ACCOUNTING FOR MANAGERS

Ms. Mani Agarwal

Assistant Professor
UNIT - 1
INTRODUCTION TO ACCOUNTING

 The term ‘Account’ is defined as “a record or statement of financial

expenditure and receipts relating to a particular period”.

 Accounting is a business language. We can use this language to

communicate financial transactions and their results. Accounting is
a comprehensive system to collect, analyze and communicate
financial information.

 Accounting is all about the process that helps to record,

summarize, analyze, and report data that concerns financial
transactions
 DEFINITION OF ACCOUNTING

According to American Institute of Certified Public

Accountants (AICPA), accounting is –
“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
thereof”.

According to American Accounting Association (AAA),

accounting is –
“The process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users
of the information”.
 SCOPE OF ACCOUNTING
 To keep systematic records
 To ascertain profitability
 To ascertain the financial position of the
business
 To assist in decision making
 To fulfill compliance of law
 To protect business properties
FINANCIAL ACCOUNTING - MEANING

Financial Accounting is a branch of accounting which

records each financial information and analyse it to
determine the financial position of a business. It is a
process of recording, summarising, analysing and
presentation of all financial transactions of a business in
the form of financial statements.
 FINANCIAL ACCOUNTING - SCOPE

 Business Forecasting
 Proper Decision-Making
 Correct Taxation
 Replacing Memory
 Analysing the Performance of the business
 Analysing the Financial Status of the Business
 Documentary Evidence
 Helping in Realisation of Debts
FINANCIAL ACCOUNTING -FUNCTIONS

 Identifying
 Recording
 Classifying
 Summarising
 Analysing
 Interpreting
 Communicating
FINANCIAL ACCOUNTING - IMPORTANCE

 Helps in Management
 Substitute to Memory
 Comparative Study
 Settlement of Taxation Liability
 Evidence in Court
 Sale of Business
 Assistance to an Insolvent Person
FINANCIAL ACCOUNTING - LIMITATIONS

Non- Monetary Items Overlooked

Original Cost
Possibility of Manipulation
Bases on Estimates
Rule of Consistency
 COST ACCOUNTING - MEANING

According to the ICMA, London,

Cost accounting is “the process of accounting

for cost which begins with the recording of
income and expenditure and ends with the
preparation of periodical statements and
reports for ascertaining and controlling costs.”
 COST ACCOUNTING - SCOPE
 Determination of Cost
 Cost Controlling
 Assists in Taking Decisions
 Setting Selling Prices
 Controls Inventory
 Reduces Costs
 Evaluates Efficiency
 Budget Preparation
 Recognizes Loss-making Production Units
 Discovers Material Losses
 COST ACCOUNTING - FUNCTIONS

 Ascertainment of Cost
 Estimation of Cost
 Control of Cost
 Reduction of Cost
 Preparation of Cost Statement
 Determination of Selling Price
 Helpful in Managerial Decisions
COST ACCOUNTING - IMPORTANCE

Aid to Management

Advantage to Employee

Useful for Outsiders

Useful for Government and the Society

COST ACCOUNTING - LIMITATIONS
 System is More Complex
 Expensive
 Inapplicability of Costing Method and Technique
 Not Suitable for Small-Scale Units
 Lack of Accuracy
 No Social Accounting
 Frequent Reconciliation
 Duplication of Work
MANAGEMENT ACCOUNTING - MEANING

According to Anglo American Productivity Council

“Management Accounting is the presentation of
accounting information in such a way to assist
management in the creation of policy and day to day
operation of an undertaking”.

According to R. N. Anthony
“Management Accounting is concerned with accounting
information which is useful to management”.
MANAGEMENT ACCOUNTING - SCOPE

 Financial Accounting
 Cost Accounting
 Financial Management
 Budgeting and Forecasting
 Inventory Control
 Reporting to Management
 Interpretation of Data
 Internal Audit
 Cost Control Procedures
 Financial Statement Analysis
MANAGEMENT ACCOUNTING - FUNCTIONS

 Planning and Forecasting

 Modification of Data
 Financial Analysis and Interpretation
 Facilitates Managerial Control
 Communication
 Use of Qualitative Information
 Co-ordination
 Helpful in making Strategic Decisions
 Supplying Information to various Levels of Management
MANAGEMENT ACCOUNTING - IMPORTANCE
 Helpful in Decision Making
 Increase in Efficiency
 To Help in Control
 Helpful in Maximisation of Profit
 Measurement of Performance
 Proper Planning
 Service to Customers
 Co-ordination of Activities of Different Departments
 Helpful in Solving Problems
 Helpful in Communication
MANAGEMENT ACCOUNTING - LIMITATIONS

 Lack of Generally Accepted Principles

 Based on Financial and Cost Informations
 Lack of Knowledge
 Intuitive Decisions
 Wide Area
 No Substitute of Management
 It provides data only
 Psychological Resistance
 Evolutionary Stage
 Expensive System
 Effect of Time Factor
 ACCOUNTING PRINCIPLES
Accounting Principles may be defined as “Those rules of
action or conduct which are adopted by the
accountants universally while recording accounting
transactions”. This is also known as ‘Generally Accepted
Accounting Principles’ (GAAP).

Accounting Principles can be categorized into two parts :

a. Accounting Concepts, and
b. Accounting Conventions.
 ACCOUNTING CONCEPTS
 Separate Entity Concept
 Going Concern Concept
 Money Measurement Concept
 Accounting Period Concept
 Cost Concept
 Dual Aspect Concept
 Accrual Concept
 Matching Concept
 Realization Concept
 ACCOUNTING CONVENTIONS

 Consistency
 Full Disclosure
 Conservatism (or Prudence)
 Materiality
 DOUBLE ENTRY SYSTEM

‘Double Entry System’ of book-keeping ensures that a

company or individual keeps track of credits and debits
and thereby keeps the accounts in balance. The system
is called ‘ Double Entry System’ as every financial
transaction is recorded in two columns, debit on the left
side and credit on the right side, ensuring that the ways
in which each transaction affects the company’s
finances is properly recorded.
CLASSIFICATION OF ACCOUNTS
All the accounts may be classified into three
categories. Details of all categories of accounts
and the ‘Rules of Journalising’ applicable under
each category.

TYPES OF ACCOUNTS

PERSONAL ACCOUNT REAL ACCOUNT NOMINAL ACCOUNT

 CLASSIFICATION OF ACCOUNTS
PERSONAL ACCOUNT
An account of a person which may be a natural person, an artificial
person or representative group of persons is referred as ‘Personal
Account’.
1. A Natural Person/Individual: This account represents living
being. For example, Ram, Shyam, Sohan, or Mohan.
2. An Artificial or Legal Person/Entity : This account represents
non-living being. For example, a business firm, company,
organisation such as bank, FI, government department.
3. A Representative/group of Persons: This account represents a
person or thing that represents another or others. For example,
debtors, creditors, borrowers, lenders, etc.

THUMB RULE : Debit – The Receiver

Credit – The Giver
 CLASSIFICATION OF ACCOUNTS
REAL ACCOUNT
Accounts related to properties or assets are known as ‘Real
Accounts’. A separate account is maintained for each asset.
1. Tangible Real Accounts: These accounts represents assets and
properties which can be seen, touched, felt, measured,
purchased and sold. E.g., Land account, Building account,
Machinery account, etc.
2. Intangible Real Accounts: These accounts represent asses and
properties which cannot be seen, touched or felt but they can
be measured in terms of money, e.g., Goodwill accounts,
Patents accounts, Trademark accounts, etc.

THUMB RULE : Debit – What Comes In

Credit – What Goes Out
 CLASSIFICATION OF ACCOUNTS

NOMINAL ACCOUNT

Accounts relating to income, expenses, gains and losses are known as

‘Nominal Accounts’. These accounts are also known as ‘Fictitious
Accounts’ as they do not represent any tangible asset. A separate
account is maintained for each head or expense or loss or gain or
income. Wages account, Rent account, Commission account, interest
received account, etc are some examples of nominal account.

THUMB RULE : Debit – All Expenses or Losses

Credit – All Income or Gains.