Amity Business School: MBA Class of 2015, Semester I

Amity Business School

MBA Class of 2015,
Semester I
Accounting and Financial Management I

Accounting is based
on a set of principles
on which there is
general agreement,
not on rules that
can be proved.
Accounting Principles
Accounting
Concepts
Accounting
Conventions
Concept includes those basic assumptions or
Conditions upon which the science of
Accounting is based
Conventions includes those customs or traditions
Which guide the accountant while preparing
Accounting statements
Basic Accounting Concepts
Accounting Period Concept
Going concern Concept
Money Measurement Concept
Business Entity Concept
Matching Concept
Revenue Recognition Concept
Dual Aspect Concept

The activities of the
entity are to be kept
separate and distinct
from the activities
of the owner and all
other economic entities.

Separate Entity Concept
Only transaction data that can be expressed in terms of
money be included in the accounting records.
MONEY MEASUREMENT ASSUMPTION
Hiring
an employee
Paying
an employee
Do not record Record
The enterprise will continue in operation long
enough to carry out its existing objectives.
GOING CONCERN ASSUMPTION
NOW
FUTURE
The economic life of a business can be
divided into artificial time periods
QTR 1
QTR 2
QTR 3
QTR 4
2008 2009 2010
JAN FEB MAR
APR MAY JUN
JUL AUG SEPT
OCT NOV DEC
Accounting Period Assumption
Expenses are matched with revenues
in the period in which efforts
are made to generate revenues.
MATCHING CONCEPT
REVENUE RECOGNITION CONCEPT
Revenue should be recognized in the
accounting period in which it is earned.

When a sale is involved, revenue is
recognized at the point of sale.
Dual Aspect Concept

This is one of the fundamental concept of Accounting. It may be stated as for every
Debit there is a credit. Every business transaction has a dual effect and the entry
Made for the transaction is recorded on the debit and as well as on the credit side

It may be expressed in the form of equation
Assets = Liabilities + Equity
ACCOUNTING CONVENTIONS
CONSISTENCY
MATERIALITY
CONSERVATISM
FULL DISCLOSURE
CONSERVATISM
The net impact on financial statements
When this principle is applied to profit and Loss Account it will show lower net
income and when applied to Balance Sheet there will be under statement of Asset and
Capital and over statement of Liabilities and Provision
According to this convention, the Accountants should
follow the Rule
Anticipate no profits but provide for all probable losses.
The convention requires
That PROFIT should neither be overstated nor anticipated
When in doubt, choose method least likely to
overstate assets and income
Do not intentionally understate!
CONSISTENCY
2000

2001

2002

Companies should use the same accounting
principles from year to year.
Changes in accounting principles must be
justifiable.
CONSISTENT INFORMATION
FULL DISCLOUSRE
It requires that the financial statements should reveal all the relevant and reliable
Information fully & fairly. This convention become more relevant in the companies
Form of organization where management & ownership are in separate hands
Section 211 of the companies Act 1956 requires that the Income statement &
Balance Sheet of a company must give true & fair value of statement of affairs of
the Company& also prescribe the forms in which these statements are to be
prepared

Materiality
Will it influence the
decision?
MATERIAL

No impact on
decision?
IMMATERIAL
PhotoDisc/Getty Images PhotoDisc/Getty Images
PART III
Accounting Cycle
Journalize Transaction
Post to Ledgers
Adjust Accounts
Prepare the TRIAL-BALANCE
Prepare
Financial Statements
Journalizing Transactions
Transactions are events that have an economic impact
on a business.
Business documents are records that are evidence of
transactions.
A journal is an accounting record in which business
transactions are entered in chronological order. It is
also called as book of original entry
Journalizing is done on the basis of Double Entry
Book-Keeping System.
DOUBLE ENTRY SYSTEM
The concept of double entry is based on the fact that every transaction
has two aspects i.e. receiving a benefit and giving a benefit
The accounting system that records both the aspects of
transaction in the same books of accounts is called double
entry system.
The account that receives the benefit is debited and the
account that provides the benefit is credited.
Debit and Credit are denoted by Dr and Cr
respectively.
The ultimate result of the system is that for every Debit (Dr)
there is an equal Credit (Cr).
Journal Entry Process
Every journal entry involves a 3-step process:
1. Identify the accounts involved with an event or
transaction.
2. Determine whether each account increased or
decreased.
3. Determine the amount by which each account was
affected.
ACCOUNT

An account is a section of the ledger in which all the
transactions
relating to the same activity that has taken place during a
given period are summarized and accumulated.

CLASSIFICATION OF ACCOUNTS

Personal accounts

It records transaction with
person and firm with whom
we deal. It take in the form
of.

Natural person.
Artificial person.
Representative person.
Impersonal Accounts

Account which do not
relates with any person
are know as impersonal
account.

Real or property account
(ASSET)
Nominal account
(EXPENSE, INCOME)

CREDIT
It signifies the providing of a benefit. In simple
words it is the right hand side
DEBIT
It signifies the receiving of benefit. In simple
words it is the left hand side
Debits are
simply
entries on
the left.
Credits are
simply
entries on
the right.
Remember:
Debit .. What comes in
Real account :
Credit ..What goes out

Debit .. The receiver
Personal Account :
Credit .. The giver
Debit .. Expenses and
losses
Nominal account :
Credit .. Revenue and gain
RULES FOR DEBIT & CREDIT
Assets = Liabilities + Capital
Dr
+
Cr
-
Dr
-
Cr
+
Cr
+
Dr
-
Format of a Journal

Date Particulars L/F Debit
Rs.
Credit
Rs.
Record the results of the transactions in a
journal.
Journalizing provides a chronological
record of all business activities.
General Journal Entry Format:
Date Debit Entry . . . . . . . . . . . . . . . xx
Credit Entry . . . . . . . . . . . .
xx
Explanation.
Journalized the Following Transaction
1.On 26.07.11 Sold Goods for Cash worth $2000.
2. On 28.07.11 Purchased Furniture for cash $8000.
Step 1. Identify the accounts involved
Two accounts involved are:
1. sales A/c 1.Furniture A/c
2. Cash A/c 2. Cash A/c
Step 2. Categories the A/c as Real, Nominal or Personal
1. Sales Real A/c 1. Furniture Real A/c
2. Cash Real A/c 2. Cash - Real A/c
Step 3. Pass the entry according to the Rule of Debit & Credit.
for Real A/c the Rule is
Debit what comes in
Credit what goes out
} T1 } T2
Date Particulars L/F Debit
Rs.
Credit
Rs.
26.07.11

28.07.11
Cash A/c
To Sales A/c
( goods sold for cash worth
$2000)

Furniture A/c
To Cash A/c
( Purchased furniture for
cash worth $8000)

$2000

$8000

$2000

$8000

Amity Business School: MBA Class of 2015, Semester I

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