 Basics of Business Accounting

MANAGERIAL ACCOUNTING

By
K.G. MURALIDHARA
      Meaning: Accounting has rightly been
termed as the language of the business.
      The basic function of a language is to serve
as means of communication accounting also
serves this function.
      It communicates the result of business
operations to various parties who have some
stake in the business namely the proprietor,
creditors, investors, Government and other
agencies.
      Though accounting is generally associated with business
but it is not only business which makes use of accounting.
      Persons like housewives, Government and other
individuals also make use of accounting.
      For example, a housewife has to keep a record of the
money received and spent by her during a particular period.
      She can record here receipts of money on one page of
her household diary, while payments for different items such
as milk, food, clothing, house, education etc, on some other
page or pages of her diary in a chronological order.
      Definition: “Accounting is the art
of recording, classifying and
summarizing 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:
The Language of Business
 Many words have similar, but not same,
meaning as in common English.
 Similar to English, some rules are definite
others are not.
 Rules continue to evolve.
 XBRL (extensible business reporting
language): a digital business language.
Functions of Accounting

       Recording: This is the basic function of

accounting. It is essentially concerned with not only
ensuring that all business transactions of financial
character are in fact recorded but also that they are
recorded in an orderly manner.
       Classifying: Classification is concerned with
the systematic analysis of the recorded data, with a
view to group transactions or entries of one nature
at one place. The work of classification is done in
the book termed as ‘Ledger’.
      Summarizing: This involves presenting the
classified data in a manner, which is
understandable and useful to the internal as
well as external end-users of accounting
statements. This leads to the preparation of the
following statements: i. Trial Balance; ii. Income
statement; ii. Balance sheet.
      Dealing with financial transactions:
Accounting records only those transactions and
events in terms of money, which are of a
financial character.
      Analyzing and interpreting: The
recorded financial data is analyzed and
interpreted in a manner that the end users
can make a meaningful judgement about
the financial condition and profitability of
business operations.
      Communicating: The accounting
information has to be Communicated to the
external world
Scope of Accounting

      Systematic Records: Accounting is

done to keep a systematic record of financial
transactions. In the absence of accounting
there would have been terrific burden on
human memory which is most cases would
have been impossible to bear.
      Ascertain Profit/Loss: Accounting helps
in ascertaining the net profit earned or loss
suffered on account of carrying the
business.
 1.     Ascertain the financial position of business: The
profit and loss account gives the amount of profit or
loss made by the business during a particular period.
 2.     Protect the business properties: Accounting
provides protection to business properties from
unjustified and unwarranted use.
 3. Facilitate rational decision making: Accounting
these days has taken upon itself the task of
collection, analysis and reporting of information at
the required points of time to the required levels of
authority in order to facilitate rational decision
making
Basic Concepts
1. Money measurement.
2. Entity.
3. Going concern.
4. Cost.
5. Dual aspect.
6. Accounting period.
7. Conservatism.
8. Realization.
9. Matching.
10. Consistency.
11. Materiality.
 ACCOUNTING CONCEPTS
      Separate Entity Concept: In accounting business
is considered to have a separate legal existence from
that of proprietor(s).
      Going Concern Concept: According to this
concept life of the business is likely to continue for a
fairly long period of time.
      Money Measurement Concept: This concept
states that the accounting records only monetary aspects
of a transaction. Non-monetary aspects like love,
affection, and gratitude to employees do not have a
place in accounting.
 Cost Concept: cost of acquisition of asset is recorded in
accounting records and this cost is the basis for all
subsequent transactions
   Dual Aspect Concept: Each transaction
has two aspects namely debit and credit.
Suppose if a business is commenced with
Rs.10,00,000, it means that the capital is
Rs.10,00,000 and cash is also Rs.10,00,000.
   Accounting Period Concept: According
to this concept, the life of the business is
divided into appropriate segments for studying
the results shown by the business after each
segment.
   Periodic Matching of Revenue and Cost
Concept: The term matching means appropriate
association of related revenues and expenses. In
order to ascertain profit/loss, the revenues and
expenditure should be known during a particular
period of time.
   Realization Concept: According to this concept
revenue is recognized when a sale is made. Sale is
considered to be made at the point when the property
in goods passes to the buyer and he becomes legally
liable to pay.
 ACCOUNTING CONVENTIONS
      Conservatism: In the initial stages of accounting,
certain anticipated profits, which were recorded, did
not materialize.
      Full disclosure: According to this convention,
accounting reports should disclose fully and fairly the
information which is of material interest to
proprietors, present and potential creditors and
investors.
      Consistency: According to this convention
accounting practices should remain unchanged from
one period to another.
 Materiality: According to this convention the
accountant should attach importance to the material
details and ignore insignificant details.
 Journal
      The meaning of journal is recording
transactions on a daily basis.
      It is very difficult to remember the various
transactions unless some records are kept.
      Say for example a student is asked to furnish
the details of his expenditure out of pocket money,
for a week somehow he may give the account.
Imagine if he is asked to furnish for 6 months or
one year what may be his position? When this is
the position for an individual what may be the
position to an organization where the transactions
are varied and multitudinous.
      Obviously there is a need for maintaining
records pertaining to the day’s transactions.
Points to be noted while passing
Journal Entries
1. The business and proprietor (i.e., owner)
of the business must be considered as two
distinct (i.e., separate) entities (i.e.,
parties).
2. While writing the name of real account or a
nominal account, we have to add the word
‘Account’ after the name of the asset or
expenses or income.
3. After passing all the journal entries, the
two amount columns of the journal should
be totaled.
4.Whenever the proprietor of a business brings in
cash or any other thing in to the business, an
account called ‘Capital Account’ should be
opened in the name of the proprietor
5.Whenever the proprietor invests in the
business the sale proceeds of his private
assets, or recorded in the books of the
business as additional capital introduced by the
proprietor.
6.Whenever the proprietor commences business
with loan borrowed from his wife, children or
friend, the two accounts that are required to be
taken in to the account
7.Whenever the proprietor of a business
withdraws cash goods or any other thing
from business for his personal or
domestic use, an account called the
‘Drawings Account’ should be opened .
8. Whenever the personal expenses of the
proprietor, are paid by the firm, those
transactions should be recorded in the
books of the business.
9. It is preferable to split the goods account in to
(a) Purchase account, (b) Sales Account (c)
Purchase Returns/return outwards, (d)
Sales return/ returns inwards, (e) opening
stock account and (f) closing stock
account.
10.Generally, purchases account, sales
account, purchase returns account and
sales returns account are treated as real
accounts, and the rules applicable to real
accounts, are applied to these accounts,
while journalizing the transactions.
11.If the name of supplier is mentioned, the
purchase should be considered as credit
purchase.
12. Whenever goods are purchased from a party
for cash, the two accounts involved in that
transaction are (1) purchases account and (2)
cash account
13. Whenever goods are purchased from party
on credit, the two accounts involved in the
transaction are (1) purchases account and (2)
the supplier’s (i.e., seller’s) account
14.Whenever some investments or securities,
say, shares or debentures are sold the two
accounts involved are (1) Cash account (2)
investments account (and not sales account
15. Cash discount allowed by the business to
its debtor at the time of receipt of money
from the debtor , for his prompt payment
16. Trade discount should not be separately
recorded at all either in the books of the
seller or in the books of the buyers.
 Ledger
      After journalizing the various transactions of a
business concern the entries are to be posted into
separate set of accounts termed as ledger.
      As said earlier each transaction has two aspects.
Ledger accounts are to be kept for each individual
accounts.
      This ledger account is maintained in T form. On
the other hand it is divided into two parts namely the
debit side and credit side respectively.
 The left hand side is debit side and the right hand side
is credit side. The following is the format of a ledger
account
Trial Balance
      A Trial Balance is a statement
containing ledger balances of the accounts.
      It gives the arithmetic accuracy of the
books of accounts.
      It is the statement through which final
accounts like manufacturing account,
Trading Account, Profit and Loss Account
and a statement termed as a Balance Sheet
are prepared to know the financial position
as on a particular date.
 Illustration
Journalise the following transactions, post the same
in relevant ledger accounts and balance the same.
2006
June 1. Anurag commenced business with Rs.20000
2. Paid into bank Rs.5000
3. Purchased Plant worth Rs.10000 from Modi&Co
4. Purchased goods worth Rs. 5000 from Anwar
6. Goods worth Rs.4000 sold to Abhishek
8Sold Goods worth Rs.2000 for cash
10 Goods returned by Abhishek Rs.50
15 Paid rent Rs.250
June 18. Withdrawn from bank for office use
Rs.2,500
20 Paid Salaries Rs.1800
25Withdrawn for personal use Rs. 250
26 Goods returned to Anwar Rs.100
27 Paid for office furniture Rs.1,500 by cheque
28 Received Rs.3,900 cash from Abhishek and
discount allowed Rs.50
29 Paid Anwar Rs.4800 and discount allowed
by him Rs.100
 Table Showing the Treatment of various adjustments in Final Accounts

Adjustment Trading P&L A/C Treatment in Balance Sheet

Closing Stock Credit side of Assets side of the Balance Sheet
Trading A/c
O/S Expenses Added to the To be shown under Liabilities
concerned side of the Balance Sheet
expenditure
Deducted from Assets side of the Balance Sheet
Prepaid Exps concerned
expenditure
Added to the Assets side of the Balance Sheet
O/S Incomes respective incomes
Deducted from the Liabilities side of the Balance
Income recd. in Adv concerned incomes Sheet

Bad Debts Dr side of P&L Deducted from S.Drs in B/S

Account
Dr side of P&L Deducted from S.Drs in B/S
Prov. For B/D
Account
Provision for
Dr side of P&L Deducted from S.Drs in B/S
discount on drs
Account
 Contd.,

Adjustment Trading P&L A/C Balance Sheet

Deducted from S.Crs on the
Res. For Discount on Cr. Side of the liabilities side of the
Crs P&L A/C Balance Sheet
Depreciation Debit side of P&L Deducted from concerned
A/c Asset
Appreciation Credit side of P&L Added to Concerned Asset
A/c
Added to the Capital A/c on
Dr. side of the the Liabilities side of the
Interest on Capital Balance Sheet
Profit and Loss
A/c

Deducted from capital on

Interest on Drawings Credit side of the the Liabilities side of the
P&L A/c Balance Sheet
Accounting Standards
9, 10, 17 and 20
 AS 9
 The Object of issuing AS9 is to provide a
basis for recognition of revenue in the books
of accounts.
 Applicability:

Sale of Goods, Rendering of services; and use

of enterprise resources yielding interest,
royalties and dividends.
Not applicable: Revenue from construction
contracts, Revenue from hire purchase, lease
agreements, Revenue from government
grants, Revenue of insurance companies.
 AS 10
 To provide guidelines for the valuation and
disclosure of certain information relating to
fixed assets owned by an enterprise, in the
books of accounts.
 Fixed assets should be shown in the balance
sheet either at their historical cost or at their
revalued figures.
 Cost consists of : Purchase price, duties and
non refundable taxes, and al the other
attributable costs for bringing the asset to
working condition, for its intended use.
 AS 17

 To establish principles for reporting financial

information about the different types of
products and services an enterprise produces
and the different geographical areas in which
it operates. Such information helps the users
of financial statements in a better
understanding the performance of the
enterprise;
 Better assessing the risks and returns of the
enterprise;
 Making more informed judgements abhout the
enterprise as a whole.
 AS 20
 To prescribe the principles for the determination and
presentation of the earnings per share, which will
facilitate a comparison of performance among
different enterprises for the same period and among
different accounting periods for the same enterprise.
 The focus of this statement is on the denominator in
the earnings per share calculation.
 AS 20 requires an enterprise to clearly present the
basic and diluted earnings per share for all the
reported accounting periods, even if the amounts
disclosed are negative ( a loss per share)