ACCOUNTING AND FINANCIAL MANAGEMENT

the linkage

Why Accounting?
Accounting is the language of

business

Accounting statements are the greatest sources of managerial

information

Accounting Information System (AIS) exists in all business organizations.

Whats Accounting? the definition

The process of Recording,, Classifying, Summarizing, Analyzing, and, Interpreting the financial transactions, and then Communicating the results thereof to different user groups of such information.

Accounting Information System

Accounting gives us a system of information, which may be termed as the Accounting Information System (AIS).

AIS is perhaps the only information system that is invariably present in each and every business enterprise on earth

AIS AND MANAGERIAL DECISION MAKING

More Efficient the System Is, More Efficient the Finance Decisions Are Likely to Be

Accounting Information~ the Main User Groups

Investors Lenders Employees Creditors

Government
General Public Financial Analysts

Economists

Double Entry Principle:

The Science of Accounting

Every transaction has two sides:

debit and credit twice

So it enters the books of account Hence the debit side will always be exactly equal to the credit side This is the test of the principle.

Golden
Rules of

Debit and Credit

Personal Accounts:
Debit the receiver
Credit the giver

Real Accounts:
Value comes in Debited Value goes out Credited

Nominal Accounts:
Debit the Expenditure

Credit the Income

Personal A/C?

An account with an individual, or a group of individuals, or a company

Real A/C?

All Assets accounts are Real accounts

Nominal A/C?

All Income accounts and Expenses accounts are Nominal accounts

Accounting Mechanics
Step1: Write down the transaction in a
journal, the book of prime entry

Step2: Record the transaction in classified

account in the ledger

Step3: At the end of the accounting year,

balance the accounts and transfer the balances either to Profit & Loss A/C or Balance Sheet, as the case may be.

Whats a Trial Balance?

A tool to check the arithmetical accuracy of transactions recorded. Could be prepared at any point of time; not necessarily at the end of the year.

How to prepare a Trial Balance?

Balance the accounts Classify them into debit and credit

Add both debit and credit balances. They should tally.

If they dont, arithmetical mistake is there. Correct it.

Can we avoid preparing a Trial Balance?

Yes. Only if we are 100% sure about the arithmetical accuracy of accounts keeping. Otherwise not.
However, the general practice favors preparing a Trial Balance.

Is a Trial Balance effective to identify all sorts of mistakes in accounts keeping?

NO. Only the arithmetical

errors.
Thus errors of principles, omission, misposting and compensating errors are not identifiable through a Trial Balance

Accounting Basis

1. Cash Basis 2. Accrual Basis

Cash Basis Accounting

Transactions are considered only when cash transfers hand. Otherwise not.

Accrual Basis Accounting

Transactions are considered as and when money is due,

ignoring the fact when money is actually paid or received.