Introduction

Dr Ritu Sapra
 Scope of Accounting

Accounting

Financial Cost Managemen

Accountin Accountin t
g g Accounting

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 Financial Accounting
Financial Accounting is a discipline which is employed to
record, classify and summarize the transactions that occur in
an organization.
The study of various definitions of financial accounting brings
to light the following facts about the nature and task of the
accounting:
● art of recording and classifying business transactions and events in a
systematic manner;
● transactions to be recorded in monetary terms;
● summarizing, analyzing and interpreting the results of accounting
information; and
● communicating and explaining the information to decision makers.

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 Objectives of Financial Accounting
�To identify financial events and transactions that occurs
in an organization;
�To measure the value of these occurrences in terms of
money;
�To organize the accumulated financial data into
meaningful information; and
�To analyze, interpret, and communicate that
information to a board range of persons and groups,
both with in and outside the organization.

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Limitations of Financial Accounting
� Historical in nature;
� Partial picture of the business;
� Fails to give true and fair view of the business;
� Fails to give requisite and adequate information;
� Fails to act as a controlling device;
� Can not be understood by non-accounting people;
� Does not indicate the cost behaviour;
� Comparisons and comparative study is not possible

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 Cost Accountancy
�Cost accounting is the branch of accounting designed
to determine and accumulate the costs of certain
activities and to report cost information to
management.
�Cost accounting procedures and routines are used as a
means of accumulating and allocating all elements of
manufacturing cost in a manner that will produce
meaningful data for the use of management.

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 Objectives of Cost Accounting
� To aid in the development of long-range plans by providing
cost data that acts as a basis for projecting data for planning;
� To ensure efficient cost control by communicating essential
data costs at regular intervals;
� To determine cost of products or activities;
� To identify profitable areas of business;
� To provide management with information in connection with
various operational problems.

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 Management Accounting
� Management accounting is a system capable of generating
accounting information that assists internal management in the
efficient formulation, execution and appraisal of business
plans that help the organizations to achieve their strategic
objectives.
� It is designed to assist internal management in the efficient
formulation, execution and appraisal of business plans.

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Scope of Management Accounting
� Financial accounting
� Cost accounting
� Financial Statement Analysis
� Budgeting
� Inflation Accounting
� Management Reporting
� Quantitative Techniques
� Tax Accounting
� Internal Audit
� Office Services

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Financial Accounting Versus Management
Accounting
Management Accounting differs from Financial Accounting on the
following grounds:
o Objectives
o Nature
o Adherence to accounting principles
o Subject-matter
o Compulsion
o Precision
o Frequency of reports
o Recipients
o Nature of data used
o Publications

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Management Accounting as an Aid
to Management

Organizing

Planning Management Evaluating

Accounting

Communicating

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 Tools and Techniques of Management
Accounting
�Financial Planning
�Analysis of Financial Statement
�Cost Accounting
�Standard Costing
�Marginal Costing
�Budgetary Control
�Funds Flow Analysis
�Management Reporting
�Statistical Analysis

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 Functions of Management Accounting

�Basic Function
◦ Data Collection
◦ Data Processing
◦ Analysis and Interpretation
◦ Communication
�Secondary Function
◦ Coordinating
◦ Special Studies
◦ Tax Administration

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 Advantages of Management Accounting

� Increases the efficiency;

� Ensures efficient regulation of business activities;
� Efficient utilization of the available resources;
� Ensures effective control by comparing actual results with
the standards;
� Maintains a good public relation;
� Provides means to motivate the employees;
� keeps management informed about the on-going
operations;
� Helps in evaluating the efficiency and effectiveness of the
company.

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 Limitations of Management Accounting
• Any drawback in the statements is bound to affect the
effectiveness of the decision;
• To find an individual in the management with a comprehensive
knowledge of the different subject required for interpretation is
almost impossible;
• There is tendency among business executives to use short cut
approach to a managerial problem rather than lengthy process as
required under scientific analysis of management accounting;
• Smaller concerns may not afford Management Accounting;
• Management accounting is in the process of evolution;
• The management system cannot be replaced by a system of
management accounting as the latter system simply provided the
necessary data for a decision and not the decision itself;
• The collection and analysis is considerably influenced by the
personal bias of the management accountant.

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Changing Role and Tasks of
Management Accountants
�Facilitator in strategic process
�Business partners
�Internal consultants
�Organizational educators

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Changing Business Environment
�Growth of service sector
�New ways of competing
�Higher expectation of customers
�New standard in customer value
�Increased reliance on strategic alliance
�Focus on customer retention
�Developments in information technology
�Growth and development of new industries

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Changing business Environment (Continued)

�Emerging tools of management accounting

�Total quality management
�Just-in-time
�Business process reengineering
�Life cycle costing
�Theory of constraint
�Balanced scorecard
�Value chain analysis

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Accounting Process and
Principles

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 Concept of Accounting

Accounting is a systematic process that

records, classifies, summarizes, analyses,
reports and interprets financial
information.

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 Analysis of Definition
The study of the definition of accounting brings to light the following facts
about the nature of the accounting:
� To set up routines or procedures for systematically recording the daily
transactions of the
business;
� To classify and summarize the recorded transactions so that the data is
available in a form that
is understandable for the parties interested in its use; and
� To interpret the available data with the help of appropriate tools and
techniques in order to
derive some information that is useful for managers for managing the
organization.

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Types of Accounting Work
�Constructing
�Recording
�Classifying
�Summarizing
�Reporting
�Interpreting
�Auditing

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 Systems of Accounting
�Cash System
�Single Entry System
�Double Entry System

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Basic Accounting Equation
Assets=Equities
Assets= Creditors Equity+ Owner’s Equity

Liabilities Capital

Assets= Liabilities+ capital

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Expanded Accounting Equation

Assets= Liabilities+ Capital+ Retained Earnings

or
Assets= Liabilities+ Capital + (Income-Expenses)
or
A = L + C + (I - E)

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Components of Accounting Equation

�Assets—properties or the material things of a business;

�Liabilities—amount that a business owes either to
creditors or owners;
�Income—amount of revenue from the sale of the
organization's output; and
�Expenses—the cost incurred in producing the
organization's output.

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 The Accounting Process
⬧ Analysis of Transaction
⬧ Journalizing
⬧ Ledger
⬧ Trial Balance
⬧ Adjusting Process
⬧ Financial Statements
⬧ Closing Entries

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Analysis of a Transaction
�A transaction is a business event that alters in some
way the value of the component(s) of the equation—
A = L + C + (I - E)

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Recording of a Transaction
�Before a transaction is recorded in the accounting
system, the accountant must analyse it to identify its
two aspects that may change the financial position of
the organization.
�The identification of the two aspects of a transaction
can be done by analysing the effect of such transaction
on the accounting equation. (Refer Table on next slide)

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Accounting rules affect the recording of Changes in the
Components of Accounting Equation

Components of Accounting Debit Credit

Equation (Dr.) (Cr.)

Capital Decrease (-) Increase (+)

Liabilities Decrease (-) Increase (+)

Assets Increase (+) Decrease (-)
Incomes/ Profits Decrease (-) Increase (+)
Expenses/Losses Increase (+) Decrease (-)

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Journal and Journalizing
� Journal is a book of original entry in which all transactions are recorded in
the form of entries.
� Journalizing means a systematic process of recording a transaction in the
journal and the form in which it is recorded is known as journal entry.
A commercial organization usually makes use of two types of journals, viz.,
� General journal; and
� Special journal:
(i) Sales journal (ii) Purchase journal
(iii) Cash receipts journal (iv) Cash disbursement journal

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 Format of the Journal
1 2 3 4 5
Date Particulars Ledger Debit Credit
Folio Amount Amount

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 Ledger
� Ledger is an accounting book that contains accounts in a
classified and summarized form.
� The term account means a record consisting of specific
information.
� A ledger account is a form used to assemble information that
shows the cumulative effect of all the transactions on the
accounts specific item of asset, liability, owners' equity,
revenue, or expense of the business.

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 Format of the Ledger
ACCOUNT TITLE
(Name of the Account)
Dr.             Cr.

Date Particulars Amount Date Particulars Journal Folio Amount

Journal Folio

  To………….       By…………    

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 Trial Balance
� A trial balance is a list of account balances taken from the
ledger to test the mathematical accuracy of the ledger as
indicated by an equality of debits and credits.
� The closing balance for each account is recorded in the
appropriate debit or credit column of the trial balance, and
before proceeding further, the total of debit and credit columns
of the trial balance must be equal.

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Format of Trial Balance
TRIAL BALANCE
Name of the Account Debit Credit
Balances
Balances
   

TOTAL

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 Financial statements
Financial statements consist of the following statements:
● Profit and loss account; and
● Balance sheet

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 Income Statement
Particulars Amount
₹
Sales
Cost of sales
Gross Profit
Operating Expenses:
Selling & Distribution Exp.
General Expenses
Total Operating Expenses
Net profit during the year

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 Balance Sheet
Liabilities Amount Assets Amount
₹ ₹
Share capital: Land and building
Equity Plant and machinery
Preferential Investments
Debentures Sundry debtors
Bank Loan Inventory
Reserves Bills receivable
Provision for taxation Cash and bank balance
Proposed dividend
Bills payable
Sundry creditors

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Accounting principles
�Business entity concept
�Money measurement concept
�Going concern concept
�Cost concept
�Periodicity concept
�Dual aspect concept
�Realization concept
�Matching concept

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 Standards of Reporting
�Full disclosure
�Consistency and comparability
�Conservatism
�Materiality
�Objectivity

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Debits & Credits
�Debits are the left of the T account.
�Debits do not mean increase.
�Debits are not “good” or “bad”.

�Credits are the right of the T account.

�Credits do not mean decrease.
�Credits are not “good” or “bad”.
Debits & Credits

Assets, Exp Liabilities, Equity

& Dividends & Revenues
DR CR DR CR
Incr. Decr. Decr. Incr.
+ - - +

If you remember this

one, the “other one” is
the reverse.
 CLASSIFICATION OF ACCOUNTS

• Accounts in the names of persons are known as

“Personal Accounts”
• Accounts in the names of assets are known as
“Real Accounts”
• Accounts in respect of expenses and incomes
are known as “Nominal Accounts”
 PERSONAL ACCOUNTS

Accounts in the name of persons are known as

personal accounts.
Eg: suresh A/C,
Suresh & Co. A/C,
Outstanding Salaries A/C, etc.
 REAL ACCOUNTS

These are accounts of assets or properties. Assets

may be tangible or intangible. Real accounts are
impersonal which are tangible or intangible in
nature.
Eg:- Cash a/c, Building a/c, etc are Real
Accounts related to things which we can feel,
see and touch.
Goodwill a/c, Patent a/c, etc Real Accounts
which are of intangible in nature.
 NOMINAL ACCOUNTS

These accounts are impersonal, but invisible and

intangible. Nominal accounts are related to those
things which we can feel, but can not see and
touch. All “expenses and losses” and all “incomes
and gains” fall in this category.
Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest
Received A/C, Commission Received A/C,
Discount A/C, etc.
Three Accounts
�1. Personal Account
� Personal account relates to persons with whom a business
keeps dealings. A person called be a natural person or a legal
person. If a person receives anything from the business, he is
called receiver and his account is to debited in the books of
the business. If person gives anything to business, he is called
as a giver and his account is to be credited in the books of the
business.
�Debit the Receiver and Credit the Giver
. Real Account
� Real account relates to property which may either come into
the business or go from business. If any property or goods
comes into the business, account of that property or goods is
to be debited in the books of the business. If any property or
goods goes out from the business account of that property or
goods is to be credited in the books of business.
� The Golden Rule for Real Account is,
� Debit What Comes in and Credit What Goes out
3. Nominal Account

�Nominal account is an account that relates to business

expenses, loss, income and gains
�The Golden Rule for Nominal Account is,
�Debit all Expenses or Loss and Credit all Income
Gains or Profit
RULES FOR DEBIT AND CREDIT

Debit the Receiver

Personal
Account Credit the Giver

Debit what comes in

Real Accounts Credit what goes
out
Debit all Expenses
Nominal and Losses
Accounts Credit all Incomes
and Gains
 Exercise

• Purchased a Building for Rs.20,000/-.

• Paid Cash Rs.1,000/- to Satheesh.

• Paid Salary Rs.1000/-.

• Received Commission Rs.250/-.

• Sold goods for Cash Rs.3500/-.
�1 - A new corporation issues 1,000 shares of common
stock and receives Rs75,000 cash.
�Accounts Affected: Assets – Cash is increased.
Stockholders' Equity - Common Stock is increased.
�The journal entry is
�Cash 75,000
�To Common Stock 75,000
�Salaries of Rs10,000 are paid.
�Accounts Affected:
�Stockholders’ Equity - Expense is increased Assets –
�Cash is decreased
�Step 2 -- The journal entry is
�Salaries Expense a/c10,000
�ToCash 10,000
�Rs1,000 of supplies are purchased on account.
�Accounts Affected: Assets - Supplies is increased
Liabilities –
� Accounts Payable is increased
� Step 2 -- The journal entry is
� SuppliesA/c 1,000
�To AP 1,000
�Services are performed and cash of $2,000 is received.
�Accounts Affected:
�Assets - Cash is increased Stockholders’ Equity -
Service Revenue is increased
�Step 2 -- The journal entry is
� Cash 2,000
�ToService Revenue 2,000
 N K
K
AAN
H
H
TT O UU
YY O

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