SYMBIOSIS CENTRE FOR DISTANCE LEARNING

CERTIFICATE COURSE IN INSTRUCTIONAL DESIGN (CCID)

PROJECT TOPICS
1. FORECASTING, PLANNING AND DECISION MAKING
2. STRESS MANAGEMENT
3. BASICS OF FINANCIAL ACCOUNTING
Audi!" #$% &'' ()% ($*i"+,
The learners are in the age group of 25 years to 45 years including both males and females. They
are all working professionals in private or multinational organizations, with a working experience
of at least two years. They are all graduates or postgraduates. !ost of them have some
supervisory experience also. They come from different parts of "ndia, and some #$% are foreign
nationals. The learners have working knowledge of computers.
TOPIC 1
FORECASTING, PLANNING AND DECISION MAKING
F$%"&+(i!-, !anagement function begins with forecasting. "t is the scientific process of looking
forward which is based on past performance, current analysis and future trends. &lanning is
based on forecasting.
'very company undertakes the process of forecasting, either on its own or takes note of general
economic forecasts made by various competent authorities. (ome companies also have
consultants for this purpose. )onfederation of "ndian "ndustries *)""+, )entre for !onitoring "ndian
'conomy *)!"'+, ,eserve -ank of "ndia *,-"+ and many other private organizations forecast
trends as per the re.uirements of companies.
(ome of the popular forecasts are/
a. 0emand 1orecasts
b. (ales 1orecasts
c. &roduction Trends 1orecasts
d. (pecific "ndustry 1orecasts
2part from this general categorization, forecasts can also be company specific or problem
specific, such as manpower forecasts for a particular industry, based on growth prospects. 'very
forecast must be preceded by authentic research, analyzing of trends, taking into consideration
risk factors and even the probability of an error.
.)&( i+ P'&!!i!-/
&lanning is defined as
2 long look ahead,
-road look around and
2 searching look within
The most popular definition of planning is based on answering the following six .uestions/
#. 3hat is to be done4 *5ature of -usiness+
2. 3hy to do it4 *6b7ectives of -usiness+
8. 9ow to do it4 *Technology and (trategies to be adopted+
4. 3here to do it4 *&lace or location+
5. 3ho will do it4 *&eople+
:. 3hen to do it4 *Time 1actor+
The above definition signifies that ;answer these .uestions and planning is complete<.
&lanning is imperative in an uncertain environment. These days the word ;(trategy< has taken the
place of the word ; &lanning<. (trategy is ;competitive planning< as it takes care of competitors and
(36T model, i.e. (trength = weaknesses = opportunities and threats.
Ad0&!(&-+ $# P'&!!i!-
#. &lanning makes companies competitive
2. &lanning anticipates risk factors and eliminates waste
8. "t reduces cost
4. "t helps the company to face future challenges
5. &lanning helps in controlling
:. &lanning gives direction and helps in formulating specific strategies
>. &lanning improves efficiency and introduces various systems in the organization
?. &lanning can warn about deviations and helps in assessing performance
Li1i(&(i$!+ $# P'&!!i!-
#. &lanning can minimize the risk but cannot eliminate the risk
2. The success of planning depends upon implementation *planning on paper is as good as no
planning+
8. "t depends on authenticity and reliability of information
4. "t depends on internal and external variables which are beyond the control of the planner
E++!(i&'+ $# & -$$d *'&!
#. &lanning must be continuous
2. &lanning must be creative
8. &lanning process must be communicated to the lowest possible level
4. &lanning should be time bound
5. &lanning should exist at all levels in the organization
:. &lanning must motivate people towards its implementation, so it must have an inbuilt
rewards system for effective execution
>. &lanning should not be rigid *it must be flexible to respond to sudden changes in internal
and external environment+
?. &lanning must coordinate the efforts of all departments *must respect the process of
unification of efforts+
@. &lanning must have an inbuilt controlling process
#$. &eople are the essence of planning *the success of every plan depends upon people, so this
factor should be kept in mind while framing plans+
C$1*$!!(+ $# P'&!!i!-
#. 6b7ectives
2. &olicies
8. &rocedures
4. &rograms
5. ,ules
:. -udgets
>. (trategies
2ny planning process generally has the above seven components, though its nature and scope
depends upon the type of plan, purpose of the plan and the time factor.
#. O23"(i0+, The word Aob7ectivesB has changed over a period of time and includes
concepts like/
a. C"("65 = *)ategory of intensions, broad, all inclusive, forward thinking+
b. !"(("65 = !ission becomes more tangible when expressed in the form of a mission
statement. 3hat is our reason for being, what is uni.ue about our company
c. D62E( = !ore specific, financial, nonfinancial issues, range of goals, reached with a
stretch
d. 6b7ectives become measurable and they incorporate dimensions of time and hierarchy.
6b7ectives can be classified as/
#. 6n the basis of time *(hortterm, !ediumterm and Eongterm+
2. 6n the basis of functions *!arketing, &roduction, !aterials, 9uman ,elations
6b7ectives+
8. 6n the basis of levels *Top, !iddle and Eower level ob7ectives+
2. P$'i"i+, &olicies are general statement. "t can be implicit or explicit. &olicies offer general
direction to planning and they offer the framework within which an organization must work.
1or example/ 9, &olicy on recruitment, selection, training.
8. P%$"du%, &rocedure is the stepbystep approach to implement policies. "t is more
specific in terms of steps. 1or e.g. ,ecruitment procedure consists of releasing an
advertisement, inviting applications, conducting written tests and interviews.
4. P%$-%&1+, 3hen time element is introduced in procedures, it becomes a program. 2s there
is an element of time, it is also called as the timetable of planning. 1or e.g. the dates on
which advertisements are to be released for recruitment, the last date of receiving
applications, day, date and time of written tests, the scheduling of interviews etc.
5. Ru'+, They are specific, rigid, and nonflexible. They offer a definite direction to the
planning process. 1or e.g. smoking is to be discouraged is a policy, but ;5o (moking in the
premises of the organisation< is a rule.
:. Bud-(+, 2ll financial re.uirements under the plan by the various departments can be called
as ;-udgets<. -udgetallocation by top management and budget re.uirements submitted by
departmental heads uses the two common terms in the organization at the time of budget
formulation. "n simple words, expected income and expenditure under different heads can
be called as budget in planning.
>. S(%&(-i+, (trategies can be called the ;2ction )omponent< of planning. 2s stated earlier it
is competitive planning. "ndian companies have adopted various strategies for survival and
facing the threats from competitors.
1ollowing are the examples of recent corporate strategies/
#. Foint Centures, 2lliances, TieGps
2. Takeover, 2c.uisitions
8. ,everse mergers, !ergers and 2malgamations
4. 0emerger
5. )ore )ompetence
:. 0iversification
>. -ackward, 1orward, 9orizontal "ntegration
?. 9iving = off unitsH0ivision
@. Turn 2round
#$. 9arvesting
##. 0isinvestments
#2. &ricing
#8. -rand-uilding
#4. 'mployee (tock 6ption
#5. &rofit )entresH(-Gs *(trategic -usiness Gnits+
#:. 0ownsizingH ,ightsizing
#>. -enchmarking
#?. TI!HTotal Iuality !anagement
Fu!"(i$!&' L0' S(%&(-4
a. &roduction
b. 9uman ,esource
c. 1inance
d. !arketing
e. "nformation Technology
5i+i$!
.)&( i+ 5i+i$!/
2 vision is essentially a dream. "n the corporate sense, it is a dream with a deadline. 2 vision
statement articulates the longterm goals of the enterprise. "t is a look beyond the present to see
what the future can be. 1or an organization a vision statement should assert what an organization
can be at its best. "t may also define what is uni.ue about the enterprise. 1or a business a vision
statement would be presented as a pen picture in terms of its likely physical appearance, size etc.
2 vision statement should have the following components.
2n ability to inspire people to work for the organization.
2 sense of worthiness, which creates a lasting impact.
"t should be precise and ob7ective.
"t should be achievable and realizable.
"t should be in a clear and understandable detail.
,ecent examples of vision statements of "ndian )orporations show the vibrate dreams of their
leaders. The tractor division of !ahindra and !ahindra has declared its vision to be the world<s
largest tractor manufacturers by 2$$8. 'ven the ,eliance "ndustries before setting up the refinery
at Famnagar had the vision to be the first among the developing countries to arrive at the global
oil scene.
&owerful visions if communicated always produce powerful results. 2n organization without a
vision is like a ship without a rudder.
Mi++i$!
"t specifies how the organization will achieve its goals. !ission statements explain what you do
and why you are in business. 2 wellformulated mission statement identifies at the minimum the
type of business it is in, its markets, customers and financial goals. !ission statements help in
generating the unity that leads to high performance. They basically indicate the purpose of the
business. !ission statements are derived from the vision statements.
The various components of the mission statements are/
'licits an emotional, motivational response.
"s easily understood and can be transformed into individual action.
9as a ma7or able, attainable goal.
"s simple, honest and frank.
"s fully believed.
!ission is an actionoriented and enduring expression of how a company wants to accomplish its
visions.
2 corporate example of a mission statement is &epsi )o<s mission statement.
A&epsi )o<s mission is to increase the value of our share holders investment. 3e do this through
sales growth, cost controls and wise investment of resourcesB.
9ence the mission statements can help a company to end up at its final destination=(G))'((.
T) Pu%*$+ O# 5i+i$! &!d Mi++i$! S(&(1!(+
)an unleash boundless constructive energy among workers.
0etermining and visualizing goals focuses the attention of workers.
"nspires them to perform better by providing yardsticks of performance.
)reates a sense of urgency.
Dives the sense of belonging as they feel they are partners in achieving the organizational
goals.
'nhances commitment as there is something real and genuine they can commit to.
(tatements of vision and mission are not 7ust elements of future planning. They also provide
benchmarks for a historic review. !anagers will find it difficult to develop a future strategy for
a business without correctly articulating its vision and mission. Cision and mission must be
combined with corporate values so as to have true realization of the organizational goals.
Cision without mission is incomplete and mission without vision is meaningless.
M&!&-1!( 24 O23"(i0+
MBO
!anagement by ob7ectives is a very popular tool in today<s organizational setup. &eter 0rucker is
the first management thinker who wrote about it. 9e acted as a catalyst by emphasizing that
ob7ectives must be set in all areas where performance affects the health of the enterprise. 9e laid
down a philosophy that emphasizes selfcontrol and selfdirection.
.)4 MBO/
#. To clearly set ob7ectivesHgoalsHtargets.
2. 1or performance evaluation.
8. 1or participation by managers in decisionmaking process.
4. 1or monitoring the performance from time to time.
5. 1or selfcontrol, assessment and selfdirection.
:. 1or effective control.
>. "t is a tool of training and development.
The above points are dealt in detail in following pages under the heading of benefits of !-6.
T) *%$"++ $# MBO
2s in all planning, one of the critical needs in !-6 is the consistent planning premise. 5o
manager can set or establish plans and budgets without guidelines. The steps included in the
process of !-6 are/
#. P%'i1i!&%4 +((i!- $# -$&'+ &( () ($*/ Diven appropriate planning premises, the first step
in setting ob7ectives is for the top manager concerned to determine what he or she perceives
to be the purpose and the more important goals for the enterprise to achieve in the given
period of time ahead. These can be set for any period of time=a .uarter, a year or five years
or whatever is appropriate in the circumstances. )ertain goals should be scheduled for the
accomplishment of a much shorter period and others for a longer period. 2lso as one
proceeds down the organizational hierarchy, the length of time set for accomplishing the
goals, tends to get shorter. The goals set by the superiors are preliminary, are based on the
analysis and 7udgment of what can and should be accomplished by the organization in a
given period of time. This re.uires to take into account the company<s strengths and
weaknesses in the light of available opportunities and threats. "t is also not advisable to force
ob7ectives on subordinates, since people seldom feel committed to goals that are pressed
upon them. !ost of the managers find that the process of working out goals with
subordinates reveals both problems to be dealt with and opportunities they would not have
previously known.
2. C'&%i#i"&(i$! $# $%-&!i+&(i$!&' -$&'+/ "deally every goal and subgoal should be some
person<s clear responsibility. -y analysing an organizational structure we often find
vagueness where we need the organizational clarification or even reorganization.
(ometimes it is impossible to structure an organization so that a given ob7ective is one
person<s clear responsibility. 1or e.g. 1or launching a new product, the managers of
research, marketing and production must carefully coordinate their activities. The specific
part of each coordinating manager to the programmed goal can and should be clearly
identified.
8. S((i!- $# Su2$%di!&( O23"(i0/ 2fter making sure that subordinate managers
have been informed of pertinent general ob7ectives, strategies and planning premises, the
superior can then proceed to work with subordinates in setting their ob7ectives. The superior
role at this point of time becomes extremely important. 9e asks various .uestions to his
subordinates such are/
a. 3hat can you contribute4
b. 9ow can we improve our operations4
c. 3hat stands in the way or what are the problems4
d. 3hat changes can be made4
e. 9ow can " help4
The things that create an obstruction in the performance are identified and many
constructive ideas are dredged from the experience and knowledge of the subordinates. "n
this step, the superiors must also be patient counsellors, helping their subordinates develop
consistent and supportive ob7ectives and being careful not to set impossible targets. The
superior<s final 7udgment and approval must be based upon what is reasonably attainable.
2nother advantage of setting up a careful network of verifying goals is tying in the need for
capital, material and human resources to the goals themselves. The superior can see the
most effective and economical way of allocating them.
4. R"4"'i!- $# O23"(i0+/ 6b7ectives can hardly be set by starting at the top and dividing
them among the subordinates nor should they be started from the bottom. 2 degree of
recycling is re.uired. ,ecycling suggest discussion, interaction with the managers
concerned and accepting suggestions from all levels. Thus the ob7ective setting is not only a
7oint process but is also one of interaction, 1or e.g. 2 sales manager may realistically set a
goal to achieve a much higher sales of a product than what the top management has
believed to be possible. "n this event the goals of the manufacturing and finance
departments will surely get affected.
F%$1 )% $! 6 6i'' 2 (&'7i!- ($ 4$u &2$u(,
Duidelines for setting ob7ectives
Iuantitative and Iualitative ob7ectives
Cerifiable and nonverifiable ob7ectives
-enefits and 3eaknesses of management by ob7ectives
5ow without clear ob7ectives, managing is haphazard. 5o individual and no group can expect to
perform effectively and efficiently unless there is a clear aim. Therefore this gives rise to
guidelines for setting ob7ectives, which is indeed a difficult task. "t re.uires intelligent coaching by
the superiors and extensive practice by the subordinates. The list of ob7ectives prepared must not
be too long and yet it should cover the main features of the 7ob.
The ob7ectives should beJ..
Cerifiable and should state what is to be accomplished and when. "f possible the .uality
desired and the pro7ected cost of achieving the ob7ectives should be indicated.
The ob7ectives should present a challenge, indicate priorities and promote professional
growth and development.
Therefore these criteria would help in setting ob7ectives.
5ow to be measurable, ob7ectives must be verifiable. This means that one must be able to
answer .uestions such asJ..
2t the end of the period, how do " know if the ob7ectives have been accomplished4
9ow much has been accomplished4
3hat has been accomplished4
3hen was it accomplished4
Thus, these falls under .uantitative and .ualitative ob7ectives, but at times it is more difficult to
state results in verifiable terms. This is especially true for staff personnel. 1or e.g. "nstalling a new
computer system is an important task but is not a verifiable goal. 6n the other hand, the ob7ective
is to install a computerized control system in the production department by 0ecember #@@@ with
expenditure not more than 5$$ working hours. Then this would be a verifiable ob7ective. 9ere the
goal accomplishment can be measured.
6ther examples would be such as to make a reasonable profit would be a nonverifiable
ob7ective, but to achieve a return on investment of #2% at the end of the current fiscal year would
be a verifiable ob7ective.
B!#i(+ $# M&!&-1!( 24 O23"(i0+
There is considerable evidence much from laboratory studies that shows the motivational aspects
of real goals. -ut there are other benefits as well.
#. I1*%$01!( i! M&!&-1!(/ !anagement by ob7ectives results in greatly improved
management. 6b7ectives cannot be set without planning and resultoriented planning is the
only one that makes sense. !anagement by ob7ectives therefore forces managers to think
about planning for results rather than merely planning activities or work.
2. C'&%i#i"&(i$! $# O%-&!i8&(i$!/ 2nother benefit of !-6 is that it forces managers to clarify
organizational roles and structures even to the extent where positions could be built around
the key results expected areas, of the people occupying them. )ompanies that have
effectively embarked on the !-6 program, have discovered deficiencies in the organization
such as lack of delegation of authority according to results expected, decentralization
management etc. 9ere !-6 helps in activating the fulfilment process for these deficiencies.
8. E!"$u%&-1!( $# P%+$!&' C$11i(1!(/ 6ne of the great advantages of !-6 is that it
encourages the people to commit themselves to their goals. 5o longer people
are 7ust doing work, following instructions and waiting for guidance and decisions, they are
now individuals with clearly defined purposes. They have had a part in actually setting the
ob7ectives, they have had an opportunity to put their ideas in planning programs. They
understand their areas of discretionK their authority and they have got their help from their
superiors to ensure that they can accomplish their goals. These are the elements that make
for a teaching for commitment.
4. D0'$*1!( $# E##"(i0 C$!(%$'/ !-6 also aids in developing effective controls. 5ow,
control involves measuring results and taking actions to correct deviations from plans to
ensure goals are reached. -ut one of the ma7or problems is knowing where one has
deviated i.e. knowing what to watch out for. Thus, here a clear set of verifiable goals is the
best guide for having effective controls.
.&7!+++ $# MBO
3ith all its advantages, a system of !-6 has a number of weaknesses most of which are due to
shortcomings in applying !-6 concepts. They are/
#. F&i'u% ($ (&") () *)i'$+$*)4 $# MBO/ !anagers who understand the concept of !-6,
who have put into practice and appreciate a good deal about it must in turn explain to the
subordinates what it is all about, how it works, why is it being done, what part will it play in
appraising the performance and how the participants can benefit from it. The philosophy is
based upon the concepts of selfcontrol and selfdirection that are aimed at making
managing professionals. Therefore, failure to teach the philosophy could pose to be a ma7or
weakness of !-6.
2. F&i'u% ($ -i0 -uid'i!+ ($ -$&' +((%+/ 9ere we would like to mention that managers
must know their corporate goals and how their own activity fits in them. 1ailure to fill certain
needs such as/ some assumptions as to future, knowledge of ma7or company policies,
understanding the policies affecting their areas of operation etc. could result in a total
vacuum in planning.
8. Di##i"u'(4 i! +((i!- -$&'+/ Truly verifiable goals are difficult to set. "t takes more study to
work. "t is more difficult to establish verifiable goals that are formidable but attainable than to
develop many other plans which tend only to lay out work to be done in the future.
4. E1*)&+i+ $! +)$%( %u! -$&'+/ This could become a danger at the expense of long run
goals. Therefore, managers should see that short run plans are designed to some longer
range goals.
5. D&!-% $# I!#'9i2i'i(4/ 5ow managers often hesitate to change ob7ectives. (ometimes
goals may cease to be meaningful if they are changed too often and do not represent a well
thought out and well planned out result. 5evertheless it is foolish to expect the manager to
strive for a goal that has been made absolute by revised corporate ob7ectives, changed
premises or modified policies. Therefore hesitation to change ob7ective could result in ma7or
weakness of !-6.
1inally to conclude, we would like to state that 7ust if a goaloriented management approach is to
produce results, then it has to be adopted to the specific situation.
D"i+i$! M&7i!-
&lanning and decision making are closely interlinked. 2s we have seen in the earlier chapters on
planning, decision making is an integral part of planning. 0ecision making as a process and
function of management is very vital as many critical aspects of management depend upon the
right decision at the right time. The following general observations will tell us how complicated
and at the same time how challenging decision making is/
'very decision is right when it is taken
5ot to take a decision is also a decision
The manager is as good as the decision he takes
0ecision making is the most creative activity in the life of a manager
,ationality in decision making is sub7ective
0ecision making is a conflict resolving process
0ecision making exists at all levels, but it is so perceptive that people in the middle and
lower levels never get an opportunity to take the decisions
,ight decisions at the wrong time are disastrous
0ecision making is also influenced by a gut feeling or intuition *Cery difficult to define these
words, but it is said that no explanation is necessary if you believe in them and no
explanation is possible if you don<t+
(o decision making is often a function of ;sixth sense<
.)&( i+ D"i+i$! M&7i!-/
0ecision making is a process of making a choice out of best alternatives. "t is an intellectual
process involving the following steps/
"dentify the problem *5eed for action is felt+
)ollect information from all possible sources
0evelop alternatives
)ompare and evaluate these alternatives
0ecision making stage of making a choice among alternatives
"mplementation and communication of decisions
1ollow up and review
F&"($%+ &##"(i!- () D"i+i$! M&7i!- P%$"++,
#. "nformation *"t must be available, authentic, ade.uate, reliable, must be available at the right
time. "t must be analysed and presented in the right manner+.
2. Time 1actor/ 0ecision must be taken at the right time. (ome products are introduced ahead
of time. 1or e.g. 0ish washers introduced in "ndia. 0ecisions are also time bound. "n
business, context, introduction of airconditioners, coolers and refrigerators in summer and
woollen clothing in winter also suggests the influence of time in decision making.
8. 'xternal 'nvironmental 1actors/ 2s decision making is always interactive with the
environment, various environmental factors influence decision making such as economic,
political, social, cultural, technical, ethical, legal, global factors.
4. "nternal 1actors/ ,ules, regulations, procedures within the organization or administrative
restrictions also affect decision making.
5. &ersonality of the 0ecision !aker or (ub7ectivity/ The decision making process has a lot to
do with who is the decision maker, his attitudes, perceptions, values, style of functioning, the
nature of personality and overall way of thinking.
:. &articipation, 2cceptance and "mplimentation/ 'lements of how decisions are taken, how far
they are accepted and how they are to be implemented also contribute in the decision
making process.
>. &recedent/ "n a bureaueratic set up this becomes a ruling factor as .uestions like A9ave we
done this before4B, A"s there a precedent of taking such decisions4B are often asked before
taking a decision.
?. 'xperience of a 0ecision !aker/ 2s it is said that experience is the best teacher, maturity in
business experience of a manager go a long way in taking effective decisions.
@. &ower to 0ecide/ !any times, people know what is wrong in the organisation, but often they
do not have the power to decide and act. That is how the concept of empowerment is
evolved which talks about decision making to the lowest possible level.
#$. 'scalation of )ommitment *&oint of 5oreturn+/ 2fter a decision has been taken, it is often
felt that the decision is going in a wrong way, but more than half of the work is completed.
Therefore, there comes a point of no return and the decision has to be completed in spite of
negative feedback.
##. -ounded ,ationality/ )onstructing simplified models that extract the essential features from
the problems without capturing all their complexities. The decision maker settles for the early
solution that is good enough. "n layman<s language, the decision maker finds out the earliest
available alternatives, takes certain things for granted and acts on it. The decision maker
takes generalised 7udgemental shortcuts which are also called 9euristics. 1or e.g. if two
students from a particular management institute show exemplary performance in the 7ob, the
7udgemental shortcut is Aevery student from this institute is goodB, and vice versa.
#2. &roblem &erception/ &roblems that are visible catch a decision makers decision. These
problems become the first to be acted upon, or a priority. 1or e.g. if at the time of the chief
executive officers *)'6+ visit, workers start agitating, then this agitation becomes the main
problem for the )'6 because it is visible for him.
TOPIC 2
STRESS MANAGEMENT
The existence and importance of stress in industry was first recognised in 2merica in #@5:. 2
machine operator named Fames )arter cracked up while working on the Deneral !otors
production line in 0etroit. !r. )arter had what is now commonly known as a nervous breakdown
and he sued Deneral !otors, claiming that the stresses of his 7ob had contributed to his condition.
"t was an important lawsuit. )arter won and from that day onwards most executives and all
lawyers and the physicians in 2merica took the relationship between stress and industry very
seriously indeed. 9owever, executives around the rest of the world have been slow to recognise
the importance of stress in "ndustry.
"ndeed, in some ways it is difficult to blame company executives for failing to understand the
importance of ;stress< as a trivial problem and laugh at any suggestion that there could be a link
between problems in the mind and problems affecting the body.
"n the last few years evidence has accumulated from around the world to show that the most
common cause of destructive ill health is stress at work. ,esearchers have not only built up
evidence showing links between industrial stresses in general and ill health but have even
accumulated evidence showing that it is possible to link specific occupations with specific types of
stress induced disease. 5o one is immune. The man or women on the shop floor is 7ust as
vulnerable as the man or women on the board of directors.
"n "ndia, the statistics show, the rate of people suffering from the heartrelated problems has gone
up nine times within the last four decades.
2lthough there is absolutely no doubt that stress is killing many people, disabling many more and
costing industry crores of rupees every year, there is one important .uestion that has to be asked.
3hy are we so susceptible to stress these days4
The answer to this apparently unanswerable paradox is .uite simple. 6ur bodies were designed a
long, long time ago. 3e were not designed for the sort of world in which we live today. 3e were
designed for a world in which fighting and or running were useful practical solutions to everyday
problems. 3e were designed to cope with physical conformations with sharptoothed tigers.
The problem is that our environment has changed far more rapidly than we have evolved. 3e
have changed our world far faster than our bodies have been able to adapt. 2t no other time in
the history of the world has there been such a constant progression of ideas and technology.
1ashions, themes and attitudes have never changed as rapidly as they have in the last hundred
years or so. 5ever before have expectations and pressures been so great. ,evolutionary
changes in agriculture, navigation, medicine, military tactics, design, transport, communications
and industrial methods have all transformed our world. -ut our bodies are still the same as they
were tens of thousands of years ago. "t takes millennia for the human body to adapt. 3e have
moved far too .uickly to be good for our bodies.
"t is these environmental changes that have made stress more pronounced. These days stress is
ubi.uitous. 5one can escape stress. 2s a matter of fact stress has its origin in the body chemistry
which has remained unchanged since the man came on the earth.
Eet us take example of the cave man. 1or him to survive was either a fight or a flight. 3henever
there was any life threatening event any action off light or fight, pituitary would give appropriate
signals for secreting adrenaline in the blood stream. This resulted in creation of additional energy
for the body either to fight or fly. This is known as ;fight or flight mechanism<.
1ollowing are some of the changes that occur in the body to protect itself from the danger within a
few microseconds. These responses of the body to a situation are known as fight or flight
mechanism with, interalia, the following bodily responses/
,elease of 2drenaline and conversion of glycogen into glucoseK
,aised &ulseK
,aised -lood &ressureK
,apid -reathingK
0ilated &upilsK
0igestion slowed because of diversion of blood supply from stomach to the extremities of the
bodyK
6ver million of years the lifestyle has changedK however, the body chemistry has not changed.
3ith the change in the lifestyle, stressors have multiplied and diversified in different forms.
9owever, the body chemistry response has remained the same.
The theory of ;Deneral 2daptation (yndrome< states that when an organism is confronted with a
threat, the general physiological response occurs in three stages viz. alarm reaction, resistance
reaction and state of exhaustion.
A'&%1 R&"(i$!
The first stage includes an initial Ashock phaseB in which resistance is lowered, and a
Acountershock phaseB in which defensive mechanism become active. 2larm ,eaction is
characterised by autonomous excitabilityK and adrenaline dischargeK increased heart rateK muscle
tone, and blood contentK and gastrointestinal ulceration. 0epending on the nature and intensity of
threat and the conditions of the organism the severity of the symptoms may differ from a mild
invigoration to disease of adaptation.
S(&- $# R+i+(&!"
!aximum adaptation occurs during this stage. The bodily signs characteristic of the alarm
reaction disappear. ,esistance increases to levels above normal. "f the stress persists, or the
defensive reaction proves ineffective, the organism deteriorates to the next stage.
iii+ (tate of 'xhaustion/ 2daptation energy is exhausted, signs of alarm reaction reappear, and
resistance level begins to decline irreversibly the organism collapses.
2 diagrammatic view of these stages is shown in the figure below
6ne of the ma7or shortcomings of this theory is that the related research was carried out on
animals where the stressors are usually physical or environmental=and this is not always the
case in relation to human organisms. The concept of Deneral 2daptation (yndrome is, therefore,
not given weightage in the present days.
&resent day human is being compressed by stresses from various sources such as his own
psychological and physical make upK the familial demands, the social demands, the demands of
the 7ob etc. etc.
3henever a superior scolds a subordinate, the latter<s body chemistry acts in the same way it did
in the cave man when he was threatened by a tiger. 'ven all his body functions race upto meet
the emergency. 9owever, physical emergency there is none. This additional burst of energy is not
only useless for him but is harmful. 9e can neither fight physically with the superior nor leave the
place of work. The adrenaline is metabolised. These metabolic changes act on various balancing
and selfcorrecting mechanisms of the body. The result is the psychosomatic diseases.
STRESS DEFINITIONS
0ifferent definitions of stress occur. 0r. (eyles, an expert in stress management, gives the best
definition in stress management. 2ccording to him Astress is a nonspecific response of the body
to situationB.
"t is important to remember that the body chemistry does not distinguish between the anxiety
causing, pleasant or unpleasant situations. "n any of these situations, the body response is the
same, resulting in fight or fly mechanism.
The other definitions of stress are /
A(tress is a physiological abnormality at the structural or biochemical level caused by
overloading experiences.B
A(tress is an adaptive response to an external situation that results in physical, psychological and
or behavioural deviations.B
2ccording to 0r. &eston7i of ".".!. 2hmedabad, the stress can be categorised as under/
Eu+(%++
This stress is because of the sudden over7oy. 1ortunately this type of stress is not long lasting.
1urthermore it is a state of happiness. 'ustress, therefore, is not harmful, being occasional and
fleeting.
Di+(%++
This is antithesis of eustress. 0istress is caused whenever a person is suddenly very sad or
angry. 0istress is caused because of the demands of the modern life and anxiety to cope with
them. This results in feelings of inade.uacy, anxiety, nervousness, loss etc. This type of stress is
harmful. "t is this stress that has caused more havoc in the executive life. "t is this stress that
7ustifies the saying AGlcer is the surest sight of executive successB.
(ince it is distress that takes a heavy toll of executive efficiency, the organisations should try to
alleviate it. 2n atmosphere of ob7ectivity and mutual trust would go a long way in reducing
distress.
:4*% .$%7 S(%++
This type of stress is caused because of the hyper activity and travails of life to meet dead lines
etc. Target mindedness and the eleventh hour rush or continuous overwork cause hyper stress.
The key therefore, to deal with hyper stress lies in good planning.
:4*$ S(%++
This type of stress is the opposite of the hyper stress. This stress is caused by less than optimum
activity. The effects of hypo stress are slower than other types but are more penetrating and
longer lasting. There are examples when the 6rganisations have deliberately created hypo stress
by denying legitimate work to their employees. (uch situations, beyond creating stress, deprive a
person of the fulfillment of selfesteem needs. !ore often the retired persons experience this
stress. 1or them it is a transition from hyper to hypo stress. This underlines the necessity of
planning the postretirement period, doing proper time management by planning activities so that
an individual remains optimally busy.
The above discussion shows that whatever an individual does or does not so, there is always
some sort and some amount of stress on him. This is why stress is known as Anonspecific
response of the body to the situation.
There are three broad categories of stressors. They are /
a+ 6rganizational stressorsK
b+ Eife stressorsK and
c+ &ersonal stressors.
O%-&!i+&(i$!&' +(%++$%+
6rganisational membership is a dominant source of stress. The concept of organisational stress
was first evolved in the classic work of Lahn et al. They were the earliest to draw attention to
organisational stress in general and role stress in particular.
(ome of the organisational stressors are intrinsic to the 7ob. They are boredom, time pressures
and deadliness, exorbitant work demands and technical problems.
(ome organisational stressors relate to the role in the 6rganisation. They are role ambiguity, role
conflict, role overload etc.
(ome organisational stressors relate to the organizational structure and the climate. They are
lack of participation in the decisionmaking, lack of responsiveness and appreciation, pressers
towards conformity etc.
Li# +(%++$%+
Eife stressors can be catagorised in three classes. They are /
a+ Eife changes,
b+ 0aily stressors
c+ Eife trauma
Li# ")&!-
9uman has tendency to maintain e.uilibrium. 2ny change occurring in the life is a reason to get
stressed. The research shows that even the minor or the trivial occurrences in the life create
stress. Carious life changes are attached weightages that are shown below.
0eath of (pouse = #$$
0ivorce = >8
Fail Term = :8
0eath of a close family member = :8
!a7or personal in7ury or illness = 58
!arriage = 5$
1ired from work = 4>
,etirement = 45
-usiness ,ead7ustment = 8@
)hange in responsibilities at work = 2@
Trouble with boss = 28
Cacation = #8
1estivals = #2
!inor violations of law = ##
P%+$!&' +(%++$%+
&ersonal stressors relate to the personal health and the familial life of an individual. They are like
menopause or male menopause, commuting problems, reduced selfconfidence as a result of
aging etc.
3hile the 3estern world has started thinking about the stress only lately, the "ndians have
thought about stress centuries before. 2ccording to Moga ignorance, ego i.e. attachment to self,
temptations, envy or hate, or 7ealousy and a state of helplessness are the main personal
stressors. "f one applies one<s mind to the reasons one will find that it is impossible to be away
from the stress.
The individual conse.uences of stress result in an individual finding it difficult to ad7ust with
others. "n extreme cases it results in divorce too. (tress at the individual level also results in
medical problems. !ost of all it affects an individual<s decision making capacity.
2t the organisational level the stress of the employees may have negative effect on the 7ob
satisfaction, morale, motivation to perform at high levels.
'ven though stress has multifarious deleterious effects on individual and the 6rganisation, stress
cannot be done away with. 'very success has its roots in stress. (tress propels a man to do
something that ultimately results in success. (tress is like the voltage on an electric bulb. 9igh
voltage fuses the bulbK at the same time less voltage dims the bulb. (tress is necessary evil. -ut
it has bad effects. Therefore the only thing a man can do is to keep the stress from harming him.
6ne must manage stress.
M&!&-1!( $# S(%++
(ince the stress affects an individual in his body and mind, it is that individual who is to do
something about his stress. The diagram below gives the strategies that can be adopted by an
individual to cope with stress.
(tress/ &ersonal coping strategies
Lnow your personality type
,ecognition is half the solution.
K!$6 4$u% *%+$!&'i(4 (4*
(tress can affect different people in different ways. The most fully developed individual relating
specifically to stress is the distinction between type 2 and type - personality profiles.
Type 2 people are the people who create unnecessary stress for themselves. 6n the contrary
type - people are the ones who are mild mannered and take the life as it comes. Type - persons
are not stress prone individuals. 9owever people are not purely type 2 or type -K instead people
tend toward one or the other type. 2lso the relationship between personality and health problems
*such as heart disease+ is unclear.
R"$-!i(i$! i+ )&'# () +$'u(i$!
6ne must remember an important facet of stress. !ost of the time a person does not understand
that he is under stress. 9ow do you recognise that you are under stress4 (elf report measure
provide clear indication that people who know us closely and observe us fre.uently can say with
certain degree of accuracy, whether we are under stress or not. To the .uestion A0id anyone tell
you that you are under stress4B !ost of the executives reported that it is their wives who told
them that they are under stress. 2 relatively less number said it was their friends and collagues
who could correctly detect that they are under stress. )orrect detection is possible by these
people because of some specific symptoms when stress still operates at behavioural and
psychosomatic level. 2wareness of these symptoms will help us to recognise when we are under
stress.
S$1 B)&0i$u%&' S41*($1+ $# S(%++ &%,
Eow productivity, decreased work performanceK
Tendency to remain absent from workK
!uch of interpersonal conflictK
LOVE THYSELF
BODY
Have regular medical
exam.
Exercise regularly
Dont touch tobacco
Do mind what you:
Drink
Eat
SOUL MIND
Mediate regularly
Learn to relax
Develop some hobby
Tendency to remain isolatedK
(udden change in habit *clothing, eating, drinking+K
Talking around a sub7ectK
&oor eye contact while talkingK
!aking others look ridiculousK
-roodingK feeling worthlessK
1re.uent references to death, suicide etc.
(ome &sychosomatic (ymptoms of (tress are/
(leep disturbanceK
9igh blood pressureK
(tress diabetesK
-owel irritationK
-ack acheK
9igh blood pressureK
(exual dysfunction.
L$0 4$u% 2$d4
6ur body is the vehicle that enables to perceive, understand the world. "t is because of our body
that we are known in this world. "t is through our body that we experience the world. "t is only
when we love our body that we will take proper care of it. Eoving is not pampering. The following
are some tips to deal with stress by making our body strong.
:&0 & %-u'&% 1di"&' ")"7u*
Gnfortunately we "ndians are not health conscious. 2 regular medical check is a preventive
measure, especially when one is beyond forties. "t is advisable that if a person is below 4$ he
must have a medical checkup at least once a year. -eyond 45th year of age the health checkup
should be at least twice a year.
D$ 9%"i+ %-u'&%'4
To effectively cope with stress a healthy body is a must. 6ne can raise defenses against stress by
regular exercises. 6ne may take any type of exercise. The exercise of walking is the best for all
the ages. 3alking as an exercise should be minimally five to six kilometres at a stretch at the
speed not less than one and a half kilometres per minute. 1or a person beyond thirtyfive
strenuous exercise is contra indicated.
D$!;( ($u") ($2&""$
The medical research has amply demonstrated that tobacco is carcinogenic substance. The
research also tells that passive smoking is more harmful than active smoking.
D$ 1i!d 6)&( 4$u
&) E&( / 6ne must be careful about what one eats. 3hat we are largely depends on what we
eat. 2s far as possible oily and pungent food be avoided. This has tendency to cause more
secretion of digestive acids, which erode the mucus membrane of the stomach. This results
in ulceration. "t is also better if one avoids eating nonvegetarian food which is rich in
calories and cholesterol and lack fiber.
2) D%i!7 / 0rink minimally three to four litres of water daily. 2void alcoholic beverages. 2lcohol
contains calories but has no food value. 'specially the use of tobacco with alcohol is
in7urious to health.
L$0 4$u% 1i!d
3e have already said that the happy as well as unhappy situations cause secretion of adrenaline.
The remedy is to keep the mind tran.uil. "t is realised that keeping the mind tran.uil is easily said
than done. The "ndian tradition has always been stressing importance of meditation. The idea is
that in meditation a person takes away his mind for some time from the usual surroundings, which
serves as a respite.
"n the modern times many new therapies of meditation have come. Transcendental !editation,
(idha (amadhi Mog, (aha7 !arg etc. to name a few. 2re all intended to initiate a person into the
art of meditation which results in a peaceful and strong mind.
The 3estern countries are somuch convinced of the utility of meditation as a way of keeping the
mind tran.uil that some firms have reserved separate rooms for meditation for their executives. "n
"ndia the organisations are slow to catch up with this. 5onetheless it can be practised at the
individual levels.
O%-&!i+&(i$!&' S(%&(-i+ #$% 1&!&-i!- 1*'$4 +(%++
)reate supportive organisational climateK
)onvince employees that their contributions are significantK
,otate employees out of potentially stressful positions and do not allow them to overworkK
6rganise training programs to help employees cope with stress provide employee counselling.
R112% $! 6)$ <d&%+; +(%++ "$!=u%+ i(,
0 =0iet
2 =2ctivity
, =,elaxation
' ='mpathy
( (pirituality
TOPIC 3
BASICS OF FINANCIAL ACCOUNTING
2s stated earlier, financial accounting is the process of recording the past financial business
transactions and calculating the net result of these transactions with the intention to communicate
the same to the various persons dealing with the business in the external capacity. 9owever,
financial accounting is the technical process. -efore we consider the technicalities of financial
accounting, let us consider some of the fundamental issues relating to the financial accounting.
A""$u!(i!- P%i!"i*'+
"n order to bring the uniformity in recording the business transactions, the accountants follow
certain basic procedures universally. These are referred to as the 2ccounting &rinciples. The
2ccounting &rinciples can be classified in two categories =
a. 2ccounting )oncepts
b. 2ccounting )onventions
A""$u!(i!- C$!"*(+
2ccounting )oncepts indicate those basic assumptions upon which the basic process of
accounting is based. 1ollowing are the important 2ccounting )oncepts /
Bu+i!++ E!(i(4 C$!"*(
This accounting concept propose that the business is assumed to be a distinct entity than the
person who owns the business. The accounting process is carried out for the business and not
for the person who owns the business. '.g. "f there is a partnership concern carrying on the
business in the name of !Hs. NMO P )o., where !r. 2 and !r. - are the e.ual partners,
!Hs. NMO P )o. is supposed to be a separate entity from !r. 2 and !r. -. The financial
statements prepared on the basis of accounting records are of !Hs. NMO P )o. and not of !r. 2 or
!r. - individually. "t should be noted in this connection that the business entity concept has
nothing to do with the legal entity of the business. "t applies to both corporate organization*which
by itself is a separate legal entity from the owners+ as well as noncorporate organization *which
is not a legal entity separate from the owners+.
Du&' A+*"( C$!"*(
This concept proposes that every business transaction has two aspects. 9owever, basic
relationship between assets and liabilities i.e. assets are e.ual to liabilities, remains the same.
'.g. "f !r. 2 starts the business by introducing the capital of ,s. 5$,$$$, the assets and liabilities
structure will be as below
Li&2i'i(i+ A++(+
)apital 5$,$$$ )ash 5$,$$$
5ow, if !r. 2 uses the cash to purchase the material worth ,s. 4$,$$$, the assets and liabilities
structure will change as below =
Li&2i'i(i+ A++(+
)apital 5$,$$$ )ash #$,$$$
(tock in Trade 4$,$$$
5$,$$$ 5$,$$$
"f !r. 2 sells the above material worth ,s. 4$,$$$ for ,s. 45,$$$ on credit basis, the assets and
liabilities structure will change as below =
Li&2i'i(i+ A++(+
)apital 55,$$$ )ash #$,$$$
,eceivables 45,$$$
55,$$$ 55,$$$
G$i!- C$!"%! C$!"*(
This concept proposes that the business organization is going to be in existence for an
indefinitely longer period of time and is not likely to close down the business in the shorter period
of time. This affects the valuation of assets and liabilities. 2s such, the assets are disclosed in the
-alance (heet at cost less depreciation and not at the current market price. "f the assets are to
be disclosed in the -alance (heet at correct value, the current market price will be most suitable.
9owever, as the business is likely to exist for an indefinitely longer period of time and as the
assets are not likely to be sold off in the market in the near future, the market price becomes
immaterial.
A""$u!(i!- P%i$d C$!"*(
'ven if the Doing )oncern )oncept proposes that the business is going to be in existence for an
indefinitely longer period of time, in order to facilitate the preparation of financial statements on
periodical basis, the indefinitely longer life span on the business is divided into shorter
timesegments, each one being in the form of 2ccounting &eriod. &rofitability is computed for this
accounting period *by preparing the profitability statement+ and the finanial position is assesseed
at the end of this accounting period *by preparing the balance sheet+. "t should be noted that the
selection of accounting period may depend upon the various factors like characteristics of the
business organization, tax considerations, statutory re.uirements etc.
C$+( C$!"*(
This concept proposes that the assets ac.uired by the organization are recorded at their cost of
ac.uisition and this cost is considered for all the subse.uent accounting purposes say charging of
depreciation. This concept does not take into consideration current market prices of the various
assets.
M$!4 M&+u%1!( C$!"*(
This concept proposes that only those transactions and facts find the place in accounting which
can be expressed in terms of money. 2s such, all those transactions and facts which can not be
expressed in terms of money *'.g. !orale and motivation of the workers, credibility of the
business organization in the market etc.+ do not find any place in accounting and that is why in
financial statements, though they may be having direct or indirect bearing on the business. This
concept imposes severe restrictions on the kind of information available from the financial
statements. "n fact, this is one of the ma7or drawbacks of financial accounting and financial
statements.
M&(")i!- C$!"*(
This concept proposes that while calculating profit for the accounting period in a correct manner,
the expenses and costs incurred during the period, whether paid or not, should be matched with
the revenues generated during the period. '.g. "f the accounting period ends on 8#st !arch, the
salaries for the month of !arch should be considered as cost for the year ending on 8#st !arch,
even if they are actually paid for in the month of 2pril. 6therwise, calculation of the profits for the
year ending on 8#st !arch will go wrong as the income will be for #2 months while the expenses
will be for ## months only.
A""$u!(i!- C$!0!(i$!+
2ccounting )onventions indicate those customs and traditions that are followed by the
accountants while preparing the financial statements. 1ollowing are the important 2ccounting
)onventions.
C$!0!(i$! $# C$!+%0&(i$!
This convention is usually expressed as Aanticipate all the future losses and expenses, however
do not consider the future incomes and profits unless they are actually realized.B This convention
generally applies to the valuation of current assets and as such, the current assets are valuedat
cost or market price whichever is lower. The valuation of noncurret assets is done at cost *as per
the cost concept+.
C$!0!(i$! $# M&(%i&'i(4
This convention proposes that while accounting for the various transactions, only those
transactions will be considered which have material impact on profitability or financial status of
the organization and other insignificant transactions will be ignored. '.g. "f the organization
purchases some postal stamps, some of which remain unused at the end of the accounting
period. 2ccording to matching concept, the cost of such nonused postal stamps should not be
considered as the item of cost. 9owever as its impact on the overall profitability is likely to be
negligible, the cost of nonused postal stamps may be ignored treating the cost of purchases as
the expenditure. 3hich transactions should be treated as material ones is a sub7ective concept
and depends upon the 7udgment and knowledge of the accountant.
C$!0!(i$! $# C$!+i+(!"4
This convention proposes that the accounting polices and procedures should be followed
consistently on periodto period basis so as to facilitiate the comparison of finanacial statements
on period to period to period basis. if there is any change in the accounting policies and
procedures, this fact coupled with its effect on profitabity should be disclosed explicitly while
preparing the financial statements.
S4+(1+ $# A""$u!(i!-
&. C&+) S4+(1 $# A""$u!(i!-
"n this system of accounting, expenses are considered to be the expenses only when they
are paid for and the incomes are considered to be incomes only when they are actually
received. This system of accounting is mainly used by the organizations established not for
earning the profits. This system of accounting is considered to be defective in nature, as it
may not represent the true picture of the profitability as well as of the state of affairs.
2. M%"&!(i' $% A""%u&' S4+(1 $# A""$u!(i!-
"n this system of accounting, expenses are considered as expenses during the period to
which they pertain. (imilarly, incomes are considered to be incomes during the period to
which they pertain. 3hen the expenses are actually paid for or when the incomes are
actually received is not significant in case of !ercantile or 2ccrual system of accounting.
This system of accounting is considered to be more ideal, generally preferred by the
accountants. 9owever, as the time of physical receipt of cash is immaterial in this system of
accounting, 2ccrual (ystem of 2ccounting may result into the unrealized profits
beingreflected in the books of accounts on which the organization may be re.uired to pay
the taxes also.
"t will not be out of place to mention here that as per the provisions of (ection 2$@ of the
)ompanies 2ct, #@5:, all the company form of organizations are legally re.uired to follow
!ercantile or 2ccrual system of accounting. 6ther organizations have a choice to select
either of the systems of accounting.
T4*+ $# E9*!di(u%
1or the purpose of accounting, the amount of money that is paid for is classified in three ways =
&. C&*i(&' E9*!di(u%
)apital 'xpenditure indicates the amount of funds paid for ac.uiring the infrastructural
properties re.uired for doing the business that are technically referred to as 1ixed 2ssets.
1ixed 2ssets do not give the returns during the same period during which they are paid for.
2s such, benefits available from capital expenditure are longterm benefits. 9ence, it will be
wrong to consider the capital expenditure as expenses while calculating the profitability
during a certain period. "n technical words, capital expenditure never affects the &rofitability
(tatement, except in case of 0epreciation, which in simple words indicates that part of
capital expenditure returns e.uivalent to which are received during the corresponding
period.
2. R0!u E9*!di(u%
,evenue 'xpenditure indicates the amount of funds paid during a certain period with the
intention to receive the return during the same period. 2s such, the benefits available from
revenue expenditure are received during the same period during which they are paid for.
The entire amount of revenue expenditure affects the &rofitability (tatement.
". D#%%d R0!u E9*!di(u%
0eferred ,evenue 'xpenditure indicates the amount of funds paid which does not result into
the ac.uisition of any fixed asset. 9owever, at the same time benefits from this expenditure
are not received during the same period during which they are paid for. The examples of
0eferred ,evenue 'xpenditure are =
a. "nitial 2dvertisement 'xpenditure
b. ,esearch and 0evelopment 'xpenditure
c. "n case of company form of organization, &reliminary 'xpenses or )ompany 1ormation
'xpenses.
&rincipally, 0eferred ,evenue 'xpenditure is not transferred to &rofitability (tatement during
the period during which they are paid for. 2s such, deferred revenue expenditure does not
affect the profitability of the period during which it is paid for. "t is transferred to &rofitability
(tatement *in technical words Awritten off to &rofitability (tatementB+ over the period over
which benefits are received, by passing the ad7ustment entry. 2s such, deferred revenue
expenditure affects the profitability only when they are written off to &rofitability (tatement.
Till they are written off to &rofitability (tatement, they are shown on the 2sset side of
-alance (heet.
GLOSSARY OF TERMS USED IN FINANCIAL ACCOUNTING
#. 2ccount = 2ccount is the record of all the transactions pertaining to a person, asset, liability,
income or expenditure which have taken place during a specified period and shows the net
effect of all these transactions finally.
2. 0ebit (ide = 0ebit (ide of the account is left hand side of the account.
8. )redit (ide = )redit (ide of the account is right hand side of the account.
4. Coucher = Coucher is any documentary evidence to 7ustify that a particular transaction has
taken place. The voucher can be internal voucher or external voucher.
5. 'ntry = 'ntry means the record of a financial transaction in the books of accounts.
:. To debit = To debit an account means to make the entry on debit side of the account.
>. To credit = To credit an account means to make the entry on credit side of the account.
?. Fournal = Fournal is the -ook of 6riginal 'ntry or the -ook of &rime 'ntry where the
financial transactions are recorded in the chronological order as and when they take place.
@. Eedger = Eedger is the book where the transactions of the similar nature are pooled together
under one Eedger 2ccount. Eedger or Deneral Eedger as it is referred to in practical
circumstances, maintains all types of accounts i.e. &ersonal, ,eal and 5ominal. 3hichever
transactions are recorded in the Fournal or (ubsidiary -ooks in chronological order, the
same transactions are posted in the Eedger, account wise.
#$. 5arration = 5arration is the summarized explanation or description of the financial
transaction recorded in the books of accounts.
##. )asting = )asting refers to totalling of the books of accounts.
#2. &osting = &osting refers to the process of transferring the transaction entered into the book
or original entry or subsidiary book to the ledger account.
#8. 1olio = 1olio refers to the page number of the book of original entry or the ledger.
#4. -rought 1orward = 3hen the balances in the ledger account or cashHbank book of the
previous year or previous period are entered in the current year<s books of accounts, the
balances are said to be -rought 1orward.
#5. )arried 1orward = 3hen the balances in the ledger account or cashHbank book of the
current year or current period are to be transferred to the next year<s books of accounts, the
balances are said to be )arried 1orward.
#:. 2ssets = 2ll the properties owned by the business are collectively referred to as the assets
of the business.
#>. Eiabilities = 2ll the amounts owed by the business to various providers of funds or services
are collectively referred to as liabilities.
#?. )apital = )apital indicates the amount of funds invested by the owner of the business in the
business.
#@. 0rawings = 0rawings indicates the amount of funds or goods withdrawn by the owner of the
business for the personal use.
2$. 0ebtor = 2 0ebtor is a customer who owes the money to the business for the goods or
services supplied to him on credit basis.
2#. )reditor = 2 )reditor is a supplier to whom the business owes the money for the goods or
services bought from him on credit basis.
22. 0ebit 5ote = 0ebit 5ote is an intimation sent to a person dealing with the business that his
account is being debited for the purpose indicated therein.
28. )redit 5ote = )redit 5ote is an intimation sent to a person dealing with the business that his
account is being credited for the purpose indicated therein.
24. Trade 0iscount = Trade 0iscount is the discount received on purchases or discount allowed
on sales which is an ad7ustment with the basic purchase or sales price. Trade discount is not
accounted for in the books of accounts. &urchase value or sales value is accounted for net
of trade discount.
25. )ash 0iscount = )ash discount is the discount received from the suppliers or allowed to
customers for making the early payment of dues. )ash discount is accounted for in the
books of accounts. )ash discount received from the suppliers is revenue income and cash
discount allowed to the customers is revenue expenditure.
2:. -alance (heet = -alance (heet is the summarized statement of what the business
owns i.e. assets and what the business owes i.e. liabilities at any given point of time.
2>. -ills &ayable = -ills &ayable indicates the amount payable to the suppliers for which the
negotiable instrument in the form of -ill of 'xchange is given to the suppliers.
2?. -ills ,eceivable = -ills ,eceivable indicates the amount receivable from the customers for
which the negotiable instrument in the form of -ill of 'xchange is given by the customer.
2@. 0epreciation = The term 0epreciation applies to fixed assets like Eand, -uildings,
!achinery, 1urniture, Cehicles etc. The term indicates reduction in the value of fixed assets
which can arise either due to time factor or use factor or both. 2 detailed note on
0epreciation 2ccounting is enclosed in the 2nnexure.
D$u2' E!(%4 S4+(1 $# A""$u!(i!-
The basic presumption made by the 0ouble 'ntry (ystem of 2ccounting is that every business
transaction has two elements i.e. when the business receives something, it has to pay something.
'g. "f the business pays the telephone bill in cash, it gets the benefit of using the telephone, but
at the same time cash goes out. (imilarly, if goods are sold to the customer for cash, goods of the
business go out, but it receives the corresponding amount of cash. 2ccordingly, if 0ouble 'ntry
(ystem of 2ccounting is followed, every business transaction affects two accounts. 6ne account
is debited, while another account is credited by the similar amount. Thus, 0ouble 'ntry (ystem of
2ccounting follows the principle of Aevery debit has a corresponding creditB and hence, total of all
debits has to be e.ual to the total of all credits.
0ouble 'ntry (ystem of 2ccounting proves to be advantageous due to certain reasons =
a. "t takes into consideration both the aspects of each business transaction.
b. 2rithmetical accuracy of the accounting records can be verified by preparing
the Trial -alance.
c. The correct result of operations can be ascertained by preparing the final accounts
periodically.
d. )orrect valuation of assets and liabilities is possible at any given point of time by preparing
the -alance (heet.
T4*+ $# A""$u!(+
The various accounts for the purpose of 1inancial 2ccounting get classified under the following
categories =
1. P%+$!&' A""$u!(+ These are the accounts of persons with whom the organization deals
in various capacities. "n practical circumstances, personal accounts may consistof the
following types of accounts =
2ccounts of the suppliers
2ccounts of the customers
-ank H 1inancial "nstitutions
)apital 2ccount
2. R&' A""$u!(+ = These are the accounts of assets and liabilities. "n practical
circumstances, real accounts may consist of the following types of accounts =
Eand 2ccount
-uilding 2ccount
!achinery 2ccount
1urniture 2ccount
Cehicles 2ccount
,eal 2ccounts may also consist of the accounts of some intangible assets like =
Doodwill 2ccount
&atents and Trade !arks 2ccount
3. N$1i!&' A""$u!(+ = These are the accounts of incomes or expenses. "n practical
circumstances, nominal accounts may consist of following types of accounts =
(alary 2ccount
3ages 2ccount
&rinting P (tationary 2ccount
"nsurance 2ccount
Telephone 'xpenses 2ccount
"nterest paid or ,eceived 2ccount
)ommission paid or ,eceived 2ccount
Ru'+ $# D$u2' E!(%4 B$$7 K*i!-
3hile entering into various financial transactions in the records maintained by the organization,
following basic rules for accounting are followed =
a. "n case of &ersonal 2ccounts = 0ebit the ,eceiver, )redit the Diver
b. "n case of ,eal 2ccounts = 0ebit 3hat )omes in, )redit 3hat Does out
c. "n case of 5ominal 2ccounts = 0ebit all the expenses, )redit all the incomes
D*%"i&(i$! A""$u!(i!-
0epreciation can be defined as a permanent, continuous and gradual reduction in the book value
of a fixed asset. 5ormally, all the fixed assets except land depreciate, in value rendering the asset
useless after the end of certain specific period. 1ollowing may be stated as the main causes of
depreciation.
(1) U+ #&"($% , The fixed assets depreciate because they are used for the purpose they are
meant for. "t is applicable in case of tangible assets like machinery, furniture, office
e.uipments etc.
(2) Ti1 #&"($% , The fixed assets depreciate due to the passage of time.
(3) O2+$'+"!" , "t is the reduction in the value of fixed assets, say a machine, due to its
supersession at a date before it is completely worn out. "t may take place due to new
inventions, modifications or improvements.
Nd #$% D*%"i&(i$! A""$u!(i!- ,
2ccording to the nature of fixed assets, these are those assets which may be used for the
business purposes over a certain number of future accounting periods and the benefit received
from them is spread over the said number of future accounting periods. 2ccording to the matching
principle of accounting, the costs incurred during an accounting period are re.uired to be
matched with the benefits or revenues earned daring that period. 9ence, it is necessary to
distribute the cost of a fixed asset less the scrap or salvage or realisable value after the useful life
of the fixed asset is over, in such a way as to allocate it as e.uitably as possible to the periods
during which the benefits are received from the use of fixed assets. This system or procedure is
called depreciation accounting. Thus the depreciation accounting is necessary for two main
purposes.
*a+ To ascertain due profits by correctly matching the various costs and expenses incurred with
various incomes and revenues earned during various accounting periods.
*b+ To represent the value of a fixed asset on the -alance (heet at its unexpired cost i.e. at
book value less depreciation. "f depreciation is not provided, the asset may appear in the
-alance (heet at an overstated amount.
"t may also be noted in this connection that the depreciation forms a part of cost for arriving at the
profits which can be distributed to the owners of the business in the form of dividend. -y providing
the depreciation, the amount of distributable profits is reduced and retained in the business,
which can be utilized for the replacement of the asset at the end of its economic life.
M()$d+ #$% C&'"u'&(i!- D*%"i&(i$! ,
There may be various methods available for calculating the amount of depreciation to be charged
to &rofit and Eoss 2ccount. 2mount of depreciation is a function of various factors.
*#+ Time, *2+ Gsage, *8+ Time and Gsage, *4+ Time and )ost of maintaining the fixed asset,
*5+ &rovision of funds for replacing the assets.
2s such the various methods available for charging the depreciation can be described as below.
(1) S(%&i-)( Li! M()$d ,
2ccording to this method, the amount of yearly depreciation is calculated as below.
)ost of asset 'stimated scrap value
'stimated life in years
'g. ) Q )ost of 2sset. ,s. #,#$,$$$
'stimated scrap value
*2t the end of life of the asset+ ,s. #$,$$$
'stimated life #$ years
Mearly depreciation Q ,s. #,#$,$$$ ,s. #$,$$$
#$ years
Q ,s. #$,$$$
The benefit of this method is that e.ual amount of depreciation is charged every year throughout
the life of the asset, making the calculation of depreciation and cost comparison easy. The main
drawback of this method is that the amount of depreciation in later years is high when the utility of
the asset is reduced.
(2) .%i((! D$6! 5&'u (Rdu"i!- B&'&!") M()$d ,
2ccording to this method, the depreciation is provided at a predetermined percentage, on the
balance of cost of asset after deducting the depreciation previously charged *usually termed as
written down value+.
'g. )ost of asset ,s. #,#$,$$$
'stimated scrap value ,s. #$,$$$
)ost of asset sub7ected to depreciation ,s. #,$$,$$$
,ate of depreciation #$%
The amount of depreciation is calculated as shown below.
Mear -alance )ost 0epreciation 3ritten 0own
of 2ssets Calue 30C
,s. ,s. ,s.
# #,$$,$$$ #$,$$$ @$,$$$
2 @$,$$$ @,$$$ ?#,$$$
8 ?#,$$$ ?,#$$ >2,@$$
4 >2,@$$ >,2@$ :5,:#$
5 :5,:#$ :,5:# 5@,$4@
The rate of depreciation to be charged is calculated according to the following formula.
0 Q # n ,
)
where n Q number of years
, Q ,esidual H (crap Calue
) Q )ost of the asset
The main benefit of this method is that it recognizes the fact that in the initial years of life of the
asset, the repairs and maintenance cost is less which goes on increasing gradually with the
progressing life of asset. 2ccording to this method, the higher amount of depreciation in the initial
years and a gradual decrease therein is counterbalanced by the lower amount of repairs and
maintenance cost in the initial years and a gradual increase therein. "t should be noted here that
the written down value can never become zero.
(3) P%$du"(i$! U!i( M()$d ,
2ccording to this method, depreciation is provided at a predetermined rate per unit which in turn
is calculated on the basis of total number of units lo be produced during the life of the asset.
'g. )ost of the machine ,s. #,#$,$$$
'stimated scrap value ,s. #$,$$$
'stimated number of units to be produced 5$,$$$
,ate of depreciation per unit Q ,s. #,#$,$$$ ,s. #$,$$$
5$,$$$ units
Q ,s. 2
"f in a particular year, >,$$$ units are produced, the depreciation to be charged will be /
>,$$$ units x ,s. 2 per unit Q ,s. #4,$$$.
This method gives more stress on usage factor rather than time factor. 9igher the number of units
produced, higher is the amount of depreciation and vice versa.
(>) P%$du"(i$! :$u% M()$d ,
This method is similar to the production unit method except that instead of number of units to be
produced during the life of asset, number of hours for which the asset is expected to work are
taken into consideration.
'g. )ost of the machine ,s. #,#$,$$$
'stimated scrap value ,s.#$,$$$
'stimated number of hours 25,$$$
,s. #,#$,$$$ ,s. #$,$$$
,ate of depreciation per hour Q 25,$$$ hours
Q ,s. 4
"f in a particular year, the machine works for 2,5$$ hours, the depreciation to be charged will be /
2,5$$ hours x ,s. 4 per hour Q ,s. #$,$$$
(?) J$i!( F&"($% R&( M()$d ,
2ccording to this method, the depreciation is provided partly at a fixed rate on time basis and
partly at a variable rate on usage basis.
'g. )ost of the machine ,s. #,$$,$$$
To be depreciated on time basis over life of the machine
i.e. #$ year ,s. 5$,$$$
'stimated number of units to be produced 5$,$$$
D*%"i&(i$! ,
*a+ 6n time basis ,s. 5$,$$$ Q ,s. 5,$$$ per year
#$ years
*b+ 6n usage basis ,s. 5$,$$$ Q ,e. # per unit
5$,$$$ units
"f in a particular year, the machine produces :,$$$ units, the depreciation to be charged
will be /
Time basis ,s. 5,$$$
Gsage basis :,$$$ units x ,e. # ,s. :,$$$
,s. ##,$$$
(@) A!!ui(4 M()$d ,
This method assumes that the amount of capital invested in the fixed assets would have earned
interest had it been invested otherwise. The depreciation to be charged under this method is a
constant proportion of the aggregate of the cost of the asset depreciated and interest at the
specific rate on written down value of the asset at the beginning of each period.
'g. )ost of the asset *c + ,s. #,$$,$$$
Eife of the asset *n+ 5 years
,ate of interest * r + #$%
0epreciation to be charged is calculated as below.
0 Q ) x r Q #,$$,$$$ x $.#$ Q ,s. 2:,8?$
# #
# *# R r+
n
# # *#.#$+
5
#
Mear )ostH30C "nterest Total 0epreciation 30C )Hfd
,s. ,s. ,s. ,s.
# #,$$,$$$ #$,$$$ #,#$,$$$ 2:,8?$ ?8,:2$
2 ?8,:2$ ?,8:2 @#,@?2 2:,8?$ :5,:$2
8 :5,:$2 :,5:$ >2,#:2 2:,8?$ 45,>?2
4 45,>?2 4,5>? 5$,8:$ 2:,8?$ 28,@?$
5 28,@?$ 2,4$$ 2:,8?$ 2:,8?$ 5il
The amount of depreciation is very high under this method and covers the opportunity cost of
noninvestment of the capital anywhere else.
(A) Si!7i!- Fu!d M()$d ,
Gnlike any other method, this method attempts to make available funds e.uivalent to the original
cost of asset, at the end of useful life of the asset. 2ccording to this method, depreciation to be
charged is the fixed period charge which is invested at a compound rate and the amount of
investmen with the compounded interest earned over the life of the asset e.uals to the original
cost of the asset.
'g. )ost of the asset *c+ ,s. #,$$,$$$
Eife of the asset *n+ 5 years
,ate of interest *r+ #$%
0epreciation to be charged is calculated as below /
0 Q ) x r Q #,$$,$$$ x $.#$ Q ,s. 2:,8?$
*# R r+
n
# *#.#$+
5
#
Mear -al. -Hfd "nterest 2nnual 2nnual -al.cHfd
&rovision "nvestment
,s. ,s. ,s. ,s. ,s.
# = = #:,8?$ #:,8?$ #:,8?$
2 #:,8?$ #,:8? #:,8?$ #?,$#? 84,8@?
8 84,8@? 8,44$ #:,8?$ #@,?2$ 54,2#?
4 54,2#? 5,422 #:,8?$ 2#,?$2 >:,$2$
5 >:,$2$ >,:$$ #:,8?$ 28,@?$ #,$$,$$$
(B) E!d$61!( P$'i"4 M()$d ,
This method is similar to sinking fund method. Gnder this method, an insurance policy is taken
out for the amount re.uired to replace the asset at the end of life of the asset. The amount of
depreciation to be charged is e.ual to the annual premium payable on the insurance policy,
which is decided by the insurance company.
(C) R0&'u&(i$! M()$d ,
2ccording to this method, the asset is revalued periodically. The amount of depreciation for that
period is the difference between the cost of the asset at the beginning of the period and the
amount of revaluation at the end of the period.
This method of charging the depreciation is extensively used for the assets like livestock, patterns
etc.
(1D) R!6&' M()$d ,
2ccording to this method, the full cost of the asset is charged as depreciation during the period in
which asset is renewed. 5o depreciation is charged in between the period. This method of
charging can be used if the asset is of small value and is renewed fre.uently.
P%&"(i"&' "$!+id%&(i$!+ %'&(i!- ($ d*%"i&(i$!
#. "n spite of the fact that there are various methods available for calculating the depreciation,
the final choice of the method depends upon the individual organization. "t should be noted
that "ncome Tax 2ct, #@:# which is a very important piece of legislation applicable to all
types of business organizations, recognizes only one method for calculating the depreciation
i.e. 3ritten 0own Calue method. The rates at which the depreciation is to be calculated are
also specified in the "ncome Tax 2ct, #@:#. "f the organization wants to calculate the
depreciation on some different basis or at some different rates, it can do so for financial
accounting purposes. 9owever, for calculating the tax liability, the depreciation has to be
calculated on 3ritten 0own Calue basis and that too at the specified rates.
2. The company form of organizations to whom the provision of )ompanies 2ct, #@5: apply
are re.uired to calculate the depreciation as per the provisions of (chedule N"C of the
)ompanies 2ct, #@5:. The salient features of (chedule N"C of the )ompanies 2ct, #@5: can
be stated as below
a. (chedule N"C of the )ompanies 2ct, #@5: provides that the company can calculate the
depreciation by using either 3ritten 0own Calue method or (traight Eine method. The
companies are given the choice to select between these two methods. The actual
choice of the method may depend upon the effect on the profitability of the company. "f
the company wants to change the method of calculating the depreciation, it amounts to
the change in accounting policy. 2ny change in the method of calculating the
depreciation has to be effected with retrospective effect from the date of incorporation
of the company. The company is re.uired to disclose the fact of change in the method
of calculating the depreciation while preparing its financial statements along with the
effect of change in the method of calculating the depreciation.
b. The rates at which the companies are re.uired to calculate the depreciation are also
specified in (chedule N"C. 1or this purpose, the fixed assets are classified in various
categories. The broad categorization of the fixed assets is as below
-uildings 1actory -uilding as well as 2dministration -uildings
&lant and !achinery
1urniture
Cehicles
)omputer "nstallations
The rates for calculation of depreciation are as below
N&(u% $# () Fi9d A++(+ .D5 SLM
-uildings 1actory #$% 8.:8%
-uildings 2dministrative 5% #.:8%
&lant and !achinery #5% 4.>5%
1urniture #$% :.88%
Cehicles 2$% @.5%
)omputer "nstallations 4$% #:.2#%
c. "f during the financial year, any addition has been made to any asset or any asset has
been sold, the depreciation on such asset will be calculated on a pro rata basis from
the date of such addition or upto the date on which such asset has been sold.
There are some of the .uestions which are normally raised in respect of the nature of
depreciation.
(1) I+ D*%"i&(i$! & "$+(/
Mes, depreciation is a cost because of the obvious reasons that it reduces the
profitability and it is a charge against the profit. 2t the same time, it should also be
noted that it is a noncash cost as it is never paid or incurred in cash.
(2) D$+ D*%"i&(i$! -!%&( #u!d+ #$% %*'&"1!( $# &++(+/
"f the depreciation is provided under the (inking 1und !ethod or 'ndowment
&olicy !ethod, sufficient funds may be available, at the end of life of the asset,
e.uivalent to the original cost of the asset. 2s such, it can be said that these two
methods make available the funds e.uivalent to the original cost of the asset at
the end of life of the asset. 9owever these funds may not be sufficient to replace
the asset due to the increased price of the same. 6ther methods of charging the
depreciation do not directly generate the funds re.uired for replacing the assets.
The fact that the assets are depreciated to the extent of almost entire of the
original cost of the same, does not indicate that the funds are available for the
replacement purpose. 9owever, depreciation may be viewed from one more
angle. "t is a charge to profits which reduces the profits which can be distributed
among the shareholders by way of dividends, thus conserving the business funds
in the business itself. This may be considered to be a very very indirect way of
interpretation that the depreciation involves a source of funds.