Accounting for Managers BBA First Year

Accounting for Managers

Introduction to Accounting

• Accounting is often called the language of business, serving as a means of communication between various stakeholders.
• Accounting is required to account for money and other economic resources in all organizations.

Meaning and Definition of Book-Keeping

• Book-keeping is the science and art of recording business transactions in a systematic manner.
• It includes recording of journal, posting in ledgers, and balancing of accounts.
• Objectives of book-keeping:
• Provides a permanent record of each transaction.
• Enables the assessment of a firm's soundness.
• Facilitates the preparation of a list of customers and suppliers.

Accounting

• Accounting is the process of identifying, measuring, and communicating economic information to users.
• It involves recording, classifying, and summarizing transactions and events in a significant manner.
• Objectives of accounting:
• To keep systematic records.
• To ascertain the results of operations.
• To ascertain the financial position of the business.
• To portray the liquidity position.
• To facilitate rational decision-making.
• To satisfy the requirements of law.

Importance of Accounting

• Importance of accounting to:
• Owners: To know the returns on investment.
• Management: To study the merits and demerits of business activities.
• Creditors: To know the financial soundness of the firm.
• Employees: To know the profitability of the firm.
• Investors: To know the safety of investment.
• Government: To know the earnings for taxation.
• Consumers: To know the cost of production.
• Research Scholars: To study the financial operations of a firm.

Functions of Accounting

• Record keeping function: To record, classify, and summarize financial transactions.
• Managerial function: To facilitate decision-making.
• Legal requirement function: To comply with legal requirements.
• Language of business: To communicate financial information to stakeholders.

Advantages of Accounting

• Advantages of accounting to a business:
• Complete record of business transactions.
• Information about profit or loss.
• Comparative study of current year's profit, sales, expenses, etc.
• Useful in judging the management's ability.
• Supplies information useful in predicting, comparing, and evaluating the enterprise's earning power.
• Helps in complying with legal formalities.

Limitations of Accounting

• Limitations of accounting:
• Historical in nature.
• Transactions of non-monetary nature are not recorded.
• Influenced by accounting conventions and personal judgments.
• Alternative accounting procedures are often equally acceptable.
• Cost concept is found in accounting.
• Does not show the impact of inflation.
• Does not reflect those increase in net asset values that are not considered realized.

Methods of Accounting

• Single entry method: An incomplete system of recording business transactions.
• Double entry method: A system that records the effects of transactions and other events in at least two accounts with equal debits and credits.### Accounting Principles

1.4 Aims and Objectives

• Understand the meaning and definition of Accounting
• Study the basic accounting principles
• Know the bases of accounting
• Understand the accounting terminology and equation

Introduction to Accounting Principles

• Accounting principles refer to certain rules, procedures, and conventions that represent a consensus view by those indulging in good accounting practices and procedures
• The American Institute of Certified Public Accountants (AICPA) defines accounting principles as "general laws or rules adopted or professed as a guide to action"
• The Canadian Institute of Chartered Accountants defines accounting principles as "the body of doctrines commonly associated with the theory and procedure of accounting"

Accounting Concepts and Conventions

2.2.1 Accounting Concepts

• Accounting concepts are basic assumptions or conditions upon which the accounting superstructure is based
• The following are common accounting concepts adopted by many business concerns:
  • Business Entity Concept
  • Money Measurement Concept
  • Going Concern Concept
  • Dual Aspect Concept
  • Periodicity Concept
  • Historical Cost Concept
  • Matching Concept
  • Realisation Concept
  • Accrual Concept
  • Objective Evidence Concept

Business Entity Concept

• A business unit is an organization of persons established to accomplish an economic goal
• The business entity concept implies that the business unit is separate and distinct from the persons who provide the required capital to it
• The accounting equation, Assets = Liabilities + Capital, represents this concept

Money Measurement Concept

• In accounting, all events and transactions are recorded in terms of money
• Money is considered a common denominator, by means of which various facts, events, and transactions about a business can be expressed in terms of numbers
• This concept does not take into account the effects of inflation, as it assumes a stable value for measuring

Going Concern Concept

• Under this concept, transactions are recorded assuming that the business will exist for a longer period of time
• The business unit is considered to be a going concern, not a liquidated one
• This concept supports the valuation of assets at historical cost or replacement cost
• It also supports the treatment of prepaid expenses as assets, although they may be practically unsaleable

Dual Aspect Concept

• According to this concept, every transaction has a two-fold aspect, i.e., giving certain benefits and receiving certain benefits

• The basic principle of the double entry system is that every debit has a corresponding and equal amount of credit

• The accounting equation, Assets = Capital + Liabilities, or Capital = Assets – Liabilities, represents this concept### Accounting Concepts and Conventions

• There are eight concepts in accounting: Going Concern, Monetary, Historical Cost, Accounting Entity, Dual Aspect, Periodicity, Accrual, and Matching.

• Going Concern concept assumes that the business will continue to operate in the future.

• Monetary concept assumes that only transactions that can be expressed in money terms are recorded in the accounts.

• Historical Cost concept records transactions at the cost at which they were acquired.

• Accounting Entity concept separates the business from its owners.

• Dual Aspect concept states that every transaction has two aspects: debit and credit.

• Periodicity concept divides the business into different periods to measure income and expenses.

• Accrual concept recognizes revenue and expenses when earned, not when cash is received or paid.

• Matching concept matches revenues with the expenses incurred to earn them.

Accounting Conventions

• There are three conventions: Consistency, Disclosure, and Conservatism.
• Consistency convention ensures that accounting rules are consistently applied from one year to another.
• Disclosure convention ensures that all material facts are disclosed in the financial statements.
• Conservatism convention recognizes losses and expenses as soon as possible, but delays the recognition of gains.

Bases of Accounting

• There are three bases of accounting: Cash, Accrual, and Hybrid.
• Cash basis records transactions when cash is received or paid.
• Accrual basis records transactions when earned, regardless of cash receipt or payment.
• Hybrid basis combines elements of cash and accrual basis.

Accounting Terminology

• Transaction: an event that affects the financial position of the business.
• Debtor: a person who owes money to the firm.
• Creditor: a person to whom the firm owes money.
• Capital: the amount invested by the proprietor in the business.
• Liability: a debt or obligation that the firm owes to outsiders.
• Asset: a physical thing or right owned by the business that has a money value.
• Goods: articles in which the business deals.
• Revenue: income earned by the business.
• Expense: a cost incurred in the process of earning revenue.
• Expenditure: a cost incurred in acquiring an asset or service.
• Purchases: buying of goods by the trader for selling them to customers.
• Sales: selling of goods to customers.
• Stock: goods purchased but not yet sold.
• Drawings: goods or money taken by the proprietor for personal use.
• Losses: expenses or outflows that do not result in any benefit.
• Account: a statement of the various dealings between a customer and the firm.
• Invoice: a statement showing the particulars of a sale.
• Voucher: a written document in support of a transaction.
• Proprietor: the person who makes the investment and bears all the risks connected with the business.
• Discount: a deduction in the price of goods allowed to customers.
• Solvent: a person who has assets that exceed liabilities.
• Insolvent: a person whose liabilities exceed assets.

Accounting Equation

• Assets = Equities
• Assets = Liabilities + Capital
• Capital = Assets - Liabilities
• Liabilities = Assets - Capital

Rules of Accounting

• Assets: increase is debited, decrease is credited.
• Liabilities: increase is credited, decrease is debited.
• Capital: increase is credited, decrease is debited.
• Expenses: decrease in owner's equity.
• Income or profits: increase in owner's equity.