ACCOUNTING FOR

MANAGEMENT
 Meaning , Definition and needs of accounting business
decisions : Forms of accounting and users of accounting
information - Framework of accounting postulates -
principles - conventions -concepts -procedures methods
etc. accounting equations and types of accounts -rule of
recording business transactions.
INTRODUCTION
 Modern accounting is often called the ‘language of
business’. The basic function of language is to serve as a
means of communication. Accounting serves this
function by communicating the results of the business
operations to various parties who are interested in it.
 Modern system of accounting owes its origin to Luca
Pacioli, an Italian who first published his book on
Double Entry System of Accounting in 1494.
 DEFINITION

 According to American Institute of Certified Public

Accountants, “Accounting is the art of recording,
classifying and summarizing in a significant manner and
in terms of money, transactions and events which are, at
least of a financial character and interpreting the results
thereof”.
ACCOUNTING PROCESS
Identifying the business transactions

Recording the business transactions

Classifying the business transactions

Summarizing the business transactions

Interpreting the business transactions

FUNCTIONS OF ACCOUNTING
 Recording- it is the basic function of accounting. The
accounting cycle starts from the recording of business
transactions in books of original entry, i.e, Journal,
where the transactions of financial nature are recorded in
an orderly manner.
 Classifying- it is the second stage of the accounting
cycle. It is concerned with the systematic analysis of
business transactions of similar nature at one place, done
in a book called Ledger.
 Summarizing- the next stage is to present the data in a
manner which is useful to internal and external users of
accounting information. This preparation is done by
preparing trial balance and final accounts with a view to
ascertain profit or loss made during a particular
accounting period.
 Analysis and interpretation- the financial data recorded
is analyzed and interpreted in such a manner that the end
users can make a meaningful judgement about the
financial condition of the business.
 Communication- After having meaningfully analyzed
and interpreted, the accounting information has to be
communicated in a proper form to the proper person.
The information is passed in the form of ratios, graphs,
diagrams, income statements and balance sheets.
BRANCHES OF ACCOUNTING

Accounting

Management
Financial accounting Cost accounting
Accounting
FINANCIAL ACCOUNTING
 The main objective of this form of accounting is to
ascertain the financial position of a business on a
particular date and to provide the users with accounting
information like shareholders, creditors, bankers,
financial institutions etc. The objective is achieved by
the preparation of financial statements, i,e, trading and
profit and loss account and balance sheet.
 Cost accounting- the main aim of cost accounting is to
ascertain the cost per unit of a product or process and to
control the cost. The cost accountant is required to assemble
and interpret cost data for the use of management in
controlling current operations and in planning the future.
MANAGEMENT ACCOUNTING
 Its main objective is to provide necessary information for
the management for discharging its functions. It assists
the management in discharging its various functions such
as planning, control, evaluation of performance and
decision making.
OBJECTIVES OF ACCOUNTING
 Maintenance of records of business
 Calculation of profit or loss.

 Depiction of financial position

 Making information available to various groups.

USERS OF ACCOUNTING INFORMATION

Business
Researcher
s

Governmen
Owners
t

Investor
Employees
s

manageme
Creditors
nt
USERS OF ACCOUNTING INFORMATION
 Owners- are those who own the business. They are
interested to know their share of profit, the long term
solvency of the concern, etc. such details can be gathered
from the published accounts.
 Management- Management may consists of board of
directors, middle management and dept. heads or
supervisors, who are entrusted with the task of policy
formulation, policy implementation and overall
supervision, respectively. Accounting provides necessary
information base for taking all managerial decisions.
 Potential investors- they need accounting information to
judge the profitability or solvency of the concern in which
they are intend to invest their savings. They can ascertain
these by analyzing the financial statements of the concern.
 Creditors, bankers etc- they lend money or materials to
business firms. Naturally they will be interested to know
whether the concern has sufficient solvency and liquidity,
so that their claims can be settled in time. They can
discover these facts by analysing the financial statements.
 Employees- they are interested in the earning capacity of
the firm. They make use of the accounting information
available from the financial statements to support their
claims,working conditions etc
 Government- for collecting income tax, sales tax, excise
duty etc., from business concerns, respective authorities
under the government look into the accounts and other
statements. Such documents are helpful to the
government to frame economic policies.
 Researchers- Research scholars extensively count on
information gathered from financial statements of
business concerns for their research study.
BASIC TERMS
 Assets- Cash or any valuables owned by the business that
can be converted into cash or anything beneficial to the
future operations of business can be termed as asset.
 Eg. Land, building, furniture, stock, cash in hand, cash at
bank etc
 Assets can be grouped into the following categories;
 Fixed assets
 Current assets
 Fixed assets- assets which are acquired and employed by
business concerns for comparatively longer periods of
time are called fixed assets. They are used to maintain
the revenue earning capacity of the business and not
meant for resale. Eg. Land, building, machinery furniture
etc
 Current assets- assets which are held for a short period
are known as current assets. Such assets are expected to
be realized in cash or consumed during the normal
operating cycle of the business.
 Liabilities- are the obligations or debts payable by the
enterprise in future in the form of money or goods. It
denote the amount which a business owes to others. they
can be grouped under
 Short term liabilities
 Long term liabilities
 Short term liabilities- these are the liabilities which become due
and payable with in a period of one year. They are generally
paid out of current assets. Eg. Creditors, B/P, outstanding
expenses etc.
 Long term liabilities- this type of liabilities need not be
discharged or paid off with in a period of twelve months. Eg,
long term loans from financial institutions, debentures etc.
 Capital- investment made by the owners in the business.
 Revenues- these are the amounts earned by the business
concern by selling its products or providing services to
customers.
 Expenses- the amount earned in the process of earning
revenue is termed as expense. Wages, salaries, rent, interest
etc. expenses can be classified into;
 Capital
expenditure
 Revenue expenditure
 Capital expenditure- an expenditure incurred to derive
long term advantage is a capital expenditure. It is the
amount spent for acquisition of an asset or for increasing
the earning capacity of a business. Amount spent for the
acquisition of fixed assets like land, building, machinery
etc are the examples of capital expenditure
 Revenue expenditure- if the benefits of an item of
expenditure lasts for a period of twelve months, then it
can be referred to as an item of revenue expenditure.
Such expenditure is incurred to maintain the revenue
earning capacity of the business.
 Purchases- the total amount of goods procured by a business
concern for cash or credit for the purpose of sale or use is
known as ‘purchases’. Goods bought by the owner for his
personal use cannot be taken as purchases as it is not meant for
resale or processing into finished goods
 Sales- it is the income earned from the sale of goods or services
rendered. Sales may be cash or credit sales. The amount
received from the sale of fixed assets is not treated as sales
 Stock- The goods available with the business for sale on a
particular date is termed as stock. It varies with every
transaction of purchase or sale. The value of goods remaining
unsold at the end of an accounting period is termed as closing
stock. The closing stock of a particular year becomes the
opening stock of the next year.
 Debtors- debtors are the persons and other entities who
owe money to the business for receiving goods and
services on credit. Debtors are also referred to as
accounts receivable. the item is an asset to the business
 Creditors- creditors are persons or other entities who
have claim for money against the business for any goods
supplied or services rendered them on credit. The item is
a liability to the business
 Drawings- withdrawal of goods or cash from the
business by the owner for personal use is called
drawings.
ACCOUNTING PRINCIPLES
 The transactions of the business enterprise are recorded in
the business language, which routed through accounting.
The entire accounting system is governed by the practice of
accountancy. The accountancy is being practiced through
the universal principles which are wholly led by the
concepts and conventions.
 Accounting Principles may be designed as those rules of
action adopted by the accountants universally while
recording accounting transaction.
CLASSIFICATION OF ACCOUNTING
PRINCIPLES
 Accounting principles can be classified into two
categories-
 Accounting concepts
 Accounting conventions

The term accounting concept refers to certain assumptions or

conditions upon which the science of accounting is based.
The conventions connote customs, traditions or practices as a
guide to the preparation of accounting statements.
Concepts and conventions are often used interchangeably. The
basic difference between them is that concepts are concerned
with maintenance of accounts where as conventions are
applicable while preparing financial statements.
 The following are the most important concepts of
accounting:-
1. Money Measurement concept
2. Business Entity concept
3. Going Concern concept
4. Cost concept
5. Duality or Double Entry concept
6. Accounting Period concept
7. Matching concept
8. Realisation concept
9. Objective evidence
10. Accrual concept
MONEY MEASUREMENT CONCEPT
As per this concept, transactions that
can be measured in terms of money
only are recorded in the books of
accounts.
BUSINESS ENTITY CONCEPT
 Under this concept, it is assumed that
business unit is distinct and completely
separate from its owners, i.e the business
is treated as a unit or entity separate from
the persons who control it. Accounts are
therefore, maintained for business entity
as distinguished from all categories of
persons associated with it
GOING CONCERN CONCEPT

As per this concept, the business unit

is assumed to have an indefinite life.
It is deemed that there is no intention
or necessity to wind up the business
activity in the immediate future.
COST CONCEPT
According to this principle, assets are
recorded in the books of accounts at
the price at which they had been
acquired. All the subsequent
transactions in relation to the same is
made on the basis of the recorded
cost.
DUAL ASPECT
This is the basic principle of
accounting. According to this
concept, every business transaction
has two aspects- a giving aspect and a
receiving aspect.
ACCOUNTING PERIOD
 The period of interval for which account is
kept for ascertaining the result of business
during the period is called accounting
period. The performance of business unit
is measured by matching the cost incurred
during the accounting period against the
revenue earned during the period.
MATCHING CONCEPT
 Matching concept is based on the
accounting period concept. As per
matching principle only those expenses
pertaining to the current accounting period
must be matched against the revenues
relating to the same period.
REALISATION CONCEPT

 According to this concept, revenue is

considered as being earned on the date at
which it is realised.ie, the date when the
property in goods passes to the buyer and
he becomes legally liable to pay. Like
wise, as advance payment received from
customers is also not treated as revenue
earned.
OBJECTIVE EVIDENCE
 Objectivity means reliability,
trustworthiness and verifiability which
means that there is some evidence in
ascertaining the correctness of information
reported.ie, all the transaction should be
supported by documentary evidence.
ACCRUAL CONCEPT
 To ascertain the correct profit/loss for an
accounting period and to show the true
and fair financial position at the end of the
accounting period, we make record of all
expenses and incomes relating to the
period whether actual cash has been paid
received or not.
CONVENTIONS
 Consistency- convention of consistency assumes
accounting policies should be consistent rules, practices
and convections should be consistent from one period to
the other. It implies that rules, policies, principles and
methods adopted by a firm for the purpose of preparation
of accounts should not be subject to frequent changes.
 If it is done so, the comparison of its financial statements
over a few years and with other firms would be difficult.
FULL DISCLOSURE
 As per this convention, all accounting statements should
be honestly prepared and to that end full disclosure of all
significant information should be made.
 Means the publishes financial statement must fully
disclose the true and fair view of the state of affairs of
the concern.
CONSERVATISM/PRUDENCE
 Business activities are carried on in a state of
uncertainty. To safeguard against possible losses a policy
of caution is adopted here. So the accountants follow the
rule “ anticipate no profit but provide for all possible
losses”
 While preparing financial statement
 Not to consider any income or gain till the same is realized in
cash
 Make providing for possible losses and contingencies on the
basis of past experiences.
MATERIALITY
 Whether something should be disclosed or not in the
financial statement will depend on whether it is material
or not. Materiality depends on the amount involved in
the transaction.
 E.g.. Minor expense of Rs. 10 for the purchase of waste
basket can be treated as an expense rather than treated as
an asset.
SYSTEMS OF ACCOUNTING
 Cash System- under this system, actual cash receipts
and actual cash payments are recorded. Credit
transactions are not recorded at all until the cash is
actually received or paid. The system being based on a
record of actual cash receipts and actual cash payments
will not be able to disclose correct profit or loss for a
particular period and will not exhibit true financial
position of the business on a particular day.
ACCRUAL SYSTEM/ MERCANTILE
SYSTEM
 Under this system all transactions relating to a period are
recorded in the books of account. i.e. in addition to
actual receipts and payments of cash income receivable
and expenses payable are also recorded.
MIXED SYSTEM
 Under this system both cash system and mercantile
systems are followed. Some records are kept under cash
system whereas others are kept under mercantile system.
ACCOUNTING EQUATION
 An equation or statement showing the equality of debits
and credits or assets and liabilities including capital is
known as accounting equation.
 Assets= Equities

 The properties owned by a business are called assets, the

rights to the properties are called equities. Equities may
be of creditors or owners. Equities of creditors debts of
the business are called liabilities. The equity of owners is
called capital or owners equity
.
 Assets= L+C
 A-L=C

 A-C=L

 A-C-L=0

 The accounting equation is also called the balance sheet

equation. It shows the fundamental relationship among
the components of Balance sheet.
RULES OF ACCOUNTING EQUATION
 Debit if increase in asset and credit if decrease in asset
 Credit if increase in capital, and debit if decrease in
capital
 Credit if increase in liabilities and debit if decrease in
liabilities
 Credit if there is increase in income, and debit if
decrease in income.
ACCOUNT
 It is defined as a formal record of all transactions
relating to changes in a particular item. Through
accounts, transactions of similar nature are brought
together at one place in a book called ledger.
 Dr A/C Cr
Date Particulars J/F Amount Date Particular J/F Amount
s
TYPE OF ACCOUNTS
 Personal accounts- accounts of persons with whom the
business deals, includes artificial persons like
companies, clubs etc and natural persons.
 Debit the receiver
 Credit the giver

 Real Account- accounts of properties/ assets (include

tangible property and intangible property)
 Eg. Cash, furniture, building, copy right, patent etc.
 Debit what comes in
 Credit what goes out
NOMINAL A/C
 Accounts of expenses or losses and incomes or gains
 Debit all expenses and losses
 Credit all incomes and gains

 Eg. According to the rule wages, salaries, insurance etc.

are debited. Commission received, interest received etc
are credited as they are in the nature of income.