 Basics of Business Accounting

MANAGERIAL
ACCOUNTING
       Meaning:  Accounting  has  rightly  been 
termed as the language of the business.
         The  basic  function  of  a  language  is  to 
serve  as  means  of  communication  accounting 
also serves this function. 
       It  communicates  the  result  of  business 
operations  to  various  parties  who  have  some 
stake  in  the  business  namely  the  proprietor, 
creditors,  investors,  Government  and  other 
agencies.
      Though accounting is generally associated with business 
but it is not only business which makes use of accounting. 
      Persons like housewives, Government and other 
individuals also make use of accounting.
      For example, a housewife has to keep a record of the 
money received and spent by her during a particular period. 
      She can record here receipts of money on one page of 
her household diary, while payments for different items such 
as milk, food, clothing, house, education etc, on some other 
page or pages of her diary in a chronological order. 
      Definition: “Accounting is the 
art of recording, classifying and 
summarizing in 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”.
Accounting:
The Language of Business
 Many words have similar, but not same,
meaning as in common English.
 Similar to English, some rules are definite
others are not.
 Rules continue to evolve.
 XBRL (extensible business reporting
language): a digital business language.
Functions of Accounting

  Recording: This is the basic function of

accounting. It is essentially concerned with not only
ensuring that all business transactions of financial
character are in fact recorded but also that they are
recorded in an orderly manner.
  Classifying: Classification is concerned with
the systematic analysis of the recorded data, with a
view to group transactions or entries of one nature
at one place. The work of classification is done in
the book termed as ‘Ledger’.
  Summarizing: This involves presenting the
classified data in a manner, which is
understandable and useful to the internal as
well as external end-users of accounting
statements. This leads to the preparation of the
following statements: i. Trial Balance; ii. Income
statement; ii. Balance sheet.
      Dealing with financial transactions:
Accounting records only those transactions and
events in terms of money, which are of a
financial character.
  Analyzing and interpreting: The
recorded financial data is analyzed and
interpreted in a manner that the end users
can make a meaningful judgement about
the financial condition and profitability of
business operations.
   Communicating: The accounting
information has to be Communicated to the
external world
Scope of Accounting

  Systematic Records: Accounting is

done to keep a systematic record of financial
transactions. In the absence of accounting
there would have been terrific burden on
human memory which is most cases would
have been impossible to bear.
  Ascertain Profit/Loss: Accounting helps
in ascertaining the net profit earned or loss
suffered on account of carrying the
business.
 1. Ascertain the financial position of business:
The profit and loss account gives the amount of
profit or loss made by the business during a
particular period.
 2. Protect the business properties: Accounting
provides protection to business properties from
unjustified and unwarranted use.
 Facilitate rational decision making: Accounting
these days 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
Basic Concepts
1. Money measurement.
2. Entity.
3. Going concern.
4. Cost.
5. Dual aspect.
6. Accounting period.
7. Conservatism.
8. Realization.
9. Matching.
10. Consistency.
11. Materiality.
 ACCOUNTING CONCEPTS
  Separate Entity Concept: In accounting business
is considered to have a separate legal existence from
that of proprietor(s).
  Going Concern Concept: According to this
concept life of the business is likely to continue for a
fairly long period of time.
  Money Measurement Concept: This concept
states that the accounting records only monetary aspects
of a transaction. Non-monetary aspects like love,
affection, and gratitude to employees do not have a
place in accounting.
 Cost Concept: cost of acquisition of asset is recorded in
accounting records and this cost is the basis for all
subsequent transactions
  Dual Aspect Concept: Each transaction
has two aspects namely debit and credit.
Suppose if a business is commenced with
Rs.10,00,000, it means that the capital is
Rs.10,00,000 and cash is also Rs.10,00,000.
  Accounting Period Concept: According
to this concept, the life of the business is
divided into appropriate segments for studying
the results shown by the business after each
segment.
  Periodic Matching of Revenue and Cost
Concept: The term matching means appropriate
association of related revenues and expenses. In
order to ascertain profit/loss, the revenues and
expenditure should be known during a particular
period of time.
  Realization Concept: According to this concept
revenue is recognized when a sale is made. Sale is
considered to be made at the point when the property
in goods passes to the buyer and he becomes legally
liable to pay.
 ACCOUNTING

CONVENTIONS
 Conservatism: In the initial stages of
accounting, certain anticipated profits, which were
recorded, did not materialize.
  Full disclosure: According to this convention,
accounting reports should disclose fully and fairly
the information which is of material interest to
proprietors, present and potential creditors and
investors.
  Consistency: According to this convention
accounting practices should remain unchanged from
one period to another.
 Materiality: According to this convention the
accountant should attach importance to the material
details and ignore insignificant details.
 Journal
  The meaning of journal is recording
transactions on a daily basis.
  It is very difficult to remember the various
transactions unless some records are kept.
  Say for example a student is asked to furnish
the details of his expenditure out of pocket money,
for a week somehow he may give the account.
Imagine if he is asked to furnish for 6 months or
one year what may be his position? When this is
the position for an individual what may be the
position to an organization where the transactions
are varied and multitudinous.
  Obviously there is a need for maintaining
records pertaining to the day’s transactions.
Points to be noted while
passing Journal Entries
1. The  business  and  proprietor    (i.e.,  owner) 
of the business must be considered as two 
distinct  (i.e.,  separate)  entities    (i.e., 
parties).
2. While writing the name of real account or a 
nominal account, we have to add the word 
‘Account’  after  the  name  of  the  asset  or 
expenses or income.
3. After  passing  all  the  journal  entries,  the 
two amount columns of the journal should 
be totaled.
4.Whenever the proprietor of a business brings in
cash or any other thing in to the business, an
account called ‘Capital Account’ should be
opened in the name of the proprietor
5.Whenever the proprietor invests in the
business the sale proceeds of his private
assets, or recorded in the books of the
business as additional capital introduced by the
proprietor.
6.Whenever the proprietor commences business
with loan borrowed from his wife, children or
friend, the two accounts that are required to be
taken in to the account
7.Whenever the proprietor of a business 
withdraws cash goods or any other thing 
from business for his personal or 
domestic use, an account called the 
‘Drawings Account’ should be opened .
8. Whenever the personal expenses of the 
proprietor, are paid by the firm, those 
transactions should be recorded in the 
books of the business.
9. It is preferable to split the goods account in to
(a) Purchase account, (b) Sales Account (c) 
Purchase Returns/return outwards, (d) 
Sales return/ returns inwards, (e) opening 
stock account and  (f) closing stock 
account.
10.Generally,  purchases  account,  sales 
account,  purchase  returns  account  and 
sales  returns  account  are  treated  as  real 
accounts,  and  the  rules  applicable  to  real 
accounts,  are  applied  to  these  accounts, 
while journalizing the transactions.
11.If the name of supplier is mentioned, the 
purchase should be considered as credit 
purchase.
12. Whenever goods are purchased from a party 
for cash, the two accounts involved in that 
transaction are (1) purchases account and (2) 
cash account 
13. Whenever goods are purchased from party 
on credit, the two accounts involved in the 
transaction are (1) purchases account and (2) 
the supplier’s (i.e., seller’s) account 
14.Whenever some investments or securities, 
say, shares or debentures are sold  the two 
accounts involved are (1) Cash account (2) 
investments account (and not sales account 
15. Cash discount allowed by the business to 
its debtor at the time of receipt of money 
from the debtor , for his prompt payment 
16. Trade discount should not be separately 
recorded at all either in the books of the 
seller or in the books of the buyers. 
 Ledger
  After journalizing the various transactions of a
business concern the entries are to be posted into
separate set of accounts termed as ledger.
  As said earlier each transaction has two aspects.
Ledger accounts are to be kept for each individual
accounts.
  This ledger account is maintained in T form. On
the other hand it is divided into two parts namely the
debit side and credit side respectively.
 The left hand side is debit side and the right hand side
is credit side. The following is the format of a ledger
account
Trial Balance
  A Trial Balance is a statement
containing ledger balances of the accounts.
  It gives the arithmetic accuracy of the
books of accounts.
  It is the statement through which final
accounts like manufacturing account,
Trading Account, Profit and Loss Account
and a statement termed as a Balance Sheet
are prepared to know the financial position
as on a particular date.
 Illustration
Journalise the following transactions, post the same 
in relevant ledger accounts and balance the same.
2006
June 1. Anurag commenced business with Rs.20000
2. Paid into bank Rs.5000
3. Purchased Plant worth Rs.10000 from Modi&Co
4. Purchased goods worth Rs. 5000 from Anwar
6. Goods worth Rs.4000 sold to Abhishek
8Sold Goods worth Rs.2000 for cash
10 Goods returned by Abhishek Rs.50
15 Paid rent Rs.250
June 18. Withdrawn from bank for office use 
Rs.2,500
20 Paid Salaries Rs.1800
25Withdrawn for personal use Rs. 250
26 Goods returned to Anwar Rs.100
27 Paid for office furniture Rs.1,500 by cheque
28 Received Rs.3,900 cash from Abhishek and 
discount allowed Rs.50
29 Paid Anwar Rs.4800 and discount allowed 
by him Rs.100
 Table Showing the Treatment of various adjustments in Final Accounts

Adjustment Trading P&L A/C Treatment in Balance Sheet

Closing Stock Credit side of  Assets side of the Balance Sheet
Trading A/c
Added to the 
O/S Expenses To be shown under Liabilities 
concerned 
expenditure  side of the Balance Sheet
Deducted from 
Prepaid Exps concerned  Assets side of the Balance Sheet
expenditure 
Added to the  Assets side of the Balance Sheet
respective incomes 
O/S Incomes Deducted from the 
concerned incomes  Liabilities side of the Balance 
Sheet
Income recd. in Adv
Dr side of P&L 
Account Deducted from S.Drs in B/S
Bad Debts
Dr side of P&L 
Account Deducted from S.Drs in B/S
Prov. For B/D
Dr side of P&L 
Provision for  Account
discount on drs Deducted from S.Drs in B/S
 Contd.,
Adjustment Trading P&L A/C Balance Sheet
Deducted from S.Crs on the 
Res. For Discount on  Cr. Side of the P&L  liabilities side of the 
Crs A/C Balance Sheet
Depreciation Debit side of P&L  Deducted from concerned 
A/c Asset
Appreciation Credit side of P&L  Added to Concerned Asset
A/c
Added to the Capital A/c on 
Dr. side of the Profit  the Liabilities side of the 
Interest on Capital Balance Sheet
and Loss A/c

Credit side of the  Deducted from capital on 
Interest on Drawings P&L A/c the Liabilities side of the 
Balance Sheet
Accounting Standards
9, 10, 17 and 20
 AS 9
 The Object of issuing AS9 is to provide a
basis for recognition of revenue in the books
of accounts.
 Applicability:

Sale of Goods, Rendering of services; and use

of enterprise resources yielding interest,
royalties and dividends.
Not applicable: Revenue from construction
contracts, Revenue from hire purchase, lease
agreements, Revenue from government
grants, Revenue of insurance companies.
 AS 10
 To provide guidelines for the valuation and
disclosure of certain information relating to
fixed assets owned by an enterprise, in the
books of accounts.
 Fixed assets should be shown in the balance
sheet either at their historical cost or at their
revalued figures.
 Cost consists of : Purchase price, duties and
non refundable taxes, and al the other
attributable costs for bringing the asset to
working condition, for its intended use.
 AS 17

 To establish principles for reporting financial 
information about the different types of 
products and services an enterprise produces 
and the different geographical areas in which 
it operates. Such information helps the users 
of financial statements in a better 
understanding the performance of the 
enterprise;
 Better assessing the risks and returns of the 
enterprise;
 Making more informed judgements abhout the 
enterprise as a whole.
 AS 20
 To prescribe the principles for the determination and
presentation of the earnings per share, which will
facilitate a comparison of performance among
different enterprises for the same period and among
different accounting periods for the same enterprise.
 The focus of this statement is on the denominator in
the earnings per share calculation.
 AS 20 requires an enterprise to clearly present the
basic and diluted earnings per share for all the
reported accounting periods, even if the amounts
disclosed are negative ( a loss per share)