AITS SUB: ACCOUNTING FOR MANAGERS

ACCOUNTING FOR MANAGERS

PREPARED BY

Dr.P.Subramanyam , M.COM, MBA, Ph.D.,

Assoc.prof & HOD

Department of Business Administration
AITS(Autonomous)
Rajampet, Kadapa
EMAIL- [email protected]
Ph- 7093769885

Dr. P.SUBRAMANYAM, M.COM , MBA, Ph.D1

AITS SUB: ACCOUNTING FOR MANAGERS

UNIT - 1

INTRODUCTION TO FINANCIAL ACCOUNTING

Introduction to Accounting: Accounting is understood as the Language of Business. However, a business may have a lot
of aspects which may not be of financial nature. As such, a better way to understand accounting could be to call it The Language
of Financial Decisions. Luca Paciolo, Mathematician Published a book De computicet scriptures in 1494 at venice in Italy.

Meaning of Accounting:

Thus, book-keeping is an art of recording the business transactions in the books of original entry and the
ledges. Accountancy begins where Book-keeping ends. Accountancy means the compilation of accounts in such a
way that one is in a position to know the state of affairs of the business. The work of an accountant is to analyze,
interpret and review the accounts and draw conclusion with a view to guide the management in chalking out the future
policy of the business.

Definition of Accounting:

American Institute of Certified Public Accountants (AICPA): “The art of recording, classifying and summarizing
in a significant manner and in terms of money transactions and Management events, which are in part at least, of a
financial character and interpreting the results thereof.”

Smith and Ashburne: “Accounting is a means of measuring and reporting the results of economic activity

R.N. Anthony: “Accounting system is a means of collecting summarizing, analyzing and reporting in
monetary terms, the information about the business activities.”

Thus, accounting is an art of identifying, recording, summarizing and interpreting business transactions of
financial nature. Hence accounting is the Language of Business.

Dr. P.SUBRAMANYAM, M.COM , MBA, Ph.D2

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Objectives Of Accounting:

1. To maintain records of Business: one of the important objectives of accounting is the systematic
maintenance of all monetary aspects of business transactions. This is known as book-keeping
2. To calculate Profit or loss: The profit earned or the loss suffered during a specific period (generally a year )
can be calculated easily from the accounting books
3. To ascertaining Financial Position: by preparing the financial statements (trading and Profit &loss account
and Balance sheet) the financial position of the company can be found out. From these statement it is possible
to know the resource (assets) owned by the firm. These statements also provide information about obligation
(liabilities) of business. Thus accounting aims at depicting the true and fair financial position of a concern.
4. To communication financial information: Accounting is called language of business. It aims at
communicating financial information to various interested parties (viz, managers, investors, government etc)

Branches of Accounting:

The important branches of accounting are:

Branches of accounting

Financial accounting
Management Accounting Human resource accounting
Cost accounting
aaaaaaaccountingaccounti
ng Inflation accounting

1. Financial Accounting: The purpose of Accounting is to ascertain the financial results i.e. profit or loss in
the operations during a specific period. It is also aimed at knowing the financial position, i.e. assets,

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liabilities and equity position at the end of the period. It also provides other relevant information to the
management as a basic for decision-making for planning and controlling the operations of the business.
2. Cost Accounting: The purpose of this branch of accounting is to ascertain the cost of a product / operation
/ project and the costs incurred for carrying out various activities. Cost Accounting is analyse the
expenditure so as to ascertain the cost of various Products Manufactured by the firm and fix Prices. It also
helps to controlling the costs and Providing necessary costing information to Management for decision
Making.
3. Management Accounting: The purpose of Management Accounting is to assist the Management in taking
rational Policy decision, Pricing Decision, Make or Buy decisions, Capital Expenditure decision etc. This
branch of Accounting is Primarily concerned with Providing the necessary accounting information about
finds, costs, Profits etc, to the Management data required for this purpose are drawn accounting and cost-
accounting.
4. Inflation Accounting:It is concerned with the adjustment in the values of assets and of profit in light of
changes in the price level. In a way it is concerned with the overcoming of limitations that arise in financial
statements on account of the cost assumption (i.e. recording of the assets at their historical or original cost)
and the assumption of stable monetary unit.
5. Human Resource Accounting: Human Resource Accounting means accounting of people as organisation
resource. It means the measurement of the cost and value of people in organisation. It is a branch of
accounting which seeks to report and emphasize the importance of human resources in a company’s earning
process and total assets. It is concerned with the process of identifying and measuring data about human
resources and communicating this information to interested parties. In simple words, it is accounting for
people as organizational resources.
6. Social Responsibility Accounting: Responsibility Accounting represents a method of apprising the
Performance of various Divisions of Organisation. It is system of accounting that recognises various
responsibility centres and reflects the plans and actions of each of these centres by assisging Particular
revenues and cost to those Plans.

Dr. P.SUBRAMANYAM, M.COM , MBA, Ph.D4

AITS SUB: ACCOUNTING FOR MANAGERS

ADVANTAGES OF ACCOUNTING

The role of accounting has changed from that of a mere record keeping during the 1 st decade of 20th century of the

present stage, which it is accepted as information system and decision making activity. The following are the

advantages of accounting.

1. Provides for systematic records: Since all the financial transactions are recorded in the books, one need not
rely on memory. Any information required is readily available from these records.
2. Facilitates the preparation of financial statements: Profit and loss accountant and balance sheet can be
easily prepared with the help of the information in the records. This enables the trader to know the net result of
business operations (i.e. profit / loss) during the accounting period and the financial position of the business at
the end of the accounting period.
3. Provides control over assets: Book-keeping provides information regarding cash in had, cash at bank, stock
of goods, accounts receivables from various parties and the amounts invested in various other assets. As the
trader knows the values of the assets he will have control over them.
4. Provides the required information: Interested parties such as owners, lenders, creditors etc., get necessary
information at frequent intervals.
5. Comparative study: One can compare the present performance of the organization with that of its past. This
enables the managers to draw useful conclusion and make proper decisions.
6. Less Scope for fraud or theft: It is difficult to conceal fraud or theft etc., because of the balancing of the
books of accounts periodically. As the work is divided among many persons, there will be check and counter
check.
7. Tax matters: Properly maintained book-keeping records will help in the settlement of all tax matters with the
tax authorities.
8. Ascertaining Value of Business: The accounting records will help in ascertaining the correct value of the
business. This helps in the event of sale or purchase of a business.
9. Documentary evidence: Accounting records can also be used as an evidence in the court to substantiate the
claim of the business. These records are based on documentary proof. Every entry is supported by authentic
vouchers. As such, Courts accept these records as evidence.

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10. Helpful to management: Accounting is useful to the management in various ways. It enables the management
to assess the achievement of its performance. The weakness of the business can be identified and corrective
measures can be applied to remove them with the helps accounting.
LIMITATIONS OF ACCOUNTING

The following are the limitations of accounting.

1. Does not record all events: Only the transactions of a financial character will be recorded under book-
keeping. So it does not reveal a complete picture about the quality of human resources, location advantage,
business contacts etc.
2. Does not reflect current values: The data available under book-keeping is historical in nature. So they do
not reflect current values. For instance, we record the value of stock at cost price or market price, which ever
is less. In case of, building, machinery etc., we adopt historical cost as the basis. In fact, the current values of
buildings, plant and machinery may be much more than what is recorded in the balance sheet.
3. Estimates based on Personal Judgment: The estimate used for determining the values of various items may
not be correct. For example, debtor is estimated in terms of collectability, inventories are based on
marketability, and fixed assets are based on useful working life. These estimates are based on personal
judgment and hence sometimes may not be correct.
4. Inadequate information on costs and Profits: Book-keeping only provides information about the overall
profitability of the business. No information is given about the cost and profitability of different activities of
products or divisions.

Dr. P.SUBRAMANYAM, M.COM , MBA, Ph.D6

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FUNCTIONS OF AN ACCOUNTANT

The job of an accountant involves the following types of accounting works

Process of accounting

1. Designing Work: It includes the designing of the accounting system, basis for identification and
classification of financial transactions and events, forms, methods, procedures, etc.
2. Recording Work: The financial transactions are identified, classified and recorded in appropriate books of
accounts according to principles. This is “Book Keeping”. The recording of transactions tends to be
mechanical and repetitive.

Preparation of
Designing Work Taxation Work
Budget

Recording Work Reporting Work Auditing

Analysis and
Summarizing communicating
Interpretation
Work results
Work

3. Summarizing Work: The recorded transactions are summarized into significant form according to generally
accepted accounting principles. The work includes the preparation of profit and loss account, balance sheet.
This phase is called ‘preparation of final accounts’
4. Analysis and Interpretation Work: The financial statements are analyzed by using ratio analysis, break-
even analysis, funds flow and cash flow analysis.

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5. Reporting Work: The summarized statements along with analysis and interpretation are communicated to
the interested parties or whoever has the right to receive them. For Ex. Share holders. In addition, the
accou8nting departments have to prepare and send regular reports so as to assist the management in decision
making. This is ‘Reporting’.
6. Preparation of Budget: The management must be able to reasonably estimate the future requirements and
opportunities. As an aid to this process, the accountant has to prepare budgets, like cash budget, capital budget,
purchase budget, sales budget etc. this is ‘Budgeting’.
7. Taxation Work: The accountant has to prepare various statements and returns pertaining to income-tax,
sales-tax, excise or customs duties etc., and file the returns with the authorities concerned.
8. Auditing: It involves a critical review and verification of the books of accounts statements and reports with
a view to verifying their accuracy. This is ‘Auditing’
This is what the accountant or the accounting department does. A person may be placed in any part of

Accounting Department or MIS (Management Information System) Department or in small organization, the

same person may have to attend to all this work.

. Explain about concepts and conventions in accounting?

Explain about GAAP principles in accounting?

Ans) Accounting has been evolved over a period of several centuries. During this period, certain rules and

conventions have been adopted. They serve as guidelines in identifying the events and transactions to be accounted

for measuring, recording, summarizing and reporting them to the interested parties. These rules and conventions are

termed as Generally Accepted Accounting Principles. These principles are also referred as standards, assumptions,

concepts, conventions doctrines, etc. Thus, the accounting concepts are the fundamental ideas or basic assumptions

underlying the theory and practice of financial accounting. They are the broad working rules for all accounting

activities developed and accepted by the accounting profession.

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Basic accounting concepts may be classified into two broad categories.

1. Concept to be observed at the time of recording transactions.(Recording Stage).

2. Concept to be observed at the time of preparing the financial accounts (Reporting Stage)

BASIC ACCOUNTING CONCEPTS

Accounting is a system evolved to achieve a set of objectives. In order to achieve the goals, we need a set of rules or
guidelines. These guidelines are termed here as “BASIC ACCOUNTINGONCEPTS”. The term concept means an
idea or thought. Basic accounting concepts are the fundamental ideas or basic assumptions underlying the theory and
profit of FINANCIAL ACCOUNTING. These concepts help in bringing about uniformity in the practice of
accounting. In accountancy following concepts are quite popular. In simple remember of word MCMC BRAD PG.

Accounting Concepts Accounting Conventions

1. Money Measurement concept .full Disclosure
2. Cost Concept consistency
3. Matching Concept Materiality
4. Consistency or Evidence concept Conservatism
5. Business entity Concept
6. Realisation
7. Accrual Concept
8. Dual Aspect concept
9. Periodical Concept
10. Going concern concept.
1. Money Measurement Concept: While recording the business transactions we don’t record them in terms of
Kilograms , metres , quintals , litres etc. We record them in a common Denominations so as see that they
become homogeneous and Meaning. In other words In this concept “Only those transactions are recorded in
accounting which can be expressed in terms of money, those transactions which can not be expressed in terms
of money are not recorded in t he books of accounting”.
2. Cost Concept: Usually all the transactions will be recorded at cost in the books, at the end of every year the
accountant shows that reduced value of the asset , after providing for depreciation .
1. This approach is preferred because it is difficult and time consuming to ascertain the Market value
3. Matching concept: According to this concept “The expenses incurred during an accounting period should
matched with the revenues recognised in that period. For example if revenue is recognised on all goods sold
during period, cost of these goods sold should also be charged to that period.

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4. Consistency: it is concept as well as convention. The methods or principle followed in the preparation of
various accounts should be followed in the tear to come.
5. Business Entity Concept: The concept implies that the business is distinct from the persons who own it. If
the owner takes any goods or cash from the business the drawing accounting is debited and cash or goods or
purchase is credited. Personal information should not recorded in business transactions. This concept also
helps to develop the theory of Assets= liabilities +capital.
6. Realisation Concept or Historical concept: The Accountants shows only those transactions which have
actually taken Place and not those which may take place in the books
 All the transactions in accounting are to be recorded in the books in chronological order. This means
the preparation of a historical record for all transactions. . Hence, this concept is called Historical
record concept.
7. Accrual concept: The accrual system is a method where by revenue and expenses are identified with specific
period of time like a month, half year or a year, It is called Objective evidence concept.
8. Dual Aspect Concept : This concept through light on the point that each transactions has two fold affect the
receiving of the benefit and giving benefit. The receiving aspect is termed as debit, where as the giving aspect
as credit.
9. Periodical or Accounting Period concept: Accounting period is the period followed by a business concern
for maintaining accounts to know profit or loss . usually one year will be the accounting period starting from
1 st April and ending 31st March (financial year) or 1 st January to December 31 st (calendar year).the profit or
loss for such period is ascertained while measuring the profit, income or expenses of that period only are to
be considered
10. Going concern concept : it is assumed that the business that the business will continue for a long time with
this assumptions fixed assets are recorded in the books at their original cost.
ACCOUNTING CONVENTIONS

Accounting is based on some customs or usages. Naturally accountants here to adopt that usage or custom.

They are termed as convert conventions in accounting. The following are some of the important accounting
conventions.

1. full disclosure: according to this convention accounting reports should disclose fully and fairly the information.
They purport to represent. They should be prepared honestly and sufficiently disclose information which is if material
interest to proprietors, present and potential creditors and investors. The companies ACT, 1956 makes it compulsory
to provide all the information in the prescribed form.

2. Materiality: Under this convention the trader records important factor about the commercial activities. In the form
of financial statements if any unimportant information is to be given for the sake of clarity it will be given as footnotes.

3. Consistency: It means that accounting method adopted should not be changed from year to year. It means that
there should be consistent in the methods or principles followed. Or else the results of a year Cannot be conveniently
compared with that of another.

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4. Conservatism: This convention warns the trader not to take unrealized income in to account. That is why the
practice of valuing stock at cost or market price, which ever is lower is in vague. This is the policy of “playing safe”;
it takes in to consideration all prospective losses but leaves all prospective profits

Explain about users of accounts

INTRODUCTION:

The main object of any Business is to make profit. Every trader generally starts business for the purpose of earning
profit. While establishing Business, he brings his own capital, borrows money from relatives, friends, outsiders or
financial institutions, then purchases machinery, plant, furniture, raw materials and other assets. He starts buying and
selling of goods, paying for salaries, rent and other expenses, depositing and withdrawing cash from Bank. Like this
he undertakes innumerable transactions in Business.

The number of Business transactions in an organization depends up on the size of the

organization. In small organizations the transactions generally will be in thousands and in big organizations they may
be in lacks. As such it is humanly impossible to remember all these transactions. Further it may not be possible to
find out the final result of the Business with out recording and analyzing these transactions.

Accounting came in practice as an aid to human memory by maintaining a systematic record

of Business transactions

USERS OF ACCOUNTING INFORMATION :

Different categories of users need different kinds of information for making decisions. The users of accounting

can be divided in two board groups

(1). Internal users and

(2). External users.

1 Internal Users:

Managers: These are the persons who manage the business, i.e. management at he top, middle and lower

levels. Their requirements of information are different because they make different types of decisions.

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Accounting reports are important to managers for evaluating the results of their decisions. In additions to

external financial statements, managers need detailed internal reports either branch division or department or product-

wise. Accounting reports for managers are prepared much more frequently than external reports.

Accounting information also helps the managers in appraising the performance of subordinates. As such

Accounting is termed as “ the eyes and ears of management.”

2 External Users:

1. Investors: Those who are interested in buying the shares of company are naturally interested in the financial

statements to know how safe the investment already made is and how safe the proposed investments will be.

2. Creditors: Lenders are interested to know whether their load, principal and interest, will be paid when

due. Suppliers and other creditors are also interested to know the ability of the firm to pay their dues in time. 3.

Workers: In our country, workers are entitled to payment of bonus which depends on the size of profit earned.

Hence, they would like to be satisfied that he bonus being paid to them is correct. This knowledge also helps them in

conducting negotiations for wage.

4. Customers: They are also concerned with the stability and profitability of the enterprise. They may be

interested in knowing the financial strength of the company to rent it for further decisions relating to purchase of

goods.

5. Government: Governments all over the world are using financial statements for compiling statistics

concerning business which, in turn, helps in compiling national accounts. The financial statements are useful for tax

authorities for calculating taxes.

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6. Public : The public at large interested in the functioning of the enterprises because it may make a substantial

contribution to the local economy in many ways including the number of people employed and their patronage to

local suppliers.

7. Researchers: The financial statements, being a mirror of business conditions, are of great interest to scholars

undertaking research in accounting theory as well as business affairs and practices.

Difference between book-keeping and accounting

According to G.A. Lee the accounting system has two stages.

1. The making of routine records in the prescribed from and according to set rules of all events with affect the
financial state of the organization; and
2. The summarization from time to time of the information contained in the records, its presentation in a
significant form to interested parties and its interpretation as an aid to decision making by these parties.
First stage is called Book-Keeping and the second one is Accounting.

Book – Keeping: Book – Keeping involves the chronological recording of financial transactions in a set of books in
a systematic manner.

Accounting: Accounting is concerned with the maintenance of accounts giving stress to the design of the system
of records, the preparation of reports based on the recorded date and the interpretation of the reports.

Distinction between Book – Keeping and Accountancy

Thus, the terms, book-keeping and accounting are very closely related, through there is a subtle difference as
mentioned below.

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Different Point Book-Keeping Accounting

1. Scope It is concerned with recording and It is concerned with recording ,
classifying the business transactions classifying, analysing and
interpreting financial data
2. Stage Book-keeping is primary stage in Apart from the primary stage it
accounting. It is the base for includes and interpretation
accounting
3. Nature of Job It is routine and clerical in nature It is analytical nature
4. Knowledge required It is requires basic knowledge of It requires through knowledge of
principles of journalising and accounting principles, procedure
posting and practices
5. Skill required Analytical skill is not required for It requires analytical skill
book-keeping
6. users Only the internal users use book- On the hand , Accounting has both
keeping internal and external users
7. final results In Bok-keeping it is not possible to Accounting gives the net results of
know the final results of business the business every year
every year

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Accounting standards

ACCOUNTING STANDARDS ISSUED BY ASB

AS-1 Disclosure of Accounting policies

AS-2 Valuation of Inventories

AS-3 Changes in Financial Position or Cash flow statement

AS-4 Contingencies and Events Occurring after the Balance Sheet Date

AS-5 Prior period and Extraordinary Items and changes in Accounting policies

AS-6 Depreciation Accounting

AS-7 Accounting for Construction Contracts

AS-8 Accounting for Research and Development

AS-9 Revenue Recognition

AS-10 Accounting for Fixed Assets

AS-11 Accounting for Changes in Foreign Exchange Rate

AS-12 Accounting for Government Grants

AS-13 Accounting for Investments

AS-14 Accounting for Amalgamations

AS-15 Accounting for Retirement Benefits in the Financial Statements of Employers/Employees

AS-16 Borrowing costs

AS-17-Segment Reporting

AS-18 Related party disclosures

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AS-19 Leases

AS-20- Earnings per share

AS-21 Consolidated Financial statements

AS-22 Accounting for taxation on income

AS-23 Accounting for investments in associates

AS-24 Discontinuing Operations

AS-25 Interim financial Reporting

AS -26 Intangible Assets

AS-27 Financial Reporting of interim in joint ventures

AS-28- Impairment of Assets

AS-29 Provisions, contingent liabilities and contingent Assets

AS-30 Financial Instruments- Recognition and measurement

AS-31 Financial instrument-presentation

AS-32 Financial instrument – Disclosure

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UNIT-2

Explain the types of accounts and state the rules for debit and credit?

CLASSIFICATION OF BUSINESS TRANSACTIONS

All business transactions are classified into two categories: personal and impersonal.

1. Those relating to persons(personal)

2. Those relating to property (impersonal)
3. Those relating to income &expenses(impersonal)
Thus, three classes of accounts are maintained for recording all business transactions. They are:

1. Personal accounts: A Natural personal account b.Artificial personal 3..representative.

2. Real accounts

3. Nominal account.

1. Personal Accounts: Accounts which are transactions with persons are called “Personal Accounts”

A separate account is kept on the name of each person for recording the benefits received from, or given to the person
in the course of dealings with him.

E.g.: Krishna’s A/C, Gopal’s A/C, , ObulReddy& Sons A/C, Raju A/C , Rani A/C

Artifical Personal Account- HMT Ltd. A/C, SBI A/C, Nagarjuna Finance Ltd.A/C etc.

Representative Personal Account- Outstanding expenses

2. Real Accounts: The accounts relating to properties or assets are known as “Real Accounts” .Every business needs
assets such as machinery, furniture etc, for running its activities .A separate account is maintained for each asset
owned by the business.

E.g.: cash A/C, furniture A/C, building A/C, machinery A/C etc.

3.NominalAccounts:Accounts relating to expenses, losses, incomes and gains are known as “Nominal Accounts”. A
separate account is maintained for each item of expenses, losses, income or gain.

E.g.: Salaries A/C, stationery A/C, wages A/C, postage A/C, commission A/C, interest A/C, purchases A/C, rent
A/C, discount A/C, commission received A/C, interest received A/C, rent received A/C, discount received A/C.

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Before recording a transaction, it is necessary to find out which of the accounts is to be debited and which is to be
credited. The following three different rules have been laid down for the three classes of accounts….

1. Personal Accounts: The account of the person receiving benefit (receiver) is to be debited and the account of the
person giving the benefit (given) is to be credited.

Rule: “Debit----The Receiver

Credit---The Giver”

2.Real Accounts: When an asset is coming into the business, account of that asset is to be debited .When an asset is
going out of the business, the account of that asset is to be credited.

Rule: “Debit----What comes in?

Credit---What goes out?”

3. Nominal Accounts: When an expense is incurred or loss encountered, the account representing the expense or loss
is to be debited. When any income is earned or gain made, the account representing the income of gain is to be
credited.

Rule: “Debit----All expenses and losses

Credit---All incomes and gains”

What is journalizing? Explain about journal?

The first step in accounting therefore is the record of all the transactions in the books of original entry viz., Journal
and then posting into ledges.

JOURNAL: The word Journal is derived from the Latin word ‘journ’ which means a day. Therefore, journal means a
‘day Book’ in day-to-day business transactions are recorded in chronological order.

Journalising:

Journal is treated as the book of original entry or first entry or prime entry. All the business transactions are
recorded in this book before they are posted in the ledges. The journal is a complete and chronological (in order of
dates) record of business transactions. It is recorded in a systematic manner. The process of recording a transaction
in the journal is called “JOURNALISING”. The entries made in the book are called “Journal Entries”.

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The Performa of Journal is given below.

Date Date Particulars L.F. Debit Credit

no
RS. RS.

Year

Month ,date Debited account Dr xxxx

Credited account

(Narration) xxxx

Date: this column represent date of the particular transaction.

Particulars: it represent particulars of the transaction. In each transaction there must be two accounts one is debit

account and other is credited account. Debited account must be entered from the near to date column and put Dr in

ending of that line .Credited account is enter by giving some space to the date column.

Narration: It will give brief information about a transaction.

L.F.NO: it means a ledger folio number ,it will give information about the particular account is entered on whitch

page on the ledger.

Explain about ledger? What are the rules that we follow while preparing the ledgers?

LEDGER:

All the transactions in a journal are recorded in a chronological order. After a certain period, if we want to know
whether a partiular account is showing a debit or credit balance it becomes very difficult. So, the ledger is designed
to accommodate the various accounts maintained the trader. It contains the final or permanent record of all the
transactions in duly classified form. “A ledger is a book which contains various accounts.” The process of transferring
entries from journal to ledger is called “POSTING”.

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Posting is the process of entering in the ledger the entries given in the journal. Posting into ledger is done periodically,
may be weekly or fortnightly as per the convenience of the business. The following are the guidelines for posting
transactions in the ledger.

1. After the completion of Journal entries only posting is to be made in the ledger.
2. For each item in the Journal a separate account is to be opened. Further, for each new item a new account is
to be opened.
3. Depending upon the number of transactions space for each account is to be determined in the ledger.
4. For each account there must be a name. This should be written in the top of the table. At the end of the name,
the word “Account” is to be added.
5. The debit side of the Journal entry is to be posted on the debit side of the account, by starting with “TO”.
6. The credit side of the Journal entry is to be posted on the debit side of the account, by starting with “BY”.

Performa for ledger: LEDGER BOOK

accountname

Date Particulars Lfno Amount Date Particulars Lfno amount

examples:

Sales account

Date Particulars Lfno Amount Date Particulars Lfno amount

Cash account

Date Particulars Lfno Amount Date Particulars Lfno amount

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Finally, a ledger may be defined as 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. The up-to-date state of any account can be easily
known by referring to the ledger.

Difference between Journal and Ledger

Difference Point Journal Ledger

1. Entry Journal is the book of first or original
The ledger is the book of secondary
entry entry
2. Nature of work Transactions in the journal will be Depending upon his convenience the
recorded immediately trader records the transactions in the
ledger
3. Maintained Journal will be maintained on Posting the journal entries only main
chronological order I.e recording of aim here
transactions on the date basis
4. Individual or institutional The transactions relating to all All transactions relating to a specific
individual or institutional may account will be posted on the same
appear in different pages of journal page or pages
5. Reveals Journal may not reveal whether one Ledger will reveal whether one
customer is a debtor or creditor person is a debtor or creditor to
business
6.importance When once the transactions are It will never loose its importance as
posted into ledger, the journal looses it is the main book of accounting
its importance which relied upon permanently
7.preparation of final Accounts In the preparation of final account is In the preparation of final accounts
not useful ledger is a must
8 Tax authority The tax authorities generally may In the finalisation of income tax to
not depend on journal be paid, the tax authorities depend
on ledger

Dr. P.SUBRAMANYAM, M.COM , MBA, Ph.D21

AITS SUB: ACCOUNTING FOR MANAGERS

Types of Subsidiary Books

Subsidiary books are divided into eight types . they are given below

1. Purchase Book: This Book records all credit purchases only. Purchase of goods for cash and purchase of

assets for cash credit will not be recorded in this book

2. Sales Book: This book is used to record credit sales only. Goods sold for cash and sale of assets for cash will

not be recorded in this book.

3. Purchase Returns Book: this book is used to record the particulars of goods returned to supplier

4. Sale returns Book: This book records the particulars of goods returned by the customer

5. Bills Receivable Book: This book is used to record all the bills and promissory notes received

6. Bills payable Book: This is used record all the bill or promissory notes accepted

7. Cash Book: All cash transactions, receipts and payments are recorded in this book. Cash includes cheques,

money orders etc. do not record credit purchases and sales in the book. Cash book prepare single column cash

book, two column cash book with discount , three column cah book with discount, bank column. Petty cash

book.

8. Journal Proper: This is used to record all the transactions that cannot be recorded in any of the above 7 b

mentioned subsidiary books. Here record bad debts, depreciation and all provisions

Dr. P.SUBRAMANYAM, M.COM , MBA, Ph.D22

AITS SUB: ACCOUNTING FOR MANAGERS

Advantages of Subsidiary Books

1. Division of work: As there are a number of subsidiary books, the work of recording business transactions

business transactions may given to a number of employees without any duplication of the same work

2. Increase in efficiency of staff: Due to division of labour each employee will specialise in the work

allotted to him. Naturally, he will become efficient in that part of the accounting work.

3. Time saving: As the recording is done simultaneously in a number of books the work will be completed

quickly and independently.

4. Ledger postings are made easier : Posting from the subsidiary books are made at convenient intervals

depending upon the nature of the business

5. Readymade information: Since a number of books are used from recording different types of

transactions the information’s relating to any class of transactions is available without any searching or

delay.

6. Minimisation of frauds: Checking the transactions for mistakes and errors can be done easily. Checking

help in tracing the errors and thus minimises the frauds.

7. Saving in stationery cost: The use of subsidiary books results in economical and limited use of stationery

materials

8. Helps in decision making: Since the transactions of a similar nature are recorded at one place, the

management can have the benefit of the using them in planning and decision making

Dr. P.SUBRAMANYAM, M.COM , MBA, Ph.D23

AITS SUB: ACCOUNTING FOR MANAGERS

TRIAL BALANCE

TRAIL BALANCE

The first step in the preparation of final accounts is the preparation of trail balance. In the double entry system of
book keeping, there will be credit for every debit and there will not be any debit without credit. When this principle
is followed in writing journal entries, the total amount of all debits is equal to the total amount all credits.

A trail balance is a statement of debit and credit balances. It is prepared on a particular date with the object of checking
the accuracy of the books of accounts. It indicates that all the transactions for a particular period have been duly
entered in the book, properly posted and balanced. The trail balance doesn’t include stock in hand at the end of the
period. All adjustments required to be done at the end of the period including closing stock are generally given under
the trail balance.

DEFINITIONS: SPICER AND POGLAR :A trail balance is a list of all the balances standing on the ledger
accounts and cash book of a concern at any given date.

J.R.BATLIBOI:

A trail balance is a statement of debit and credit balances extracted from the ledger with a view to test the arithmetical
accuracy of the books.

Thus a trail balance is a list of balances of the ledger accounts’ and cash book of a business concern at any given date.

PROFORMA FOR TRAIL BALANCE:

Trail balance for MR…………………………………… as on …………

NO NAME OF ACCOUNT DEBIT CREDIT

AMOUNT (RS.) AMOUNT (RS.)
(PARTICULARS)

Specimen of trial balance

1 Capital Credit Loan

2 Opening stock Debit Asset
3 Purchases Debit Expense
4 Sales Credit Gain
5 Returns inwards Debit Loss

Dr. P.SUBRAMANYAM, M.COM , MBA, Ph.D24

AITS SUB: ACCOUNTING FOR MANAGERS

6 Returns outwards Debit Gain

7 Wages Debit Expense
8 Freight Debit Expense
9 Transport expenses Debit Expense
10 Royalties on production Debit Expense
11 Gas, fuel Debit Expense
12 Discount received Credit Revenue
13 Discount allowed Debit Loss
14 Bas debts Debit Loss
15 Bad debts reserve Credit Gain
16 Commission received Credit Revenue
17 Repairs Debit Expense
18 Rent Debit Expense
19 Salaries Debit Expense
20 Loan Taken Credit Loan
21 Interest received Credit Revenue
22 Interest paid Debit Expense
23 Insurance Debit Expense
24 Carriage outwards Debit Expense
25 Advertisements Debit Expense
26 Petty expenses Debit Expense
27 Trade expenses Debit Expense
28 Petty receipts Credit Revenue
29 Income tax Debit Drawings
30 Office expenses Debit Expense
31 Customs duty Debit Expense
32 Sales tax Debit Expense
33 Provision for discount on debtors Credit Liability
34 Provision for discount on creditors Debit Asset
35 Debtors Debit Asset
36 Creditors Credit Liability
37 Goodwill Debit Asset
38 Plant, machinery Debit Asset
39 Land, buildings Debit Asset
40 Furniture, fittings Debit Asset
41 Investments Debit Asset
42 Cash in hand Debit Asset

Dr. P.SUBRAMANYAM, M.COM , MBA, Ph.D25

AITS SUB: ACCOUNTING FOR MANAGERS

43 Cash at bank Debit Asset

44 Reserve fund Credit Liability
45 Loan advances Debit Asset
46 Horse, carts Debit Asset
47 Excise duty Debit Expense
48 General reserve Credit Liability
49 Provision for depreciation Credit Liability
50 Bills receivable Debit Asset
51 Bills payable Credit Liability
52 Depreciation Debit Loss
53 Bank overdraft Credit Liability
54 Outstanding salaries Credit Liability
55 Prepaid insurance Debit Asset
56 Bad debt reserve Credit Revenue
57 Patents & Trademarks Debit Asset
58 Motor vehicle Debit Asset
59 Outstanding rent Credit Revenue

FINAL ACCOUNTS

In every business, the business man is interested in knowing whether the business has resulted in profit or loss
and what the financial position of the business is at a given time. In brief, he wants to know (i)The profitability of the
business and (ii) The soundness of the business.

The trader can ascertain this by preparing the final accounts. The final accounts are prepared from the trial
balance. Hence the trial balance is said to be the link between the ledger accounts and the final accounts. The final
accounts of a firm can be divided into two stages. The first stage is preparing the trading and profit and loss account
and the second stage is preparing the balance sheet.

TRADING ACCOUNT

The first step in the preparation of final account is the preparation of trading account. The main purpose of
preparing the trading account is to ascertain gross profit or gross loss as a result of buying and selling the goods.

Dr. P.SUBRAMANYAM, M.COM , MBA, Ph.D26

AITS SUB: ACCOUNTING FOR MANAGERS

Trading account of MR……………………. for the year ended ………………

Particulars Amount Particulars Amount

To opening stock Xxxx By sales xxxx

To purchases xxxx Less: returns xxx Xxxx
Less: returns xx Xxxx By closing stock Xxxx

To carriage inwards Xxxx

To wages Xxxx
To freight Xxxx
To customs duty, octroi Xxxx

To gas, fuel, coal, Xxxx

Water

To factory expenses Xxxx

To other man. Expenses Xxxx
To productive expenses Xxxx
To gross profit c/d Xxxx

Xxxx
Xxxx

PROFIT AND LOSS ACCOUNT

The business man is always interested in knowing his net income or net profit.Net profit represents the excess of
gross profit plus the other revenue incomes over administrative, sales, Financial and other expenses. The debit side
of profit and loss account shows the expenses and the credit side the incomes. If the total of the credit side is more, it
will be the net profit. And if the debit side is more, it will be net loss

Dr. P.SUBRAMANYAM, M.COM , MBA, Ph.D27

AITS SUB: ACCOUNTING FOR MANAGERS

PROFIT AND LOSS A/C OF MR…………………….FOR THE YEAR ENDED…………

PARTICULARS AMOUNT PARTICULARS AMOUNT

TO office salaries Xxxxxx By gross profit b/d Xxxxx
TO rent,rates,taxes Xxxxx Interest received Xxxxx
TO Printing and stationery Xxxxx Discount received Xxxx
TO Legal charges Commission received Xxxxx
Audit fee Xxxx Income from
TO Insurance Xxxx investments
TO General expenses Xxxx Dividend on shares Xxxx
TO Advertisements Xxxxx Miscellaneous Xxxx
TO Bad debts Xxxx investments
TO Carriage outwards Xxxx Rent received xxxx
TO Repairs Xxxx
TO Depreciation Xxxxx
TO interest paid Xxxxx
TO Interest on capital Xxxxx
TO Interest on loans Xxxx
TO Discount allowed Xxxxx
TO Commission Xxxxx
TO Net profit------- Xxxxx
(transferred to capital a/c)
xxxxxx Xxxxxx

BALANCE SHEET

The second point of final accounts is the preparation of balance sheet. It is prepared often in the trading and profit,
loss accounts have been compiled and closed. A balance sheet may be considered as a statement of the financial
position of the concern at a given date.

DEFINITION: A balance sheet is an item wise list of assets, liabilities and proprietorship of a business at a certain
state.

Dr. P.SUBRAMANYAM, M.COM , MBA, Ph.D28

AITS SUB: ACCOUNTING FOR MANAGERS

J.R.botliboi: A balance sheet is a statement with a view to measure exact financial position of a business at a particular
date.

Thus, Balance sheet is defined as a statement which sets out the assets and liabilities of a business firm and
which serves to as certain the financial position of the same on any particular date. On the left-hand side of this
statement, the liabilities and the capital are shown. On the right-hand side all the assets are shown. Therefore, the two
sides of the balance sheet should be equal. Otherwise, there is an error somewhere

BALANC SHEET OF …………………………AS ON …………

Liabilities and capital Amount Assets Amount

Creditors Xxxx Cash in hand Xxxx

Bills payable Xxxx Cash at bank Xxxx
Bank overdraft Xxxx Bills receivable Xxxx
Loans Xxxx Debtors Xxxx
Mortgage Xxxx Closing stock Xxxx
Reserve fund Xxxx Investments Xxxx
Capital xxxxxx Furniture and fittings Xxxx
Add: Plats&machinery
Net Profit xxxx Land & buildings Xxxx
------- Patents, tm ,copyrights Xxxx
xxxxxxx Goodwill Xxxx
Prepaid expenses
Outstanding incomes Xxxx
Less: Xxxx
Drawings xxxx Xxxx Xxxx
--------- XXXX XXXX

Advantages: The following are the advantages of final balance .

1. It helps in checking the arithmetical accuracy of books of accounts.

2. It helps in the preparation of financial statements.
3. It helps in detecting errors.
4. It serves as an instrument for carrying out the job of rectification of entries.
5. It is possible to find out the balances of various accounts at one place.

Dr. P.SUBRAMANYAM, M.COM , MBA, Ph.D29

AITS SUB: ACCOUNTING FOR MANAGERS

Explain How The adjustments affect the accounts?

FINAL ACCOUNTS -- ADJUSTMENTS

We know that business is a going concern. It has to be carried on indefinitely. At the end of every accounting year.
The trader prepares the trading and profit and loss account and balance sheet. While preparing these financial
statements, sometimes the trader may come across certain problems .The expenses of the current year may be still
payable or the expenses of the next year have been prepaid during the current year. In the same way, the income of
the current year still receivable and the income of the next year have been received during the current year. Without
these adjustments, the profit figures arrived at or the financial position of the concern may not be correct. As such
these adjustments are to be made while preparing the final accounts.

The adjustments to be made to final accounts will be given under the Trial Balance. While making the
adjustment in the final accounts, the student should remember that “every adjustment is to be made in the final
accounts twice i.e. once in trading, profit and loss account and later in balance sheet generally”. The following are
some of the important adjustments to be made at the time of preparing of final accounts:-

1. CLOSING STOCK:-

(i)If closing stock is given in Trail Balance: It should be shown only in the balance sheet “Assets Side”.

(ii)If closing stock is given as adjustment:

1. First, it should be posted at the credit side of “Trading Account”.

2. Next, shown at the asset side of the “Balance Sheet”.
2.OUTSTANDING EXPENSES :-

(i)If outstanding expenses given in Trail Balance: It should be only on the liability side of Balance Sheet.

(ii)If outstanding expenses given as adjustment :

1. First, it should be added to the concerned expense at the debit side of profit and loss account or Trading
Account.
2. Next, it should be added at the liabilities side of the Balance Sheet.
3.PREAPID EXPENSES :-

(i)If prepaid expenses given in Trial Balance: It should be shown only in assets side of the Balance Sheet.

(ii)If prepaid expense given as adjustment :

1. First, it should be deducted from the concerned expenses at the debit side of profit and loss account or Trading
Account.
2. Next, it should be shown at the assets side of the Balance Sheet.
4.INCOME EARNED BUT NOT RECEIVED [OR] OUTSTANDING INCOME [OR] ACCURED INCOME :-

Dr. P.SUBRAMANYAM, M.COM , MBA, Ph.D30

AITS SUB: ACCOUNTING FOR MANAGERS

(i)If incomes given in Trial Balance: It should be shown only on the assets side of the Balance Sheet.

(ii)If incomes outstanding given as adjustment:

1. First, it should be added to the concerned income at the credit side of profit and loss account.
2. Next, it should be shown at the assets side of the Balance sheet.
5. INCOME RECEIVED IN ADVANCE: UNEARNED INCOME:-

(i)If unearned incomes given in Trail Balance : It should be shown only on the liabilities side of the Balance Sheet.

(ii)If unearned income given as adjustment :

1. First, it should be deducted from the concerned income in the credit side of the profit and loss account.
2. Secondly, it should be shown in the liabilities side of the Balance Sheet.
6.DEPRECIATION:-

(i)If Depreciation given in Trail Balance: It should be shown only on the debit side of the profit and loss account.

(ii)If Depreciation given as adjustment

1. First, it should be shown on the debit side of the profit and loss account.
2. Secondly, it should be deduced from the concerned asset in the Balance sheet assets side.
7.INTEREST ON LOAN [OR] CAPITAL:-

(i)If interest on loan (or) capital given in Trail balance:It should be shown only on debit side of the profit and loss
account.

(ii)If interest on loan (or)capital given as adjustment :

1. First, it should be shown on debit side of the profit and loss account.
2. Secondly, it should added to the loan or capital on the liabilities side of the Balance Sheet.
8.BAD DEBTS:-

(i)If bad debts given in Trail balance :It should be shown on the debit side of the profit and loss account.

(ii)If bad debts given as adjustment:

1. First, it should be shown on the debit side of the profit and loss account.
2. Secondly, it should be deducted from debtors in the assets side of the Balance Sheet.
9.INTEREST ON DRAWINGS :-

(i)If interest on drawings given in Trail balance: It should be shown on the credit side of the profit and loss account.

(ii)If interest on drawings given as adjustments :

Dr. P.SUBRAMANYAM, M.COM , MBA, Ph.D31

AITS SUB: ACCOUNTING FOR MANAGERS

1. First, it should be shown on the credit side of the profit and loss account.
2. Secondly, it should be deducted from capital on liabilities side of the Balance Sheet.
10.INTEREST ON INVESTMENTS :-

(i)If interest on the investments given in Trail balance :It should be shown on the credit side of the profit and loss
account.

(ii)If interest on investments given as adjustments :

1. First, it should be shown on the credit side of the profit and loss account.
2. Secondly, it should be added to the investments on assets side of the Balance Sheet.

Dr. P.SUBRAMANYAM, M.COM , MBA, Ph.D32