Accounting for managers

Accounting for managers Faculty: Ms. Luvnica Rastogi Amity International Business School Imp Website: www.investorwords.com

Learning Objectives

Introduction

Definition:

Meaning of Accounting Accounting is an Art Accounting classifies as an art as it helps in attaining the goal of ascertaining the financial results. Analysis and interpretation of the financial data is the art of accounting, requiring special knowledge, experience and judgment.

Contd. Involves Recording, Classifying and Summarizing Recording means systematically writing down the transactions and events in account books soon after their occurrence. Classifying is the process of grouping transactions or entries of similar nature at a place. This is done by opening accounts in a book called ledger. Summarizing involves the preparation of reports and statements from the classified data (ledger), understandable and useful to management and other interested parties. This involves preparation of final accounts.

Records Transaction in Terms of Money Recording business transaction in terms of money is the common measure of recording and helps in better understanding of the state of affairs of the business.

Deals with Financial Transactions Accounting records only those transactions and events which are of financial character. If a transaction has no financial character, it will not be measured in terms of money and hence will not be recorded.

Interpretation Interpretation is the art of interpreting the results of operations to determine the financial position of an enterprise, the progress it has made and how well it is getting along.

Accounting involves Communication The results of analysis and interpretation are communicated to management and to other interested parties

Accounting-- A Means and Not an End Keeping accounts is not the primary objective of a person or an entity. On the contrary, the primary objective is to take decision on the basis of the financial facts given by the accounting statements. Thus, the understanding of accounts is not the basic objective. It only helps to realize a specific objective. As such, accounting is not an end in itself but a means to an end.

Objectives and Functions • Provides necessary information about the financial activities to the interested parties • Provides necessary information about the efficiency or otherwise of management with regard to the proper utilization of scarce resources • Provides necessary information for making predictions (financial forecasting) • Facilitates to evaluate the earning capacity of a firm by supplying the statement of financial position, the statement of periodical earning, together with the statement of financial activities to various interested parties

Contd… • Facilitates in decision-making with regard to the changes in the manner of acquisition, utilization, preservation and distribution of scarce resources • Facilitates in decision-making with regard to the replacement of fixed assets and expansion of the firm • Provides necessary data to the government to enable it to take proper decisions concerning to duties, taxes, price control etc. • Devices remedial measures for the deviations of the actual from the budgeted performance • Provides necessary data and information to managers for internal reporting and formulation of overall policies

Branches of Accounting Accounting deals with recording, classifying and summarizing the business events that have already occurred. It is, therefore, historical in nature. That is why it is called historical accounting or post-mortem accounting or more popularly financial accounting. Its aim is to collate the information about income and financial position on the basis of business events that have taken place during a particular period of time.

Cost Accounting Cost accounting deals with the detailed study of cost pertaining to cost ascertainment, cost reduction and cost control. The emphasis is on historical costs as well as future decision-making costs.

Management Accounting Management accounting provides information to management not only about cost but also about revenue, profits, investments etc. to enable managers to discharge their duties more efficiently and effectively. Thus, it provides required database to managers to plan and control the activities of business.

Social responsibility accounting involves accounting of social costs incurred by an enterprise and reporting of social benefits created by it. Social Responsibility Accounting

Users of Accounting Information (1) Owner(s) Owner(s) refers to a person or a group of persons who has provided capital for running the business. It refers to an individual in case of proprietor, partners in case of partnership firm and shareholders in case of a joint stock company. The information needs of shareholders have assumed a greater significance in the corporate business world because of the separation of ownership and management in the case of joint stock companies.

Contd. (2)Managers For managing business profitably, management requires adequate information about financial results and financial position. By providing this information, accounting helps managers in efficient and smooth running of the business. (3). Investors Prospective investors would be keen to know about the past performance of business before making investment in that concern. By analyzing historical information provided by accounting records, they can arrive at a decision about the expected return and the risk involved in investing in a particular business.

Contd. (4). Creditors and Financial Institutions Whosoever is extending credit or loan to a business enterprise would like to have information about its repaying capacity, credit worthiness etc. Analyzing and interpreting the financial statements of an enterprise can help in obtaining the required information. (5). Employees Employees are concerned about job security and future prospects. Both of these are intimately related with the performance of business. Thus, by analyzing the financial statements, they can draw conclusions about their job security and future prospects.

Contd. (6). Government Government policies relating to taxation, providing subsidies etc. are guided by the relevance of industries in the economic development of the country. The policies also consider the past performance of industries. Information about past performance is provided by the accounting system. Collection of taxes is also based on accounting records. (7).Researchers Researchers need financial information for testing hypothesis and development of theories and models. The required information is provided by accounting system.

Contd. (8). Customers The customers who have developed loyalties toward a business are those who are certainly interested in the continuance of the business. They certainly want to know about the future directions of the enterprise with which they are associating themselves. The way to information about the enterprise is through their financial statements. (9).Public Public at large is always interested in knowing the future directions of an enterprise and the only window to peep inside an enterprise is through their financial statements.

Advantages Of Accounting • Facilitates to Replace Memory Accounting facilitates to replace human memory by maintaining a complete record of financial transactions. Human memory is limited by its very nature. Accounting helps to overcome this limitation. 2. Facilitates to Comply with Legal Requirements 3. Facilitates to Ascertain Net Result of Operations 4. Facilitates to Ascertain Financial Position 5.Facilitates the Users to take Decisions

Contd. 6. Facilitates a Comparative Study 7. Assist Management 8. Facilitates Control over Assets 9. Facilitates the Settlement of Tax Liability 10. Facilitates the Ascertainment of Value of Business 11. Facilitates Raising Loans

Basic Terms in Accounting 1. Capital 2. Assets Assets refer to the tangible objects or intangible rights owned by an enterprise and carrying probable future benefits. Capital generally refers to the amount invested in an enterprise by its owners. For example, paid up share capital in a corporate enterprise. Capital also refers to the interest of owners in the assets of an enterprise.

Basic Terms in Accounting 3. Liability 4. Revenue Revenue is the gross inflow of cash, receivables or other considerations arising in the course of ordinary activities of an enterprise’s resources yielding interest, royalties and dividends. • Liability is the financial obligation of an enterprise other than owners’ funds.

Basic Terms in Accounting 5. Cost of Goods Sold 6. Profit Profit is a general term for the excess of revenue over related cost. When the result of this computation is negative, it is referred to as loss. • It is the cost of goods sold during an accounting period. In manufacturing operations, it includes the following: • • Cost of materials • • Labor and factory overheads

Basic Terms in Accounting 8. Expenses 9. Deferred Expenditure Deferred expenditure is the expenditure for which payment has been made or a liability incurred but which is carried forward on the presumption that it will be a benefit over a subsequent period or periods. This is also referred to as deferred revenue expenditure. • Expense is the cost relating to the operation of an accounting period, or the revenue eared during the period, or the benefit of which do not extend that period.

Sundry Creditor Sundry Debtor Sundry debtors are persons from whom amounts are due for goods sold or services rendered, or in respect of contractual obligations. These are also termed as debtor, trade debtor and account receivable. • Sundry creditor is the amount owed by an enterprise on account of goods purchased or services received, or in respect of contractual obligations. It is also termed as trade creditor or account payable.

Contingent Asset Contingent Liability Contingent liability is an obligation relating to an existing condition or situation which may arise in future depending on the occurrence or non-occurrence of one or more uncertain future events. • Contingent asset is an asset, the existence, ownership or value of which may be known or determined only on the occurrence or non-occurrence of one or more uncertain future events.

Accounting Cycle

ACCOUNTING CONCEPTS • The Business Entity Concept: • Entity concept is an assumption that for an accounting purposes, the business is separate and different from that of its owners. The entity concept is also known as the concept of an “Enterprise” and is one of the central concepts in accounting. The entity concept may be applied to the whole organization or even to the part of the organization. Thus according to these concepts the business is treated as separate unit from that of its owners, creditors, managers, employees and others.

The Going Concern Concept • According to this concepts an enterprises has an unlimited existence. Thus the concept of Going Concern Continuity can be expressed as under.“Unless & until there is evidence to the contrary, anenterprise must be considered as continuing largely in itspresent form and with its present purpose”

3. The Money Measurement Concept: - • The money measurement a concept is an assumption that any accounting transaction is to be measured in money or money’s worth. It is only when a transaction is measured that it can be recorded in the books of an enterprise and the result of the business is determined. • Thus the measurement of a transaction also has to be in a common denomination (medium). • Money is this common denominations in which transaction are recorded in the books of account.

4. The concept of Accounting Periodicity: - • The determination of the income of the enterprise cannot be postponed till the end of the enterprise. Since, according to Going-concern concept there is no limit for the life of the enterprises. Hence the economic activities of the business must be recorded periodically. These period is called as Accounting period & these Accounting period is normally called as “Accounting Year” or “Financial Year” or “Fiscal Year”. • It is, within this Accounting Year, that the income & expenses (i.e.) costs & revenues are matched with reasonable accuracy to provide significant results.

5. The Historical Cost Concept: - • According to Historical cost concept, all the transactions are recorded in the books at cost and not at its market value. Thus the underlying ideas of this concept are two forms.a. An asset is recorded at the price paid to acquire it i.e. atcost andb. This cost is the basis of all the subsequent treatment ofthe assets. e.g. depreciation, stock valuation, etc.,

6. The Concept Of Matching Cost and Revenues • Matching of Expired cost (i.e., expenses) and revenues for the period’s determination of income, is one of the most important concept and procedures of accounting. • This concept follows the accounting period concept i.e. once an accounting period is determined, within that period, the revenues and its related costs are matched. • This concepts is one of the most important concept of accounting and has received major attention of accountants. Matching of costs and revenue is the ‘Test reading’ of the results and the success of the business activity. At the same time, it is one of the most difficult accounting problems.

7. The Accrual Concept • This concept is also called the Accrual theory of Accounting or Accrual Accounting It means a system of recording revenues and expenses of particular accounting period. • Whether or not they are receive or paid in cash, at the time of accounting. It is also known as “Mercantile System of Accounting” as contrasted to “ Cash system of Accounting. In cash system of accounting, the revenues are recorded only when received, whether due or not. Payments i.e. expenses are also recorded irrespective of the fact whether they pertain to the period concerned or not. • For matching of costs and revenue under accrual concept, all revenues related to current year, whenever received, and all costs of the current year, whenever paid, must be taken into account.

CONVENTIONS • ASSIGNMENT: • What are the conventions of accountancy ?Explain.

CONVENTIONS Consistency: This concept states that once the organisation has decided on a method, it should use the same method subsequently unless there is a valid reason for a change of method. If frequent changes are made it is not possible to carry out comparisons on an inter-period or interfirm basis. If a change is necessary it has to be highlighted. e.g. if depreciation is charged on diminishing balance method, it should be done year after year.

Disclosure • All significant information should be disclosed. The disclosure concept states that all significant information should be disclosed and all insignificant information should be disregarded. However, there are no definite rules to separate the two. For recording purposes also only significant events are recorded in detail taking into consideration the cost of detailed record keeping

Materiality : The accountant should attach importance to material details and ignore insignificant details. The question what constitutes a material detail is left to the discretion of the accountant. An item is material if there is reason to believe that knowledge of it would influence the decision of the informed investor. a) Materiality of information b) Materiality of amount c ) Materiality of procedure.

Conservatism Financial statements are drawn on a conservatism basis where better evidence is required of losses. This is necessary as Management and ownership are in different hands and a cut is needed on management to show overoptimistic, favourable performance results. For example, inventories are valued at the cost or market price whichever is lower. Revenues are recognised when they are certain but expenses as soon as they are reasonably possible. e.g. it encourages the accountant to create provisions for bad and doubtful debts.

DOUBLE ENTRY SYSYTEM • Double-entry accounting is a method of record-keeping that lets you track just where your money comes from and where it goes. • Using double-entry means that money is never gained nor lost---it is always transferred from somewhere (a source account) to somewhere else (a destination account). This transfer is known as a transaction, and each transaction requires at least two accounts. • An account is a record for keeping track of what you own, owe, spend or receive.

Contd… • For example, we buy machinery for Rs. 300,000. • It has brought two changes, machinery increases by Rs 300,000 and cash decreases by an equal amount. • While recording this transaction in the books of accounts, both the changes must be recorded. In accounting language these two changes are termed "as a debit change" & "a credit change".

Contd… • Thus we see that for every transaction there will be two entries, one debit entry and another credit entry. • For each debit there will be a corresponding credit entry of an equal amount. • Conversely, for every credit entry there will be a corresponding debit entry of an equal amount. • So, the system under which both the changes in a transaction are recorded together, one change is debited, while the other change is credited with an equal amount, is known as double entry system.

ACCOUNTING EQUATION • The equation that is the foundation of double entry accounting. The accounting equation displays that all assets are either financed by borrowing money or paying with the money of the company’s shareholders. Thus, the accounting equation is Assets = Liabilities + Shareholder Equity

Accounting for managers