors and frauds
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Trial Balance•A basic rule of double-entry accounting is that for every credit there must be an equal debit amount. If debits do not equal credits, then an error has been made. The trial balance is a tool for detecting such errors.
•The trial balance is calculated by summing the balances of all the ledger accounts. The account balances are used because the balance summarizes the net effect of all of the debits and credits in an account.
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Account Debits Credits
Account 1 xxxx.xx
Account 2 xxxx.xx
Account 3 xxxx.xx
.
.
.
Account 4 xxxx.xx
Account 5 xxxx.xx
Account 6 xxxx.xx
.
.
.
Total xxxx.xx xxxx.xx
Trial Balance of X Co.as on ____
Steps to Prepare the Trial Balance•For each ledger account — Cash, Accounts Payable, etc. — total your credits and debits.
If the credit total is larger, subtract the debit total from the credit total to get your ledger account total which goes in the credit column of the trial balance.
If the debit total is larger, subtract the credit total from the debit total to get your ledger account total which goes in the debit column of the trial balance
Put the ledger account total in the credit or debit column of your trial balance (as identified above).
•When you have debit or credit totals for each ledger account, add all of your credit totals to get a Credit Grand Total.•Add all of your debit totals to get a Debit Grand Total.
•This is your Trial Balance.Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Cash A/c
Date Particulars J Dr. Date Particular
s J Cr.
July 1 Capital1000
0 July 5 Interest 2000
July 25 Supplier 1000
July 30
Drawings 500
Bal. c/d 6500
Total1000
0 Total 10000Capital A/c
Date Particulars J Dr. Date Particular
s J Cr.
Bal. c/d1000
0 July 1 Cash A/c 10000
Total1000
0 Total 10000
Interest Paid A/c
Date Particulars J Dr. Date Particular
s J Cr.
July 5 Cash 2000 Bal. c/d 2000
Total 2000 Total 2000
Supplier A/c
Date Particulars J Dr. Date Particular
s J Cr.
July 25 Cash 1000 July 5
Purchase 2500
Bal. c/d 1500
Total 2500 Total 2500
Drawings A/c
Date Particulars J Dr. Date Particular
s J Cr.
July 30 Cash 500 Bal c/d 500
Total 500 Total 500
Trial Balance of Mr. XAs on March 31, 200X
ParticularsDebit
AmountCredit
Amount
Cash A/c 6500
Capital A/c 10000
Interest Paid 2000
Drawings A/c 500
S. Creditors 1500
Purchases 2500
TOTAL 11500 11500
Purchases A/c
Date Particulars J Dr. Date Particular
s J Cr.
July 5Supplie
r 2500 Bal C/d 2500
Total 2500 Total 2500
Accounting for Managers | X.I.S.S. – PGDM (Marketing) | Revision | July 2015
Thank You!