Accounting for Manager For MBA

Book-Keeping
“Book keeping is branch of knowledge which tell us how to keep
record” Book-keeping is concerned with recording of financial data.
Characteristics and nature of Book-keeping
1. Book-keeping is a science as well as an art.
2. It records business transitions.
3. Such records quite systematic.
4. The transactions which are recorded, relate to transaction of money.
Meaning Accounting:-
Accounting is the language of business with books of accounts being its script and
debit-credit its style. i.e. the way of expressing it.

Definition of Accounting:-
“The Art of recording, classifying and summarizing in a Significant manner and in
terms of money, transactions and events which are in part at least of a financial character
and interpreting the results thereof.”

According to this definition, following four points are found in accountancy-

 Recording of transactions and events in terms of money.
 Classification or preparation of accounts.
 Summarizing the accounts or preparation of Profit and Loss and Balance Sheet.
 Interpreting the results
(The American Institute of Certified Public Accountants)
Accountancy:-
Accountancy is a study of systematic knowledge and contains those rules,
regulations procedures, principles, concepts and techniques, which are to be
applied in the process of accounting. Its a broader term that acts as a guide for the
preparation of books of accounts and communicating the result to all the concerned
parties.
Objects of Accounting:
Following are some of the most important objects of accounting:
1. Financial information is necessary in order to run a business in an efficient
manner. Reliable information will be available only through keeping proper books of
accounts.
2. Borrowings from Money Lenders:
Proper accounting is essential, if money is to be borrowed for the purpose of business.
The lender will only agree to lend money when he is satisfied as to the solvency of the
borrower. Information available from books of accounts is the means of measuring such
solvency.
3. Verification of Cash:
Cash in hand can be verified and any defalcation can be detected, if proper books of
accounts are maintained

4. Payment of Tax:
Payment of sales tax and income tax is only possible if books of accounts are maintained.
5. Dispute Settlement:
In case of any dispute, books of accounts can be produced in the court of law as a
documentary evidence.
6. Government Requirements and Policies:
Government fixes up fair prices, formulates industrial policy, prepares economic
plans, decides import-export quotas and does many other functions on the basis of
accounting information available from books of accounts.

Characteristics of Accounting:-
1. Economic Events
2. Identification
3. Measurement
4. Recording
5. Communication
6. Interested users of Information
Need of Accounting
A business organization must keep a systematic record of day-to-day
transaction so that it can be known what is exactly happening in the business. A
systematic record of transaction presents a complete financial picture.

The need for accounting may be summarized in the following points

1. Transactions take place regularly in the business. It is not possible to keep all the
transactions in memory.
2. Systematic record of day-to- day transactions in compulsory for every business
organization.
3. It helps in knowing the results of business in terms of profit or loss.
4. Accounting is an important decision- making tool.
5. Accounting is useful to the management. It helps the management to assess the
performance and achievements.

Importance:-

1. It serves as a historical record.

2. It facilitates the preparation of financial statements.
3. It supplies information to interested persons
4. It helps the management in taking important business decisions.
5. It facilitates comparative study of the performance of business over
different periods.
6. It provides evidence in case of disputes.
7. It helps to forecast the future.
8. It provides information for judging the efficiency of business
9. It is useful in getting loans.
10. It helps in valuation of good will.
11. It helps in controlling expenses.
12. It helps in controlling employees.
13. It helps in prevention and detection of errors and frauds.
Limitations of Accounting:-
Accounting suffers from the following limitations:

1. It is historical in nature.
2. Transactions of non-monetary nature will not be recorded in accounting.
3. Information recorded in accounts is influenced by the personal judgment
of the accountant.
 4. In accounting valueless assets are also shown.
5. In accounting price changes are not considered.
6. It is not an exact science.
7. Use of different accounting methods reduces the reliability of accounts.
8. Account records show only actual cost figures.

Users of Accounting Information:-

Internal Users External Users
1. Board of Director 1. Investors
2. General Manager 2. Lenders
3. Sales Manager 3. Suppliers and
Creditors
4. Customers
5. Trade unions
6. Government Agencies
7. Taxation Authorities
8. Society

Accounting Concepts or principles:

Accounting concepts are those assumptions, principles or conditions on which the
accounting system is based. Principles are set of rules to be followed in accounting.
The following are important accounting concepts or principles:

1. Business Entity Concepts According to these concepts, a business is treated as

separate Entity distinct from its owner. This means that in accounting the business and
owner must be treated separately. Thus, when one person invests amount in to the
business, it will be deemed to the liability of the business. The concept of separate
entity is applicable to all form of business.
2. Going concern concepts: According to this, it is assumed that business will exist
for a long time. There is no intention t o liquidate the business in the immediate
future.

3. Money measurement concepts: only those transactions which are expressed in

monetary terms. Transactions which cannot be expressed in money do not find place
in the books of accounts.

4. Cost Concepts: According to this concept, all transactions are recorded in the
books of accounts at actual price involved.

5. Dual aspect Concepts: According to this concept, every transaction has two
aspects. These two aspects are receiving aspect and giving aspect. These two aspects
have to be recorded. The basis of this principle is that for every debit, there is an equal
and corresponding credit.

6. Realization Concept: According to this principle revenue is said to be realized

when goods or services are sold to be a customer. It emphasizes the fact that the mere
receipt of an order for goods or services cannot be taken for the realization of revenue.
So advanced payment received from a customer cannot be considered as revenue
earned.
7. Matching Concept: According to this concept, cost of a business of a particular
period is compared with the revenue of that period in order to ascertain net profit or
net loss.
Accounting conventions
Accounting conventions are the customs and traditions which guide the accountant
while preparing accounting statements. Some of the accounting conventions are:-
(1) Convention of consistency: - This convention follows that the basis followed in
several accounting periods should be consistent. This means the methods adopted in
one accounting year should not be changed in another year. Then only comparison of
results is possible.
(2) Convention of conservatism: - This is a convention of playing safe, which is
followed while preparing the financial statements. The idea of this convention is to
consider all possible losses and to ignore all probable profits.
(3) Convention of Materiality: - Materiality means relevance or importance or
significance. It is generally accepted in the accounting circle that the accounting
statements and records must reveal all material facts.
 Branches of Accounting
1. Financial Accounting:- The Art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events which are in
part at least of a financial character and interpreting the results.
2. Cost Accounting :- Cost Accounting is a specialized branch of accounting. It has
been developed because of limitations of Financial accounting
3. Management Accounting:- Management accounting is the application of
professional information in such a way as to assist the management in the
formation of policies and in the planning and control of the operations of the
undertaking
4. Social Responsibility Accounting:- Social responsibility accounting is a new
phase in the development of accounting. It is concerned with studying the social
effects of business decision. The management is not only responsible for efficient
conduct of business but also to contribute for social welfare.
Definition and Explanation of Journal:
Journal
• The word journal is derived from the Latin word ‘Journ’ which means a day.
• Journal means a day book where in day-to-day business transactions are
recorded in a chronological order.
• The process of recording a transaction in the journal is called Journalisation.
• The entries made in the book are called journal entries.
Entry:
Recording a transaction in the appropriate place of the concerned book of
account is called entry. Entry may be of the following two types:
FORMAT OF JOURNAL
Particulars Amount Amount
(Dr) (Cr)
Mohan (Receiver) Dr. ……. …….
To Cash a/c ……. …….
(Being paid to
Mohan)
 LEDGER:-

INTRODUCTION :- After recording the business transaction in the Journal or

special purpose Subsidiary Books, the next step is to transfer the entries to the
respective accounts in the Ledger. Ledger is a book where all the transactions
related to a particular account are collected at one place.

LEDGER Definition:

The Ledger is the main or principal book of accounts in which all the business
transactions would ultimately find their place under various accounts in a duly
classified form. According to L.C. Cropper,” The book which contains a classified
and permanent record of all the transactions of a business is called the ledger.”
Format of Ledger
Date Particulars J/F Amt. Date Particulars J/F Amt.

The following rules should be observed while posting transactions in the ledger
from the journal:
1. Separate account should be opened in the ledger for posting transactions relating to
different accounts recorded in the journal.
2. The concerned account, which has been debited in the journal should also be
debited in the ledger.
3.The concerned account, which has been credited in the journal should also be
credited in the ledger

Types of Account:

There are three types of Accounts

(I) Personal Account (II) Real Account (III) Nominal Account
(I) Personal Account:- It include the accounts of persons with whom the business
deal. Rule:- “Debit the Receiver” "Dr."
“Credit the Giver” "To"
There are three types of personal Account
Natural Persons:- It refers to all human being such as Ram, Sunil and Anil etc.

Artificial Persons:- Are those persons who are not human but they can work like
Humans. Such as Firm, Govt. bodies, Society, Bank and Club etc.

Representative Persons:- It represent certain person such as outstanding wages and

prepaid Rent etc.
Example:-
(1) Paid to Mohan Rs. 10000:-

Particulars Amount Amount

(Dr) (Cr)
Mohan Dr. 10000 …….
To Cash a/c ……. 10000
(Being paid to
Mohan)

(2) Received Rs. 20000 From Ram.:-

Particulars Amount Amount
(Dr) (Cr)
Cash a/c Dr. 20000 …….
To Ram ……. 20000
(Being received from Ram)

(3) Mohit Commenced business with Cash Rs.50000 :-

Particulars Amount Amount
(Dr) (Cr)
Cash A/c Dr. 50000 ……
To Capital a/c ……. 50000
(Being Started business with cash)
(4) Mohit withdrew Rs. 2000 for personal use:-
Particulars Amount Amount
(Dr) (Cr)
Drawings a/c Dr. 2000 ……
To Cash a/c ……. 2000
(Being withdrawn for personal use)

(5) Purchase Goods From Amit Rs. 15000 :-

Particulars Amount Amount

(Dr) (Cr)
Purchase a/c Dr. 15000 ……
To Amit ……. 15000
(Being Purchase from Amit)

(6) Goods Sold to Ramlal Rs.20000:-

Particulars Amount Amount

(Dr) (Cr)
Ramlal Dr. 20000
To Sales a/c ……. 20000
(Being goods sold to Ramlal)

(7) Deposit into Bank Rs. 6000:-

Particulars Amount Amount

(Dr) (Cr)
Bank a/c Dr. 6000
To Cash a/c ……. 6000
(Being deposited into
bank)

(Dr. santosh Solanki, LNCT-MBA)

(8) Cash withdrawn from Bank for office use Rs. 8000:-

Particulars Amount Amount

(Dr) (Cr)
Cash a/c Dr. 8000
To Bank a/c ……. 8000
(Being withdrew from
bank)

Note:1. Capital accounts always credit

2. Drawings accounts always debit
3. Except some exception Purchase accounts always Debit
4. Sales a/c always Credit
5. Purchase Return or Return outward a/c always Credit
6. Sales Return or Return Inward a/c always Debit

(II) REAL ACCOUNTS:-

RULE:-
“Debit What Comes in” "Dr."
“Credit What Goes out” "To"

There are tow types of Real Accounts:

(i) Tangible Real A/c (ii) Intangible Real A/c

1. Tangible Real Account:- are those which have physical presence. They can be
touch, felt and measured such as Cash, Building and Furniture etc.

2. Intangible Real Account:- Are those assets which do not have any physical
presence and they can neither be seen nor touched such as Goodwill Trade marks
are its example.

(1) Goods Purchased for Cash Rs. 15000 :-

Particulars Amount Amount

(Dr) (Cr)
Purchase a/c Dr. 15000 ……
 To Cash a/c ……. 15000
(Being Purchase for
cash)

(2) Goods sold for Cash Rs. 12000 :-

Particulars Amount Amount

(Dr) (Cr)
Cash a/c Dr. 12000 ……
To Sales a/c ……. 12000
(Being Goods sold for cash)

(3) Purchase Furniture Rs. 10000 :-

Particulars Amoun Amount
t (Cr)
(Dr)
Furniture a/c Dr. 10000 ……
To Cash a/c ……. 10000
(Being Purchase
furniture)

(4) Sold Machinery Rs 20000:-

Particulars Amount Amount
(Dr) (Cr)
Cash a/c Dr. 20000 ……
To Machinery a/c ……. 20000
(Being Purchase for cash)
(5) Goods Bought from Mohan Worth Rs.8000 :-

Particulars Amount Amount

(Dr) (Cr)
Purchase a/c Dr. 8000 ……
To Mohan a/c ……. 8000
(Being Purchase from
Mohan)

(6) Goods Returned to Mohan Rs. 2000 :-

 Particulars Amount Amount
(Dr) (Cr)
Mohan Dr. 2000 ……
To Purchase Return a/c ……. 2000
(Being Returned to mohan)

(7)Goods Sold to Satish worth Rs. 9000 :-

Particulars Amount Amount
(Dr) (Cr)
Satish Dr. 9000 ……
To Sales a/c ……. 9000
(Being sold to satish)

(8)Goods Returned by Satish Rs.3000 :-

Particulars Amount Amount

(Dr) (Cr)
Sales Return a/c Dr. 3000 ……
To Satish a/c ……. 3000
(Being Returned by satishs)
Note:-
(a) If Purchased any Fixed Assets either Cash or Credit than Fixed Assets always
Debit
EXAMPLES:- Purchase Motor car for Rs.10000 :-
Particulars Amount Amount
(Dr) (Cr)
Motor car Dr. 10000 ……
To Cash a/c ……. 10000
(Being Purchase motor car)

Purchase Furniture from K. and Sons Rs. 50000 :-

Particulars Amount Amount
(Dr) (Cr)
Furniture a/c Dr. 50000 ……
To K. and Sons a/c ……. 50000
(Being Purchase from K and
sons)
 (b) If Sold any fixed Assets either cash or Credit than Fixed Assets always Credit
Example:- Sold Building to Krishna and Company Rs. 12000 :-
Particulars Amount Amount
(Dr) (Cr)
Krishna and Co. a/c Dr. 12000 ……
To Building a/c ……. 12000
(Being Sold to K and Co.)

Example:- Sold Machinery for Rs. 10000 :-

Particulars Amount Amount
(Dr) (Cr)
Cash a/c Dr. 12000 ……
To Machinery a/c ……. 12000
(Being Sold to K and Co.)
Examples of Personal Account:-
Capital a/c, Bank Overdraft, Loan from Bank, Drawings, Bank, etc
And All individual accounts like Mohan. Sohan and Amit
Examples of Real Account:-
All Fixed Assets like:-
Land and Building, Plant and Machinery, Furniture and fitting,
Motorcar, Computer and Goodwill etc.
Purchase a/c, Sales a/c, Purchase Return a/c, Sales Return a/c and cash a/c

(III) NOMINAL ACCOUNT

Rule:- “All expenses and Losses are debit” "Dr."

“All Incomes and gains are credit” "To"

Examples of Nominal Account:-

There are two types of Expenses
(1) Direct Expenses (2) Indirect Exp.

(a) Direct Expenses:-

Direct expenses are the expenses incurred by trading concern on Purchase of
goods and bringing them to saleable condition. In the Case of Manufacturing concern
direct expenses also include the cost of conversion of Raw material into finished
product.
Examples of Direct exp.:-Wages, Carriage, Freight, Import duty, Dock
Charges, Octroi, fuel, Gas, Power and Royalty etc.
Example:- Paid wages to Labour Rs.500
Particulars Amount Amount
(Dr) (Cr)
Wages a/c Dr. 500 ……
To Cash a/c ……. 500
(Being wages paid.)
Example:- Purchase Stationery Rs. 1000

Particulars Amount Amount

(Dr) (Cr)
Stationery a/c Dr. 1000 ……
To Cash a/c ……. 1000
(Being paid for stationery.)

Example:- Received Commission in cash Rs.2000

Particulars Amount Amount

(Dr) (Cr)
Cash a/c Dr. 2000 ……
To Commission a/c ……. 2000
(Being Sold to K and Co.)

(b) Indirect Expenses.

Indirect exp. Are those expenses which are incurred in connection with selling and
distribution of goods.
Examples of Indirect Account:-
Indirect Expenses Indirect Income
Salaries and wages Interest received
Rent and taxes, Interest on Securities
Insurance Depreciation Discount received
Bad Debts Dividends Received
Printing and Stationery Profit on sale of assets
Postage and Telegram Commission received
Commission paid Interest on Drawings.
Interest Paid Interest on Investment
Discount Allowed Rent Received
Traveling Expenses
Advertisement
Audit Fees
Telephone
Expenses Law
charges
Repair and renewal
 General expenses, Office
Expenses
Miscellaneous expenses
Charity and Donation
Carriage outward
Loss on Sale of Assets etc.
Interest on Capital
Bank charges etc.

Types of
Discount
Trade discount: The discount which is allowed when purchases are made in large
quantity is known as trade discount. It is allowed as deduction from the sale value and
the sale is recorded at a new amount. This is called sale less trade discount. Trade
discount never show in journal but deducted from price of goods
Cash discount: The discount which is allowed by the supplier for immediate payment
or before the due date is known as cash discount. It is usually allowed as a percentage
of the amount received.
Quantity Discount:- The discount allowed by the seller to the buyer on the amount
crossing minimum target sales is called quantity discount. I.E. after granting a normal
trade discount if the sale amount crosses the minimum target sale, the seller grants an
excess discount to the buyer.
This excess amount of discount is called a quantity discount. It is included in the cash
discount which is shown on the challan/invoice.
Examples:-
(i). Received from Mohan of Rs. 6900 in full settlement of Rs. 7000
Particulars Amount Amount
(Dr) (Cr)
Cash. a/c Dr. 6900 ……
Discount a/c Dr. 100
To Mohan a/c 7000
(Being received in full settlement)

(Dr. santosh Solanki, LNCT-MBA)

(ii) Paid to Neha Rs. 14500 in full settlement of Rs.15000

Particulars Amount Amount

(Dr) (Cr)
Neha a/c Dr. 15,000 ……

To Mohan a/c 14500

To Discount a/c 500

(Being paid to neha in full settlement)

Banking Transaction
1. Cheque Received from Mohan of Rs. 6000
Particulars Amount Amount
(Dr) (Cr)
Cash. a/c Dr. 6000 ……
To Mohan a/c ……. 6000
(Being Cheque received)

2. Cheque received from Neha and sent to Bank same day Rs 4000
Particulars Amount Amount
(Dr) (Cr)
Bank. a/c Dr. 4000 ……
To Neha a/c ……. 4000
(Being cheque sent to bank)

3. Goods purchased and payment made by cheque Rs. 5000

Particulars Amount Amount
(Dr) (Cr)
Purchase. a/c Dr. 5000 ……
To Bank a/c ……. 5000
(Being Purchase through cheque)
4. Cheque issued for Charity Rs.1000
Particulars Amount Amount
(Dr) (Cr)
Charity a/c Dr. 1000 ……
To Bank a/c ……. 1000
(Being cheque issued for charity)

5. Bank charges charged by Bank Rs. 500

Amount Amount
(Dr) (Cr)
Bank Charges. a/c Dr. 500 ……
To Bank a/c ……. 500
(Being Exp. charged by Bank)

6. Neha’s cheque dishonored and returned by Bank

Particulars Amount Amount
(Dr) (Cr)
Neha a/c Dr. 4000 ……
To Bank a/c ……. 4000
(Being cheque dishonored)

7. Commission credited by Bank Rs. 700

Particulars Amount Amount
(Dr) (Cr)
Bank a/c Dr. 700 ……
To Commission a/c ……. 700
(Being Comm. credited by Bank)

8. Cheque issued to Rajesh Rs. 980 in full settlement of Rs. 1000

Particulars Amount Amount
(Dr) (Cr)
Rajesh a/c Dr. 1000 ……
To Bank a/c ……. 980
To Discount a/c 20
(Being cheque issued to Rajesh)