FINANCIAL AND MANAGEMENT ACCOUNTING PGDBM/TERM-1

By : Ms. Palka Chhillar

Objective of the Bridge Course

To support the students in the better understanding of the underlying fundamental concepts of the subject To prepare the students for the efficient & effective application of the concepts in the real world situations.

Pedagogy
y In each bridge course session, first the students will be familiarized with the brief theoretical background of the topic followed by solving of worksheets. y At the end of every week, students will be responsible for reading one or more articles relevant to the accounting topics we are studying taken from the business press. y You will be asked to solve relevant exercises/self-study problems /worksheet at home. y 10 marks have been allocated for tutorials y Students / group of students can give a request to discuss any topic apart from the curriculum by intimating one day in advance

The emphasis here is on EFFORT and not on ANSWERS to the exercises. Working toward the correct answer is not the point; working to understand the concepts and the underlying accounting issues is what it s all about.

The Need for Accounting

Managers, investors, and other internal groups want the answers to two important questions:

How well did the organization perform?

Where does the organization stand?

Financial Accounting & Management Accounting

Financial accountancy (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders.

Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.

ACCOUNTING CONCEPTS
y In order to make the accounting language convey the

same meaning to all people & to make it more meaningful, most of the accountants have agreed on a number of concepts which are usually followed for preparing the financial statements. These concepts provide a foundation for accounting process. No enterprise can prepare its financial statements without considering these concepts.

1.BUSINESS ENTITY CONCEPT

y Business is treated as separate & distinct from its

members y Separate set of books are prepared. y Proprietor is treated as creditor of the business. y For other business of proprietor different books are prepared

2.GOING CONCERN CONCEPT

y Business will continue for a long period. y As per this concept, fixed assets are recorded at their

original cost & depreciation is charged on these assets. y Because of this concept, outside parties enter into long term contracts with the enterprise.

3.MONEY MEASUREMENT CONCEPT

y Transactions of monetary nature are recorded. y Transactions of qualitative nature, even though of great

importance to business are not considered.

4.HISTORICAL COST CONCEPT

y Assets are recorded at their original price. y This cost serves the basis for further accounting

treatment of the asset. y Acquisition cost relates to the past i.e. it is known as historical cost.

y JUSTIFICATION FOR HISTORICAL COST CONCEPT y This cost is objectively verifiable. y Justified by going concern concept. y Current values are difficult to determine. y Difficult to keep track of up down of the market price.

5.DUAL ASPECT CONCEPT

y Every transaction recorded in books affects at least two

accounts. y If one is debited then the other one is credited with same amount. y This system of recording is known as DOUBLE ENTRY SYSTEM . y ASSETS = LIABILITIES + CAPITAL

ACCOUNTING PERIOD CONCEPT

y Entire life of the firm is divided into time intervals for ascertaining the

profits/losses are known as accounting periods. y Accounting period is of two types- financial year(1 st Apr to 31 st March) & calendar year(1 st Jan to 31 st Dec).

MATCHING CONCEPT
y All the revenue of a particular period will be matched with the cost of that

period for determining the net profits of that period. y Accordingly, for matching costs with revenue, first revenue should be recognised & then costs incurred for generating that revenue should be recognised.
y Following points must be considered while matching costs with revenue-:
y y y y

Outstanding expenses though not paid in cash are shown in the P&L a/c. Prepaid expenses are not shown in the P&L a/c. Closing stock should be carried over to the next period as opening stock. Income receivable should be added in the revenue & income received in advance should be deducted from revenue.

REVENUE RECOGNITION/REALISATION CONCEPT

y Revenue means the addition to the capital as a result of y y y y y

business operations. Revenue is recorded when earned and costs are recorded when incurred Revenue is realised on three basis-: Basis of cash Basis of sale Basis of production

ACCRUAL CONCEPT
y In this concept revenue is recorded when sales are made or

services are rendered & it is immaterial whether cash is received or not. y Same with the expenses i.e. they are recorded in the accounting period in which they assist in earning the revenues whether the cash is paid for them or not.

ACCOUNTING CONVENTIONS
y An accounting convention may be defined as a custom or generally accepted practice which is adopted either by general agreement or common consent among accountants.

1. Convention of Full Disclosure

Information relating to the economic affairs of the enterprise should be completely disclosed which are of material interest to the users.

2. Convention of Materiality
y According to American Accounting Association ,

An

item should be regarded as material if there is reason to believe that knowledge of it would influence decision of informed investor.
y It is an exception to the convention of full disclosure. y Items having an insignificant effect to the user need not

to be disclosed.

3. Convention of Consistency
y Accounting method should remain consistent year by

year. y This facilitates comparison in both directions i.e. intra firm & inter firm. y This does not mean that a firm cannot change the accounting methods according to the changed circumstances of the business.

4.Convention of Conservatism/ Prudence

y All anticipated losses should be recorded but all

anticipated gains should be ignored.

y It is a policy of playing safe. y Provisions is made for all losses even though the amount

cannot be determined with certainty .

Accrual Basis and Cash Basis

The accrual basis of accounting recognizes revenues and expenses when they occur regardless of when cash is received or disbursed.

The cash basis of accounting recognizes revenue and expense when cash is received and disbursed.

DOUBLE ENTRY BOOK KEEPING & SINGLE ENTRY BOOK KEEPING

Single entry bookkeeping means that all transactions are entered only once on to the accounts system. For instance, buying a vehicle for 15,000 would be entered as a payment in a cashbook

Double entry bookkeeping means that all transactions are entered twice on to the accounts system. For instance, buying a vehicle for 15,000 would be entered as a decrease in the cash account, and as an increase in the vehicle account.

Few Important Terms

1. Assets: - Assets are the economic resources owned or controlled by a company, resulting from past transactions. Assets can be classified into two categories namely Current assets & Noncurrent Assets y Current assets are the assets the company plans to turn into cash or use to generate revenue in the next fiscal year. y Noncurrent assets, or long term assets, are assets that will last for more than a year.

2. Liabilities are obligations the company has incurred to obtain the assets it has acquired. y Current liabilities are liabilities the company will settle-pay off-in the next fiscal year. y Noncurrent liabilities or long-term liabilities are liabilities that will take longer than a year to settle. 3.Owners Equity : The owners equity of a corporation is called shareholders equity y Paid-in capital y Retained Earnings

4. Revenues: Revenues are increases in ownership claims arising from the delivery of goods or services. 5. Expenses are decreases in ownership claims arising from delivering goods or services or using up assets 6. Business Transactions : A transaction is any event that affects the financial position of an organization and requires recording

y Debtor: A debtor is a person or enterprise that owes

money to another party.

y Creditor : A Creditor is a person, bank, or other

enterprise that has lent money or extended credit to another party.

y Example : If Company X borrowed money from its

bank, Company X is the debtor and the bank is the creditor. If Supplier A sold merchandise to Retailer B, then Supplier A is the creditor and Retailer B is the debtor.