AC Module 1

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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 1

Introduction to Accounting

- Thangjam RavichandraAsst. Professor

IASMS

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The Need for Accounting

Managers, investors, and other internal groups

want the answers to two important questions:

How well did

the organization

perform?

Where does

the organization

stand?

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Accountants answer these questions

with three major financial statements:

Income

statement

Balance

sheet

Statement of

cash flows

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A

transaction

is any event that affects the

financial position of an organization

and requires recording.

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Accounting

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Objectives of Accounting

To ascertain whether the business

operations have been profitable or not

To ascertain the financial position of thebusiness

To generate information

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Functions of Accounting

1. Systematic record of business

transactions2. Protecting the property of the business3. Communicating results to interested

parties4. Compliance with legal requirement

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Who uses accounting information ?

Owners

Managers

Investors (including potential)

Analysts on their behalf Creditors (including potential)

Government (tax assessment)

Regulators

Customers

Employees

Public & Research Scholar

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Branches of Accounting

Financial Accounting

Cost Accounting

Management Accounting

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CLASSIFICATION OF ACCOUNTS

ACCOUNTS

PERSONALACCOUNTS

IMPERSONALACCOUNTS

REALACCOUNTS

NOMINALACCOUNTS

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PERSONAL ACCOUNTS

Accounts in the name of persons are known aspersonal accounts.

Eg:Babu A/C,

Babu & Co. A/C,

Outstanding Salaries A/C, etc.

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REAL ACCOUNTS

These are accounts of assets or properties. Assetsmay be tangible or intangible. Real accounts are

impersonal which are tangible or intangible innature.

Eg:- Cash a/c, Building a/c, etc are Real

Accounts related to things which we canfeel, see and touch.

Goodwill a/c, Patent a/c, etc Real Accountswhich are of intangible in nature.

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NOMINAL ACCOUNTS

These accounts are impersonal, but invisible andintangible. Nominal accounts are related to those

things which we can feel, but can not see andtouch. All expenses and losses and all incomesand gains fall in this category.

Eg:- Salaries A/C, Rent A/C, Wages A/C, InterestReceived A/C, Commission Received A/C,Discount A/C, etc.

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Lets Start Then.. Huh?

1. Drawings A/c2. Bank A/c3. Cash A/c4. Discount A/c5. Patent A/c6. Goodwill A/c

7. Salaries A/c8. Capital A/c9. Machinery A/c10.Purchases A/c

: Personal: Personal: Real: Nominal: Real: Real

: Nominal: Personal: Real: Real

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RULES FOR DEBIT AND CREDIT

PersonalAccount

Debit the Receiver

Credit the Giver

Real Accounts

Debit what comes in

Credit what goesout

NominalAccounts

Debit all Expensesand Losses

Credit all Incomesand Gains

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Steps for finding the debit and credit

aspects of a particular transaction

Find out the two accounts involved in the

transaction.

Check whether it belongs to Personal, Real or

Nominal account.

Apply the debit and credit rules for the two

accounts.

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Exercise

Started Business with Rs 50,000 Purchased Furniture for Rs 1000 from Pankaj Goods purchased for cash Rs 20,000 Goods sold to Ram for Rs 5000 on credit Paid salaries to staff Rs 1800

Goods worth Rs 500 returned by Ram Rs 1000 Commission received

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Accounting Equation

Assetsare economic resources that

are expected to benefit futureactivities of the organization.

Liabilitiesare the entitys economic

obligations to nonowners.

Owners equityis the excessof the assets over the liabilities.

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Double EntryAccounting Equation

Initial investment by owners: $100,000 cash

Acquisition of inventory: $75,000 cash

Acquisition of inventory onopen account: $35,000

Merchandise costing $100,000 wassold on open account for $120,000.

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Balancing of Accounting Equation

1) Cash +100,000 +100,000

2) Cash 75,000Inventory + 75,000

3) Inventory + 35,000 + 35,0004a) Receivable +120,000 +120,0004b) Cost 100,000 100,000Subtotal +155,000 + 35,000 +120,000

Assets = Liabilities +Stockholders

equity

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Exercise

Cash collections of accounts receivable: $15,000

Cash payments of accounts payable: $20,000

On March 1, paid $3,000 cash for store rent for

March, April, and May. Rent is $1,000 per month.

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King Hardware Transactions

5) Cash + 15,000

Receivable 15,0006) Cash 20,000 20,0007) Cash 3,000

Prepaid + 3,000

Total 20,000 20,000Totals (1-4) +155,000 + 35,000 +120,000

Assets = Liabilities +Stockholders

equity

134,000 134,000

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Revenues and Expenses

Revenues are increases in ownershipclaims arising from the delivery

of goods or services.

Expenses are decreases in ownership

claims arising from delivering goodsor services or using up assets.

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The Analytical Power of the

Balance Sheet Equation

The balance sheet equation can highlight the linkbetween the income statement and balance sheet.

Assets (A) = Liabilities (L) + Stockholders equity (SE)

A = L + Paid-in capital + Retained income

A = L + Paid-in capital + RevenueExpenses

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Accounting Concepts

Business Entity Concept

Money Measurement Concept

Cost Concept

Going Concern Concept

Dual Aspect Concept

Realization Concept

Accounting Period Concept

Matching

Objective Evidence

Accrual

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Accounting Conventions

Convention of Consistency

Convention of Disclosure

Convention of Conservation

Convention of Materiality

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Fundamental Accounting

Assumptions

Going Concern Consistency Accrual

Disclosure of Accounting Policies as per AS1 :

All significant accounting policies The disclosure should form part of the financial statement Any change in the accounting policies which has material effect

should be disclosed

If the fundamental accounting assumptions viz, Going concern,Consistency and Accrual are followed in financial statement, specificdisclosure is not required. Otherwise, the fact should be disclosed.

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Recording Business Transactions

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Analyzesourcedocuments.

Journalizetransactions inthe general

journal.

Post entries tothe accounts inthe generalledger.

Prepare financialstatements.

Prepare a trialbalance.

Steps in The Accounting Cycle

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Recording Transactions

Each transaction always affects at least twodifferent accounts.

One account has a debit effect.

The second account has a credit effect.

This methodology was named double entry

accounting by whom?

- Luco Pacioli (1494)

All transactions are recorded in the General Journal.

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General Journal Page

GENERAL JOURNAL

Page:

Date Description PR Debit Credit

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Journal EntriesExample 1

On January 1, 19X7, CaldwellCompany borrows $10,000 from

the bank.

Prepare the appropriate general

journal entry for the abovetransaction.

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Journal EntriesSolution 1

Two accounts are affected:Cash is increased by $10,000.

Notes Payable is increased by $10,000.

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Journal Entries

Solution 1



GENERAL JOURNAL

Page: 1


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Journal Entries

Solution 1



GENERAL JOURNAL

Page: 1


1-Jan Cash 100 10,000

Notes Payable 201 10,000

to record loan from bank

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Journal Entries

Solution 1



GENERAL JOURNAL

Page: 1


1-Jan Cash 100 10,000



Typically, accounts arenumbered. The accountnumbers are used as

references for posting to theGeneral Ledger. More onaccount numbers will comelater.

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Journal Entries

Example 2

On January 15, 19X7, CaldwellCompany purchases a truck for

$19,500 cash.

Prepare the appropriate journal

entry for the above transaction.

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Journal Entries

Solution 2

Two accounts are affected:Trucks is increased by $19,500.Cash is decreased by $19,500.

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Journal Entries

Solution 2


GENERAL JOURNAL

Page: 1


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Journal Entries

Solution 2


GENERAL JOURNAL

Page: 1


15-Jan Trucks 150 19,500

Cash 100 19,500

to record purchase of truck

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Journal Entries

Example 3

On January 20, 19X7, CaldwellCo. pays the $400 electric bill for

January.

Prepare the appropriate journal

entry for the above transaction.

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Journal Entries

Solution 3

Two accounts are affected:Utility Expense is increased by $400.

Cash is decreased by $400.

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Journal Entries

Solution 3



GENERAL JOURNAL

Page: 1


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Journal Entries

Solution 3



GENERAL JOURNAL

Page: 1


20-Jan Utility Expense 511 400

Cash 100 400

to record payment of January

electric bill

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Start with the journal entry fromthe General Journal.

GENERAL JOURNALPage: 1


1-Jan Cash 10,000

Notes Payable 10,000


Posting to the GLExample

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1-Jan Cash 10,000



ACCOUNT NAME: CASH ACCOUNT No. 100

Date Description PR Debit Credit Balance

Beginning Balance 0 0

Next, find the appropriate page in theGeneral Ledger for Cash.


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1-Jan Cash 100 10,000



Post the account reference number.





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1-Jan Cash 100 10,000





Beginning Balance 0 01-JanLoan G1 10,000


Post the transaction info to the GL.

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1-Jan Cash 100 10,000





Beginning Balance 0 01-JanLoan G1 10,000 10,000

Update the General Ledger balance.


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1-Jan Cash 100 10,000



ACCOUNT NAME: Notes Payable ACCOUNT No. 201



Posting to the GLExampleNext, find the Notes Payable page inthe General Ledger.

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1-Jan Cash 100 10,000







Post the account reference number.

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1-Jan Cash 100 10,000





Beginning Balance 0 01-JanLoan G1 10,000


Post the transaction info to the GL.

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1-Jan Cash 100 10,000





Beginning Balance 0 01-JanLoan G1 10,000 10,000



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15-Jan Trucks 9,500

Cash 9,500




Beginning Balance 0 01-JanLoan from bank G1 10,000 10,000

Examine the next journal entry.


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15-Jan Trucks 9,500

Cash 100 9,500






Record the account reference.

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15-Jan Trucks 9,500

Cash 100 9,500





15-JanPurchase of truck G3 9,500


Post the entry to the GL.

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15-Jan Trucks 9,500

Cash 100 9,500





15-JanPurchase of truck G3 9,500 500



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IllustrationsJournal, Ledger and

Trial Balance

Page 33-44

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Assignments ( for internals)

1. GAAP and Accounting Environment2. Role of Accounting in Capital Markets and

Corporate Governance3. Frauds done by Accountant with a Case

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AC Module 1

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