Accounting for Managers

Account: It is a unit of information that represents business records. There are five types of accounts:
Asset, Liability, Equity, Revenue and Expense.
Accounting: It is concerned with the use of which the records are put, their analysis and interpretation.
It is the process of recording business activities that make changes to accounts. Sales of products,
Revenue from services earned, Buying products and/or services and so on.
Attributes
 It is the art of recording business transactions.
 It is the art of classifying business transactions.
 The transactions or events of a business must be recorded in monetary terms.
 It is the art of summarizing financial transactions.
 The results should be communicated to users.
Functions
 Systematic record of business transactions.  Communicating results to users.
 Protecting the property of business.  Compliance with legal requirements.
Users of Accounting Information
 Owners  Government
 Creditors (Suppliers)  Public
 Investors  Research Scholars / Agencies
 Employees  Managers
Branches of Accounting
 Financial Accounting (Record keeping)
 Cost Accounting (Price fixation & Operating efficiency)
 Management Accounting (Analysis for decision making)
Advantages
 Replacement of Memory  Sale of business
 Evidence in court  Assistance to the insolvent
 Tax purpose  For various parties
 Comparative study
Limitations
 Records only monetary transactions  Permits alternative treatments (LIFO,
FIFO)
 Effect of price level changes not
considered  No real test for managerial performance
 No realistic information  Historical in nature
 Personal bias of accountant affects the
accounting statements
 Accounting for Managers

Accounting Terminology
Account: A record that holds the results of financial transactions.
Accounting: A service that oversees, measures, and evaluates financial information for decision
making purposes.
Business: An organization created with the objective of making a profit from the sale of goods or
services.
Bookkeeping: The act of systematically recording the financial transactions affecting a business.
Book Value: The net amount (original value plus or minus any adjustments such as depreciation)
showed in the accounts for an asset, liability, or owners' equity item.
Calendar Year: An entity's reporting year, covering 12 months.
Transactions: Exchange of goods or services between businesses or individuals. Can also be other
events having an economic impact on a business.
Journal: A book or original entry in a double-entry bookkeeping system. The journal lists all
transactions and indicates the accounts to which they are posted.
Journal Entry: A recording of a transaction where debits equal credits.
Ledger: A summary statement of all the transactions relating to a person, asset, expense or income
which have taken place during a given period of time and show their net effect.
Trial Balance: A listing of all account balances that provides a test of whether total debits equals total
credits.
Revenues: Increases in a company's resources from the sale of goods or services.
Balance sheet: A balance sheet is an itemized statement which lists the total assets and the total
liabilities of a given business to show its net worth at a given moment in time (like a snapshot).
Capital: Property or money used and owned by a business and used to acquire future income or
benefits.
Debtor: A debtor is a person who owes money. The amount due from his is called debt.
Creditor: A person to whom money is owing or payable is called a creditor.
Credit: An entry on the right side of a ledger account.
Goods: This includes all articles, commodities or merchandise in which the business deals. Thus, cloth
would be goods for a dealer in cloth; furniture would be goods for a dealer in furniture and so on.
Assets: Economic resources owned or controlled by a person or company.
Net Assets: The difference between assets and liabilities.
Liquidity: The availability of cash or ability to obtain it quickly. Also used to determine debt
repayment ability.
Goodwill: An intangible asset that exists when a business is valued at more than the fair market value
of its net assets.
 Accounting for Managers

Interest: The cost of the use of money.

Current Assets: Current assets are those assets of a company that are expected to be converted to cash,
sold, or consumed during the normal operating cycle of the business (usually one year). Examples are
cash, accounts receivable, short-term investments, US government bonds, inventories, and prepaid
expenses.
Current Liabilities: Liabilities to be paid within one year of the balance sheet date.
Drawings: Any amount or goods withdrawn by the owner of a business for personal use is called
drawings.
Bad Debt: An uncollectible Account Receivable.
Loss: A loss is expenditure without any benefit to the concern. On the other hand, expense is incurred
to result in some benefit. Thus, amount spent on lighting is an expense but loss due to fire is loss.
Income: It is an inflow of assets which results in an increase in the owner’s equity.
Expenditure: Expenditure takes place when an asset or service is acquired. Expenditure will include
both payment of a sum immediately and a promise to pay it at a future date.
Expense: An expenditure whose benefit is finished or enjoyed immediately such as salaries, rent, etc.
Turnover: It means total trading income from cash sales and credit sales.
Net worth: It means assets minus outside liabilities. Profits of a business increase net worth whereas
losses reduce the net worth of a business.
GAAP - Refer to Generally Accepted Accounting Principles.

Basis of Accounting
 Cash basis: Actual cash receipts and payments are recorded. Credit transactions are not
recorded.
 Accrual basis: The income whether received or not but has been earned or accrued during the
period forms part of the total income of the period. The firm has taken benefit of a particular
service, but has not paid within that period, the expenses will relates to the period in which the
service has been utilized and not to the period in which payment for it is made.
 Mixed basis: Combination of cash and accrual basis.

System of Accounting
 Single Entry System: This system has no complete record of business transactions done during
a specified period.
 Double Entry System: One account is given debit while the other account is given credit with
an equal amount.
 Accounting for Managers

Classification of Accounts
Types of Accounts

Personal Accounts Impersonal Accounts

Natural Artificial Representative Real Nominal

Persons Persons Persons Accounts Accounts
Accounts Accounts Accounts

Tangible Intangible
Real Real
Accounts Accounts

 Natural Person’s Personal Account: An account recording transactions with an individual

human being is known as a natural person’s Personal Account. (eg. Krishna account)
 Artificial Person’s Personal Account: An account recording financial transactions with an
artificial person created by law or otherwise is called an artificial person’s personal account.
(eg. VSL College)
 Representative Person’s Personal Account: An account indirectly representing a person or
persons is known as a representative account. (eg. Salaries account)
 Tangible Real Account: An asset which can be touched, seen, and measured. (eg. Machinery
Account)
 Intangible Real Account: An asset which can’t be touched physically but can be measured in
value. (eg. Goodwill)

Rules of Double Entry System

 Personal Accounts: These accounts are dealings with persons or firms.
o Debit the receiver
o Credit the giver
 Real Accounts: These are the accounts of assets.
o Debit what comes in
o Credit what goes out
 Nominal Accounts: These accounts deal with expenses, incomes, profits and losses.
o Debit all losses and expenses
o Credit all gains and incomes
 Accounting for Managers

Accounting cycle
Recording monetary transactions in a systematic manner

Journal entries

Ledger

Trial balance

Trading and Profit & Loss Account

Balance Sheet

Role of Accountant in Modern Organisation

 Supporting, planning, controlling, directing, communicating and coordinating the decision
making activities.
 Two main activities of management accountant
o Advisory Services: Tendering of opinions, assisting the making of evaluations or the
formation of expectations, and the development of norms or objectives.
o Information Services: Provision of historical information, and future-oriented
information.
 Compliance, control and competitive support are the three factors which influence management
accountant work.
 Competitive support has risen due to globalization, increase in competition, greater customer
focus, and importance of quality.
o Communication skills and analytical skills.
o Speaking and presentation skills.
o Support both strategic & operational decisions.
 Functions of an accountant
o Designing work o Reporting work
o Recording work o Preparation of budgets
o Summarizing work o Taxation work
o Analysis and interpretation work o Auditing
 Accounting for Managers

Accounting Principles
 Accounting Concepts
o Business entity concept: The Business is distinct from the persons who own it.
o Going concern concept: It assumes that the business will continue for a long time.
o Cost concept: All the transactions will be recorded at cost in the books. It means deducted
depreciation from the assets yearly.
o Dual aspect concept: Each transaction is twofold affect.
o Money measurement concept: The transactions should be recorded in monetary aspect
only. We should not record the transaction in kilograms, quintals, meters, liters, etc.
o Accounting period concept: Measuring the profit, incomes or expenses of the period only
are to be considered. Usually the period is one year (12 months).
o Realization concept: If the revenue is recognized too early or too late, the company would
not project the right financial position. It would look more profitable or less profitable
than what it actually is.
o Matching concept: Expenses incurred for a period are matched with the revenues for the
same period to arrive as a reasonably correct measurement of the net income or the net
loss. The difference between revenues and expenses is a measure of how effectively
management has utilized the firm’s resources.
o Objective evidence concept: All accounting transactions should be evidenced and
supported by object documents.
 Accounting conventions
o Convention of disclosure: Accounts should be prepared in such a way that all material
information is clearly disclosed to the users.
o Convention of consistency: An accounting method or procedure once chosen should be
followed consistently from year to year.
o Convention of conservatism: Any business while recording the transactions should
‘anticipate no profits but provide for all possible losses’.
o Convention of materiality: Only those events should be recorded which have a significant
bearing and insignificant things should be ignored. There is no formula for identifying
material and immaterial events. It depends on the accountant discretion.
Accounting Standards in India
 The Institute of Chartered Accountants of India (ICAI) constituted the Accounting Standard
Board in April 1977.
 ASB’s functions
o To formulate accounting standards (AS), while formulating the AS it considered all the
applicable laws.
o To propagate the AS and persuade the concerned parties to adopt them in the preparation
and presentation of financial statements.
o To issue guide notes on AS and give clarifications on issues arising there from.
o To review the accounting standards at periodic intervals.
 ASB issued 28 Accounting Standards in addition to these standards; the ICAI has issued
statements, guidance notices and opinions which seek to bring uniformity in corporate
accounting and reporting practices.