CENTRE FOR DISTANCE AND ONLINE EDUCATION

OPEN AND DISTANCE LEARNING (ODL) MODE

Program: MBA
BLOCK 1

MBA18R5101 –ACCOUNTING FOR MANAGEMENT

Prepared By. Dr.S.B.Inayathahameed
Introduction and basic
Accounting
INTRODUCTION

Accounting is a business language which elucidates the various kinds of transactions

during the given period of time. Accounting is broadly classified into three different
functions viz.
❖ Recording
❖ Classifying and
❖ Summarizing

Define – the accounting for the managerial decisions

It refers to accounting for the management. It provides necessary information to
assist the management in the creation of policy and day to day operations. It enables
the management to discharge all its functions, planning, organizing, staffing,
directing, and control efficiently with the help of accounting information.
R.n. Anthony
Main Objectives of Accounting
The main objectives of accounting is as follows:-
⮚ To evaluate the operating results of the enterprise.
⮚ To disclose the financial position of the business
⮚ To ensure necessary control over the operation as well as the resources of
the business.
Accounting Principles
Accounting principles are the norms or rule of actions adopted while recording
business transactions which will ensure the uniformity, clarity and understanding
of business. The accounting principles are mainly classified in to two categories.
They are Accounting Concepts and Accounting Conventions.
1. Accounting Concepts
• Accounting concepts are basic assumptions or conditions which the accounting
system is based. The important accounting concepts are Business Entity
Concept, Going Concern concept, Dual Aspect Concept, Cost Concept, Money
measurement Concept, Realization Concept, Accrual Concept and matching
Concept.
Business Entity Concept- Business entity concept states that the business and
business man are two separate entity. Under this, business is treated as a
separate unit distinct from its owner. The transactions between the proprietor
and the business will be recorded separately in the books of business and
shown separately under the heading 'Capital account'.
Going Concern concept- As per this concept business unit has a perpetual
succession or a continued existence and the transactions are are recorded
from the point of view. The concept says that the business will continue in
operation long enough to charge the cost of fixed assets over the useful life
time against the income from business.
Dual Aspect Concept- Under this concept each business transaction has two
aspects they are receiving aspects and giving aspects. The receiving aspect is
known as Debit aspect and the giving aspect is known as the Credit aspect of
the business.
Cost Concept- Cost Concept is based on the Going concern concept. According
to this concept, assets purchased will be entered in the business book as per
the cost price in which they are purchased and this will be the base for further
accounting of assets.
Money measurement Concept- This concepts states that, the transactions which
will treat only in the terms of money.
Realization concept- According to this Revenue is recognized only when the sale
is made.
Matching Concept- This matches the cost along with the revenue.
2. Accounting Conventions
This is method or custom in which the accountants are following for the
preparation of accounting statements. This includes mainly three types of
conventions. They are as follows:-
❖ Convention of conservatism
❖ Convention of consistency
❖ Convention of material Disclosure.
❖ These all are the accounting concepts and conventions.

Systems of Accounting
• There are mainly two kinds of system of accounting for recording business
transactions. They are Cash System of accounting and Mercantile system or
Accrual system of Accounting.

1. Cash System of Accounting

Under the cash system of accounting, only actual cash transitions are recording in
to the account. That means actual cash received and cash paid are recoded
properly and no entry for any due of receipts and outstanding expenses.
2. Mercantile system or Accrual system of Accounting
Under Mercantile system of accounting, all the cash transactions and credit
transactions of the business are recorded in the books of accounts. This will
create the entries not only for actual cash receipts and payments but also for
amount due and outstanding expenses. This is the system which all the
commercial business organizations are follows. Along with the above shown
systems of accounting we can record the business transactions in two other
important systems also. They are Single Entry System and Double entry
systems.
3. Single Entry System
Single Entry System is a system which records only the personal and cash
aspects of the business. Under this system of recording ignores impersonal
aspects of transactions. This is not based on the Dual aspect Concept so it will
be incomplete account or inaccurate account.
4. Double Entry System
This is a dual aspect concept of business transactions that is receiving aspects
(debit) and giving aspects (credit) are recorded in the books of accounts. This
is the most common system of book keeping used for recording every business
transactions. Double entry system is the method of making all transactions in
the account in an opposite side for equal value. This system of accounting
provides more accurate data with scientific system of accounting.
Difference between Single Entry System and Double Entry System of Accounting are
as follows:-
� In Double Entry System of Accounting, the double aspects of the transactions are
recorded. But in the case of Single Entry System, only single aspects are recorded.
� In Double Entry System of Accounting, For every debit aspect will have an equal amount
of credit aspect. But in the case of Single Entry system, there will have a debit without a
corresponding credit and vice versa.
� In Double Entry System of Accounting, there are personal and impersonal accounts (ie,
real and nominal accounts). But in the case of Single Entry System, there are personal
and cash accounts only.
� Under Double Entry System of Accounting, a trial balance can be prepared to check the
accuracy of accounts While in the single entry system, it cannot prepare the trial balance.
� Under Double Entry System of Accounting, the Trading, profit and loss account and
balance sheet can be prepared directly. But the single entry system those statements
cannot prepared directly.
� In double entry system we can directly calculate actual net profit of the business. But in
the case of single entry system it is not easy to calculate actual net profit of the business
directly.
� In Double Entry System of Accounting, it involves more clerical labours, But there are only
less numbers of clerical labours in the case of Single entry system.
� These all are the difference between Single entry system of Accounting and Double entry
system of accounting.
�
Characteristics of Accounting
On the basis of above definitions, the characteristics of accounting may be drawn as follows:
1. Accounting is the art of recording of financial transactions of the business: All those
Transactions of business which are financial in nature are recorded in accounting and those
which are not of financial nature are not recorded in accounting. As the honesty of the workers
cannot be measured in money, it cannot be recorded into accounting.
2. Classifying and summarising of recorded data is done in accounting: In accounting the
financial transactions are recorded in the journal. With the help of journal, the recorded data are
classified into ledger under appropriate heads. Then with the help of ledger the trial balance and
financial statements are prepared.
3. Data are recorded in terms of money: In accounting, the financial data are recorded in a
definite term i.e. money. No other unit is accepted to record the business transaction. If there is
sale of 100 articles at the rate of 50 per article, only the monetary value of these articles i.e.
5,000 (100 x 50) is recorded.
4. Accounting is a science also: On account of recording of business transactions in a systematic
manner, it is also called a science. First the business transactions are recorded in the primary
books i.e. journal, for classification the ledger is prepared. With the help of ledger the trail
balance, profit and loss account and balance sheet is prepared. Profit and loss account is
prepared after a period to find the result of the business and balance sheet to know the financial
position of the business.
5. Analysing and interpretation of the results is done in accounting: It not only record
classifies and summaries the business data but also analyse and interprets the results for the
future decisions. On the basis of data forecasting regarding profit, sales, etc., may be done.
Objectives of Accounting
� The main purpose of book-keeping and accounting is to furnish the necessary
financial data to the persons interested in the business. These persons can be the
internal users of the business and external users of the business. Among the internal
users all the managers at lower, middle and top level are included. While among the
external users, investors, creditors, government and public are included. The
financial statements are supplied to the external users for the necessary information.
In brief, following are the objectives of accounting:
1. To maintain the systematic records of the business: The primary objective of the
accounting is to maintain the records of all transactions of the business. As the
memory of humanbeing is very limited and short, it would be very difficult to
remember all the transactions especially if there is a huge amount of transaction. So
it is very necessary to record all business transactions properly to determine the
amount of profit or loss and the financial position of the business on a particular date.
2. To ascertain the profit or loss of the business: The main objective of the business
is to earn a profit. Exact profit can be ascertained with the help of financial
accounting which helps to determine the net profit or loss of the business over a
period. For the determination of the amount of profit or loss, a trading and profit and
loss account is prepared at the end of a period. If there is excess of revenue for a
period over the expenses incurred to earn that revenue, it is said to be a profit. And if
there is excess of expenses over the revenue, it is said to be a loss. In the case of
profit the management can take the decisions relating to selling price and output etc.
In the case of loss, the causes of such a loss are investigated and remedial action is
taken by the management.
3. To present the financial position of the business: The objective of the
accounting is not only recording of the financial transactions of the business
and determination of profit or loss but also to present the financial position of
the business. To present the financial position, financial accounting helps in the
preparation of balance sheet. Balance sheet is the statement of assets and
liabilities of the business. It also gives the information about the borrowed
capital as well as owned capital along with different assets such as fixed assets,
current assets and miscellaneous. Balance sheet is the reflector of the financial
position of a business (solvency and insolvency).
4. To provide the financial information to the various users: One more
objective of the accounting is to provide the required financial information to the
different users – internal as well as external users. Internal users of the financial
statements are owners, shareholders, management and external users of the
financial statements are debenture holders, creditors, investors, employees,
government, etc.
5. For Decision Making: These days accounting has taken upon itself the task of
collection, analysis and reporting of information at the required points of time to
the required levels of authority in order to facilitate rational decision-making.
• Scope of Accounting
• The Scope of accounting is divided into following two parts:
• 1. Branches of Accounting
• 2. Accounting as a science or an art
• Branches of Accounting
• The main objectives of accounting are to record the business transactions
and to provide the necessary information to the internal and external users
of the financial statements. In order to achieve the above objectives, the
accounting is classified into followings branches:
• 1. Financial Accounting: It is the original form of accounting. It refers to
the recording of daily business financial transaction. Recording of the
transaction is done in such a way that the profit of the business may be
ascertained after a definite period and the picture of the financial position of
the business may be presented.
• 2. Cost Accounting: As the name indicates, this accounting is related with
the ascertainment of cost of the product in a period. Under this system,
record of raw materials used in production, wages and labour paid and
other expenses incurred on production are kept to control the costs.
• 3. Management Accounting: The accounting which provides the
necessary information to the management is called management
accounting. Under this, the analysis and interpretation of the accounts,
prepared by financial accounting, are done in a manner so that the
managers may forecast, plan for future and frame the policy.
• 4. Tax Accounting: Under tax accounting, the accountants prepare the
accounts as per the provisions of taxation. The accounts prepared as per
taxation provisions may differ from the accounts prepared as per financial
accounting.
• 5. Inflation Accounting: The financial statements are prepared on the
basis of historical cost which do not present the true picture of the financial
position and correct profit or loss of the business due to inflation. Thus the
fresh financial statements are prepared keeping in mind the price level
changes under inflation accounting.
• 6. Human Resource Accounting: Human Resource Accounting means the
accounting for human being as now in an organization human being is
treated as an asset like other physical assets. It is recorded in the books like
other assets. HRA deals with the measurement of costs on recruiting,
selecting, hiring, training, placing and development of the employees in one
side and on the other side it deals with the present economic value of the
employees. For the determination of the value of human being different
methods are used under HRA.
 7. Responsibility Accounting: Responsibility accounting is a special
technique of management under which accountability is established
according to the responsibility delegated to the various levels of
management. Management information and reporting system is instituted to
give adequate feedback in terms of the delegated responsibility. Under this
system, units of an organization, under a specified authority in a person, are
developed as responsibility center and evaluated individually for their
performance.

• Accounting as Science or an Art

• Accounting is both the science and art. Study of science is based on some
principles and it is systemized. It is a science because the business
transactions are recorded on the basis of some principles and journal of
transaction, ledger posting, trial balance and preparation of final statements
are done in a sequence. Art is the creation of practical applications and
rules for the completion of any work. On the basis of it, accounting is an art
as we do not only study principles of accounting but also we learn to apply
these principles in practice to record the business transaction. Thus
accounting is both science and art.
•
• Users of Accounting Information
• There are two types of persons interested in financial statements:
• (1) Internal users, and (2) External users.
• 1. Internal Users: These are: (a) Shareholders, (b) Management, and (c)
Trade unions employees, etc.
• Shareholders are interested to know the welfare of the business. They can
know the operational results through such financial statements and the
financial position of the business.
• Management is interested to take important decisions relating to fixing up
the selling prices and making future policies.
• Trade unions and employees are interested to know the operational results
because their bonus etc. is dependent on the profit earned by the business.
Financial statements also help in their negotiations for wages/salaries.
• 2. External Users: The following are most important external users of
financial statements:
• Investors: They are interested to know the earning capacity of business
which can be known through financial statements. They can also know the
financial soundness of the business through financial statements.
• Creditors, Lenders of Money etc.: The creditors and lenders of money
etc. can also know the financial soundness through financial statement.
They have to see two things (i) Regularity of income and (ii) solvency of the
business so that their investment is risk free.
• Government: Government is interested to formulate laws to regulate
business activities and also law relating to taxation etc. Financial statements
help while computing National Income statistics etc.
• Taxation authorities: Financial statements provide information relating to
operational results as well as financial position of the business. Tax
authorities decide the amount of tax as per financial statement. It is very
useful to other taxation authorities such as sales tax etc.
• Stock Exchanges are meant for dealing in share/securities. Purchase
and sale of such shares and securities are possible through stock
exchanges which provide financial information about each company which
is listed with them.
• Consumer: Consumer is interested in information on the continued
existence of the business and thus probability of the continued supply of the
products, parts and after sale services. They ensure continuous existence
of a business, especially in case of durable products which require after
sales service and spare parts.
• Importance and Advantages of Accounting
• Appropriate and adequate accounting system plays a vital role for the
successful operation of the business. It also helps in the determination of
cost of production, controlling internal as well as external activities of the
business, forecasting of profit, cost and sales, etc. Accounting is also useful
in locating the errors, distribution of dividend and bonus to shareholders.
Thus, accounting is being used as a means to achieve the objective of the
business. The other advantages of the accounting are as follows:
• 1. Replacement of human memory: As the human’s memory is limited
and short, it is difficult to remember all the transactions of the business.
Therefore, all the financial transactions of the business are recorded in the
books. By this way the businessmen cannot only see the records at the
required time but can also remember them for a long time. Thus, recording
of the transactions is the replacement of human’s memory.
• 2. Helpful in the determination of financial results and presentation of
financial position:
• Accounting is very useful in the determination of the profit and loss of a
business and showing the financial position of the business.
• 3. Helpful in assessing the tax liability: Generally, a businessman has to
pay corporate tax, VAT and excise duty, etc. Therefore, it is necessary that
proper accounts should be maintained to compute the tax liability of the
business.
• 4. Helpful in the case of insolvency: Sometimes the businessman
becomes the insolvent. If he has properly maintained the accounts, he will
not face the problems in explaining few things in the court.
• 5. Helpful in the valuation of business: If the business is shut down and
sold, accounting helps the businessman to determine the value of business.
It would be possible only in that case when the accounts of the business are
properly maintained.
• 6. Helpful in the valuation of goodwill and shares: If accounts of the
business are properly maintained, it would be quite convenient to determine
the value of goodwill. Goodwill is very important for the determination of the
value of shares of the company.
• 7. Accounting makes comparative statement possible: Proper and
adequate accounting helps in comparing the income, expenditure,
purchase, sale of the current year with that of the previous years, And then
future plans, policies and forecasting may be possible.
• 8. Rising of funds become easy: It helps in raising funds from investors or
financial institutions by promising investors a fixed claim (interest payments)
on the cash flows generated by the assets, with a limited or no role in the
day-to-day running of the business.
•
• Limitation of Accounting
• 1. Recording of monetary items only: In accounting only those
transactions, which have the monetary value, are recorded. And those
transactions which do not have the financial value whether those are
important in business are not recorded in the accounting. For example,
efficiency of the management, honesty of the workers, etc.
• 2. Effect of inflation: In accounting the transactions are recorded at the
historical cost. Accordingly the assets of the business are shown at cost in
the balance sheet. Thus the balance sheet prepared on the basis of
historical cost ignores the price-level changes (inflation). In this way the
balance sheet of the business does not present the true and fair picture of
the business.
• 3. Conflict between accounting principles: In accounting, one accounting
principle conflicts another. For instance, inventory should be valued on the
basis of ‘least of the cost and market price’ as per the principle of the
conservatism. If in the first year, inventory is valued on the basis of cost
(being lower than market price) and in the second year at the market price
(being lower than cost), this principle conflicts the accounting principle of the
consistency.
• 4. Financial statements are affected by personal judgment of the
accountants: Persona decisions of the accountants regarding the adoption
of accounting policies, affects the results of the financial statements. As a
result the financial statements lose their objectivity.
• 5. Financial statements do not reflect the right picture of the business:
Sometimes the profit and loss account of the business does not show the
accurate profit/loss and the balance sheet does not show the true picture of
the business because the assets shown in the balance sheet are shown at
the realizable (resalable) value which is wrong. Some worthless figures are
also shown in the balance sheet as preliminary expenses, discount on issue
of shares/debentures, etc.
• Methods of Accounting
• Business transactions are recorded in two different ways.
• 1. Single Entry: It is incomplete system of recording business transactions.
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.
• 2. Double Entry: It this system every business transaction is having a
twofold effect of benefits giving and benefit receiving aspects. The recording
is made on the basis of both these aspects. 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.
• 1. Accounting Concepts
• Accounting concepts are basic assumptions or conditions which the
accounting system is based. The important accounting concepts are
Business Entity Concept, Going Concern concept, Dual Aspect Concept,
Cost Concept, Money measurement Concept, Realization Concept, Accrual
Concept and matching Concept.
• Business Entity Concept- Business entity concept states that the business
and business man are two separate entity. Under this, business is treated
as a separate unit distinct from its owner. The transactions between the
proprietor and the business will be recorded separately in the books of
business and shown separately under the heading 'Capital account'.
• Going Concern concept- As per this concept business unit has
a perpetual succession or a continued existence and the transactions are
are recorded from the point of view. The concept says that the business will
continue in operation long enough to charge the cost of fixed assets over
the useful life time against the income from business.
• Dual Aspect Concept- Under this concept each business transaction has
two aspects they are receiving aspects and giving aspects. The receiving
aspect is known as Debit aspect and the giving aspect is known as the
Credit aspect of the business.
• Cost Concept- Cost Concept is based on the Going concern concept.
According to this concept, assets purchased will be entered in the business
book as per the cost price in which they are purchased and this will be the
base for further accounting of assets.
• Money measurement Concept- This concepts states that, the transactions
which will treat only in the terms of money.
• Realization concept- According to this Revenue is recognized only when
the sale is made.
• Matching Concept- This matches the cost along with the revenue.
• 2. Accounting Conventions
• This is method or custom in which the accountants are following for the
preparation of accounting statements. This includes mainly three types of
conventions. They are as follows:-
• Convention of conservatism
• Convention of consistency
• Convention of material Disclosure.
• These all are the accounting concepts and conventions.
• Subsidiary Books
• Most of the big companies are recording the business transactions in one
journal and the posting of the same to the concerned ledger accounts are
very difficult tasks and which require more clerical labour also. For avoiding
such kind of difficulties most of the business organizations are subdividing
the journal in to subsidiary journals or subsidiary books. Subsidiary books
are those books of original entry in which similar nature of transactions are
recording in a chronological order.
• Kinds of Subsidiary Books
• There are different kinds of subsidiary books which includes purchase day
book, Sales day book, purchase returns book, Sales returns book, Bills
receivable books, Bills payable books, Cash book.
• 1. Purchase day book:
• Purchase day book is used for recording credit purchase of goods only. This
will not record any cash purchase or credit purchase of any assets. The
term goods means all the commodities and services in which the company
deals in day to day activities. The preparation of purchase day book
involves the Date column, Particulars column, Invoice number column,
Ledger folio column, inner amount column and Amount column.
• 2. Sales day book:
• Sales day book is mainly used for recording credit sales of goods and
services in an organization. This will not record any cash sales or assets
sales. The ruling for the preparation of this book is same as like Purchase
day book. This involves the Date column, Particulars column, Invoice
number column, Ledger folio column, inner amount column and Amount
column.
� 3. Purchase returns book:
� This is maintained to record the transactions of goods returned to the
supplier when purchase on credit. The ruling of the preparation of purchase
return book or returns outward book involves Date, Particulars, Debit note
number, Ledger folio and amount column.
� 4. Sales returns book:
� This book is used to record the goods returned by the customer the goods
sold on credit. The ruling of the preparation of Sales return book or returns
inward book involves Date, Particulars, credit note number, Ledger folio and
amount column.
� 5. Bills receivable books:
� It is used to record the transactions when the bills received from the
customer for credit sales. This provides a medium for posting bills
receivable transaction. The preparation of this book involves Date when
received, Drawer, Acceptor, Where payable, date of bill, term, due date
ledger folio, Amount, remarks columns.
• 6. Bills payable books:
• This is used to record the acceptances given to the suppliers for credit
purchase. The preparation of bills payable book involves Date of
acceptance, giver, payee, Where payable, date of bill, term, due date,
ledger folio, Amount, remarks columns.
• 7. Cash book:
• The cash book is used to record all the receipts and payments of cash. For
the preparation of cash book there are different rules are available
according to the nature of business. The different forms of cash book are as
follows:-
• a. Simple Cash book – This is the simple form of cash book.
• b. Two column cash book – This type of cash book have two columns like
cash column and discount column.
c. Three column cash book – This involves three columns such as Bank column, cash
column and discount column.
d. Petty cash book - This is used to record petty expenses like postage, cartage, printing
and stationery etc in the day to day business activities.
Advantages of Subsidiary Books:
• 1. Saving of Clerical Labour
• 2. Division of Clerical Work
• 3. Minimizes Frauds
• 4. Facilitates Further Reference

Types of Accounts
• The object of bookkeeping is to keep a complete record of all the transactions that place
in the business. To achieve this object, business transactions have been classified into
three categories:
• 1. Transactions relating to persons.
• 2. Transactions relating to properties and assets
• 3. Transactions relating to incomes and expenses.
• The accounts falling under the first heading are known as ‘personal Accounts’. The
accounts falling under the second heading are known as ‘Real Accounts’, the accounts
falling under the third heading are called ‘Nominal Accounts’. The accounts can also be
classified as personal and impersonal.
1. Personal Accounts
• Accounts recording transactions with a person or group of persons are known as personal
accounts. These accounts are necessary, in particular, to record credit transactions.
Personal accounts are of the following types:
• Natural persons: An account recording transactions with an individual human being is
termed as a natural persons’ personal account. For example, Kamal’s account, Mala’s
account, Sharma’s accounts. Both males and females are included in it
• Artificial or legal persons: An account recording financial transactions with an artificial
person created by law or otherwise is termed as an artificial person, personal account. For
example, Firms’ accounts, limited companies’ accounts, educational institutions’ accounts,
Co-operative society account.
• Groups/Representative personal Accounts: An account indirectly representing a person
or persons is known as representative personal account. When accounts are of a similar
nature and their number is large, it is better tot group them under one head and open a
representative personal account. For example, prepaid insurance, outstanding salaries,
rent, wages, etc. When a person starts a business, he is known as proprietor. This
proprietor is represented by capital account for that entire he invests in business and by
drawings accounts for all that which he withdraws from business. So, capital accounts and
drawings account are also personal accounts.
• The rule for personal accounts is:
• Debit the receiver
• Credit the giver
2. Real Accounts: Accounts relating to properties or assets are known as ‘Real Accounts’, A
separate account is maintained for each asset e.g., Cash Machinery, Building, etc., Real
accounts can be further classified into tangible and intangible.
• 1. Tangible Real Accounts: These accounts represent assets and properties which can
be seen, touched, felt, measured, purchased and sold. For example, Machinery accounts
Cash account, Furniture account, stock account, etc.
• 2. Intangible Real Accounts: These accounts represent assets and properties which
cannot be seen, touched or felt but they can be measured in terms of money. For
example, Goodwill accounts, patents account, Trademarks account, Copyrights account,
etc.
• The rule for Real accounts is:
• Debit what comes in
• Credit what goes out

3. Nominal Accounts: Accounts relating to income, revenue, gain expenses and losses are
termed 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 and gain or income. Wages account, Rent account Commission
account, Interest received account are some examples of nominal account.
• The rule for Nominal accounts is:
• Debit all expenses and losses
• Credit all incomes and gains
Posting in a Ledger
� Now let us try to understand how a journal works. With the help of journal entries,
we book each and every financial transaction of the organization chronically
without considering how many times the same type of entry has been repeated in
that particular accounting year or period.
� Journal entries in any organization may vary from hundreds to millions depending
upon the size and structure of the organization. With the help of a journal, each of
the transactions might be recorded; however, we can conclude nothing from a
journal. Let us consider the following cases. Suppose we want to know:
� the total sale value or purchase value
� the total of any particular income or expenses
� the total of amount payable to any particular creditor or receivable from a debtor
� In such cases, it might be a tedious job for any bookkeeper or accountant. Hence,
the next step is ledger accounts.
� The ledger helps us in summarizing journal entries of same nature at single place.
For example, if we pass 100 times a journal entry for sale, we can create a sales
account only once and post all the sales transaction in that ledger account date-
wise. Hence, an unlimited number of journal entries can be summarized in a few
ledger accounts. Transferring journal entries into a ledger account is called
‘posting’.
TRIAL BALANCE
� Trial balance is a statement containing the various ledger balances on a particular
date. This statement is prepared to check the correctness of ledger posting and
balancing of accounts. If the total of the debit balances is equal to the credit balances.
It is implied that posting and balancing of accounts are correct.
Features of trial balance
� It is prepared on a specific date
� It is not a part of double entry and not an account
� It is a statement of balance of all accounts or totals of ledger accounts
� Total of the debit and credit columns of the trial balance must tally
� If the debit and credit columns are equal it is presumed that accounts are
arithmetically accurate
� Difference in the debit and credit columns indicate that some mistakes have been
committed
� Tallying of trial balance is not a conclusive proof of accuracy of books of accounts;
it serves to prove only the arithmetical accuracy of books
Objectives of trial balance
� The following are the objectives of preparing trial; balance
� To ascertain the arithmetical accuracy of the ledger accounts
� To help in locating errors
� To help in the preparation of final accounts
Dr.M.SELVAKUMAR
Assistant Professor
Kalasalingam Business School (KBS)
KALASALINGAM ACADEMY OF RESEARCH AND EDUCATION
Anand Nagar, Krishnankoil-626126,
Tamil Nadu,India.

Topic:
ACCOUNTING CONCEPT
INTRODUCTION
Accounting is a business language which elucidates the various kinds of
transactions during the given period of time. Accounting is broadly classified into
three different functions viz.
❖ Recording
❖ Classifying and
❖ Summarizing

Define – the accounting for the managerial decisions

It refers to accounting for the management. It provides necessary information to
assist the management in the creation of policy and day to day operations. It
enables the management to discharge all its functions, planning, organizing,
staffing, directing, and control efficiently with the help of accounting information.
R.n. Anthony
• Management accounting is the presentation of accounting information in
such a way as to assist management in the creation of policy and in the
day to day operation of and undertaking.
CIMA-London
The above mentioned definition shows the following aspects of
accounting.
• Accounting involves both art and science.
• This includes recording, classifying and summarizing of business
transactions.
• This records the transactions in terms of money.
• It records the financial things and events only.
• Accounting is the process of interpreting the results of financial
operations.
• This communicates the results of analysis and interpretation to the
management or to the concerned party.

Briefly explain the objectives of the accounting for the managerial

decisions
• To assist the management in promoting efficiency includes best
possible services to the customers investors employees.
• To prepare budgets covering all functions of a business like production
sales, research,
• To analyze monetary and non monetary transactions
• To compare the actual performance with the plan for identifying
deviations and their causes
• To interpret financial statements to enable the management to
formulate the functional policies
• To submit to the management at frequent interval operating
statements and short term financial statements
• To arrange for the systematic allocation of responsibilities for the
implementation of plants and budgets
• To provide a suitable organization for discharging the
responsibilities.
• In short the objectives of management accounting are to help the
management in making decisions and implementing them
efficiently.
Accounting as Science or an Art
Accounting is both the science and art. Study of science is based on
some principles and it is systemized. It is a science because the
business transactions are recorded on the basis of some principles and
journal of transaction, ledger posting, trial balance and preparation of
final statements are done in a sequence. Art is the creation of practical
applications and rules for the completion of any work. On the basis of it,
Thus accounting is both science and art.

Methods of Accounting
Business transactions are recorded in two different ways.
• 1. Single Entry: It is incomplete system of recording business
transactions. 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.

• 2. Double Entry: It this system every business transaction is having a

twofold effect of benefits giving and benefit receiving aspects. The
recording is made on the basis of both these aspects. 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.
Dr.M.SELVAKUMAR
Assistant Professor
Kalasalingam Business School (KBS)
KALASALINGAM ACADEMY OF RESEARCH
AND EDUCATION
Anand Nagar, Krishnankoil-626126,
Tamil Nadu,India.

Topic:
USERS OF ACCOUNTING INFORMATION
USERS OF ACCOUNTING INFORMATION
There are two types of persons interested in financial statements:
(1) Internal users, and (2) External users.
• 1. Internal Users: These are: (a) Shareholders, (b) Management, and (c)
Trade unions employees, etc.
• Shareholders are interested to know the welfare of the business. They can
know the operational results through such financial statements and the
financial position of the business.
• Management is interested to take important decisions relating to fixing up the
selling prices and making future policies.
• Trade unions and employees are interested to know the operational results
because their bonus etc. is dependent on the profit earned by the business.
Financial statements also help in their negotiations for wages/salaries.

• 2. External Users: The following are most important external users of

financial statements:
• Investors: They are interested to know the earning capacity of business
which can be known through financial statements. They can also know the
financial soundness of the business through financial statements.
• Creditors, Lenders of Money etc.: The creditors and lenders of money
etc. can also know the financial soundness through financial statement.
They have to see two things (i) Regularity of income and (ii) solvency of the
business so that their investment is risk free.
• Government: Government is interested to formulate laws to regulate
business activities and also law relating to taxation etc. Financial statements
help while computing National Income statistics etc.
• Taxation authorities: Financial statements provide information relating to
operational results as well as financial position of the business. Tax
authorities decide the amount of tax as per financial statement. It is very
useful to other taxation authorities such as sales tax etc.
• Stock Exchanges are meant for dealing in share/securities. Purchase
and sale of such shares and securities are possible through stock
exchanges which provide financial information about each company which
is listed with them.
• Consumer: Consumer is interested in information on the continued
existence of the business and thus probability of the continued supply of the
products, parts and after sale services. They ensure continuous existence
of a business, especially in case of durable products which require after
sales service and spare parts
IMPORTANCE AND ADVANTAGES OF ACCOUNTING
Appropriate and adequate accounting system plays a vital role for the
successful operation of the business. It also helps in the
determination of cost of production, controlling internal as well as
external activities of the business, forecasting of profit, cost and sales,
etc.
1. Replacement of human memory
2. Helpful in the determination of financial results and
presentation of financial position
3. Helpful in assessing the tax liability
4. Helpful in the case of insolvency
5. Helpful in the valuation of business
6. Helpful in the valuation of goodwill and shares
7. Accounting makes comparative statement possible
8. Rising of funds become easy
LIMITATION OF ACCOUNTING
1. Recording of monetary items only
2. Effect of inflation
3. Conflict between accounting principles
4. Financial statements are affected by personal judgment of
the accountants:
5. Financial statements do not reflect the right picture of the
business
Dr.M.SELVAKUMAR
Assistant Professor
Kalasalingam Business School (KBS)
KALASALINGAM ACADEMY OF RESEARCH
AND EDUCATION
Anand Nagar, Krishnankoil-626126,
Tamil Nadu,India.

Topic:
TYPES OF ACCOUNTS, JOURNAL, LEDGER &
TRAIL BALANCE
Types of Accounts
The object of bookkeeping is to keep a complete record of all the
transactions that place in the business. To achieve this object, business
transactions have been classified into three categories:
1. Transactions relating to persons.
2. Transactions relating to properties and assets
3. Transactions relating to incomes and expenses.
• The accounts falling under the first heading are known as ‘personal
Accounts’. The accounts falling under the second heading are known as
‘Real Accounts’, the accounts falling under the third heading are called
‘Nominal Accounts’. The accounts can also be classified as personal and
impersonal.
• 1. Personal Accounts
• Accounts recording transactions with a person or group of persons are
known as personal accounts. These accounts are necessary, in particular,
to record credit transactions.
• The rule for personal accounts is:
• Debit the receiver
• Credit the giver
• 2. Real Accounts
• Accounts relating to properties or assets are known as ‘Real Accounts’, A
separate account is maintained for each asset e.g., Cash Machinery,
Building, etc., Real accounts can be further classified into tangible and
intangible.
• The rule for Real accounts is:
• Debit what comes in
• Credit what goes out
• 3. Nominal Accounts
• Accounts relating to income, revenue, gain expenses and losses are termed
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 and gain or income. Wages
account, Rent account Commission account, Interest received account are
some examples of nominal account.
• The rule for Nominal accounts is:
• Debit all expenses and losses
• Credit all incomes and gains
Journal
• “The process of recording a transaction in a journal is called
journalizing the transactions.”
• --Meigs and Meigs and Johnson
• Journal is a book that is maintained on a daily basis for recording all
the financial entries of the day. Passing the entries is called journal
entry. Journal entries are passed according to rules of debit and
credit of double entry system.

Debit Credit
Date Particulars L.F.
(Rs.) (Rs.)

1 2 3 4 5

Xxxx ******************A/c Dr. xx xxxx

Xxxx
To ************A/c xx
(Narration******************)
Posting in a Ledger
• Now let us try to understand how a journal works. With the help of
journal entries, we book each and every financial transaction of the
organization chronically without considering how many times the same
type of entry has been repeated in that particular accounting year or
period.

In the books of M/s. ABC Company

Ledger account of M/s XYZ LTD.
Dr Cr

Date F.N Rs. Date Particulars F.N Rs.

xx
To Balance b/d x By balance b/d xxx
To Name of the debit account xxxx By Name of Credit
account
xxx

To Balance c/d By Balance c/d

Total Rs. Total Rs.
xxx
TRIAL BALANCE
Trial balance is a statement containing the various ledger
balances on a particular date. This statement is prepared to
check the correctness of ledger posting and balancing of
accounts. If the total of the debit balances is equal to the
credit balances. It is implied that posting and balancing of
accounts are correct
 TRIAL BALANCE

S.No. Ledger Accounts L.F. Debit (Rs) Credit (Rs)

1 Advance from customers XX

2 Advance to stff XX
3 Audit fees XX
4 Balance at bank XX
5 Bank borrowings XX
6 Bank interest paid XX
7 Capital XX
8 Cash in hand XX
9 Commission on sale XX
10 Electricity expenses XX
11 Fixed assets XX
12 Freight outward XX
13 Interest received XX
14 Inward freight charges XX
15 Office expenses XX
16 Outstanding rent XX
17 Prepaid insurance XX
18 Purchases XX
19 Rent XX
20 Repair and renewals XX
21 Salary XX
22 Salary payable XX
23 Sale XX
24 Staff welfare expenses XX
25 Stock XX
26 Sundry creditors XX
27 Sundry debtors XX
TOTAL XXXXX XXXXX