MBA - I Semester I

101-Managerial Accounting

By- Prof. Rajesh Gade

Email- [email protected]
Mob-+919527449527
 Business..???

Profit, Loss…???

Assets, Liabilities..???

Debit, Credit, Account, Accounting,

Accountancy….???
 Book-keeping and Accounting

Book-keeping:-

Book-keeping is the art of recording business transactions in a systematic

manner. Book-keeping involves the recording, on a daily basis, of a
company’s financial transactions.

Accounting:-

Accounting is all about the process that helps to record, summarize, analyze,
and report data that concerns financial transactions.

It is a systematic process of identifying, recording, measuring, classifying,

verifying, summarizing, interpreting and communicating financial information.
 Steps in Accounting Cycle
Recording
Recording is a basic phase of accounting
that is also known as bookkeeping. In this
phase, all financial transactions are
recorded in a systematical and
chronological manner in the appropriate
books or databases.
Accounting recorders are the documents
and books involved in preparing financial
statements.
 Classifying

The classifying phase of accounting involves

sorting and grouping similar items under the
designated name, category or account. This phase
uses systematic analysis of recorded data in which
all transactions are grouped in one place. For
example, "travel expenses" might be a category
that accountants use to classify expenses relating
to company travel. The term “ledger” refers to the
book in which classifications are recorded.
 Summarizing
The summarizing phase of accounting
involves summarizing the data after each
accounting period, such as a month, quarter or
year. The data must be presented in a manner
which is easy to understand and use by both
external and internal users of the accounting
statements. Graphs and other visual elements
are often used to complement the text data.
 Analyzing and Interpretation
The interpreting phase of the accounting
process in concerned with analyzing financial
data, and is a critical tool for decision-making.
This final function interprets the recorded data
in a manner which allows end-users to make
meaningful judgments regarding the financial
conditions of a business or personal account,
as well as the profitability of business
operations.
 Objectives of Accounting:-

Permanent Record
Measurement of Outcome
Creditworthiness
Efficient Use of Resources
Projections
Branches of Accounting
Financial Accounting
It provides information about financial performance and
financial position of the business. The main purpose of
financial accounting is to calculate the profit or loss of a
business during a period and to provide an accurate picture of
the financial position of the business as on a particular date.
Cost Accounting
It provides information of ascertainments of costs to control
costs and for decision making about the costs. The objective
of cost accounting is to help the management in fixing the
prices and controlling the cost of production. It also pin points
any wastages, leakages and defects during manufacturing
and marketing processes
Management Accounting
The accounting system which provides relevant information to
the managers to make policies, plans and strategies for
running the business effectively is known as Management
Accounting.
Users of Accounting Information
 Accounting Concepts

Business entity concept:

A business and its owner should be treated separately as far as their
financial transactions are concerned.
Money measurement concept:
Only business transactions that can be expressed in terms of money are
recorded in accounting, though records of other types of transactions may
be kept separately.
Dual aspect concept:
For every credit, a corresponding debit is made. The recording of a
transaction is complete only with this dual aspect.
Going concern concept:
In accounting, a business is expected to continue for a fairly long time and
carry out its commitments and obligations. This assumes that the business
will not be forced to stop functioning and liquidate its assets at “fire-sale”
prices.
Cost concept:
The fixed assets of a business are recorded on the basis of their original
cost in the first year of accounting. Subsequently, these assets are
recorded minus depreciation. No rise or fall in market price is taken into
account. The concept applies only to fixed assets.
Accounting period concept:
Each business chooses a specific time period to complete a
cycle of the accounting process—for example, monthly,
quarterly, or annually—as per a fiscal or a calendar year.
Matching concept:
This principle dictates that for every entry of revenue
recorded in a given accounting period, an equal expense
entry has to be recorded for correctly calculating profit or
loss in a given period.
Realization concept:
According to this concept, profit is recognized only when it
is earned. An advance or fees paid is not considered a
profit until the goods or services have been delivered to
the buyer.
Accrual concept:
According to this concept, revenue is recognized when it is
realized, i.e. when sale is complete and it is not important
whether cash is received or not.
 Accounting Conventions

Conservatism
Conservatism is the convention by which, when two values of a
transaction are available, the lower-value transaction is
recorded. By this convention, profit should never be
overestimated, and there should always be a provision for
losses.
Consistency
Consistency prescribes the use of the same accounting
principles from one period of an accounting cycle to the next, so
that the same standards are applied to calculate profit and loss.
Materiality
Materiality means that all material facts should be recorded in
accounting. Accountants should record important data and
leave out insignificant information.
Full disclosure
Full disclosure entails the revelation of all information, both
favorable and detrimental to a business enterprise, and which
are of material value to creditors and debtors.
Basic concepts and terms used in accounting

Invoice-
Bill prepared by a seller of goods or services and submitted to the purchaser.
Journal Entry (JE)-
Journal Entries are how updates and changes are made to a company’s books. Every Journal Entry must consist of a unique
identifier (to record the entry), a date, a debit/credit, an amount, and an account code (that determines which account is
altered).
General Ledger –
Record of all financial transactions across all of a company's accounts, which is maintained continuously for the entire life of the
company.
Trial Balance (TB)-
Trial Balance is a listing of all accounts in the General Ledger with their balance amount (either debit or credit). The total
debits must equal the total credits, hence the balance.
Balance Sheet -
A financial document that reconciles all the company's assets with their liabilities and equity.
Accounts Payable –
Outstanding payments the company currently owes to suppliers, vendors, and creditors essentially any bills the company
still has yet to pay.
Accounts Receivable –
Outstanding payments the company is currently owed by all customers or clients. Basically, this is anything the company
bills out.
Costs of Goods Sold –
The total money spent to produce goods and services, including production, labor, storage and material costs.
Fixed Assets –
Assets with long-term value, such as land and property, tools and machinery, or vehicles.
Liabilities –
Outstanding payments the company is currently owed by all customers or clients. Basically, this is anything the
company bills out.
Current Asset
ASSET that one can reasonably expect to convert into cash, sell, or consume in operations within a
single operating cycle, or within a year if more than one cycle is completed each year.
Current Liability
Obligation whose LIQUIDATION is expected to require the use of existing resources classified as
CURRENT ASSETS, or the creation of other current liabilities.
Expenses –
Any additional money spent operating the company that's not associated with the production of
sellable products and services. Examples of expenses include office supplies, lease for the place of
business and employee wages.
Income Statement –
All outstanding debts owed by the company. This could include accounts payable, loans, liens on
property or other long-term investments.
Net Income –
The company's total profit (or loss, if negative) once costs and expenses are subtracted from
revenue.
Revenue –
All incoming money from selling products and services or generated through a company's
additional assets, before expenses are taken into account. Also referred to as "gross income.“
Capital Expenditure
Outlay of money to acquire or improve capital assets such as buildings and machinery.
Credit –
An entry on a balance sheet that decreases asset values and/or increases liability and equity
values.
Debit –
An entry on a balance sheet that increases asset values and/or decreases liability and equity
values (or incoming payments).
Bad Debt
All or portion of an ACCOUNT, loan, or note receivable considered to be uncollectible.
 Capital & Revenue Expenditure

Capital expenditures
Capital expenditures are for fixed assets, which are expected to be
productive assets for a long period of time. A capital expenditure is an
amount spent to acquire or significantly improve the capacity or
capabilities of a long-term asset such as equipment or buildings. Usually
the cost is recorded in a balance sheet account that is reported under the
heading of Property, Plant and Equipment.
Examples of Capital Expenditures
Examples of capital expenditures include the amounts spent to acquire or
significantly improve assets such as land, buildings, equipment,
furnishings, fixtures, vehicles.

Revenue expenditures
Revenue expenditures are for costs that are related to
specific revenue transactions or operating periods, such as the cost of
goods sold or repairs and maintenance expense. A revenue expenditure is
an amount that is spent for an expense that will be matched immediately
with the revenues reported on the current period's income statement.
Examples of Revenue Expenditures
Examples of revenue expenditures include the amounts spent on repairs
and maintenance, selling, general and administrative expenses.
 Capital & Revenue Receipts
Capital Receipts
Capital Receipts are the income generated from the non-operating sources, which are having a
long term effect.
Capital receipts are the income received by the company which is non recurring in nature.
They are generally part of financing and investing activities rather than operating activities.
The capital receipts either reduces an asset or increases a liability. The receipts can be
generated from the following sources:
 Issue of Shares
 Issue of debt instruments such as debentures.
 Loan taken from a bank or financial institution.
 Government grants.
 Insurance Claim.
 Additional capital introduced by the proprietor

Revenue Receipts
Revenue Receipts are the major source of income of the enterprise, without which a business
may not survive for a long time.
The income received from the day to day activities of business includes all the operations that
bring cash into the business like:
 Revenue generated from the sale of inventory
 Services Rendered
 Discount Received from the creditors or suppliers
 Sale of waste material/scrap.
 Interest Received
 Receipt in the form of dividend
 Rent Received
Fundamental Accounting Equation

Assets=(Liabilities + Owner’s Equity)

 The accounting equation is considered to be the foundation of the

double-entry accounting system.
 The accounting equation shows on a company's balance sheet where
the total of all the company's assets equals the sum of the company's
liabilities and shareholders' equity.
 Assets represent the valuable resources owned by the company.
 The liabilities represent their obligations.
 Both liabilities and shareholders' equity represent how the assets of
a company are financed.
 Financing through debt shows as a liability, and financing through
issuing equity shares appears in shareholders' equity.
Types of Accounts

Personal Account:
Accounts that deals with persons, i.e. human beings and artificial judicial persons such as companies,
government organisations, HUF, etc.
Natural Personal Account: Accounts that are concerned with natural human beings are called natural
personal account. It includes accounts of debtors, creditors, proprietor, etc.
Artificial Personal Account: All the business concern has a separate legal identity in the eyes of the
law, and so the entities are different from its members. Therefore, the accounts of clubs, charitable
trust, company, bank, etc are covered under this category.
Representative Personal Account: The accounts which represent persons or group thereof, are called
representative personal accounts, such as capital A/c, drawings A/c, prepaid A/c, outstanding liability
A/c.
Impersonal Account:
As the name suggests, the accounts which are not personal are called impersonal account.
Real Account: Real accounts covers all the accounts related to firm’s assets. It includes both tangible real
account, such as cash A/c, building A/c, furniture A/c, investment A/c, etc. and intangible real account,
such as goodwill A/c, patent A/c, intellectual property A/c.
Nominal Account: These are fictitious accounts, that are associated with expenses, losses, revenues and
gains of the firm, such as rent and rates account, travelling expenses A/c, the commission received
A/c, interest paid A/c.
 Golden Rules of Accounting

As per Double Entry System of Book Keeping, every transaction affects two
sides, i.e. debit and credit. So, the transactions are entered in the book as per
the Golden Rules of Accounting, to know which account is to be debited and which
one is to be credited.

Personal Account

“Debit the Receiver, Credit the Giver”

Real Account

“Debit what comes in, Credit what goes out”

Nominal Account

“Debit all expenses and losses, Credit all incomes and gains”
Journal

In the accounting world, Journal refers to a book wherein transactions are logged for the
very first time, and that is why it is also called as “Book of Original Entry“.
There are two types of the journal
General Journal:
General Journal is one in which a small business entity records all the day to day
business transactions
Special Journal:
In the case of big business houses, the journal is classified into different books called as
special journals. Transactions are recorded in these special journals on the basis of their
nature. These books are also known as subsidiary books. It includes cash book, purchase
day book, sales day book, bills receivable book, bills payable book, return inward book,
return outward book and journal proper.

The steps involved in the process of Journalizing are as under:

Identification of Accounts:
The first and foremost step in any given transaction is to identify the accounts which are
being affected with it.
Recognition of Account type:
Once the accounts are identified, the type of account is ascertained, i.e. whether it is a
personal account, real account or nominal account
Applying the golden rules of accounting:
The rules of debit and credit, i.e. the golden rules of accounting are to be applied to the
accounts which are affected by the transactions.
Ledger

Ledger implies the principal books of accounts, wherein all accounts, i.e.
personal, real and nominal are maintained. After recording the transactions
in the journal, the transactions are classified and grouped as per their title,
and so all the transactions of similar type into are put in a particular
account.

Posting
When the debit and credit items are transferred from journal to the specific
ledger accounts, the process is called as Posting.
Trial Balance

Trial Balance refers to a schedule, in which the balances of all ledger books
are assembled into debit and credit columns, to check the arithmetical
accuracy of the entries posted in the ledger accounts.
The balances of all the assets, expenses, losses, drawings, cash and bank
account are taken to the debit column whereas the balances of all the
liabilities, incomes, gains, capital are transferred to the credit column.
Financial Statements/Accounts

Financial statements are reports prepared by a company’s

management to present the financial performance and position at a
point in time.
Trading Account
Preparing a trading account is the first stage in of final accounts of a
trading concern. It determines the gross profit or gross loss of the
concern for that accounting year.
Profit & Loss Account
An account in the books of an organization to which incomes and
gains are credited and expenses and losses debited, so as to show
the net profit or loss over a given period.
A financial statement showing a company's net profit or loss in a
given period.
Balance Sheet
A balance sheet or statement of financial position, reports on a
company's assets, liabilities, and owners equity at a given point in
time. Balance sheet is a financial statement which shows the net
worth of a company at the end of a financial period. A Balance sheet
portrays the financial position of a company, disclosing what it owes
and owns.
Trading Account
Profit & Loss Account
Balance Sheet
Treatment of some items from trial balance
Important Adjustment of Final Account
 Forms of Business Organization
Business :-
Business is the activity of making one's living or making money by producing or buying and
selling products (such as goods and services).
An organization or economic system where goods and services are exchanged for one another or for money.
Every business requires some form of investment and enough customers to whom its output can be sold on a
consistent basis in order to make a profit.

Types of Business
There are three major types of businesses:

1. Service Business
A service type of business provides intangible products (products with no physical form). Service type firms
offer professional skills, expertise, advice, and other similar products.
Examples of service businesses are: salons, repair shops, schools, banks, accounting firms, and law firms.

2. Merchandising Business
This type of business buys products at wholesale price and sells the same at retail price. They are known as
"buy and sell" businesses. They make profit by selling the products at prices higher than their purchase costs.
A merchandising business sells a product without changing its form.
Examples are: grocery stores, convenience stores, distributors, and other resellers.

3. Manufacturing Business
Unlike a merchandising business, a manufacturing business buys products with the intention of using them as
materials in making a new product. Thus, there is a transformation of the products purchased.
A manufacturing business combines raw materials, labor, and factory overhead in its production process. The
manufactured goods will then be sold to customers.
Forms of Business Organization:-

1. Sole Proprietorship
A sole proprietorship is a business owned by only one person. It is easy to set-up
and is the least costly among all forms of ownership.
The owner faces unlimited liability; meaning, the creditors of the business may
go after the personal assets of the owner if the business cannot pay them.
The sole proprietorship form is usually adopted by small business entities.

2. Partnership
A partnership is a business owned by two or more persons who contribute
resources into the entity. The partners divide the profits of the business among
themselves.
In general partnerships, all partners have unlimited liability. In limited
partnerships, creditors cannot go after the personal assets of the limited
partners.

3. Hindu Undivided Family (HUF)

Business Formed by birth in a Hindu family
The family pool of resources
Family members are automatic co-owners
Head of the family (Karta) is the decision maker
The Karta has unlimited liability
4. Corporation
A corporation is a business organization that has a separate legal personality from its owners.
Ownership in a stock corporation is represented by shares of stock.
The owners (stockholders) enjoy limited liability but have limited involvement in the company's
operations. The board of directors, an elected group from the stockholders, controls the activities
of the corporation.
Private Company
Minimum members = 2, maximum members = 200, and a minimum of two directors, Minimum
Capital 1,00,000
Certain restrictions on the transfer of shares
Once incorporated, the company can start the business
Public Company
Minimum members = 7, maximum members = no limit, and a minimum of three directors,
Minimum Capital 5,00,000
Shares are freely tradable on the stock exchange through a listing
Also, post-incorporation, the company must obtain a Certificate of Commencement of Business to
start the business

5. Cooperative
A cooperative is a business organization owned by a group of individuals and is operated for their
mutual benefit. The persons making up the group are called members. Cooperatives may be
incorporated or unincorporated.
Some examples of cooperatives are: water and electricity (utility) cooperatives, cooperative
banking, credit unions, and housing cooperatives.

6. Joint Venture
Joint Venture is when two organizations come together for a specific purpose. It is like a
partnership, except for the fact that it is meant to achieve a common purpose after which the
parties to the joint venture proceed their own way.