179c4module1.1
TRANSCRIPT
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Amity Business School
MBA Class of 2011, Semester I
Accounting for Management
Module I
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ACCOUNTANCY, ACCOUNTING ANDBOOK-KEEPING
Accountancy
Accounting
Book-Keeping
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ACCOUNTINGAccounting is a process of Identifying, Measuring, Recording,
Classifying, Summarizing, Analyzing, Interpreting and
Communication the economic information of an organizationto its users.
Accounting is also called the language of business
Accounting is a method to communicate financial information tointerested internal and external parties.
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BOOK-KEEPING
Book-keeping is an art of recording the financial transaction ofa business, or an individual, in terms of money, in a set of
books accurately and systematically in order to obtainnecessary information about the conduct and status of business.
Book-keeping is a part of Accounting and it starts withidentifying the transaction and ends with recording thetransaction in the books of accounts.
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ACCOUNTANCY
Accountancy is a field of knowledge concerned with theprinciples 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 dividedinto two parts:
(1) Book-Keeping (2) Accounting
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Activities Under
Accounting
MeasuringIdentifying Recording Classifying Summarizing
Analyzing Interpreting Communication
Transactions
Events
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ACCOUNTING CYCLEAccounting cycle is a complete sequence beginning with the
recording of the transaction and ending with preparationof 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
Cost AccountingFinancial
AccountingManagement
Accounting
Social
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 toascertain 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 informationdesigned to help all levels of management in planning and controlling the activities ofbusiness 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, andcommunicating 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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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 samemeaning 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 ofAccounting
Money
Measurement
Assumption
Accounting Entity
Assumption
Accounting Period
Assumption
Going Concern
Assumption
Accounting Entity Assumption:Business is a separate entity that is distinct from itsowner(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.
MoneyMeasurement Assumption:Only those transactions which are capable ofbeing 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.
Verifiable
Objective
Evidence
Assumption
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Accounting Period Assumption:Also known as Periodicity assumption or Timeperiod 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. Enterpriseis 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 thatare recorded in the books of accounts should be evidenced and supported by
business documents.
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Basic Principles of
Accounting
Principle of
Expense
Revenue
Recognition
Principle
Dual Aspect
Principle
Matching
Principle
Fill Disclosure
Principle
Basic Principles of Accounting:On the basis of the concepts of accounting discussedabove, 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 byproviding 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 notrecognized when cash is paid for them but only when they are actually used to generate
revenue
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Principle ofMatching Cost and Revenue:In determining the net profit frombusiness operation, all costs which are applicable to revenue period should becharged 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 shouldbe 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. Thats why we are showing Contingent liabilities as a footnote in financial
statements.
Dual Aspect Principles
:Every business transaction is recorded as having a dualaspect. 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. Thats 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 orCapital = Assets - Liabilities
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Modifying Principles
Principle of
Consistency
Principle of
Materiality
Principle of Conservatism
Or Prudence
Principle of
Timeliness
Principle of
Accounting Practice
Modifying Principles: There are certain accounting principles which can be slightlymodified 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, inorder 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 recordedin 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 theearliest 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 peculiarnature 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 financialtatement .
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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 27thApril 1977, The institute of CharteredAccountants 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 andMandatory. 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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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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S.N.
Transactions Accounts AffectedAssets Liabilities and Capital
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 increases4 Purchased furniture for cash Cash decreases
Furniture increases
5 Paid rent Cash decreases Rent = Expenses Therefore,
Capital decreases
6 Received Commission Cash increases Commission = IncomeTherefore, Capital Increases
7 Withdrew cash for private use Cash decreases Capital decreases
8 Paid to creditors Cash decreases Creditors decreases