The words you are searching are inside this book. To get more targeted content, please make full-text search by clicking here.
Discover the best professional documents and content resources in AnyFlip Document Base.
Published by john.jpk, 2019-11-29 00:38:16



Keywords: a/c


Prof. John Pradeep Kumar
KJSOM, Bengaluru

Syllabus (MBA203A12)

• Unit 1 Introduction to Accounting
• Introduction to Financial Accounting- uses and users of

accounting information; GAAP - Significant Accounting
Policies; Accounting Standards and IFRS; Introducing
Book Keeping and Record Maintenance; The concept of
double entry and fundamental principles; Accounting
Equation; Journal; Ledger; Trial Balance.
• Bank reconciliation statement-Calculating bank balance
at accounting date, Need and preparation, corrected
Cash book balance, Detection and Rectification of errors;
preparation of Suspense Account

Mr. John Pradeep Kumar, KJC

• Unit 2 Preparation of Financial Statements

Preparation of Financial Statements only for sole
Trading concern and Joint Stock Companies; Form
and Contents of Financial Statements and
Interfaces with Companies Act, 1956.(As per the
amendments of Companies Act 2013)

• Unit 3 Analysing and Interpreting Financial
Statements - I

• Comparative; Common Size; Trend Analysis.

Mr. John Pradeep Kumar, KJC

• Unit 4 Depreciation Accounting
• Depreciation Accounting; Valuation of


• Unit 5 Accounting Information System
• Accounting Information System; Application of

TALLY accounting Software

Mr. John Pradeep Kumar, KJC

Prescribed Text Book
• Arora A.N., (2013). Accounting for Management (2nd edition), New Delhi, HPH

• R. Narayanaswamy, (2014). Financial Accounting(5th edition), New Delhi, PHI
• NitinBalwani, (2001). Accounting and Finance, (1st edition), New Delhi, Excel Books
• Dr. Jawaharlal, (2001). Accounting for Management,(1st edition), New Delhi, HPH
• Khan and Jain, (2010). Management Accounting (5th edition), New Delhi TMH
• Louderback and Holmen (2002). Managerial Accounting,(10th edition) Thomson
• Ambrish Gupta, (2009). Financial Accounting for Management (3rd edition), New

Delhi Pearson
• Robert Anthony, David Hawkins and Kenneth Merchant (2007). Accounting, (12th

edition) New Delhi, TMH
• James Stice and Michael Diamond, (2005), Financial Accounting, (7th edition) South

western, Thomson
• Tulsian, (2012). Financial Accounting (1st edition) New Delhi, Pearson
• Warren Reeve Fess (2004), Financial Accounting, (9th edition) south western,

• Bannerjee (2009), Financial Accounting (3rd edition) New Delhi, EB

Mr. John Pradeep Kumar, KJC

Unit 1

Introduction to Accounting

Mr. John Pradeep Kumar, KJC

What is Accounting ????

Mr. John Pradeep Kumar, KJC

Mr. John Pradeep Kumar, KJC


• A formal record of a particular type of
transaction expressed in money or other
unit of measurement and kept in a ledger.
- Kohler

Formal record
Expressed in money

Mr. John Pradeep Kumar, KJC


• Purchased 1,000 kilograms of raw material,
₹ 100 per kilogram from SNL Traders.

• Paid to SNL traders ₹ 50,000.
• Paid salaries - ₹ 10,00,000
• Received from customer ₹ 1,00,000

Mr. John Pradeep Kumar, KJC

Accounting Entry

• An accounting entry is a formal record that
documents a transaction.

Mr. John Pradeep Kumar, KJC

Definition of Accounting

• American Institute of Certified Public Accountants
(AICPA) which defines, accounting as

• “The art of recording, classifying and summarizing in
a significant manner and in terms of money,
transactions and events, which are in part, at least of
a financial character and interpreting the results

Mr. John Pradeep Kumar, KJC

Definition of Accounting

The American Accounting Association (AAA)
defined accounting as follows:
“Accounting is the process of identifying,
measuring and communicating economic
information to permit informed judgments and
decisions by users of the information”.

Mr. John Pradeep Kumar, KJC

Functions of Accounting

• Recording: Accounting helps to record all the business transactions
of financial character in an orderly manner. Recording is done on
various Journals.

• Classifying: After the systematic analysis of the recorded data, the
entries of similar nature are grouped at one place. Transactions are
classified on ledgers.

• Summarizing: The classified data is displayed in understandable and
easy to use statements such as trial balance, balance sheet, etc.

Mr. John Pradeep Kumar, KJC

Functions of Accounting (Cont..)

• Financial Dealing: Accounting records only monetary transactions that
are of financial nature.

• Analyzing: A methodical classification of recorded data and presenting
in financial statements such as current liabilities, current assets, etc.

• Interpreting: Accounting helps in explaining the meaning and
significance of the data in simplified form.

• Communicating: Accounting helps in communicating the analyzed and
interpreted information in the form of graphs, ratios, etc.

Mr. John Pradeep Kumar, KJC

Uses of Accounting information

• It provides information to tax authorities and government agencies
• Provides information that helps the management of the organization

to plan the future course of action and other funds related issues.
• Accounting makes it possible to record, analyse and retrieve

important financial information
• Accounting provides the information used to determine a company’s

financial status and provides us with the reports needed to make
sound financial decisions
• Accounting helps with controlling assets, planning in respect to cash
and in determining the results of operations in a particular period.

Mr. John Pradeep Kumar, KJC

End Users of Accounting Information

• Proprietors: Profitability and financial health of an enterprise needs to be
communicated to the proprietors.

• Managers: Financial disclosures communicate the financial health and help the
managers to plan and manage the enterprise better.

• Creditors: Entities that have extended credit look into financial statements to
ascertain security of their credit.

• Prospective Investors: Financial statements communicate profitability and financial
health to attract investment into an enterprise.

• Government: Financial statements serve as the basis of meeting government
liabilities pertaining to taxation, labour and corporate laws.

• Employees: Bonus or profit sharing or Employees Stock Options Plan is prepared
using financial statements. Mr. John Pradeep Kumar, KJC

Generally Accepted Accounting Principles

GAAPs are a combination of authoritative
standards set by policy boards and most
preferred ways of recording and reporting
accounting information like balance sheet
classification of assets and liabilities,
treatment of out standing incomes and
expenses, reserves, etc., .

• Indian GAAP is a set of accounting standards that
every company operating in India has to follow when
reporting its financial results.

• While US has its own set of accounting Standards
termed as US GAAP. A non-US company when
presenting its financial results in US has to follow US

• GAAP includes the standards, conventions and rules
followed by the accountants in recording,
summarizing and the preparation of financial

• GAAP is slowly being phased out in favor of the
International Financial Reporting Standards (IFRS)
due to global business.

• While there is close similarity between GAAP and the
international rules, the differences can lead a
financial statement user to believe incorrectly that
company A is better than company B simply because
they report using different rules.

• The move towards International Standards aims to
eliminate this kind of disparity.

Accounting Standards

• Accounting standards are written documents issued
by the regulatory bodies covering various aspects of
cost measurement, treatment, presentation and
disclosure of accounting transactions.

• They serve as guidelines for preparation of financial
statements in acceptable form .

Objectives of Accounting Standards

• To remove the differences in the treatment of
various accounting aspects.

• To bring standardization in presentation so as to

facilitate intra-firm and inter-firm comparison.

List of AS

(so far 32 accounting standards have been issued by ICAI)

AS 1 Disclosure of Accounting Policies
AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies and Events Occurring after the Balance Sheet Date
AS 5 Net Profit or Loss for the period, Prior Period Items and Changes in

Accounting Policies
AS 6 Depreciation Accounting
AS 7 Construction Contracts (revised 2002)
AS 9 Revenue Recognition
AS 10 Accounting for Fixed Assets
AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003),
AS 12 Accounting for Government Grants
AS 13 Accounting for Investments
AS 14 Accounting for Amalgamations
AS 15 Employee Benefits (revised 2005)
AS 16 Borrowing Costs

AS 17 Segment Reporting
AS 18 Related Party Disclosures
AS 19 Leases

AS 20 Earnings Per Share
AS 21 Consolidated Financial Statements
AS 22 Accounting for Taxes on Income.
AS 23 Accounting for Investments in Associates in Consolidated Financial

AS 24 Discontinuing Operations
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 27 Financial Reporting of Interests in Joint Ventures
AS 28 Impairment of Assets
AS 29 Provisions, Contingent` Liabilities and Contingent Assets
AS 30 Financial instruments: Recognition and measurement
AS 31 Financial Instruments: Presentation
AS 32 Financial Instruments: Disclosures

Significant Accounting Policies

• The accounting policies refer to the specific
accounting principles adopted by the enterprise.

• Proper disclosure would ensure meaningful
comparison both inter/intra enterprise

• Enable the users to properly appreciate the
financial statements.

• Financial statements are intended to present a
fair reflection of the financial position, financial
performance, and cash flows of an enterprise.

Mr. John Pradeep Kumar, KJC

Areas involving different accounting
policies by different enterprises are

• Methods of depreciation, depletion and amortization
• Treatment of expenditure during construction
• Treatment of foreign currency conversion/translation,

Valuation of inventories
• Treatment of intangible assets
• Valuation of investments
• Treatment of retirement benefits
• Recognition of profit on long-term contracts Valuation of

fixed assets
• Treatment of contingent liabilities

Mr. John Pradeep Kumar, KJC

Factors governing the selection and
application of accounting policies are:

• Prudence: Prudence means making of estimates, which is
required under conditions of uncertainty. Profits are not
anticipated till certain for realization, while provisions are
made for all known liabilities ascertainable or based on
estimates (e.g. warranty expenses).

• Substance over form: It means that transaction should be
accounted for in accordance with actual happening and
economic reality of the transactions, i.e. events governed
by substance and not merely by the legal form.

Mr. John Pradeep Kumar, KJC

Materiality :
a) As to the disclosure of all material items, individually or in

aggregate in the context of fair presentation of financial
statements as a whole if its omission or misstatement
could influence the economic or financial decision of the
user relying upon the financial statements
b) Depends on the size of the items or errors judged in the
particular circumstances of its omissions or
c) Is a cutoff point rather than being a primary qualitative
characteristic which information must have.
d) This is a matter of judgment, varies from one entity to
another and over one period to another.

Mr. John Pradeep Kumar, KJC

Meaning of Accounting Principles

• Accounting principles refer to the rules and actions
adopted by the accountants globally for recording
accounting transactions.

• These are classified into two categories:

– Accounting concepts
– Accounting conventions

Mr. John Pradeep Kumar, KJC

Accounting Concepts

• Accounting concepts include the assumptions and conditions on which the science of
accounting is based. These are also known as accounting standards.

Important accounting concepts are:

• Separate Entity Concept - Business is treated as a unit or entity
• Going Concern Concept - Continue to exist in the foreseeable future
• Money Measurement Concept - Transaction is recorded in terms of money
• Cost Concept - Asset is recorded at the price paid to acquire it
• Accounting Period Concept - The time interval is called accounting period
• Dual Aspect Concept - The recognition of two aspects to every transaction
• Matching Concept - Process of relating costs to revenue
• Realisation Concept – Revenue realised is to be taken in income statement
• Balance Sheet Equation Concept - Assets = Equity + External Liabilities
• Verification and Objective Evidence Concept - Documentary evidences of transactions
• Accrual Concept. - Revenue recognition depends on its realisation and not actual receipt

Mr. John Pradeep Kumar, KJC

Accounting conventions

• An accounting convention is not a legally binding practice; rather it is generally
accepted convention based on customs and is designed to help accountants
overcome practical problems that arise out of the preparation of financial

Important Accounting conventions are;

• Convention of Disclosure - accounts must be honestly prepared and all material information must be
disclosed therein.

• Convention of Materiality - An item should be regarded as material if there is reason to believe that
knowledge of its would influence the decision of informed investor.

• Convention of Consistency - The comparison for one accounting period with that in the past is
possible only when the convention of consistency is adhered to.

• Convention of Conservatism - It takes into consideration all prospective losses but leaves all

prospective profits. Mr. John Pradeep Kumar, KJC

What is IFRS

(International Financial Reporting Standards)

IFRS is the global structure It may become mandatory in India
for accounting/auditing from 2013. Need for all finance
across the world professionals to know it

The global perspective and the corporate learning environment is
the perfect vehicle for improved employability.

Why Converge to IFRS?

• To bring about uniformity in reporting system globally.
• To access foreign capital markets.
• Foreign Direct Investors and FIIs are more comfortable and

confident with globally accepted standards.
• To increase comparability
• To bring balance sheet closer to economic value and to have

single set of AS around the globe.

Objectives of IFRS

• “To develop, in the public interest, a single set of high quality,
understandable and enforceable global accounting standards
that require high quality, transparent and comparable
information in financial statements and other financial
reporting to help participants in the various capital markets of
the world and other users of information to make economic

 To promote the use and application of IFRS
 To facilitate the adoption of IFRS through convergence of

national accounting standards of countries with IFRS

List of IFRS

IFRS 1 First-time Adoption of International Financial Reporting Standards January 1, 2004
IFRS 2 Share-based Payment January 1, 2005
IFRS 3 Business Combinations April 1, 2004
January 1, 2005
IFRS 4 Insurance Contracts January 1, 2005
January 1, 2006
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations January 1, 2007
January 1, 2009
IFRS 6 Exploration for and Evaluation of Mineral Resources January 1, 2015
January 1, 2013
IFRS 7 Financial Instruments: Disclosures January 1, 2013
January 1, 2013
IFRS 8 Operating Segments January 1, 2013

IFRS 9 Financial Instruments

IFRS 10 Consolidated Financial Statements

IFRS 11 Joint Arrangements

IFRS 12 Disclosure of Interests in Other Entities

IFRS 13 Fair Value Measurement

Structure of IFRS

International International Accounting Standards
Financial Reporting
Interpretation IAS


Standards on Interpretation


International Financial Reporting Standards

International Accounting Standard Board

Book- Keeping

• Bookkeeping, often called record keeping, is the part of
accounting that records transactions and business events in the
form of journal entries in the accounting system.

• In other words, bookkeeping is the means by which data is
entered into an accounting system.

• This can either be done manually on a physical ledger pad or
electronically in an accounting program like Quickbooks, and

Mr. John Pradeep Kumar, KJC

Bookkeeping Accounting

1. Bookkeeping is mainly related to the 1. Accounting is the process of summarizing,
process of identifying, measuring, recording interpreting and communicating financial
and classifying financial transactions. transactions which were classified in the
ledger account as a part of bookkeeping.

2. It is the beginning stage and acts as a base 2. Accounting begins where bookkeeping

for accounting. ends.

3. Management can’t take decisions based on 3. Management can take decisions based on

bookkeeping. accounting.

4. The objective of bookkeeping is to keep 4. The objective of accounting is to ascertain
proper and systematic records of financial the financial position and further
transactions. communicate the information the relevant

5. Financial statements are not prepared 5. Financial statements are prepared on the
during bookkeeping. basis of records obtained through

6. Bookkeeping doesn’t require any special 6. Accounting, on the other side, requires
skills as it is mechanical in nature. special skills due to its analytical and
somewhat complex nature.

Mr. John Pradeep Kumar, KJC

Methods/ Types of Accounting

1. Single Entry
• It is incomplete system of recording business

• The business organization maintains only cash book and

personal accounts of debtors and creditors.
• So the complete recording of transactions cannot be

made and trail balance cannot be prepared.

Mr. John Pradeep Kumar, KJC

Methods/ Types of Accounting

2. Double Entry

• Double Entry is an accounting system that records
the effects of transactions and other events in at
least two accounts with equal debits and credits.

• In this system every business transaction is having a
two fold effect of benefits giving and benefit
receiving aspects.

• The recording is made on the basis of both these

Mr. John Pradeep Kumar, KJC

Accounting Equation

• Accounting equation is also called as balance sheet equation, represent

the relation between assts, liabilities and owners equity of a business. It

is foundation for the double entry book keeping.

The total debits equal to total credits. It can be expressed as
Expenses + Loss + Assets = Income + Gains + Liabilities
Asset = Net Profit (-) Net Loss + Liabilities

Assets = Net Profit or (-) Net Loss + External liabilities + Dues to Proprietors

Assets = Equity + External Liabilities

Proprietor’s Fund or Equity = Asset – Liabilities
Mr. John Pradeep Kumar, KJC

Principles of Double Entry System

• For every transaction there are two

• One is called Debit and the other is called

• The debit and credit aspects of a
transaction are to be identified based on
the principles of double entry system of

Mr. John Pradeep Kumar, KJC

• Debit refers to entering an amount on the left
side of an account and Credit means to enter
an amount on the right side of an account.

• The abbreviated form of Dr. Stands for Debit
and Cr. Stands for Credit.

• Rules of debit and credit is based on dual
aspect concept i.e. every transaction has Debit
effect and an equivalent credit effect.

Mr. John Pradeep Kumar, KJC

• Before deciding which account is to be
debited or credited, it is necessary to decide
the nature of accounts which are influenced
by the business transactions.

• The rules of Debit and Credit are given below

Mr. John Pradeep Kumar, KJC

Mr. John Pradeep Kumar, KJC

Personal Accounts

• These accounts are related to individuals, firms, companies,
etc. A few examples of personal accounts include debtors,
creditors, banks, outstanding/prepaid accounts, accounts
of credit customers, accounts of goods suppliers, capital,
drawings, etc.

• Natural personal accounts: This type of personal accounts
is the simplest to understand out of all and includes all
god’s creations who have the ability to deal, who, in most
cases, are people. E.g. Kumar’s A/C, Adam’s A/C, etc.

• Artificial personal accounts: Personal accounts which are
created artificially by law, such as corporate bodies
and institutions, are called Artificial personal
accounts. E.g. Pvt. Ltd companies, LLCs(limited liability ,company)
LLPs(limited liability ,partnership) clubs, schools, etc.

Mr. John Pradeep Kumar, KJC

• Representative personal accounts: Accounts

which represent a certain person or a group

directly or indirectly.

• E.g. Let’s say that wages are paid in advance

to an employee – a wage prepaid account will

be opened in the books of accounts.

• This wages prepaid account is a representative

personal account indirectly linked to

the person.

• E.g. "Wages Outstanding Account", Pre-paid

Insurance Account, advance interest, accrued

salaries Mr. John Pradeep Kumar, KJC

Personal Accounts:

• Rule : Debit the Receiver
Credit the Giver

• According to the above principle, the benefit
receiver’s account is to be debited and the
benefit giver’s account is to be credited.

Mr. John Pradeep Kumar, KJC

For Examples:

1. Goods purchased from Ramesh on credit for 2,000
• The two accounts involved in this transaction are goods purchased A/c and

Ramesh A/c. so, Ramesh is the Giver of the goods. Hence Ramesh account is be
credit (i.e. credit the giver rule applies) goods purchased is expenditure, so
nominal account, hence is to be debited.

2. Goods sold on credit to Mahesh Rs. 5,000/-
• In this transaction Mahesh is receiving the benefit from the business. Hence,

Mahesh account is to be debited and goods sold is an income, so nominal account
hence to be credited.

3. Cash paid to Mohan Rs. 500
• In this transaction cash ( asset – real account) is going out and Mohan (personal –

personal A/c) is receiving cash. Hence Mohan account is to be debited and cash
account is to be credit.

Mr. John Pradeep Kumar, KJC

Real Accounts:(Assets)

• All assets of a firm, which are tangible or intangible, fall
under the category “Real Accounts“.

• Tangible real accounts are related to things that can be
touched and felt physically. A few examples of tangible
real accounts are building, machinery, stock, land, etc.

• Intangible real accounts are related to things that can’t
be touched and felt physically. A few examples of such
real accounts are goodwill, patents, trademarks, etc.

• Rule : Debit What comes in
Credit what goes out

Mr. John Pradeep Kumar, KJC

Click to View FlipBook Version