Accounting

&
Finance
MBA 1st Semester
Amity Global Business School
Ms. Kavitha Menon
Module I –

Introduction
 Overview Of Module I
 Concepts of accounting
 Users of accounting information
 Scope and inter-relationship between
financial, cost and management accounting
 Introduction to HR accounting
 Accounting records and books – Journal,
Ledger, Subsidiary books
 Trial Balance
 Definition of Accounting
 “Accounting is the process of identifying,
measuring and communicating economic
information to permit informed judgments
and decisions by users of the information.”
- American Accounting
Association
 ACCOUNTING
 Is a methodology,
 Is the measurement of financial transactions
 Disclosure or provision of assurance about
financial information primarily used by
managers, investors, tax authorities and other
decision makers
 Accounting is also widely referred to as the
“Universal Language of Business"
 Accountancy is a profession.
ACCOUNTS RECORDS
What we own

What we owe

What we’ve paid

What we are owed

What we have been paid

 Activities Covered by Accounting

Identifying Measuring Recording Classifying

Summa Commu
Analyzing Interpreting
rizing nicating
 Difference between
Accounting and Book-Keeping
 Book keeping is merely recording the business
transactions in books and ledgers. It is part of
Accounting. It is often routine and clerical in nature
 Accounting is a wider concept: Compilation of
accounts in such a way that one is in a position to
understand state of affairs of business

ACCOUNTING BEGINS WHERE BOOK-

KEEPING ENDS
Significance of Accounting
is a
Accounting
Accounting Identifies
Identifies
system that

Records
Records
information
Relevant
Relevant Communicates
Communicates
that is
Reliable
Reliable
to
to help
help users
users make
make
Comparable better
better decisions.
decisions.
Comparable
 Objectives of Accounting
 To maintain systematic records
 To protecting business properties
 To ascertain the operational profit or loss
 To ascertain financial position
 To meet the information need of decision
makers
 To satisfy requirements of law
 To facilitate rational decision making
 Functions Of Accounting
 Performance measurement
 Forecasting
 Government Regulation and Taxation
 Evaluation and Control
 Decision Making
 Stewardship
 Fixing Responsibility
 To determine whether
Users of Accounting Information To thedetermine
amount owing whetherto
theirwill
them principals
be paidandwhen
the and
due interest thereof
whether they
 Short-term creditors will should
be paidextend,
when due
To judge prospects for
 Long-term creditors To review
their maintainthe firm’s
and whether
investment
(a)
they
or restrict
and
To judge
short-term should prospects
solvency
extend,(b)of
 Present investors the
Stability
to an flow
determine and of credit
whether to an
long-termenterprise
maintain solvency
or and(c)to
restrict
they individual
profitabilityshouldof the
buy,enterprise
hold
 Potential investors determine
effective
the flow
employers, to
whether
utilization
of credit to
assess of an
or
theysellshould
the shares
buy the in
 Management resources (d)
individual
the ability tosharesprofitability
pay enterprise
relation to turnover (e)
remuneration,
 Employees To profitability
know
To assess
retirement aboutthein
the
benefits relation to
tax
 Tax authorities investments
continuation
liabilities
and to provide ofand
of an to decide
an
upon
enterprise theespecially
course of action to
enterprise
employment
 Customers when be taken
they have
opportunities
Toinregulate
future the
activities, determine
 Government and their agencies
established a long-
taxation policies,
term involvement
national income etc.
 Branches of Accounting

Cost Accounting
Mana
g
t Acc emen
ounti
Financial ng
Accounting
Social
esp ons i b il ity
R
Human Accounting
Resour
ce
Accoun t ing
ting co un
Tax Ac
 Steps in Accounting

• Passing of adjustment entries

• Preparation of financial statements

BASIC ACCOUNTING
TERMINOLOGY
 ASSETS

 Includes tangible objects and intangible rights

 Carry probable future benefits
 Classification
 Current Assets

 Fixed Assets
 CURRENT ASSETS
Assets held -
 In the form of cash

 For their conversion into cash

 For their consumption in the production of goods

or rendering of services in the course of business
 Example: Cash in hand, Cash at bank, Stock,
Debtors, Bills receivable, Prepaid Expenses,
Accrued Income, Short-term Investments
 FIXED ASSETS
Assets which
 are held for the purpose of producing or providing

goods or services
 Are not held for resale in the normal course of

business
 Classification –

 Tangible fixed assets

 Intangible fixed assets

 TANGIBLE FIXED ASSETS
 Fixed assets which can be seen and touched

 Example: Land & Building, Plant &

Machinery, Furniture & Fixtures
INTANGIBLE FIXED ASSETS
 Fixed assets which cannot be seen and touched

 Subject to depreciation

 Example: Goodwill, Patents, Copyrights,

Trademarks
 LIABILITIES
 Financial Obligation

 Settling them results in an

outflow of resources

 Classification –
 Current Liabilities

 Long-term Liabilities
 CURRENT LIABILITIES
 Liabilities which fall due for payment in a
relatively short period (normally, a period of not
more than 12 months from the date of Balance
Sheet

 Example – Bills Payable, Trade Creditors,

Outstanding Expenses, Bank Overdraft, Income
received in advance
 LONG-TERM LIABILITIES
 Liabilities which do not fall due for payment
in a relatively short period

 Example – Long-term loans, Debentures

 CAPITAL
 Amount invested in an enterprise by the
proprietor or partners
 This amount is increased by the amount of
profits earned and amount of additional capital
introduced and is decreased by the amount of
losses incurred and the amount withdrawn
 Also known as Owner’s Equity or Net Assets or
Net Worth
 DRAWINGS
 Total amount of cash or goods or any other
asset withdrawn by the proprietor or partner
for personal use.
 PURCHASES
 Total amount of goods obtained by an
enterprise for resale or for use in the
production or rendering of services in the
normal course of business

Credit
Cash Purchase
Purchases s
 SALES
 The mount for which the goods are sold or
services are rendered

Cash Credit
Sales Sales
 STOCK/INVENTORY
 Tangible property held for sale in the ordinary
course of business or for consumption in the
production of goods or services for sale
 Includes –
 Raw materials
 Work-in-progress
 Finished goods
 TRADE TRADE
DEBTOR CREDITOR

The person from The person to

whom the whom the amounts
amounts are due are due for goods
for goods sold or purchased or
services rendered services rendered
on credit basis on credit basis
 BILLS OF EXCHANGE
 An unconditional order in writing given by a
creditor to the debtor to pay on demand or at a
fixed or determinable future time, a certain
sum of money to or to the order of a specified
person or to the bearer

Bills
Bills
Receivab
Payable
le
 PROVISIONS
 Amount kept aside out of profits – charge on
the profits

 For the purpose of providing for any liability or

loss which is likely to occur but the amount or
date on which they will arise may or may not be
known with reasonable accuracy

 Reduces the amount of net profit

 Example – provision of doubtful debts
 RESERVES
 appropriation of profits

 kept aside for a specific or general purpose

 created to strengthen the financial position of the

business & to meet any unforeseen expenditure

 Example – General Reserve

 Concepts and Conventions
It governs:
• Recording of transactions &

• Preparation of financial statements

• Reporting

• Provides a foundation for accounting

Also known as GENERALLY ACCEPTED

ACCOUNTING PRINCIPLES (GAAP)
 Accounting Concepts
 Basic Assumptions
 Foundation pillars on which the structure of
accounting is based
 List of Concepts
 Business Entity Concept
 Going Concern Concept

 Money Measurement Concept

 Accounting Period Concept

 Historical Cost Concept

 Dual aspect Concept

 Realization Concept

 Matching Concept

 Accrual Concept
 Business Entity Concept
 Business treated as a separate entity that is distinct
from its owners
 The financial affairs of the business are to be treated
as being separate from the non-business activities of
its owners
 Personal transactions of the owner should not be
included
 Separate bank accounts of the business and the
owner.
 Proprietor treated as the creditor of the business
 If household expenses of Rs. 12000 of the proprietor
are shown as a business expense, the profits will be
understated to the extent of Rs. 12000
 Business Entity Forms

Sole
Sole Partnership
Partnership Joint
JointStock
Stock
Proprietorship
Proprietorship Firm
Firm Company
Company
 Going Concern Concept
 An enterprise is viewed as a going concern, i.e. will
continue to operate in the foreseeable future.
 Assumes the enterprise has neither the intention nor the
necessity to curtail the scale of its operations
 Does not imply permanent existence but simply stability
and continuity for a period sufficient to carry business
plans
 Example: Depreciation on fixed
assets, long term contracts
 Money Measurement Concept
 Accounting will deal only with those items
to which a monetary value can be
attributed.
 Transactions of qualitative nature, even though
of great importance to a business are not
considered E.g. good management,
hardworking members of
staff, entrance of a new
competitor in the market
 Accounting Period Concept
 The entire life of the firm is divided into time
intervals for the measurements of the
profit/loss of the business.
 A business has to compulsorily adopt financial

year from 1st April to 31st March( prescribed by

Govt.)
 Companies whose shares are listed on the stock

exchange are2005
required 2006
to publish2007
quarterly results
QTR 1 JAN FEB MAR
QTR 2 APR MAY JUN
QTR 3 JUL AUG SEPT
QTR 4 OCT NOV DEC
 Historical Cost Concept
 Assets should be recorded initially at cost
i.e. the price paid to acquire it
 Main Limitation:-
 In times of inflation, historical

costs figures lack relevance and can mislead

users of financial information.
 In order to overcome this limitation,
revaluation of assets is allowed as an
alternative to historical cost accounting.
 Dual Aspect Concept
 Every transaction affects at least two
accounts.
 If one account is debited then the other
one is credited with the same amount
 This system of recording is known as
“Double Entry System” of accounting
 Accounting Equation:
ASSETS = LIABILITIES + CAPITAL
 Realization Concept
 Revenue is recognized at the point of sale,
when the ownership is passed on to the buyer
 Profit can only be taken into account when
realization occurs
 Generally sales revenue arising from sale of
goods is recognized when the goods are
delivered to the customers
 Matching Concept
 All revenue of a particular period will be
matched with the cost of that period for
determining the net profits of that period
 Points to be noted:
 Outstanding expenses to be added to expenses
 Prepaid expenses to be deducted from expenses
 Closing stock should be carried over to the next period as
opening stock
 Accrued income to be added to revenue
 Income received to advance to be deducted from revenue
 Accrual Concept
 Revenue is recorded when sales are made and
it is immaterial whether cash is received or not
 Also, expenses are recorded in the accounting
period in which they assist in earning the
revenues whether the cash is paid for them or
not.
 Accounting Conventions
 A custom or generally accepted practice which is
adopted either by general agreement or common
consent among accountants
 Conventions:
 Convention of Full Disclosure
 Convention of Consistency
 Convention of Prudence/Conservatism
 Convention of Materiality
 Convention of Full Disclosure
 Information relating to economic affairs of the
enterprise should be completely disclosed
which are of material interest to the users
 Proforma and contents of balance sheet and P&L
account are prescribed by Companies Act
 It does not mean that leaking out the secrets of
the business.
 Convention of Consistency
 Accounting methods (e.g. depreciation methods,
inventory valuation) should remain consistent
year after year
 This facilitates both inter-firm and intra firm
comparison
 This does not mean that a firm cannot change the
accounting methods according to the changed
circumstances of the business.
Convention of Prudence/Conservatism

 “Anticipate no profits but provide for all

possible losses”
 All anticipated losses should be recorded but all
anticipated gains should be ignored.
 It is a policy of playing safe.
 Provisions is made for all losses even though the
amount cannot be determined with certainty
 Inventory is valued at cost or market price
whichever is less
 Materiality Concept
 According to American Accounting
Association, “An item should be
regarded as material if there is reason
to believe that knowledge of it would influence decision
of informed investor.”
 An exception to the convention of full disclosure.
 Items having an insignificant effect to the user need not to
be disclosed.
 Information is material if its omission or mis-statement
could influence the economic decisions of users taken on
the basis of the financial statement.
 Do not waste your time in recording trivial items.
Exercise – State the concept/convention

 Building purchased for Rs. 4 lakhs is recorded

in the books of accounts at that price even
though market value is Rs. 5 lakhs
 The company had a poor trading year and the
owners believe that a more balanced result
could be presented if a LIFO stock valuation
method was adopted instead of the present
FIFO method.
Exercise
 – owners
One of the State the concept/convention
of the company has
invested his drawings in some corporate bonds
and shares.
 The managing director wishes the company’s
good industrial relations to be reflected in the
accounts.
 Although the sales have not yet actually taken
place, some reliable customers of the
company have placed several large orders
that are likely to be extremely profitable.
 The long term future success of the company
is extremely uncertain.
Exercise
 – State
At the year end, the concept/convention
an amount is outstanding
in respect of electricity bills.
 The company has added notes and
schedules in an annual report.
 The company has classified assets as
current assets and fixed assets
 A debtor who owes a large amount of
money is rumoured to be going into
liquidation.
 Accounting of a small calculator as an
expense and not as an asset
 Valuation of stock at cost or market price
whichever is lower
Accounting Equation

Assets = Liabilities + Capital

Derived from:

Resources = Sources of Finances

 Moon started business with Rs. 100,000
 Borrowed Rs. 10,000 from Sun
 Purchased furniture for Rs. 10,000
 Purchased goods for cash Rs. 20,000
 Purchased goods from Moon on credit for Rs. 30,000
 Sold goods costing Rs. 10,000 for cash Rs. 12,000
 Sold goods costing Rs. 20,000 to Star on credit for Rs. 25,000
 Returned goods costing Rs. 5000 to supplier of goods
 Received cash from a customer Rs. 20,000
 Paid cash to a supplier of goods Rs. 15,000
 Paid salary Rs. 1000
 Withdrew cash for personal use Rs. 2,000
 Withdrew goods for personal use Rs. 3,000
 Furniture costing Rs. 10,000 valued at Rs. 9,000
 Rent due but not paid Rs. 2000
 Repaid loan along with interest Rs. 100