Amity Business School

Amity Business School

MBA Class of 2011, Semester I
Accounting for Management
Module I
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ACCOUNTANCY, ACCOUNTING AND

BOOK-KEEPING
Accountancy

Accounting

Book-Keeping
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ACCOUNTING
Accounting is a process of Identifying, Measuring, Recording,
Classifying, Summarizing, Analyzing, Interpreting and
Communication the economic information of an organization to
its users.

Accounting is also called the language of business

Accounting is a method to communicate financial information to

interested internal and external parties.
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BOOK-KEEPING
Book-keeping is an art of recording the financial transaction of
a business, or an individual, in terms of money, in a set of
books accurately and systematically in order to obtain
necessary information about the conduct and status of business.
Book-keeping is a part of Accounting and it starts with
identifying the transaction and ends with recording the
transaction in the books of accounts.
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ACCOUNTANCY
Accountancy is a field of knowledge concerned with the
principles and techniques which are applied in accounting in
order to meet the specific the need of a particular concern.

For the purpose of simplicity, the accountancy can be divided

into two parts:
(1) Book-Keeping (2) Accounting
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Activities Under
Accounting

Identifying Measuring Recording Classifying Summarizing

Transactions

Events

Analyzing Interpreting Communication

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ACCOUNTING CYCLE
Accounting cycle is a complete sequence beginning with the
recording of the transaction and ending with preparation
of the final accounts.

Steps in Accounting cycle:

1. Journalizing (Recording the Transaction)
2. Posting (Transfer of transaction in respecting a/c)
3. Balancing (Calculating diff. b/w both sides of a/c)
4. Trial Balance (Preparing list of all a/c)
5. Income Statement (Preparing Trading and P&L a/c)
6. Balance sheet (Preparing Balance Sheet)
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Users of Accounting
 Creditors (Short term and Long term)
 Investors (Present and Potential)
 Management
 Employees
 Tax Authorities
 Customers
 Government and their Agencies
 Public
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Usefulness of Accounting
 Facilitates to replace memory
 Facilitates to comply with legal requirement
 Facilitates to ascertain net result of operations
 Facilitates to ascertain financial position
 Facilitates the users to take decisions
 Facilitates a comparative study
 Assists the management
 Facilitates control over assets
 Facilitates the settlement of tax liability
 Facilitates the ascertainment of value of business
 Facilitates raising loans
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Accounting Limitations
 Ignores the qualitative elements
 Not free from bias
 Estimated position and not real position
 In some cases ignores the price level changes
 Window Dressing
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Branches of Accounting

Financial Cost Accounting Management Social

Accounting Accounting Responsibility
Accounting

Financial Accounting: Process of identifying, measuring, recording,

classifying, summarizing, analyzing, interpreting and communicating the financial
transactions and events.
The main purpose of this branch of accounting is to keep systematic records to
ascertain financial performance and financial position and to communicate the
accounting information to the interested parties.
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Cost Accounting: Process of accounting and controlling the cost of a product,

operation or function.
Purpose of this branch of accounting is to ascertain the cost, to control cost and to
communicate information for decision-making.
Management Accounting: This Branch of accounting provides information
designed to help all levels of management in planning and controlling the activities of
business enterprise and decision making.
Purpose of this branch is to supply any and all information that management may need in
taking decision and evaluate the impact of its decisions and actions.
Social Responsibility Accounting: Process of identifying, measuring, and
communicating the social effect of business decisions to permit informed judgement and
decisions by the users of the information.
Accounting for environment and ecology is part of social responsibility accounting.
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 Amity Business School

Generally Accepted Accounting

Principles (GAAP)
Those rules of action or conduct which are derived from experience and
practice and when they prove useful, they become accepted as principles of
accounting.
General Acceptance of accounting principles or practices depends upon how
well they meet the following criteria:
Relevance : Should be relevant to the extent it results in information that is
meaningful and useful to the user of accounting information.
Objectivity : Should be objective to the extent the accounting information is
not influenced by personal bias or judgment of those who provide it.
Principles should be verifiable also.
Feasibility : Should be feasible to the extent it can be implemented without
much complexity of cost.
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Kinds of Accounting Principles

 Basic Concepts or Assumptions
 Basic Principles
 Modifying Principles

 Basic Concepts or Assumptions: To make the accounting language convey the same
meaning to all people and to make it more meaningful, most of the accountants have agreed on
a number of concepts which are usually followed for preparing the financial statements.
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Basic Assumptions of
Accounting

Accounting Entity Money Accounting Period Going Concern Verifiable

Assumption Measurement Assumption Assumption Objective
Assumption Evidence
Assumption

Accounting Entity Assumption: Business is a separate entity that is distinct from its
owner(s), and all other economic proprietors. E.g. in case of proprietary concern, though the
legal entity of the business and its proprietor is the same, for the purpose of accounting, they
are to be treated as separate.

Money Measurement Assumption: Only those transactions which are capable of

being expressed in terms of money are included in the accounting records. E.g. If the sales
director is not on speaking terms with the production director, the enterprise is bound to
suffer. Since monetary measurement of this information is not possible, this fact is not
recorded in accounting records.
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 Accounting Period Assumption: Also known as Periodicity assumption or Time

period assumption. The economic life of an enterprise is artificially split into periodic
intervals which are known as accounting periods, at the end of which an income
statement and position statement are prepared to show the performance and financial
position.

 Going Concern Assumption: Also known as Continuity assumption. Enterprise

is normally viewed as going concern, that is, continuing in operation for the
foreseeable future. It is assumed that the enterprise has neither the intention nor the
necessity of liquidation or of curtailing materially the scale of operation.

 Verifiable Objective Evidence Assumption: All accounting transaction that

are recorded in the books of accounts should be evidenced and supported by
business documents.
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Basic Principles of
Accounting

Revenue Principle of Dual Aspect Matching Fill Disclosure

Recognition Expense Principle Principle Principle
Principle

Basic Principles of Accounting: On the basis of the concepts of accounting discussed

above, certain principles have been developed that guide how transactions should be
recorded and reported. These basic principles are as follow:

Principle of Revenue Recognition: Revenue is earned by sale of goods or by

providing a service. This principle determines or the particular period in which the revenue is
realized. The basis that may be used for determining the period in which revenue is realized
are: On the basis of Sales, On the basis of Cash, On the basis of Production.

Principle of Expenses: According to this principle of expenses, expenses are not

recognized when cash is paid for them but only when they are actually used to generate
revenue
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 Principle of Matching Cost and Revenue: In determining the net profit from
business operation, all costs which are applicable to revenue period should be
charged against that revenue. Accordingly, for matching costs with revenue, first
revenue should be recognized and then costs incurred for generating that revenue
should be recognized.

 Principle of full disclosure: All significant information relating to the economic

affair of the enterprise should be completely disclosed. In other words, there should
be sufficient disclosure of information which is of material interest to the users of the
financial statements such as proprietors, present and potential creditors, investors
and others. That’s why we are showing Contingent liabilities as a footnote in financial
statements.

 Dual Aspect Principles: Every business transaction is recorded as having a dual

aspect. In other words, every transaction affects at least two accounts. If one account
is debited, any other account must be credited. This system of recording transactions
based on this principle is called as “Double Entry System”. That’s why the two sides
of the balance sheet are always equal and the following accounting equation will
always hold good at any point of time:
Assets = Liabilities + Capital or Capital = Assets - Liabilities
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Modifying Principles

Principle of Principle of Principle of Conservatism Principle of Principle of

Materiality Consistency Or Prudence Timeliness Accounting Practice

Modifying Principles: There are certain accounting principles which can be slightly
modified by different accountants according to the situations and requirements of the business.
This is done in order to make the financial statements more relevant and reliable. These
principles are:
Principle of Materiality: This principle is an exception to the principle of full
disclosure. According to this principle, items having an insignificant effect or being irrelevant
to the user need not be disclosed. These unimportant items are either left out or merged with
other items, otherwise accounting statements will be unnecessarily overburdened. It should be
noted what may be material for one concern may be immaterial for another. E.g. the cost of
small tools may be material for a small repair workshop, but the same figure may be
immaterial for Escorts Ltd. Similarly the nature of transaction should also be taken into
consideration. A difference of Rs. 5,000 in valuation of stock may be regarded as immaterial,
but a difference of Rs. 5,000 in cash could be termed material.
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Principle of Consistency: Accounting principles and methods should remain

consistent from one year to another. These should not be changed from year to year, in
order to enable the management to compare profit & loss A/c and Balance sheet of
different periods and draw important conclusion about the working of the enterprise.
But this principle of consistency should not be taken to mean that it does not allow a firm
to change the accounting methods according to changed circumstances of the business.
Otherwise, the accounting will become non-flexible and the improved techniques of
accounting will not be used.
Principle of Conservatism or Prudence: All anticipated losses should be recorded
in the books of accounts, but all anticipated or unrealized gain should be ignored. In other
words, it is a policy of playing safe. Provision is made for all known liabilities and losses
even though the amount can not be determined with certainty.
Principle of Timeliness: Financial statements should be prepared quickly at the end
of accounting period and made available to management and other external users at the
earliest possible time. If they are delayed, they will be of little or no use.
Principle of Industry Practice: Some time the unique characteristics or the peculiar
nature of industry requires the departure from accounting principles to report the true
results of the business. E.g. if a particular method of providing depreciation and valuing
stock is prevailing in an industry, it becomes the industry practice. An accountant must
follow the accounting practices prevailing in the industry which preparing financial
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 Amity Business School

Introduction to Accounting Standards

• Accounting standards deal with the system of financial measurement and disclosure
used to prepare fairly presented financial statements.

• These standards draw boundaries within which acceptable conduct should lie. In other
words, they provide Generally Accepted Accounting Principles (GAAP) and procedures
as pronounced by professionally competent organizations. These standards suggest
rules and criteria of accounting measurement.

• Accounting Standards in India: On 27th April 1977, The institute of Chartered

Accountants of India constitute Accounting Standards Board (known as A.S.B.) with a
view to harmonize accounting policies and practices used in India. The main function of
A.S.B. is to formulate the standards after taking into consideration the applicable laws,
customs, usages and business environment.

• Types of Standards: The Standards are of two types: Recommendatory and

Mandatory. Initially the standards are recommendatory in nature. Certain period is
allowed for smooth transition to conform to the Standards from existing practices. This
period is decided by Institute of Chartered Accountant of India. “Mandatory” standards
imply that compulsory adherence to the standards by all enterprises covered by
standards, is to be ensured.
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 Amity Business School

Accounting Equation means the total of assets will be equal to the total of
liabilities. The basic idea behind this equation is that the business does not have
anything of its own. All assets of the business are claimed by someone (either owner of
outsiders). It follows, therefore that, whenever an asset comes into business, and equal
claims arises or an equal value of other asset goes away. As no asset can drop from
heaven, it must be accompanied by a claim. This expression can be shown in the form
of following equation:
Assets = Equities*
or
Assets = Liabilities + Capital
*Claims of various parties against the assets

Example:
Govind commenced business with capital of Rs. 60, 000.

Assets = Liabilities + Capital

Cash = Liabilities + Capital
60, 000 = Nil + 60, 000
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 Govind purchased goods from Gopal on credit for Rs. 20, 000

Assets = Liabilities +
Capital
Cash + Goods = Creditors +
Capital
Old Equation 60, 000 + 0 = 0 + 60,
000
Transaction 0 + 20, 000 = 20, 000 + 0

New Equation 60, 000 + 20,000 = 20, 000 + 60,

000

 Govind purchased furniture for cash Rs. 2, 000.

 Govind purchased goods for cash Rs. 30, 000.
 Goods costing Rs. 15, 000 sold on credit for Rs. 18, 000.
 Paid Rent Rs. 600.
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Accounts Affected
S. Transactions
Assets Liabilities and Capital
N.
1 Capital brought in Cash increases Capital increase
2 Purchased goods for cash Stock increases
    Cash Decreases  
3 Purchased goods on credit Stock Increases Creditors increases
4 Purchased furniture for cash Cash decreases
    Furniture increases  
5 Paid rent Cash decreases Rent = Expenses Therefore,
      Capital decreases
6 Received Commission Cash increases Commission = Income
      Therefore, Capital Increases
7 Withdrew cash for private use Cash decreases Capital decreases
8 Paid to creditors Cash decreases Creditors decreases