Vaijanath Babshetti 1

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Accounting for Management (12MBA14)

Module 1
Accounting is an Art of entering the transactions in the books of accounts systematically.
Debit aspect/ Receiving Aspect
Credit aspect /Giving Aspect
Double system of book keeping
Double system of book keeping refers to entering the transactions in two different accounts, in
opposite direction with the same value, Applying the rules of double entry system.

Rules for recording transactions under double entry system

Classification of Accounts
Personal account
 Natural person
 Artificial/Legal person
 Representative person
Rules: Debit the receiver
Credit the Giver
Real account
 Tangible Assets
 Intangible Assets
Rules: Debit what comes in
Credit what goes out
Nominal Account
Rules: Debit all expenses and losses
Credit all incomes and gains

Users of accounting information

 Creditors
 Debtors
 Utility Companies/Suppliers
 Banks/Lenders
 Employees
 Management
 Trade unions
 Regulatory Authorities
 Government/Tax authorities
 Credit rating agencies

Accounting Equation
The equation showing the equality between the total assets and the total liabilities is the
accounting equation
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Importance and scope of Financial Accounting

Financial accounting basically concerned with the preparation of financial statements and
communication of financial information. Financial statements include a Balance sheet, Profit and
Loss Account, a statement of retained earnings and cash flow statements.

The purpose of financial accounting is to provide information to owners about the performance
of management of an enterprise. The notes, schedules and explanatory material are an integral
part of the financial statements.

Importance
 External reporting
 Financial position
 Helps in making investment and credit decisions
 Liquidity position
 Profitability position
 Performance of management
 Denotes progress and performance
 Taxation policy
 Profits and dividends

Scope of financial Accounting

 Income statement or P & L A/c
 Balance sheet
 Statement of retained earnings
 Statement of cash flows
 Notes, Schedules, Annexures, Attachments

Principles of Accounting
Accounting is the language used by a concern for communicating financial information about
itself to all those who are interested in knowing them. While communicating these information
certain guidelines or principles are followed by accountants in writing and presentation of
accounts.
The general rules or principles adopted in accounting are called accounting standards or
accounting principles.

Accounting principles can be derived in two heads

Accounting Concepts
Accounting Conventions

Accounting Concepts
Accounting Concepts generally means the assumptions upon which accounting are based. It
should convey the same meaning to all.
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 Money measurement concept

 Accounting entity concept
 Going concern/ Continuity concept
 Historical cost concept
 Dual aspect/Equation concept
 Accounting period concept
 Objective evidence concept
 Realisation concept
 Accrual concept
 Legal aspect concept

Accounting Conventions
Accounting convention refers to customs, traditions, practices followed by accountants as a
guide in the preparation of financial statements. They are adopted to make the financial
statements clear and meaningful.

Convention of materiality
“An item should be regarded as material if there is reason to believe that knowledge of it would
Influence the decision of informed investor”.
Kohler has defined materiality as under: “The characteristic attaching to a statement, fact, or an
item where by its disclosure or the method of giving it expression would be likely to influence
the judgment of a reasonable person”.

Convention of Conservatism

Convention of Consistency

Convention of full disclosure

The term disclosure does not imply that all information that anyone could conceivably desire is
to be included in accounting statements. The term only implies that there is to be a sufficient
disclosure of information which is of material interest to proprietors, present and potential
creditors and investors. The practice of appending notes relative to various facts or items which
do not find place in accounting statements is in pursuance to the convention of full disclosure of
material facts.
Examples are
(a) Contingent liabilities appearing as a note,
(b) Market value of investments appearing as a note.

Generally Accepted Accounting Principles (GAAPS)

Financial statements are generally prepared in accordance with accounting principles generally
followed in each country, hence they are called by name “Generally Accepted Accounting
Principles (GAAPS)”
These principles are gradually developed over the years. The up gradation, refinement and
development of these principles vested with specially constituted rule making body. This body
includes accounting practioners, academicians and regulatory authorities etc.
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In USA Federal Accounting Standard Board was created in 1973. This body is responsible for
issuing guidelines called”Statement of financial Accounting Standards”
Statutory auditors are also required to ensure the compliance with GAAPs and report to share
holders if there non-compliance.
GAAPs therefore are guidelines for preparing financial statements and in fact the reporting
standards of financial statements to external users. GAAPs differ from country to country
depending upon legislative requirement of the country.
Some of Indian companies like,ICICI,Infosys prepares accounts according to American GAAPs.
Some of the significant requirement of American GAAPs which we have not found in India are
Provision for deferred taxes
Consolidated presentation of subsidiary company accounts

Accounting standards
To maintain uniformity in accounting principles through out the world, International
Accounting standard committee(IASC) came into existence on 29th June 1973 when 16
accounting bodies from Nine nations USA. Canada, U.K, Australia, France, Germany, Japan,
Mexico and Netherlands signed the agreement for its formation. The committee head quarter’s
are at London. A revised Agreement and Constitution was signed in October, 1977.
The objectives of the committee as set out in paragraph I of the 1977 Agreement are “to
formulate and publish in the public interest , standards to be observed in presentation of audited
financial statements and to promote their world wide acceptance and observance.”