Introduction to Accounting
What is accounting?
• Accounting is the language of business
• Entails measuring the activities of the business, process that information
into reports and then use those reports to make business decisions
Accounting for Managers Course – Session 1
• Accounting is much more than recordkeeping or bookkeeping
– Helps to ascertain profitability and financial position of the business
– Facilitates managerial decision making
• Decision makers include all stakeholders – owners, investors, lenders, and
even internal stakeholders – everyone uses accounting information
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Branches of Accounting
Financial Accounting Management (and Cost) Accounting
• Provides information for external decision • Provides information for internal decision
makers makers
• Prepared under relevant accounting • Company’s managers and employees
principles and standards set by bodies
• Investors, lenders, governments, creditors,
analysts, owners
Accounting for Managers Course – Session 1
Which branch of accounting do you think would address the following questions? On basis of which
information do you think the concerned stakeholder will take the decision?
1. Should I invest in the Business?
2. How much money should the Business budget for production?
3. Should we lend money to the Business?
4. Should the Business expand to a new location?
5. How do actual costs compare to the budgeted costs?
Accounting Principles
Every company is required to follow Generally Accepted Accounting Principles (GAAP) in the preparation and
reporting of financial Statements. Accounting Standards Board (ASB) under the ICAI formulates these standards
in India. These are substantially converged with the International Financial Reporting standards (IFRS)
Cost Principle
Economic Entity Concept Acquired assets and services Going Concern Principle
An organisation stands apart as a should be recorded at their actual Entity will remain in operation for a
separate economic unit cost (Now the Fair Value concept foreseeable future
Accounting for Managers Course – Session 1
is emerging)
Revenue Recognition Principle /
Monetary Unit Principle Accrual Basis
Accounting Period Principle
Only those transactions are Income and expenses are
Every organisation must report the
recorded than can be expressed recorded on occurrence
results at regular intervals
in money terms irrespective of realisation or
payment
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Accounting Principles (Continued)
Every company is required to follow Generally Accepted Accounting Principles (GAAP) in the preparation and
reporting of financial Statements. Accounting Standards Board (ASB) under the ICAI formulates these standards
in India. These are substantially converged with the International Financial Reporting standards (IFRS)
Materiality Full Disclosure Principle Consistency
Accountants should use Company must disclose fully and Accountants are expected to be
professional judgement to decide fairly all the information to the consistent when applying
significance or immateriality of an stakeholders which they have to accounting principles, procedures,
Accounting for Managers Course – Session 1
amount report and practices
Conservatism Dual Aspect Principle
Matching Principle
The management must provide Every transaction has two aspects
Expenses should be matched with
provision for all possible losses to and must be accounted for in
revenues of the same year
safeguard the business financial statements
Basic Tool of Accounting – the ACCOUNTING EQUATION
ASSETS LIABILITIES Equity
Owners claims to the assets
Anything of value that the Debts that are owed to
of the business
business owns or has control Creditors (Both Short Term
(Includes CAPITAL and
of and Long Term)
Retained Earnings)
Retained Earnings is the equity is earned by profitable operations of a corporation that is not distributed to
Accounting for Managers Course – Session 1
stockholders.
• Retained Earnings = Net Income – Dividends
• Net Income = Revenues – Expenses
A Dividend is a distribution of a corporation’s earnings to stockholders
REVENUES are amounts earned from delivering goods or services to customers
EXPENSES are the costs of selling goods or services
Any event that affects the financial position of the business and can be measured will affect the equation
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Recording, Classifying and Summarizing Business Transactions
• Account is a detailed record of all increases and decreases that have occurred in an individual asset,
liability, or equity during a specific period
• Examples of Asset Accounts: Cash, Inventory, Accounts Receivables, Prepaid Expenses, Land,
Building, Equipment, Furnitures & Fixtures, Intangible Assets
• Example of Liabilities Accounts: Accounts Payable, Accrued or Outstanding Liabilities, Unearned
Revenues, Debt
Accounting for Managers Course – Session 1
• Examples of Equity Accounts: Common Stock, Dividends, Revenues, Expenses
• All transactions are first recorded in a Journal (A record of transactions in chronological order) and
then posted to a Ledger
• Ledger is the record holding all the accounts of a business, changes in those, and their balances
• Trial Balance is a list of ledger accounts with their balances at a point in time
Standard Financial Statements and their Analysis
• Financial Statements are business documents that are used to communicate information needed to
make business decisions; these are prepared from the Trial Balance
• Income Statement provides information about the profitability for a particular period for the company
– It reports Net Income or Net Loss defined as the difference between revenue and expenses
• Balance Sheet provides information about the economic resources that the company has as well as
Accounting for Managers Course – Session 1
the debts that the company owes
– Reports on the assets, liabilities and stockholders equity of the business as on a specific date
• Cash Flow Statement reports on a business’s cash receipts and cash payments for a period of time
– Divided into three distinct sections: Operating Activities, Investing Activities and Financing
Activities
• Financial Statements can be used to evaluate business performance using various tools, commonly
known as Ratio Analysis
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Summarising the Accounting Process
Journalising and Recording all business transactions of financial
nature
Classifying in a Ledger
Accounting for Managers Course – Session 1
Summarising in a Trial Balance, Income Statement, Balance Sheet
and Cash Flow Statement
Analysing and Interpreting recorded financial data to make a
judgement about the profitability and financial health of the business
Communicating to End Users through various Accounting Reports
DEBITS and CREDITS
• In the Double Entry System of Accounting, every transaction affects at least two accounts, with one
account being debited and the other being credited, so that total debits equal total credits
• The left side of the Ledger or T-account is DEBIT and the right side of the account is CREDIT
• Debits are NOT always decreases, and Credits are NOT always increases. Standard Rules are as follows:
Assets Liabilities Equity
Accounting for Managers Course – Session 1
Increases in Assets are Debits Decreases in Liabilities are Debits Decreases in Equity are Debits
Decreases in Assets are Credits Increases in Liabilities are Credits Increases in Equity are Credits
Common Stock Dividends Revenues Expenses
Decreases are Debits Increases are Debits Decreases are Debits Increases are Debits
Increases are Credits Decreases are Credits Increases are Credits Decreases are Credits
