1

Module 1

Introduction to Accountancy

Accounting for Managers

2

Module 1(7 Hours)

Principle of double entry book keeping:

Importance & scope of accounting, Accounting concepts, conventions, GAAPS & accounting standards. Accounting equations, Users of accounting statements.

3

Definition And Meaning Of Accounting

The American Institute of Certified Public Accountants (1941) defines ‘Accounting is the art of recording, classifying and summarising in significant

manner and in terms of money, transactions and events which are in part, at least of a financial character and

interpreting the results thereof.

 

Accounting As An Information Cycle

Input Process Output

4

Accountancy, Accounting And Book-keeping

5

IMPORTANCE OF ACCOUNTING

1. Facilitates to replace memory and comply with

legal requirements

2. Facilitates to ascertain net result of operations

and also to know the financial position

3. Facilitates the users to take effective decisions

4. It is helpful in a comparative study

5. It assists the management

6. It facilitates to have control over assets

7. It facilitates the settlement of tax liability

8. It facilitates raising of loans

9. It acts as a legal evidence

10. It facilitates ascertainment of value of business.

6

SCOPE OF ACCOUNTING

• Identifying• Measuring• Recording• Classifying• Summarising• Analysing• Interpreting• Communication

7

Accounting Principles 

Accounting principles are a body of doctrines commonly associated with the theory and procedures and as a guide for selection of conventions or procedures where alternatives exist.

These principles are classified into two categories:     1.  Accounting Concepts

2. Accounting Conventions 

 

8

TYPES OF ACCOUNTING

Accounting

Financial Accounting

Cost Accounting

Management Accounting

Social Responsibility

Accounting

9

ACCOUNTING CONCEPTS

Concept means a general notion, a theory or belief held by person or group of persons. The term ‘concepts’ includes those basic assumptions or conditions upon which the science of accounting is based.

 1.      Business entity concept2.      Money measurement concept3.      Cost concept4.      Going concern concept5.      Dual aspect concept6.      Realisation concept7.      Accrual concept

10

ACCOUNTING CONVENTIONS 

A convention means a custom or an established usage formed or adopted by an agreement. The term ‘conventions’ includes those customs or traditions which guide the accountant while preparing the accounting statements.  1.   Convention of consistency2.   Convention of full disclosure3.   Convention of conservatism4.   Convention of materiality 

11

Accounting StandardsThe Accounting standards bring uniformity in the preparation and presentation of financial statements and aids in comparison of different financial statements of companies in the same or different industries.

Procedure for framing Accounting Standards

• The International Accounting Standards are issued by the IASC • These Standards are received by ICAI assigned to ASB• The Accounting standards are issued under the authority of the council of ICAI.So far the ASB of ICAI has issued 28 Accounting standards as shown below:

12

Accounting

Standard Title Mandatory for

Accounting period beginning on or after

AS-1 Disclosure of Accounting Policies 1.4.1991

AS-2(Revised)

Valuation of inventories 1.4.1999

AS-3(Revised)

Cash Flow Statements 1.4.2001

AS-4(Revised)

Contingencies and Events occurring after Balance Sheet Date

1.4.1995

AS-5(Revised)

Net Profit or Loss, prior period items and changes in Accounting policies

1.4.1996

AS-6(Revised)

Depreciation Accounting 1.4.1995

AS-7(Revised)

Accounting for construction contracts 1.4.2003

13

AS-8 Accounting for Research and Development

1.4.1991

AS-9 Revenue Recognition 1.4.1991

AS-10 Accounting of Fixed Assets 1.4.1991

AS-11(Revised) Accounting for the effect of changes in foreign exchange rates

1.4.1995

AS-12 Accounting for Government Grants 1.4.1994

AS-13 Accounting for Investments 1.4.1995

AS-14 Accounting for Amalgamations 1.4.1994

AS-15 Accounting for retirement benefits in the financial statements of employers

1.4.1995

AS-16 Borrowing costs 1.4.2000

AS-17 Segment reporting 1.4.2001

14

AS-18 Related Party Disclosures 1.4.2001

AS-19 Leases 1.4.2001

AS-20 Consolidated Financial Statements 1.4.2001

AS-21 Earnings per share 1.4.2001

AS-22 Accounting for taxes on income 1.4.2001

AS-23 Accounting for investments in consolidated finance statements

1.4.2002

AS-24 Discounting operations 1.4.2004

AS-25 Interim financial reporting 1.4.2002

AS-26 Intangible assets 1.4.2003

15

AS-27 Financial reporting of interest in joint ventures 1.4.2002

AS-28 Impairment of Assets 1.4.2004

AS-29 Provisions, Contingent Liabilities and Contingent Assets

1-4-2004

16

Accounting equationsMeaning:The statement of equality between debits and credits is known as accounting equations. In other words ,statement regarding equality of assets with its corresponding liability is termed as accounting equations.

Constituents of accounting equations:

Assets: valuable things owned by the business is termed as assets. Cost of acquiring , installation and development o0f these in the value of assets is regular feature.

Liabilities: proprietor’s and creditors claim against business is termed as liabilities. Creditors for goods loan, expenses and proprietor's claim is termed as liability . In case of accounting equation the term liability is restricted to outsider’s claim.

Capital: proprietor’s claim towards business is known as capital. It includes cash introduced as capital + reserve + income + profit + interest on capital – drawings – losses – interest on drawings – expenses.

17

Accounting equationsCapitals + liabilitiesCapitals + liabilities ↓Proprietors' capitals + liabilities ↓LoansBank overdraft CreditorsBills payableOutstanding expensesIncome received in advance

AssetsAssets ↓Properties and assets ↓BuildingsLandMachineryFurnitureStock in tradeDebtorsBills receivableBank cash

Every business every time has some assets and liabilities. These are always equal. So balance sheet showing the assets and liabilities is always in the form

of an equation:

Assets = Capital + Liabilities

18

Accounting Equations  An accounting equation is a statement of equality between the resources

and the sources that finance the resources.Resources = Sources of finances-------------- (1)

 Resources means Assets & Sources of finances means Equity. If we substitute the above synonyms, the equation will be as under:

Total Assets = Total Equities------------ (2)Equities means borrowed funds, which may be funds borrowed from internal sources and those that can be from external sources. These are also called

internal equities and external equities. In that case the above equation may also be written as under:

Assets = Internal Equity + External Equity-----------(3) It is a known fact that Internal Equity means Capital and External Equity means Liability. So the above equation can be written as Assets = Capital + Liabilities---------------(4)

ORAssets – Liabilities = Capital--------------(5)

ORAssets – Capital = Liabilities------------(6)

 Equations 4,5,6 are accounting equations

19

USERS OF FINANCIAL STATEMENTS  1.      Creditors (short term & long term) 2.      Investors (present & potential) 3.      Management 4.      Employees 5.      Tax Authorities 6.      Customers 7.      Government and their agencies 8.      Public

20

Double Entry System Of Book-keeping 

The main principle involved in Double Entry system is the duality transactions i.e., for every debit, there is an equal and opposite credit.

 Total Debits = Total Credits

Personal Accounts Real Accounts

Nominal Accounts

Names of individuals, firms, companies and

other entities

Expenses, losses and incomes and gains

Assets And Liabilities

Principles Of Double Entry System

Classifications of accounts under double entry system

1. Traditional classification

21

Assets: Resources, things or rights or value owned by a businessLiability: Claims of others against a business / Assets owned by the business to

the outsidersExpenses:An expenditure in return for which a benefit is received.Loss: An expenditure in return for which no benefit is received.Income: Refers to the earnings of a business for the expenses incurredProfit: Refers to the earnings of a business for no expenses incurred or

proportionally meagre expenses incurred

Type of Account Debit Credit

Personal Account The receiver The giver

Real Account What comes in What goes out

Nominal Account All expenses and losses All incomes and gains

         

Rules for debit and credit under traditional classification

22

2. Classification based on accounting equation

Rules of debit and credit for classification based on accounting equation

Type of Account Debit Credit

Asset Accounts Increase Decrease

Liabilities Accounts Decrease Increase

Capital Accounts Decrease Increase

Revenue Accounts Decrease Increase

Expenditure Accounts Increase Decrease

Asset Accounts

Liabilities Accounts

Capital Accounts

Revenue Accounts

Expenditure Accounts

23

End of the Module