Accounting For Management ((Module I)

TKM Institute of Management, Kollam

Study Notes, Semester I
Accounting for Managers
Module I
Syllabus
Introduction to Financial Accounting; Purpose, use and role. Financial
Accounting rules, Concepts and Conventions; Financial Accounting Transactions,
The process of recording, rules of book-keeping, Journalizing, Priar! and
"econdar! books. Financial Accounting and #anageent Accounting; $enerall!
Accepted Accounting Principles %$AAP&; Accounting standards; 'nternational
accounting standards; (egulator! frae)ork of financial reporting in 'ndia.
THE ACCOUNTIN S!STEM
Accounting is an ancient art, certainly as old money itself "#ic# con$eys t#e language of
business by recording, classifying and summari%ing money transactions & e$ents in a significant
manner and inter'reting t#e results t#ereof(
In modern age t#e sco'e of business #as been "iden( T#e 'roduction and t#e sales are made at
large scale due to di$ision of labor, s'eciali%ation and scientific management( T#e customers of a
seller are s'read o$er t#roug#out t#e country( Usually t#e seller sells t#eir goods for cas# but to
increase t#eir sales t#e number of credit transactions increases( T#e memory of #uman being is
limited( T#erefore, it is not 'ossible to remember all t#e transactions of a business( To o$ercome
t#is 'roblem, t#e "or) of recording t#e business transactions started "#ic# de$elo's( *ifferent
met#ods of boo))ee'ing "ere used in different 'eriods( Today "e can say t#at t#e boo))ee'ing is
a foundation on "#ic# t#e "#ole structure of modern business is based(
Need for Accounting
Accounting #as rig#tly been termed as t#e language of business( It communicates t#e
business o'erations to $arious 'arties "#o #a$e some sta)e in t#e business $i%(, t#e 'ro'rietor,
creditors, in$estors, o$ernment and ot#er agencies( T#e need for accounting is mainly for a
'erson "#o is running a business( He s#ould )no"+ ,i- "#at #e o"ns. ,ii- /#at #e o"es. ,iii-
/#et#er #e #as earned a 'rofit or suffered a loss on account of running a business. ,i$- /#at is #is
financial 'osition. i(e( "#et#er #e "ill be in a 'osition to meet all #is commitments in t#e near
future or #e is in t#e 'rocess of becoming a ban)ru't(
In India, C#ana)ya in #is Arthashastra #as em'#asi%ed t#e e0istence and need for 'ro'er
accounting and auditing( Ho"e$er t#e modern system of accounting o"es its origin to 1acoili, "#o
li$ed in Italy, in t#e 23
t#
century(
Prepared by Asst. Prof. Rajesh Janardhanan
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Accounting For Management ((Module I)
MEANING OF ACCOUNTING
4Accounting is t#e 'rocess of identifying, measuring and communicating economic information
to 'ermit informed 5udgments and decisions by t#e users of information6
In t#e beginning t#e main ob5ecti$e of accounting "as to ascertain t#e result of t#e business
,"#et#er 'rofit #as been earned or loss #as been suffered- during a year and to s#o" t#e financial
'osition of t#e business as on a 'articular date( 7ut "#ic# t#e la'se of time more and more being
e0'ected from accounting( At 'resent accounting #as to meet t#e re8uirements of ta0ation
aut#orities, in$estors, go$ernment regulations, management and o"ners( T#is #as resulted in
"idening to sco'e of accounting and may be defined as follo"s+

/it# greater economic de$elo'ment resulting in c#anging role of accounting, its sco'e became
broader( In 29:: t#e American Accounting Association ,AAA- defined accounting as 4t#e 'rocess
of identifying, measuring and communicating economic information to 'ermit informed 5udgments
and decisions by users of information(6
In 29;< t#e, Accounting 1rinci'les 7oard of AIC1A also em'#asi%ed t#at t#e function of
accounting is to 'ro$ide 8uantitati$e information, 'rimarily financial in nature, about economic
entities, t#at is intended to be useful in ma)ing economic decisions(
Accounting can t#erefore be defined as t#e 'rocess of identifying, measuring, recording and
communicating t#e re8uired information relating to t#e economic e$ents of an organi%ation to t#e
interested users of suc# information( In order to a''reciate t#e e0act nature of accounting, "e must
understand t#e follo"ing rele$ant as'ect of t#e definition+
Economic e$ents
Identification, Measurement, =ecording and communication
Organi%ation
Interested users of information(
*efinition and >unctions of Accounting
In 29?2, t#e American Institute of Certified 1ublic Accountant ,AIC1A- defined
accounting as follo"s+
4Accounting is t#e art of recording, classifying and summarising in significant manner and in
terms of money, transactions and e$ents "#ic# are, in 'art, at least of a financial c#aracter and
inter'reting t#e results t#ereof(6
In 29::, t#e American Accounting Association ,AAA- defined accounting as follo"s+
4Accounting is t#e 'rocess of identifying, measuring and communicating economic information to
'ermit informed 5udgments and decisions by users of t#e information(6
Accounting is t#e art of recording, classifying, analy%ing, summari%ing and inter'reting and t#e
financial transactions and communicating t#e results t#ereof to t#e 'ersons interesting in suc#
information(
T#us accounting cycle in$ol$es t#e follo"ing stages+
1. Recording of Transactions. T#is is done in t#e boo) termed as @AournalB(
Prepared by Asst. Prof. Rajesh Janardhanan
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Accounting For Management ((Module I)
2. Classifying te Transactions. T#is is done in t#e boo) termed as @DedgerB(
!. "u##ari$ing te Transactions. T#is includes 're'aration of t#e trial balance, 'rofit and loss
account and balance s#eet of t#e business(
%. Inter&reting te Result. T#is in$ol$es com'utation of $arious accounting ratios, etc(, to
)no" about t#e li8uidity, sol$ency and 'rofitability of business(
An analysis of t#e definition brings out t#e follo"ing functions of accounting+
1. Recording
T#is is t#e basic function of accounting( =ecording is done in t#e boo) 4Aournal6( T#is
boo) may be furt#er subdi$ided into $arious subsidiary boo)s suc# as Cas# Aournal ,for
recording cas# transactions-, 1urc#ase Aournal ,for recording credit 'urc#ase of goods-, Sales
Aournal ,for recording credit sales of goods-, etc( t#e number of subsidiary boo)s to be
maintained "ill be according to t#e nature and si%e of t#e business(
2. Classifying
Classification is concerned "it# t#e systematic analysis of t#e recorded data, "it# a
$ie" to grou' transactions or entries of one nature at one 'lace( T#e "or) of classification is
done in t#e boo) termed as 4Dedger6(
!. "u##arising
T#is in$ol$es 'resenting t#e classified data in a manner "#ic# is understandable and
useful to t#e internal as "ell as e0ternal endEusers of accounting statements( T#is 'rocess leads
to t#e 're'aration of t#e follo"ing statements+
,i- Trial 7alance, ,ii- Income Statement, and ,iii- 7alance S#eet
%. 'ealing (it Financial Transactions
Accounting records only t#ose transactions and e$en in terms of money "#ic# are of a
financial c#aracter( Transactions "#ic# are of a financial c#aracter are not recorded in t#e
boo)s of accounts(
). Analysing and Inter&reting
T#e recorded financial data is analysed and inter'reted in a manner t#at t#e endEusers
can ma)e a meaningful 5udgement about t#e financial condition and 'rofitability of t#e
business o'erations( T#e term @AnalysisB refers to t#e met#odical classification of t#e data
gi$en in t#e financial statements( T#e term @Inter'retationB means, e0'laining t#e meaning and
significance of t#e data sim'lified(
*. Co##unicating
T#e accounting information after being meaningfully analysed and inter'reted
done t#roug# 're'aration and distribution of accounting re'orts, "#ic# includes besides t#e
usual income statement and t#e balance s#eet, additional information in t#e form of accounting
rations, gra'#s, diagrams, funds flo" statements, etc( t#e initiati$e, imagination and inno$ati$e
ability of t#e accountant are 'ut to test in t#is 'rocess(

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Accounting For Management ((Module I)
ACCOUNTING "+"TEM
7usiness transactions may be recorded in any system, "#ic# "ill enable t#e ascertainment of t#e
'rofit or loss of a business and its financial 'osition( T#e follo"ing are t#e main systems ado'ted
by business 'eo'le+
1, Cas# System of Accounting + Under t#is system, only actual cas# recei'ts and 'ayments
transactions "ill be entered into t#e 7oo)s of Accounts( No entry "ill be made for credit
transactions( o$ernment system of accounting is mostly on cas# basis( Certain 'rofessional
organi%ations also record t#eir income on cas# basis, but "#ile recording e0'enses t#ey ta)e
into account t#e outstanding e0'enses also and 're'are Income and E0'enditure Account
instead of 1rofit and loss Account(
2, Mercantile System of Accounting+ T#is system is based on *ouble Entry 'rinci'le( T#is
47oo) 1rofit System of Accounting6 ta)es into consideration all t#e as'ects of business
transactions ,7OTH C=E*IT AN* CASH T=ANSACTIONS-( T#is system is follo"ed by most of t#e
industrial and commercial firm( T#is system o"es its origin to an Italian Merc#ant Duco 1acioli
"#o "rote a boo) entitled 4*e Com'utis et Scri'turis6 on *ouble Entry Accounting in t#e year
2?9?(
"+"TEM OF -OO. .EE/ING
The art and techni*ue of recording the business transactions in a set of books is called as
+ookkeeping. 't is the process of anal!zing, classif!ing and recording transactions in
accordance )ith a preconceived plan.
T#is recording may be done according to t"o "ays+
1, "ingle ,ntr! "!ste- "#ic# is an incom'lete maintenance of boo)s of accounts "it#out
follo"ing t#e *ouble Entry Conce'ts and Con$entions, "#ere some business #ouses maintains
for t#eir con$enience )ee'ing only some of t#e essential 7oo)s of =ecords( T#us it is referred
as incom'lete double entry recording of business transactions(
2, .ouble ,ntr! System+ /#ere t#e transactions are recorded according to t#e olden =ules of
Accounting ta)ing into consideration bot# t#e as'ects of a transaction ,*ebit and Credit- and
follo"ing t#e Accounting Conce'ts and Con$entions( T#is system maintains bot# 7oo) of
Original Entry ,Aournal G Subsidiary 7oo)s- and 7oo) of >inal Entry ,Dedger- according to t#e
classification of Accounts into =eal, 1ersonal & Nominal, in order to )no" t#e state of affairs
of t#e business by 're'aring t#e 1rofit and Doss Account and 7alance S#eet from t#e Trial
7alance(
-RANC0E" OF ACCOUNTING
T#e sub5ect of accountancy #as become im'ortant for all t#e business organi%ation in t#e 'resent
time( Its sub5ect matter #as been increased and it #as ta)en t#e form of accounting( Accounting
sub5ect #as t#e follo"ing branc#es+
Prepared by Asst. Prof. Rajesh Janardhanan
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Accounting For Management ((Module I)
>INANCIAD ACCOUNTIN
2( Aournal
C( Dedger
F( Trial 7alance
?( >inal Accounts
COST ACCOUNTIN
2( Cost s#eet
C( Aob and contract costing
F( 1rocess costing
?( O'erating costing
MANAEMENT ACCOUNTIN
2( =atio Analysis
C( 7rea) e$ent 1oint Analysis
F( Standard costing
?( Analysis Of >inancial Statements
TAH ACCOUNTIN
2( Sales Ta0
C( Income Ta0
F( /ealt# Ta0
?( E0cise *uty
OIE=NMENT ACCOUNTIN
2( 7udget
C( Consolidated >und
F( Contingency >und
?( 1ublic Accounting
SOCIAD =ES1ONSI7IDIT! ACCOUNTIN
2( Social >und
C( TJM
F( En$ironmental Accounting

HUMAN =ESOU=CES ACCOUNTIN
Em'loyee In$entory Management
H=* O'erational & Administrati$e As'ects
1rofitability and /or) Measurement
,2- >inancial Accounting+ 4>inancial Accounting is t#e art of recording, classifying and
summari%ing in a significant manner and in terms of money, transactions and e$ents "#ic# are at
least in 'art, of a financial c#aracter, and inter'reting t#e results t#ereof(6 In financial accounting
"e record t#e business transactions in t#e boo)s of accounts( Its ob5ect is to ascertain t#e 'rofit or
loss and to )no" t#e financial 'osition of t#e business( In t#is Aournal, Subsidiary boo)s, Dedger,
Trial balance, trading account, 1rofit & loss account and 7alance s#eet are 're'ared(
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Accounting For Management ((Module I)
,C- Cost Accounting+ T#is branc# of accounting #as attained good im'ortance in recent days(
Under it, t#e ra" materials, labors and ot#er e0'enses incurred in t#e industrial 'roduction and
business acti$ities are recorded regularly so t#at 'roduction cost and 'er unit cost can be
ascertained and t#e unnecessary e0'enses can be c#ec)ed out to control t#e cost( Cost accounting
#el's in maintaining a desirable margin bet"een cost and 'rice so t#at business can earn 'rofit( It
also include 5ob and contract costing, 'rocess costing, o'erating costing and cost s#eet 're'aration(
,F- Management Accounting + T#is branc# of accounting su''lies necessary information to t#e
managers( On t#e basis of t#ese information t#e e$aluation of 'olicies is done and decisions for
future are ta)en( It includes =atio Analysis, Analysis of financial statements, >und flo" Analysis,
Cas# flo" Analysis etc(
,?-Ta0 Accounting+ E$ery businessman #as to 'ay $arious ty'es of ta0es suc# as sales ta0, Income
ta0, e0cise duty etc( >inancial Accounting #el's only in determining t#e ta0able income of t#e
business( Some s'ecific se'arate ad5ustments are needed for determination of ta0 liabilities(
Moreo$er $arious ty'es of deductions and 'ro$isions of Acts are also ta)en into consideration for
ta0 accounting(
,K- o$ernment Accounting+ Central go$ernment, state go$ernment and local bodies also
underta)e t#e "or) of accounting and it is called o$ernment Accounting( It differ from financial
accounting( It e0'lains t#e 7udget and $arious ot#er ty'es of accounts suc# as L consolidated fund,
contingent fund and 'ublic fund account(
,:-Social =es'onsibility Accounting+ T#e society 'ro$ides infrastructure and t#e facilities "it#out
"#ic# business cannot o'erate at all( T#erefore t#e business also #as a res'onsibility to"ards t#e
society( Social res'onsibility accounting is t#e 'rocess of identifying, measuring and
communicating t#e contribution of a business to t#e society( T#e contribution of a business to t#e
society consist of 'ro$iding em'loyment to under 'ri$ileged, 'ro$iding financial and man'o"er
su''ort for 'ublic utility 'rogrammes, en$ironmental and ecology contribution, 'roduct 8uality,
'roduct safety, 'roduct durability and customer satisfaction etc( In social res'onsibility accounting
tec#ni8ues #a$e been de$elo'ed for measuring t#e cost of t#ese contributions and t#e benefit to t#e
society
,;- Human =esources Accounting+ H= Accounting is an art and science of e$aluating t#e
"ort# of #uman resources of a business organi%ation in a systematic manner as a "#ole to t#e
concern and t#e society and recording t#em for 'resenting t#e information in t#e financial
statements to communicate t#eir "ort# to t#e readers of financial statements( 4It is t#e 'rocess of
identifying and measuring data about #uman resources and communicating t#is information to
interested 'arties6
=ole of an Accountant
Accountants are 'ersons "#o 'ractice t#e art of accounting( T#e Accounting system and t#e
Accountants, "#o maintain it, 'ro$ide useful ser$ices to t#e society( Accountants can broadly be
classified into t"o categories+
1. Accountants in /u1lic /ractice
Prepared by Asst. Prof. Rajesh Janardhanan
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Accounting For Management ((Module I)
T#e accountants in 'ublic 'ractice are also )no"n as 'rofessional accountants( T#ey offer
t#eir ser$ices for conducting financial audit, cost audit, designing of accounting system and
rendering ot#er 'rofessional ser$ices for a fee( In India, t#ere are t"o recognised 'rofessional
bodies for t#is 'ur'ose( T#ey are+ ,i- t#e Institute of C#artered Accountants of India and ,ii- t#e
Institute of Cost and /or)s Accountants of India(

2. Accountants in E#&loy#ent
T#ese are accountants "#o are em'loyed in nonEbusiness entities or business entities(
NonEbusiness entities are di$erse set of organisations including Educational Institutions,
o$ernment, C#urc#es, Museums, Hos'itals, etc( t#eir ob5ect is not to earn 'rofit( T#e
accountants em'loyed by business entities arte fre8uently called Management Accountants since
t#ey re'ort to, and are 'art of, t#e entityBs management( T#ese accountants 'ro$ide information
for ta0 returns, budgeting, routine o'erating decisions, in$estment decisions, 'erformance
e$aluation and e0ternal financial re'orting of t#e business(
Ser$ices =endered by an Accountant
2( Maintenance of 7oo)s of Accounts
C( Auditing of Accounts
F( Ta0ation
?( >inancial Ser$ices
O-2ECTI3E" OR FUNCTION" OF ACCOUNTING
No" a days accounting becomes a sub5ect of 'ractical im'ortance for e$ery
business concern t#at may be a mar)eting firm, manufacturing firm, ban), trans'ort agency,
insurance com'any or a 'rofessional organi%ation( Accounting attains t#e im'ortance e$ery "#ere(
Iarious 'ersons are interested in accounting "or) of a business concern e(g( s#are#olders,
in$estors, ban)s, go$ernment, creditors, em'loyees, customers etc( T#erefore accounting #as to
fulfill t#eir ob5ecti$es also( >or t#is accounting 'erform $arious functions( Some of t#e im'ortant
ob5ecti$es or t#e functions of accounting are as follo"s+

,2-To 4ee& syste#atic record of 1usiness transactions5 T#e main ob5ecti$e of accounting is to
)ee' com'lete record of business transactions according to rules( >or t#is 'ur'ose all t#e business
transactions are firstly recorded in t#e 5ournal or subsidiary boo)s and t#en 'osted into t#e ledger(
T#is #el's to a$oid t#e 'ossibility of omission and fraudM moreo$er "e can get t#e financial
information at any time during t#e year(
,C- To calculate &rofit or loss of te 1usiness+ T#e second main ob5ecti$e or t#e functions of
accounting is to ascertain t#e net 'rofit earned or loss suffered by a business concern( >or t#is
'ur'ose a Trading and 1rofit and loss account is 're'ared at t#e end of eac# accounting 'eriod(
/#en re$enue of t#e business is more t#an e0'enditure t#e difference is said to be 'rofit( In
addition to it, a businessman is able to get t#e follo"ing information from accounting(
2( Ho" muc# goods #a$e been 'urc#ased during a 'articular 'eriod
C( Ho" muc# goods #a$e been sold during a 'articular 'eriod
Prepared by Asst. Prof. Rajesh Janardhanan
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Accounting For Management ((Module I)
F( Ho" muc# goods #a$e been remained unsold and "#at is its $alue(
?( Ho" muc# amount #as been s'ent and earned on $arious #eads
,F- To de&ict te financial &osition of te 1usiness+ >or t#is 'ur'ose a balance s#eet is 're'ared
on t#e last day of t#e accounting year "#ic# s#o"s t#e $alues of $arious assets on one side and t#e
liabilities and ca'ital on t#e ot#er side( 7alance s#eet s#o"s t#e financial 'osition of t#e business(
7esides t#is, from accounting a businessman can get t#e follo"ing information+
2( Ho" muc# amounts t#e business #as to reco$er from debtors(
C( Ho" muc# amount t#e business #as to 'ay to creditors(
F( Amount of o'ening ca'ital and closing ca'ital
?( Amount of cas# recei'ts and cas# 'ayments from t#e cas#boo)s(
,?- To &ro6ide infor#ation7s to 6arious &arties5 Iarious 'ersons #a$e $ested interests in a
business firm( Accounting 'ro$ides useful information to all t#e interested 'arties suc# as+ o"ners,
managers, in$estors, creditors, researc#ers, em'loyees, customers, ban)s, go$ernment de'artments,
etc(
,K-Oter o18ecti6es5 Accounting functions also fulfill t#e follo"ing ob5ecti$es+
To )ee' systematic and 'ermanent record of all financial transactions
To use accounting records for future reference
To fulfill t#e legal re8uirements
To 'ro$ide information about $arious ta0 liabilities
To c#ec) t#e accounting errors, frauds, and misa''ro'riations of funds
To )no" t#e re8uirements of t#e business
To #el' in fulfilling tenders and 8uotations
To 'ro$ide information about 'rofitability of $arious 'roducts
To facilitate rational decisionEma)ing(
To control o$er e0'enditures to minimi%e t#em(
A'3ANTAGE" OF ACCOUNTING
Accounting #as many ob5ecti$es and fulfillments of t#ese ob5ecti$es are t#e ad$antages and
usefulness of accounting+
9A, Ad6antages to 1usiness#an5
,2- =ecording of transactions+ It is a systematic and com'lete record of business transactions
"#et#er t#ey are 'ersonal, real, or nominal( 1ermanent recording of business transactions ma)e t#e
results more realistic(
,C- =e'lacement of memory+ In a large business it is $ery difficult for a businessman to
remember all t#e transactions( Accounting 'ro$ides records "#ic# "ill furnis# information as and
"#en re8uired and t#us it re'laces #uman memory(
,F- 1ro$ides information+ E$ery trader "ants to get t#e information about #is business from
time to time so accounting 'ro$ides all t#ese information(
,?- A$ailability of net results+ In accountancy at t#e end of t#e year final accounts are
're'ared from t#e accounts of business transactions (ross 'rofit is ascertained by Trading AGc and
net 'rofit is ascertained by 'rofit and loss AGc( Ot#er financial statements ma)e a$ailable t#e net
results of income and e0'enditure items also(
,K- Kno"ledge of financial 'osition+ Accounting #el's a businessman to )no" t#e financial
'osition of #is business(
Prepared by Asst. Prof. Rajesh Janardhanan
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Accounting For Management ((Module I)
,:- =eference in future+ /#en t#e "or) of accounting #as been 'erformed 'ro'erly t#en t#e
businessman can 'resent t#e old ledgers as references in future( 1osting u' t#e boo)s if accounts
are treated as business e$idences and can be used in future as references( 7oo)s of accounts can
be 'resented in t#e courts as e$idences(
,;- Com'arati$e study+ /#en business transaction are recorded in a 'ro'er manner t#en t#e
business results can be inferred easily and t#e result of different years can be com'ared to ta)e
'ro'er decisions for t#e future(
,3- C#ec) t#e errors and frauds+ /#en t#e business transactions are recorded regularly and
systematically in t#e boo)s of accounts t#en t#e c#ances of errors minimi%e( Moreo$er accounting
also c#ec)s t#e frauds in stoc) and cas#(
,9- Hel'ful in management+ Mangers of business need $arious information to manage t#e
business( T#ese information are su''lied by t#e Accounts *e'artment only( In a good business t#e
Accounts *e'artments #as a s'ecial im'ortance(
,2<- Hel'ful in t#e sale of business+ If accounts are 'ro'erly maintained it #el's to ascertain
t#e 'urc#ase 'rice in case t#e businessman is interested to sell business(
9-, Ad6antages to custo#ers
,2- 1ro'er 'rice+ A manufacturer can determine t#e 'ro'er cost if #is 'roduct t#roug# an
ade8uate and com'lete recording( T#is furt#er #el's in 'ro'er 'rice determination and t#e 'roduct
can be made a$ailable at 'ro'er 'rice to t#e consumer(
,C- Juality goods+ An indirect ad$antage is accounting is t#at "#en accounting is t#at
"#en Accounts *e'artment of a business is good t#en t#e 8uality of its 'roduct "ill also be good
"#ic# benefits t#e consumers(
9C , Ad6antages to Go6ern#ent
,2- >inancial assistance+ o$t( also gets $arious ad$antages from accounting( o$t( gi$es
financial assistance in t#e form of subsidies and grants to t#e business firms( /e can ta)e
ad$antages of t#eir financial assistance only "#en "e #a$e recorded 'ro'erly our business
transactions (So it #el's to attain t#e ad$antages of go$t( 'olicies(
,C- Kno"ledge of financial 'osition of t#e country+ o$t( can ascertain t#e commercial and
industrial 'rogress of t#e country as a "#ole t#roug# t#e )no"ledge of 'rogress of $arious trades(
It is 'ossible "#en all t#e business units #a$e 'ro'er accounting "or)(
,F- ranting license+ If t#e "or) of accounting is 'erformed 'ro'erly it "ill #el' t#e go$t(
in granting im'ort, e0'ort and 'roduction licenses to t#e enter'rises(
,?- Commercial Da"s+ Accounting also ma)es 'ossible to frame and amend t#e $arious
commercial la"s suc# as Com'any Act, M=T1 Act, Consumer 1rotection Act etc(
,K- Ta0 Assessment+ Traders #a$e to 'ay $arious ta0es suc# as LSales ta0, Income ta0,
E0cise duty etc( T#ese ta0es be determined 'ro'erly if t#e recording in t#e boo)s of accounts is
done 'ro'erly( o$ernment officers also recommend t#e accounting (T#us businessman and t#e
go$t( bot# are benefited by t#e accountancy(
,' , Ad6antages to e#&loyees
,2- Control+ It is $ery im'ortant in a business t#at "or)ers s#ould be em'loyed according
to "or)( Ho" muc# em'loyees can be em'loyed at a fi0ed "ages is also related "it# t#e Accounts
*e'artment( T#us accounting controls t#e em'loyees indirectly(
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Accounting For Management ((Module I)
,C- Increase in salary and bonus+ Accounting also #el's in determining t#e salaries, bonus
and ot#er 'ayments to t#e em'loyees( /it# t#e 'artici'ation of em'loyees in t#e management t#e
im'ortance of accounting #as also s'ecial status(
9E , Oter Ad6antages
,2- Hel'ful in 'lanning+ Managers of business re8uire t#e estimates of 'urc#ase, sales
e0'enses, costs and cas# recei'ts for t#e ne0t year, so t#at future 'lans can be framed( T#ese
information are recei$ed from Accounts *e'artment due to accounting(
,C- Hel'ful in decision ma)ing+ E$ery trader #as to ta)e decisions about 'roduction, sales
etc( >or e(g( "#et#er 'rice can be reduced to increase sale or not( ifts is to be 'resented "it#
'roduct or not etc( T#e information related to t#ese decisions can be obtained from t#e Accounts
de'artment only(
,F- Hel'ful in borro"ing+ /e need additional ca'ital for e0'ansion of t#e business( T#is is
'ro$ided by t#e accounting(
,?- *etermination of good"ill+ on t#e basis of accounts for $arious years ood"ill of t#e
business can be calculated(
,K- Hel'ful in 'artners#i'+ In 'artners#i' a ne" 'artner can )no" t#e financial 'osition of
t#e firm t#roug# t#e accounts of t#e firm( An outgoing 'artner "it# t#e #el' of accounts of t#e firm
can easily ascertain #is s#are to be recei$ed from t#e firm( In 'artners#i' t#ere are more t#an one
manager #ence for confidence must 're$ail among t#em 'ro'er recording of business transactions
is re8uired(
,:- In largeEscale business+ Today e$ery 'roduct is 'roduced and sold at large scale( T#us
business acti$ities also enlarge( Accounting #el's in easy control of suc# large business(
,;- In case of insol$ency+ /#en a businessman fails to 'ay #is liabilities #e becomes
insol$ent, t#en t#e creditors torture t#e businessman( If #e #as maintained 'ro'er record of
business transactions #e can ta)e t#e 'rotection of t#e court( T#e court declares a businessman
sol$ent on t#e basis of boo)s of accounts(
,3- Assessment of 'rogress+ 7y )no"ing about t#e 'rofit and loss, assets and liabilities,
'urc#ases and sales income and e0'enditure of last many years "e can assess t#e 'rogress made by
a business( It is 'ossible only by t#e accounting(
:IMITATION" OF ACCOUNTING
T#oug# accounting #as a number of ad$antages yet it #as some limitations also( >ollo"ing are
t#e ma5or limitations of accounting(
,2- Incom'lete information+ In accounting only t#ose transactions are recorded "#ic# can be
e0'ressed in terms of money( Ot#er e$ents, e(g( efficiency of managers, c#anges in tastes of
consumers, 'o'ularity of 'roduct and ability of em'loyees, Economic and 'olitical conditions of
t#e country, le$el of com'etition etc t#oug# affect t#e success of business and financial 'osition
and managers continuously try to collect t#ese information, yet t#ey cannot be e0'ressed in terms
of money and t#us not re'resented in accounting(
Prepared by Asst. Prof. Rajesh Janardhanan
2<
Accounting For Management ((Module I)
,C- Influenced t#e by 'ersonal 5udgments+ In accounting some 'rinci'les and conce'ts are
obeyed( 7ut at t#e end of an accounting year to ascertain t#e net 'rofit or loss some estimates are
used( To c#arge de'reciation life of an asset and its scra' $alue are to be estimated, 7ad debts are
also estimated etc( T#e li)ing and disli)ing of t#e accountant affect t#ese estimates( T#us t#e
results are also affected(
,F- =eali%able $alue of business is not s#o"n+ T#e balance s#eet "#ic# is 're'ared at t#e end
of t#e 'eriod to 'resent t#e financial 'osition of t#e business s#o"s t#e assets at t#eir #istorical
costs and not at t#eir reali%ation 'rice( T#us it is not 'ossible to estimate t#e 'resent reali%able
$alue of t#e business(
,?- Com'lete control on frauds is im'ossible+ Accountancy can c#ec) t#e arit#metic accuracy
of boo)s accounts but cannot c#ec) t#e frauds com'letely( T#e 'rofit and loss at t#e end of t#e
year can also be mani'ulated by mani'ulating t#e $alue of closing stoc)(
,K- Mani'ulation in accounts+ If an o"ner s#o"s t#e items of #is o"n interest in t#e boo)s of
accounts t#e result obtained by t#e accountant "ill be biased and "rong(
,:- *oes not 'ro$ide timely information+ >inal accounts are 're'ared at t#e end of t#e
accounting year( T#us t#ey contain t#e information of #istorical im'ortance( /#ile managers need
current information for management and 'lanning, "#ic# are not su''lied by t#e accounting
easily((
FINANCIA: ACCOUNTING
>inancial Accounting is concerned "it# t#e 'ro$isions of informations to e0ternal 'arties outside
t#e organi%ation( T#e outsiders "#o use accounting information #a$e a $ariety of interests(
In$estors and s#are#olders "ant to )no" t#e com'anyBs 'rofit 'otential( T#e su''liers, ban)s, and
ot#er lenders "ant to )no" "#et#er a business is credit "ort#y( o$ernment agencies regulate and
ta0 businesses and analy%e t#e 'ublis#ed financial statements to ma)e decisions(
>inancial accounting is concerned "it# recording and summari%ing financial transactions and
're'aring statements relating to t#e business according to enerally Acce'ted Accounting
1rinci'les agreed on by t#e accounting 'rofession( >inancial Accounting is t#e basis of e0ternal
re'orting(

:i#itations Of Financial Accounting
>inancial accounting "or)s as a 'ostmortem of business affairs of an enter'rise
during t#e accounting year( It cannot fulfill t#e needs of modern management as A(C(Dittleton #as
a'tly said t#at 4'ro$iding of significant data regarding mar)et demand, state of com'etition,
general business conditions, engineering, 'ersonal information, legal and regulatory limitations are
out of t#e s'#ere of financial accounting( 4In t#e c#anged business scenario $arious ne"
re8uirements suc# as future 'lanning, e$aluation of 'lans and 'olicies, cost control, timely
decisions etc( #a$e emerged on account of increasing si%e of business, tec#nical com'le0ities,
go$ernment interferences and 'ublic a"areness to"ards social res'onsibilities of business(
>inancial accounting #as t#e follo"ing limitations(
1, >inancial accounting gi$es only limited information to t#e management( It is inade8uate for
management in t#e tas) of decision ma)ing(
2, Managerial decisions relate to future( Hence t#ey are made on t#e basis of estimates and
'ro5ections( >inancial accounting is inade8uate for ma)ing future 'ro5ections because it 'ro$ides
only #istorical information(
Prepared by Asst. Prof. Rajesh Janardhanan
22
Accounting For Management ((Module I)
!, T#e 'resent day management is of t#ree tier system( *ifferent le$els of management needs
different information( >inancial accounting fails to meet t#e information needs of different le$els
of management(
%, >inancial accounting considers only 8uantifiable information( No"adays business decisions
are influenced by a number of social factors( >or t#is many of t#em are ignored in financial
accounting(
), T#e ra'id c#ange in tec#nology and fast gro"t# of business units #a$e made t#e tas) of
modern management #ig#ly com'licated( >inancial accounting "it# its sim'le structure is not in a
'osition to cater t#e needs of modern management(
'ifference 1et(een Manage#ent Accounting and Financial Accounting(
Management accounting cannot re'lace financial accounting( It ta)es a ma5or 'art of t#e
information from financial accounting and modifies t#e same for managerial uses (T#erefore
7ot# branc#es of accounting are com'lementary to eac# ot#er( 7ut t#ere are certain 'oints of
differences bet"een t#e t"o( T#ey are gi$en belo"(
,2- T#e 'rimary ob5ecti$e of financial accounting is recording business transactions in a systematic
"ay and ascertains t#e business results and financial 'osition of a business concern( T#e ob5ecti$e
of management accounting is to 'ro$ide necessary information to t#e management for t#e efficient
disc#arging of its functions(
,C- >inancial accounting is an e0ternal accounting because it 'resents information to t#e e0ternal
'arties li)e s#are#olders, creditors, ban) etc( Management accounting is an internal accounting
because it 'resents information to t#e management(
,F- >inancial accounting is concerned "it# #istorical records relating to t#e 'ast, "#ere as
Management accounting is mainly concerned "it# future 'lans and 'olicies(
,?- >inancial accounting is com'ulsory, "#ile Management accounting is o'tional(
,K- >inancial accounting relates to t#e business as a "#ole( Management accounting deals "it# re'orts
about a 'articular de'artment or di$ision of an enter'rise(
,:- In financial accounting t#ere is more em'#asis on 'recise data( In Management accounting t#ere is
less em'#asis on 'recision( Estimates and future data are mostly used(
,;- >inancial accounting is 're'ared in accordance "it# t#e AA1( Management accounting is
're'ared according to t#e internal re8uirements of t#e management(
,3- >inancial accounting 'resents annual re'orts, "#ile management accounting re'orts are of bot#
s#orter and longer durations(
,9- >inancial accounting is based on measurements "#ile management accounting is based on
5udgment( T#us financial accounting is more ob5ecti$e and management accounting is more
sub5ecti$e(
,2<- >inancial accounting records only t#ose transactions "#ic# can be e0'ressed in terms of
money( On t#e ot#er #and management accounting records not only monetary transactions but
also nonEmonetary e$ents li)e tec#nical c#anges, go$ernment 'olicies etc
,22- T#e sco'e of financial accounting is not $ast as com'ared to management accounting( It does not
include t#e tec#ni8ues li)e costing, statistics, management accounting etc( It is a 'art of
management accounting( T#e sco'e of management accounting is most "ide because financial
accounting, cost accounting, statistics and ot#er tec#ni8ues are used in it(
GENERA::+ ACCE/TE' ACCOUNTING /RINCI/:E"

Prepared by Asst. Prof. Rajesh Janardhanan
2C
Accounting For Management ((Module I)
What is GAAP ?
enerally Acce'ted Accounting 1rinci'les ,AA1- includes accounting con$entions, rules,
'rocedures and accounting standards, acce'ted accounting 'ractices bot# 'romulgated and nonE
'romulgated( AA1 are t#ose 'rinci'les, "#ic# #a$e substantial aut#oritati$e su''ort(
In order to maintain uniformity and consistency in accounting records, certain rules or 'rinci'les
#a$e been de$elo'ed "#ic# are generally acce'ted by t#e accounting 'rofession t#e ICAI( T#ese
rules are called by different names suc# as 'rinci'les, conce'ts, con$entions, 'ostulates,
assum'tions and modifying 'rinci'les(
T#e term @'rinci'lesB #as been defined by AIC1A as 4A general la" or rule
ado'ted or 'rofessed as a guide to action, a settled ground or basis of conduct or 'ractice6( T#e
"ord 4generally6 means in a general manner i(e(, 'ertaining to many 'ersons or cases or occasions(
T#us, AA1 refers to t#e rules or guidelines ado'ted for recording and re'orting of business
transactions in order to bring uniformity in t#e 're'aration and t#e 'resentation of financial
statements(
T#e AA1 #a$e e$ol$ed o$er a long 'eriod of time on t#e basis of 'ast
e0'eriences, usage or customs, statements by indi$iduals and 'rofessional bodies and regulations
by t#e go$ernment agencies and #a$e general acce'tability among most accounting 'rofessionals(
Ho"e$er t#e 'rinci'les of accounting are not static in nature( T#ese are constantly influenced by
c#anges in t#e legal, social, and economic en$ironment as "ell as t#e needs of users( T#ese
'rinci'les are also referred as conce'ts and con$entions( T#e term Conce't refers to t#e necessary
assum'tions and ideas t#at are fundamental to accounting 'ractice, and t#e term con$ention refers
to customer or tradition as a guide to t#e 're'aration of accounting statements( In 'ractice t#e same
rules and guidelines #a$e been described by on aut#or as a conce't by anot#er as a 'ostulate and
still by anot#er as con$ention( T#is at times becomes confusing to t#e learners( Instead of going
into t#e semantics of t#ese terms, it is im'ortant to concentrate on t#e 'racticability of t#eir usage(
>rom t#is 'racticability $ie" 'oint it is obser$ed t#at t#e $arious terms suc# as 'rinci'les,
'ostulates, con$entions, modifying 'rinci'les, assum'tions etc #a$e been used inter c#angeably
and are referred to as basic accounting Conce'ts and Con$entions(

-asic Accounting Conce&ts
T#e basic accounting conce'ts are referred to as t#e fundamental ideas or basic
assum'tions underlying t#e t#eory and 'ractice of financial accounting and are broad "or)ing
rules for all accounting acti$ities and de$elo'ed by t#e accounting 'rofession(
T#e im'ortant conce'ts #a$e been listed as belo"+
4Conditions on "#ic# t#e accounting system is based are called accounting assum'tions or
conce'ts(6
Accounting system is based on certain assum'tions or conce'ts( T#ese assum'tions
constitute t#e foundation of accounting 'rocess( No concern can 're'are financial statements and
accounts "it#out considering t#ese assum'tions( Alt#oug# t#ere is no aut#oritati$e list of
assum'tions, some ma5or assum'tions are as follo"s(
Accounting entity Conce't
Money measurement Conce't
oing concern Conce't
Accounting 'eriod Conce't
Historical cost Conce't
Prepared by Asst. Prof. Rajesh Janardhanan
2F
Accounting For Management ((Module I)
*ual as'ect Conce't
=e$enue recognitionG=eali%ation Conce't
91, Accounting entity conce&t5
4T#e conce't or assum'tions t#at business #as a se'arate entity or e0istence a'art from
t#e o"ners is an entity6
T#is conce't assumes t#at t#e entity of business is distinct from t#e its o"ners( O"ner is a creditor
in accordance "it# t#is conce't( T#at is "#y ca'ital account is s#o"n on t#e liability side of t#e
balance s#eet( Moreo$er business is treated as a unit or entity se'arate from t#e 'ersons "#o
control and associate "it# it( So accounts "#ic# are 're'ared and maintained for business entity
are distinct from all categories of 'ersons associated "it# it(

92, Money Measure#ent conce&t 5
4Under money measurement conce't, only transactions e0'ressed in terms of
money are recorded in t#e boo)s of accounts(6
Money is common denominator in terms of "#ic# all transactions can be e0'ressed in a better
manner( Hence under t#e conce't of monetary e0'ression or money measurement conce't only
t#ose transactions "#ic# can be e0'ressed in terms of money are recorded in t#e boo)s of account(
T#is facilitates in recording $arious )inds of economic acti$ities on a uniform basis( >or instance,
'lant, furniture, land etc
/#ic# are generally e0'ressed in terms of 8uantity, area etc are recorded in terms of money $alue(
A transaction or an e$ent "#ic# is not measurable in terms of money cannot be recorded in t#e
boo)s of account( >or instance dismissal of "or)er, stri)es etc are $ery im'ortant e$ents, but do
not find t#eir 'lace in t#e boo)s of account( T#is conce't suffers from t#e follo"ing limitations(
,2- It does not consider t#e c#anges in t#e $alue of money(
,C- Human resources cannot be recorded in t#e boo)s of accounts, alt#oug# it is greatest asset of a
concern(
9!, Going concern conce&t5
4 T#e conce't t#at t#e business "ill continue for a fairly long 'eriod is a going concern conce't6(
Under t#is conce't it is assumed t#at t#e business concern "ill continue to e0ist for a fairly
long 'eriod( T#ere is no intention to s#ut do"n t#e 'articular business concern in t#e near future(
Ho"e$er t#is conce't does not im'ly a 'ermanent e0istence of t#e business( 7ut t#is indicates
stability and continuity of a business for a long 'eriod to carry out its 'lan(
9%, Accounting &eriod conce&t5
4 T#e 'eriod of inter$al for "#ic# accounts are 're'ared and 'resented for ascertaining t#e
result of business is an accounting conce't(6
T#e going concern conce't im'lies t#at t#e business #as a long 'eriod of life( 7ut #o"e$er
t#e o"ners and ot#ers "#o are interested in t#e business cannot "ait for suc# an indefinite 'eriod
to )no" its results( Moreo$er suc# belated com'utation of financial 'osition of a business "ill not
ser$e its $ery 'ur'ose( Hence t#e accountants s'ecify an accounting 'eriod ,say 2C mont#s,
:mont#s, Fmont#s,etc - for 're'aring financial statements(
9), 0istorical; Cost conce&t5
4Accounting based on t#e actual cost of a transaction is t#e 'rinci'le of #istorical
cost(6
Prepared by Asst. Prof. Rajesh Janardhanan
2?
Accounting For Management ((Module I)
Under t#is 'rinci'le all t#e transactions s#ould be recorded at t#eir re8uisition cost( T#e cost of
ac8uisition is t#e cost of 'urc#asing t#e assets and includes e0'enses incurred in bringing t#em to
t#e intended condition and location of use( Ho"e$er t#is conce't does not mean t#at t#e assets are
al"ays s#o"n at cost but "ill be reduced by decrease in $alue )no"n as de'reciation(
9*, 'ual as&ect5

4T#e conce't of double as'ects in e$ery transaction is a duality conce't(6

According to t#is conce't e$ery transaction #as t"o as'ects( In case t#ere is a debit t#en
t#ere is corres'onding credit of t#e amount( Accounting e8uation is de$elo'ed on t#e strengt# of
dual as'ect conce't( >or instance "#en t#ere is an increase in one asset t#ere is a corres'onding
decrease in ot#er assets or increase in liabilities(
T#us assets and liabilities are e8ual at all t#e times i(e( NAsset O Ca'ital PliabilitiesQ( T#e system of
recording transactions "it# its dual conce't is )no"n as double entry system(
,<, Re6enue recognition
Unless money #as been reali%ed ,eit#er cas# #as been reali%ed or a legal obligation to 'ay #as
been assumed by t#e customer- no sale can be said to #a$e ta)en 'lace and no 'rofit or income can
be said to #a$e arisen(
9=, Accrual Conce&t
Normally all transactions are settled in cas# , but e$en if cas# settlement #as not ta)en
'lace, it is 'ro'er to bring t#e transactions or t#e e$ent concerned into t#e business boo)s during
t#e 'articular accounting 'eriod as it relates to t#at 'eriod( >or eg+ =ent accrued fro t#e last mont#(
=ent for t#e last mont# of t#e accounting 'eriod may be 'aid only in t#e ne0t accounting 'eriod,
but still as t#e e$ent is related to t#e current 'eriod it "ill be considered as accrued and debited in
t#e current 'eriod itself(
The International Accounting Standards Committee (IASC) of )hich the 'nstitute of Chartered
Accountants of 'ndia %'CA'& is an associate eber, treats Going concern, Consistency and
Accrual as the fundamental accounting assumptions
Accounting Con6entions regarding financial state#ents.
Con$entions are t#e customs or 'ractices, "#ic# "ere follo"ing for a long 'eriod( T#ey are t#e
'ractices or traditions, "#ic# guide t#e accountant "#ile 're'aring t#e accounting statements( In
order to ma)e t#e message contained in t#e financial statements ,1rofit and Doss Account &
7alance S#eet- clear and meaningful t#e follo"ing con$entions are used+
91,Conser6atis#
>inancial Statements are usually dra"n u' on t#e assum'tion t#at 4antici'ate no 'rofit but
'ro$ide for all 'ossible losses6 i(e(, s#o"ing a 'osition better t#an "#at it is, is not 'ermitted
Prepared by Asst. Prof. Rajesh Janardhanan
2K
Accounting For Management ((Module I)
,"#ic# is called as /indo"Edressing-( It is also not 'ermitted to s#o" a 'osition substantially
"orse t#an "#at it is( In ot#er "ords, secret reser$es are not 'ermitted( It is based on t#is
con$ention t#at t#e in$entory is $alued at 4cost or mar)et 'rice "#ic#e$er is less6
92,Consistency
T#e accounting 'ractices s#ould remain t#e same from one year to anot#erE for instance, it
"ould not be 'ro'er to $alue stoc)EinEtrade according to one met#od one year and anot#er met#od
ne0t year( If a c#ange is re8uired, t#e c#ange& its effect s#ould be stated clearly(
9!,Materiality;'isclosure
T#is con$ention suggests t#at t#e accountant s#ould attac# im'ortance to material details and
ignore insignificant details( T#e accountant s#ould regard an item as @materialB if t#ere is reason to
belie$e t#at )no"ledge of it "ould influence t#e decision of t#e informed in$estor( >or e(g(, "#ile
sending eac# debtor a statement of #is account, com'lete details u' to 'aise #a$e to be gi$en( ood
accounting 'ractices demands t#at all significant matters or information s#ould be disclosed(
T#e 1rocess of Accounting
Accounting is t#e art of recording, classifying, and summerising t#e financial transactions
and inter'reting t#e results t#erefore( T#us accounting cycle in$ol$es t#e follo"ing stages+
). Recording of Transactions. T#is is done in t#e boo) termed as @AournalB(
*. Classifying te Transactions. T#is is done in t#e boo) termed as @DedgerB(
<. "u##erising te Transactions. T#is includes 're'aration of t#e trial balance, 'rofit and loss
account and balance s#eet of t#e business(
=. Inter&reting te Result. T#is in$ol$es com'utation of $arious accounting ratios, etc(, to
)no" about t#e li8uidity, sol$ency and 'rofitability of business(
Accounting /rocess Cart
Prepared by Asst. Prof. Rajesh Janardhanan
2:
Accounting For Management ((Module I)
=ules of *ebit and Credit
1. /ersonal Account
Includes t#e accounts of 'ersons "it# "#om t#e business deals(
E0am'les+ E *ebtors, Creditors, 'ro'rietor etc(
Rule5
2. Real Account
Includes t#e accounts "#ic# relate to suc# t#ings "#ic# can be touc#ed, felt, measured
etc( e0am'les of suc# accounts are cas# account, buildings account, furniture account, stoc)
account etc(
Rule5
*ebit "#at Comes In
Credit "#at oes Out
!. No#inal Account
T#ese accounts are o'ened in t#e boo)s to sim'ly e0'lain t#e nature of t#e transactions(
T#ey do not really e0ist( >or e0am'le, salary, rent, commission etc(
Rule5
Prepared by Asst. Prof. Rajesh Janardhanan
Transactions
& E$ents
1urc#ases
*ay 7oo)
1urc#ases
=eturn 7oo)
Sale *ay
7oo)
Sales =eturn
7oo)
Cas# 7oo)
Aournal
1ro'er
Dedger
Accounts
Trial
7alance
1rofit &
Doss AGc
7alance
S#eet
7an)
=econciliation
Ot#er End
of
Accounting
1eriod
Ad5ustment
s
=ectification
of Errors
2;
*ebit t#e recei$er
Credit t#e gi$er
*ebit "#at Comes In
Credit "#at oes Out
Accounting For Management ((Module I)
*ebit All E0'enses and Dosses
Credit All ains and Incomes
7oo)s Maintained
I( Subsidiary 7oo)s
Subsidiary boo)s are t#e subdi$ision of Aournal usually 're'ared according to a set of 'attern
for academic 'ursuits( It constitutes t#e follo"ing+
,a- /urcases 'ay -oo4 9In6oice -oo4 or -ougt -oo4 or /urcases 2ournal,
It is t#e boo) in "#ic# all credit 'urc#ases of merc#andise ,goods- are
recorded(
,b- "ales 'ay -oo4
It is t#e boo) in "#ic# all credit sale of goods are first recorded(
9c, Returns -oo4s
i, 1urc#ases =eturnsG=eturn Out"ard 7oo)s+E to record t#e 'urc#ase
returns of goods
ii, Sales =eturnsG=eturn In"ard 7oo)s+E to record t#e sales return of goods(
9d, -ills Recei6a1les > -ills /aya1le -oo4
T#ese are boo)s in "#ic# t#e recei't and issue of bill of e0c#anges are
recorded( If t#e organi%ation doesnBt maintain suc# boo)s, t#e recei't and issues of
bill of e0c#anges "ill be recorded in t#e 5ournal 'ro'er
9e, Cas -oo4
It is a boo) of account in "#ic# all recei'ts and 'ayments of cas# are
recorded in t#e c#ronological order irres'ecti$e of "#et#er t#ey are of ca'ital or
re$enue in nature( It is bot# a ledger as "ell as 5ournal ,as it is usually ruled li)e an
ordinary ledger account, and transactions in$ol$ing eit#er recei't or 'ayment of
cas# are recorded in it directly in t#e first instance-( Sometimes it is treated as
s'ecial 5ournal(
9f, 2ournal /ro&er
It is a boo) of original entry ,"#ic# retains t#e original form of a 5ournal to
)ee' a record of t#ose transactions for "#ic# t#ere is no se'arate boo)-, in "#ic#
transactions t#at could not be recorded in any of t#e subdi$idedGs'ecial 5ournals are
recorded( Usually, t#e follo"ing ty'es of transactions are recorded in t#e Aournal
'ro'er(
i, O'ening Entries
ii, Closing Entries
iii, Transfer Entries
i6, =ectification Entries
6, Ad5usting Entries
6i, Entries for dis#onour of 7ills
6ii, Miscellaneous Entries
AOU=NADIRIN
Prepared by Asst. Prof. Rajesh Janardhanan
23
*ebit All E0'enses and Dosses
Credit All ains and Incomes
Accounting For Management ((Module I)
T#e 5ournal records all daily transactions of a business into t#e order in "#ic# t#ey occur( A
5ournal may t#erefore be defined as a boo) containing a c#ronological record of transactions( It is
t#e boo) in "#ic# t#e transactions are recorded first of all under t#e double entry system( T#us,
5ournal is t#e boo)s, of original record( A 5ournal does not re'lace but 'recedes t#e ledger( T#e
'rocess of recording transaction in a 5ournal is termed as @Aournalising(B Aournal is )no"n as @7oo)
of 1rime EntryB(
A 'ro forma of 5ournal is gi$en belo"+

*ate 1ro'erties D(> *ebit
,=s(-
Credit
,=s(-
1. 'ate5 ? T#e date on "#ic# t#e transaction "as entered is recorded #ere(
2. /articulars5 E t#e t"o as'ects of transactions are recorded in t#is column, i(e(, t#e details
regarding accounts "#ic# #a$e to be debited and credited(
!. :.>(+E it means t#e Dedger >olio( T#e transactions entered in t#e 5ournal are later on 'osted
to t#e ledger(
%. 'e1it5 E in t#is column, t#e amount to be debited is entered( In =eal account, it is *ebit
"#at @comes inBM in 1ersonal account, it is *ebit @t#e recei$erBM in Nominal account, it is
*ebit @all e0'enses or lossesB(
). Credit5 E in t#is column, t#e amount to be credited is s#o"n( In =eal account it is Credit
"#at @goes outBM in 1ersonal account, it is Credit @t#e gi$erBM in Nominal account it is Credit
@all incomes and gainsB(
II( MainG1rinci'al 7oo) of Account ,Dedger-
Dedger is a @7oo) of Secondary EntryB or 1rinci'al 7oo) of Account, "#ic# contains
$arious accounts( In ot#er "ords, ledger is a set of accounts( It contains all accounts of t#e business
enter'rise "#et#er =eal, Nominal or 1ersonal( It is usually 're'ared after t#e 5ournal and t#erefore
it is a secondary or deri$ed record( It is t#e most im'ortant boo) for a businessman, as it is from
t#e ledger t#at a trial balance can be 're'ared and from t#e trial balance, t#e final accounts are
're'ared( 7ecause of t#e im'ortance of t#e ledger it is called t#e @King of 7oo)s of AccountsB(
1osting
T#e term 41osting6 means transferring t#e debit and credit items from t#e 5ournal to t#eir
res'ecti$e accounts in t#e Dedger( It s#ould be noted t#at t#e e0act names of accounts used in t#e
Aournal s#ould be carried to t#e Dedger(
Prepared by Asst. Prof. Rajesh Janardhanan
29
Accounting For Management ((Module I)
1osting may be done at any time( Ho"e$er, it s#ould be com'leted before t#e financial
statements are 're'ared( It is ad$isable to )ee' t#e more acti$e ac counts 'osted to date( T#e
e0am'les of suc# accounts are t#e cas# account, 'ersonal account of $arious 'arties etc(
T#e Dedger >olio ,D(>- column in t#e 5ournal is used at t#e time "#en debits and credits are
'osted to t#e Dedger( T#e 'age number of t#e Dedger on "#ic# t#e 'osting #as been done is
mentioned in t#e D(>( column of t#e Aournal( Similarly a folio column in t#e Dedger can also be
)e't "#ere t#e 'age from "#ic# 'osting #as been done from t#e 5ournal may be mentioned( T#us,
t#ere are cross references in bot# t#e Aournal and t#e Dedger(
>orm of Dedger Accounts

*r( EEEEEEEEEEEEEEEEE Account Cr(
*ate 1articulars A(> Amount
,=s(-
*ate 1articulars A(> Amount
,=s(-
=elations#i' bet"een Aournal and Dedger
7ot# Aournal and Dedger are t#e most im'ortant boo)s used under *ouble Entry System of
boo)E)ee'ing( T#eir relations#i' can be e0'ressed as follo"s+
2( T#e transactions are recorded first of all in t#e Aournal and t#en t#ey are 'osted to t#e
Dedger( T#us, t#e Aournal is t#e boo) of first or original entry, "#ile t#e Dedger is t#e boo)
of secondary entry(
C( Aournal records transaction in a c#ronological order, "#ile t#e Dedger records transaction in
an analytical order(
F( Aournal is more reliable in com'ared to t#e Dedger since it is t#e boo) in "#ic# t#e entry is
'assed first of all(
?( T#e 'rocess of recording transactions is termed as @AournalisingB "#ile t#e 'rocess of
recording transactions in t#e Dedger is called as @1ostingB(
7alancing of an Account
T#e tec#ni8ue of finding out t#e net balance of an account, after t#e end of a 'eriod
,say a mont#, a 8uarter or a year-, by considering t#e totals of bot# debits and credits a''earing in
t#e account is )no"n as @7alancing t#e AccountB( T#e balance is 'ut on t#e side of t#e account
"#ic# is smaller and a reference is gi$en t#at it #as been carried for"ard or carried do"n ,c/f or
c/d- to t#e ne0t 'eriod( On t#e ot#er #and, in t#e ne0t 'eriod a reference is gi$en t#at t#e o'ening
balance #as been broug#t for"ard or broug#t do"n ,b/f or b/d- from t#e 're$ious 'eriod(
ACCOUNTING "TAN'AR'"
Accounting Standards are "ritten documents, 'olicies issued by e0'ert accounting body or
o$ernment or ot#er regulatory body co$ering t#e as'ects of recognition, measurement, treatment,
Prepared by Asst. Prof. Rajesh Janardhanan
C<
Accounting For Management ((Module I)
'resentation and disclosure of accounting transaction in t#e financial statement( T#e Institute of
C#artered Accountants of India issues accounting Standards in India(
O18ecti6e of Accounting "tandards
T#e main ob5ecti$e of AS is to standardi%e t#e di$erse accounting 'olicies and 'ractices "it# a
$ie" to eliminate to t#e e0tent 'ossible t#e nonEcom'arability of financial statements and add t#e
reliability to t#e financial statements(( T#e Institute of C#artered Accountants of India, recogni%ing
t#e need to #armoni%e t#e di$erse accounting 'olicies and 'ractices, constituted an Accounting
Standard 7oard ,AS7- on C2
st
A'ril 29;;(
Co#&liance (it Accounting "tandards issued 1y ICAI
SubEsection ,FA- to Section C22 of T#e Com'anies Act, 29K: re8uires t#at e$ery 1rofit and Doss
Account and 7alance S#eet s#all com'ly "it# t#e Accounting Standards( T#us Accounting
Standards means t#e standard of accounting recommended by t#e ICAI and 'rescribed by t#e
Central o$ernment in consultation "it# t#e National Ad$isory Committee on Accounting
Standards ,NACAS- constituted under section C2<A,2- of Com'anies Act, 29K:(
Accounting "tandards and te Auditors
Auditors are duty bound "#ile disc#arging t#eir attest function to ensure t#at t#e Accounting
Standards issued are made mandatory by t#e ICAI( Section CC;,F- of Com'anies Act, 29K:
re8uires t#e auditors to re'ort "#et#er in #is o'inion t#e 1rofitGDoss Account and 7alance S#eet
com'ly "it# t#e Accounting Standards referred in Section C22,FC- of t#e Com'anies Act, 29K:(
Section C2;,CAA-,2- of t#e Com'anies Act, 29K: states t#at *irectors =es'onsibility Statement
s#ould include t#at, in t#e 're'aration of t#e annual accounts t#e a''licable Accounting Standards
#ad been follo"ed along "it# 'ro'er e0'lanations relating to material de'arture(
So far t#e ICAI #as issued C9 Accounting Standards, as gi$en belo"+
A" 1. *isclosure of Accounting 1olicies
A" 2. Ialuation of In$entories
A" !. Cas# >lo" Statement
A" %. Contingencies and E$ents Occurring After 7alance S#eet *ate
A" ). Net 1rofit or Doss for t#e 1eriod, 1rior 1eriod Items and C#ange in Accounting
1olicies(
A" *. *e'reciation Accounting
A" <. Construction Contracts
A" =. ,/it#dra"n-
A" @. =e$enue =ecognition
A" 1A. Accounting for >i0ed Assets
A" 11. T#e Effects of C#anges in >oreign E0c#ange =ates(
A" 12. Accounting for o$ernment rants(
A" 1!. Accounting for In$estments
A" 1%. Accounting for Amalgamations
A" 1). Accounting for =etirement benefits in financial Statements of Em'loyers
A" 1*. 7orro"ing Costs
A" 1<. Segment =e'orting
A" 1=. =elated 1arty *isclosures
Prepared by Asst. Prof. Rajesh Janardhanan
C2
Accounting For Management ((Module I)
A" 1@. Deases
A" 2A. Earning 1er S#ares
A" 21. Consolidated >inancial Statements
A" 22. Accounting for Ta0es on Income
A" 2!. Accounting for In$estments in Associates in Consolidated >inancial Statements
A" 2%. *iscontinuing O'erations
A" 2). Interim >inancial =e'orting
A" 2*. Intangible Assets
A" 2<. >inancial =e'orting of Interests in Aoint Ientures
A" 2=. Im'airment of Assets
A" 2@. 1ro$isions, Contingent Diabilities and Contingent Assets
Ad6antages and 'isad6antages of Accounting "tandards
Ad$antages+
Standards reduce to a reasonable e0tent or eliminate altoget#er confusing $ariation in t#e
accounting treatments used to 're'are t#e financial statements(
T#ere are certain areas "#ere im'ortant information is not re8uired by la" to be disclosed,
standards may call for disclosure beyond t#at re8uired by la"(
It facilitates com'arison of financial statements of different com'anies situated at different 'laces(
*isad$antages of setting Accounting Standards+
T#ere may be a trend to"ards rigidity and a"ay from fle0ibility in a''lying Accounting Standards(
*ifferences in Accounting Standards are bound to be because of differences in t#e traditions and
legal system from one country to anot#er(
Accounting Standards cannot o$erride t#e la"( T#e Standards are re8uired to be framed "it#in t#e
ambit of 're$ailing statute e$en t#oug# it is not an acce'table standard(
International Accounting "tandards
International Accounting Standards 7oard ,IAS7- issues International Accounting Standards(
International Accounting Standards Committee ,IASC-, t#e Dondon based grou' res'onsible for
de$elo'ing IASs #as been in e0istence for o$er C< years( T#e IASC com'rises of t#e 'rofessional
accountancy bodies of o$er ;K countries ,including t#e Institute of C#artered Accountants of India-
IAS7 so far #a$e issued ?2 IASs and : I>=S ,International >inancial =e'orting Standards-
T#e list of IAS includes+
IAS 2 1resentation of >inancial Statements
IAS C In$entories
IAS ; Cas# >lo" Statements
IAS 3 Accounting 1olicies, C#ange in Accounting estimates and errors
IAS2< E$ents after t#e 7alance S#eet *ate
IAS22 Construction Contracts
IAS2C Income Ta0es
IAS2? Segment =e'orting
Prepared by Asst. Prof. Rajesh Janardhanan
CC
Accounting For Management ((Module I)
IAS2: 1ro'erty, 1lant and E8ui'ment
IAS2; Deases
IAS23 =e$enue
IAS29 Em'loyee 7enefits
IASC< Accounting for o$ernment rants and disclosure of o$ernment Assistance
IASC2 T#e effect of C#anges in >oreign E0c#ange =ates
IASCF 7orro"ing costs
IASC? =elated 1arty *isclosure
IASC: Accounting and =e'orting by =etirement 7enefits 1lan
IASC; Consolidated and Se'arate >inancial Statements
IASC3 In$estments in Associates
IASC9 >inancial =e'orting in Hy'er Inflationary Economies
IASF< *isclosure in t#e >inancial Statements of t#e 7an)s and similar >inancial Institutions
IASF2 Interest in Aoint Ientures
IASFC >inancial Instruments+ *isclosure and 1resentation
IASFF Earnings 1er S#are
IASF? Interim >inancial =e'orting
IASF: Im'airment Assets
IASF; 1ro$isions, Contingent Diabilities and Contingent Assets
IASF3 Intangible Assets
IASF9 >inancial Instruments+ =ecognition and Measurement
IAS?< In$estment 1ro'erty
IAS?2 Agriculture

IA"- as issued te follo(ing siB IFR" 9International Financial Re&orting "tandards,5 ?
I>=SE2 >irst time Ado'tion of I>=S
I>=SEC S#are 7ased 1ayments
I>=SEF 7usiness Combination
I>=SE? Insurance Contracts
I>=SEK NonEcurrent assets #eld for sale and discontinued o'erations
I>=SE: E0'loration for and e$aluation of mineral resources(
Regulatory Fra#e(or4 of Financial Re&orting in India
T#e regulations t#at go$ern >inancial =e'orting by a business entity can $ary de'ending on t#e
entityBs legal form( T#us regulations go$erning t#e financial re'orting by limited liability
com'anies can differ considerably from t#e regulations go$erning 1artners#i's( 1artners#i' re'orts
"ill co$er t#e 'ro$isions mentioned under t#e Indian 1artners#i' Act 29FC( Com'anies registered
under T#e Com'anies Act 29K: can be of se$eral ty'es( >or e0am'le, com'anies registered under
section CK of t#e Act are essentially non'rofit entities, similarly s'ecial 'ro$isions may be
a''licable to o$ernment Com'anies under Section :2; of t#e Act, and Section F "ill be
a''licable to 1ublic Dimited Com'anies( Some of t#e 'ublic Dimited com'anies under t#e Act "ill
also be listed on one or more stoc) e0c#anges( Suc# com'anies "ill co$er t#e s'ecial 'ro$isions
a''licable to >inancial =e'orting enunciated by t#e SE7I ,Securities E0c#ange 7oard of India-
Prepared by Asst. Prof. Rajesh Janardhanan
CF
Accounting For Management ((Module I)
and by t#e $arious stoc) e0c#anges( >inancial re'orts t#at are 'ut by business entities in t#e 'ublic
domain can be classified as+
a- =egular >inancial =e'orts suc# as t#e Annual =e'ort and t#e Half !early =e'ort and
b- >inancial =e'orts issued at t#e time of 'ublic offering of s#ares(
Section C<9 Sub section F of t#e com'anies Act 29K: re8uires t#at t#e 7oo)s of Account s#ould be
)e't on accrual 1asis and according to t#e *ouble Entry System of Accounting( Sub section ? of
Section C<9 re8uires com'anies to 'reser$e t#eir boo)s for a 'eriod of at least eigt years( Under
Section C2< of t#e Act it is t#e duty of t#e 7oard of *irectors to lay before t#e Annual eneral
Meeting ,AM- t#e 7alance s#eet and 1rofit and Doss Account of t#e com'any( Section C22 of t#e
Act deals "it# t#e form and contents of t#e >inancial Statements( T#e 7alance S#eet is re8uired to
be 're'ared in accordance "it# form setout in 1art I Sc#edule II to t#e Act and t#e 1rofit and Doss
Account is to be 're'ared in accordance "it# 1art II of Sc#edule II of t#e Act( Section C2C to C2?
of t#e Act deals "it# accounts of Subsidiary com'anies( T#e 7alance S#eet and 1rofit and Doss
Account #a$e to be signed by t#e Com'any Secretary and at least t"o of t#e directors of t#e
Com'any( T#e Auditors =e'ort li)e t#e 7oard of *irectorsB re'ort under Section C2; must co$er
all t#e anne0ure to t#e 7alance S#eet and s#all be attac#ed to t#e 7alance s#eet( A Co'y of t#e
Annual =e'ort is re8uired to be sent to t#e com'anyBs s#are#olders at least t"entyEone days before
t#e date of t#e AM( T#ree co'ies of t#e 7alance S#eet and t#e 1rofit and loss account s#ould be
filed "it# t#e =egistrar of Com'anies "it#in F< days form t#e date of t#e AM at "#ic# financial
statements "ere laid( According to Section CC<,2-, only 7alance S#eet of a 1ri$ate Dtd(, Com'any
is a 'ublic document( T#e 1rofit and Doss account of a 'ri$ate limited com'any is o'en only to t#e
s#are#olders of t#e com'any( Under section CC: of t#e Act only C#artered Accountants "it#in t#e
meaning of t#e C#artered Accountants Act, 29?9 are 8ualified to be a''ointed as t#e auditors of a
com'any( Section CC; of t#e Act defines t#e 'o"ers and duties of auditors( Com'anies Act
re8uires disclosing, "#et#er its Accounting 1olicies are in accordance "it# Accounting Standards
issued by t#e AS7 of t#e ICAI( Sections C<K to C<3 of t#e Act deals "it# t#e 'ayment of
*i$idends, "#ic# also #a$e bearing on t#e >inancial =e'orts of Com'aniesM "#ic# could be 'aid
only out of 'rofits arri$ed at after 'ro$iding for *e'reciation in accordance "it# t#e 'ro$isions of
subsection C of Section C<K(
SE7I regulations also influence t#e contents of 'eriodic re'orts of listed com'anies(




Prepared by Asst. Prof. Rajesh Janardhanan
C?