Amity Business School

Accounting for
Management

Amity Business School

ACCOUNTING
Accounting is an art of Recording, Classifying, Summarizing,
Analyzing, Interpreting and Communication the economic
information of an organization to its users.
Accounting is also called the language of business
Accounting is a method to communicate financial information to
interested internal and external parties.

Amity Business School

Activities Under
Accounting
Identifying

Measuring

Recording

Classifying

Summarizing

Transactions
Events
Analyzing

Interpreting

Communication

Amity Business School

ACCOUNTANCY, ACCOUNTING AND

BOOK-KEEPING
Accountancy
Accounting
Book-Keeping

Amity Business School

ACCOUNTING

CYCLE

Accounting cycle is a complete sequence beginning with the

recording of the transaction and ending with preparation
of the final accounts.
Steps in Accounting cycle:
1. Journalizing (Recording the Transaction)
2. Posting (Transfer of transaction in respecting a/c)
3. Balancing (Calculating diff. b/w both sides of a/c)
4. Trial Balance (Preparing list of all a/c)
5. Income Statement (Preparing Trading and P&L a/c)
6. Balance sheet (Preparing Balance Sheet)

Amity Business School

Users of Accounting
Creditors (Short term and Long term)
Investors (Present and Potential)
Management
Employees
Tax Authorities
Customers
Government and their Agencies
Public

Amity Business School

Amity Business School

Business Entity Concept

Money Measurement Concept
Going concern Concept
Materiality Concept
Full Disclosure concept
Materiality Concept
Consistency Concept
Conservatism Concept
Dual Aspect

Amity Business School

Amity Business School

Accounting Equation means the total of assets will be equal to the total of
liabilities. The basic idea behind this equation is that the business does not have
anything of its own. All assets of the business are claimed by someone (either owner of
outsiders). It follows, therefore that, whenever an asset comes into business, and equal
claims arises or an equal value of other asset goes away. As no asset can drop from
heaven, it must be accompanied by a claim. This expression can be shown in the form
of following equation:
Assets = Equities*
or
Assets = Liabilities + Capital
*Claims of various parties against the assets
Example:
Govind commenced business with capital of Rs. 60, 000.
Assets = Liabilities + Capital
Cash = Liabilities + Capital
60, 000 =
Nil + 60, 000

Amity Business School

Govind purchased goods from Gopal on credit for Rs. 20, 000
Assets

Liabilities

Creditors

Capital
Cash
Capital
Old Equation
000
Transaction
New Equation
000

60, 000 +
0

Goods =
0

+ 20, 000 =

20, 000

60, 000 + 20,000 =

20, 000

Govind purchased furniture for cash Rs. 2, 000.

Govind purchased goods for cash Rs. 30, 000.
Goods costing Rs. 15, 000 sold on credit for Rs. 18, 000.
Paid Rent Rs. 600.

+
+
+

60,
0
60,

Amity Business School

Amity Business School

Classification of
Accounts
Personal Account

Natural

Artificial

Impersonal Account

Representative

Real Accounts

Nominal Account

Personal Account: The accounts which relates to an individual, firm, company or an

institution are called personal account. Account of Mohan, account of Ram Chander, Krishan
Chander, Account of D.C.M. Ltd, Account of Delhi University, Bank Account, Capital Account
of the proprietor, Drawing account of the proprietor etc.
Rule: Debit the receiver and Credit the giver
In other words, Debit that persons account who receives something from the business and
Credit that persons account who gives something to the business"

Amity Business School

Example 1: Paid Rs. 1,000 to Hari:
In this case two accounts affected are Haris A/c and Cash A/c. Haris account will be
debited as he is the receiver of cash, the account of cash will be credited, as cash
has gone out and the entry will be:
Hari (Debit the receiver)
To Cash A/c

Dr.

1, 000
1, 000

Example 2: Received Rs. 500 from Mohan:

In this case, cash account will be debited as cash has been received, and Mohans
account will be credited according to the rule of Credit the Giver. And the entry will
be:
Cash A/c

Dr.
500
To Mohan (Credit the Giver)

500

Amity Business School

Real Accounts: The accounts of all those things whose value can
be measured in terms of money and which are the properties of the
business are termed as Real Account. Such as Cash Account,
Furniture Account, Machinery Account, Building Accounts, Goodwill
Accounts etc.
Rule: Debit what comes in and Credit what goes out
In other words, whenever any property comes into the business, it is
debited and when it goes outside the business, it is credited.
For Example, if furniture for Rs. 5, 000 has been purchased for
cash, furniture account should be debited according to the rule of
Debit what comes in, while cash account should be credited
according to the rule of Credit what goes out. And the entry should
be:
Furniture A/c (Debit what comes in)
Dr.
5, 000
To Cash A/c (Credit what goes out)5, 000

Amity Business School

Nominal Accounts: These accounts include the accounts of all expenses and
incomes. E.g. Salaries paid, Rent paid, Discount Allowed and Bed Debts etc.
Rule: Debit the expenses and losses and Credit the incomes and gains
Example 1: Paid Rs. 5, 000 for Salaries.
In this case two accounts being affected are Salaries A/c and Cash A/c. Salaries
represents expenses and as such, Salaries account will be debited according to the
rule of Debit the expenses. On the other hand, Cash A/c will be Credited according
to the rule of Credit what goes out and the entry will be:
Salaries A/c (Debit the Expenses)
Dr.
5, 000
To Cash A/c (Credit what goes out)
5, 000
Example 2: Received Rs. 1, 000 for Commission.
Commission A/c is a nominal account and represents an income. As such,
Commission A/c will be credited according to the rule of Credit the incomes. Cash
A/c is a real account and cash is coming in, therefore Cash A/c will be debited
according to the rule of Debit what comes in. And the entry will be:
Cash A/c (Debit what comes in)
Dr.
1, 000
To Commission A/c (Credit the incomes)
1, 000

Amity Business School

Performa of Journal

Date

Particulars

Ledger
Folio

Example 1:
Enter the following transactions in the Journal of Siya Ram:
1994
June 1 Siya Ram started business with cash
2 Purchased goods for cash
4 Purchased goods from Subhash
5 Purchased furniture for cash
7 Sold goods for cash
9 Sold goods to Mahesh
10 Paid cash to Subhash
12 Received cash from Mahesh
16 Purchased goods from Ravi for cash

Amount Dr. Amount Cr.

(in Rs.)
(in Rs.)

17

Rs.
50, 000
20, 000
12, 000
6, 000
13, 000
15, 000
8, 000
10, 000
7, 500

Amity Business School

June 17 Purchased goods from Ravi for cash
5, 000
18 Sold goods to Suresh for Cash 12, 600
19 Sold goods to Suresh 7, 000
20 Bought Machinery for Cash
8, 000
24 Withdrew cash from office for personal use
27 Paid Rent
400
29 Paid Wages
450
30 Paid salary to Gopal 1, 200
30 Received Commission
200

2, 500

Different Entries:
Discount
Discount is of two types:
(1) Trade Discount: The discount allowed by a seller to its customers at a fixed % on the
listed price of goods is termed as Trade discount. No separate entry is passed for the
trade discount, as it is deducted from the cash memo or invoice of goods.
(2) Cash Discount: This discount is allowed to customers for making prompt payment. As
the discount is allowed at the time of making payment, so the entry for cash discount is
recorded along with the entry for payment. Discount is a nominal account and an
expense to the company, hence debited.

Amity Business School

Opening Entry
Every firm starts its new books in the beginning of each year. Since the closing balances
of last year have to be carried forward to the next year, the first entry in each years
journal will be recorded the previous years closing balances of all assets and
liabilities. As it is the first entry, is called the opening entry. In this entry the accounts
of all assets are debited because assets always show debit balances and the
accounts of liabilities and capital are credited because they always show credit
balances. In case the total of liabilities exceeds the total of assets, the difference will
be treated as the amount of Goodwill and the same will be debited in the opening
entry.
Bad Debts
When the goods are sold to customer on credit, and if the amount becomes irrecoverable
due to his insolvency or for some other reason, the amount not recovered is called
bad- debts. For recording it, bad debts account is debited and the customers account
is credited.
Bad Debts Recovered
Cash A/c
Dr.
1, 000
To Bad Debts Recovered A/c 1, 000

Amity Business School

Outstanding Expenses
Salary A/c (or any other expense A/c) Dr.
To Outstanding Salary A/c 1, 000

1, 000

Prepaid Expenses
Insurance Premium (or any other expense A/c) Dr.
To Cash A/c
1, 200

1, 200

Depreciation
Depreciation A/c
To Assets A/c 200

Dr.

200

Interest on Capital
Interest on Capital A/c
To Capital A/c 500

Dr.

500

Expenditure on Installation of Machinery:

Machinery A/c
To Cash A/c

Dr.
10, 00

10, 000

Amity Business School

Drawing in Goods
Drawings A/c Dr.
To Purchases A/c

Goods given away as charity

Charity A/c
Dr.
To Purchases A/c

Goods distributed as free sample

Free Sample A/c
To Purchases A/c

Dr.

Loss of goods by theft of loss by fire

Loss by theft (fire)
To Purchases A/c

Dr.

Recovery of Sales Tax

Cash A/c
Dr.
To Sales Tax A/c

Amity Business School

Example 2:
Journalize the following:
1999
March 1 Ganesh invested Rs. 2, 00, 000 in business of general stores
March 2 Paid into current account Rs. 1, 20, 000
March 4 Purchased goods for Rs. 60, 000 and paid Rs. 2, 000 for carriage of goods
March 6 Purchased goods for Rs. 1, 00, 000 on credit from Raghunath and paid Rs.
1,200 on carriage of these goods
March 10 Purchase machinery for Rs. 10, 000 and spent Rs. 100 on its carriage.
March 12 Received an order of goods for Rs. 1,25, 000 from Sunil
March 13 Payment made to Raghunath by cheque after getting 10% discount for prompt
payment
March 15 Sunils order was executed and cartage Rs. 3, 000 was paid in this connection.
March 16 Additional cash introduced by the proprietor Rs. 50, 000.
March 17 Spent Rs. 25, 000 for show-case.
March 20 Purchased goods from Ravi for Rs. 12, 000 and payment made by cheque.
March 22 Sold 1/5th of above goods at a profit of 33^1/3 % on cost.
March 28 Bank charges for its services Rs. 200.

Amity Business School

Ledger
Business transactions are first entered in Journal or subsidiary books. The next step
is to transfer the entries to respective accounts in Ledger. In other words, all entries
recorded in Journal or Subsidiary Books are classified and in order to ascertain the
position of a particular account, all transactions relating to that particular account are
collected at one place in the Ledger. In short, a ledger is a book which contains all
accounts of the business enterprise whether Personal, Real, Nominal.
The book which contains a classified and permanent record of all the transactions of
a business is called the Ledger
- L.C. Cropper
Advantages of Ledger:
a) Easy to understand the collective effect of all transaction
b) Easy excess of information
c) Help in preparing Trial balance
d) Help in preparing Trading and Profit & Loss A/c
e) Help in preparing Balance Sheet

Amity Business School

Performa of Ledger
Dr.

Cr.

Date

Particulars

J.F.

Amount

Date

Particulars

J.F.

Amount

Rules of Posting:
1.All transactions relating to one account should be entered at one place.
2.The word To is used before the account which appears on the debit side and By is used
before the account which appears on the credit side.
3.If an account has been debited in the Journal Entry, it should be recorded on the debit side
of Ledger.
4.If an account has been credited in the Journal Entry, it should be recorded on the credit
side of Ledger.
5.Similar amount which has been posted on the debit side of an account should also be
posted on the credit side of another account.
6.Its not necessary to write the word A/c after personal accounts.

Amity Business School

Trial Balance
When posting of all the transactions into the Ledger is completed and the
accounts are balanced off, it becomes necessary to check the arithmetical
accuracy of the accounting work. For this purpose the balance of each and
every account in the Ledger is put on a list. The list so prepared is called a
trial balance..
Ledger A/c which shows a debit balance is put on the debit side of the Trial
balance and vice versa.
Ledger A/c which shows no balance (neither debit nor credit) is not
recorded in the Trial Balance.

Amity Business School

Bank Reconciliation Statement

Bank Reconciliation statement is a statement prepared mainly to reconcile the
difference between the Bank Account shown by the Cash Book and Bank Pass Book.
- Patil
Causes of difference between cash book and pass book balance
Cheque issued but not yet presented for payment in the bank
Cheque paid into the bank for collection but not yet credited by the bank
Cheque paid into the bank for collection but dishonored by the bank
Interest allowed by the bank
Interest charged by the bank on overdraft
Bank charges and commission charged by the bank
Direct deposit by customers into the bank.
Interest and dividend collected by the bank
Direct payment made by the bank on behalf of customers
Any wrong entry made by the bank in the pass book
Other reasons

Amity Business School

Preparation of Bank Reconciliation Statement

A bank reconciliation statement can be prepared by taking the balance either as per
cash book or as per pass book as a starting point. If the statement is started with the
balance as per bank column of the cash book, the answer arrived at in the end will be
the balance as per pass book.

Methods of preparing Bank Reconciliation Statement by Debit Balance of Bank

Column of Cash Book
(A) Items to be added:

Cheques issued but not yet presented for payment

Credit made by the bank for interest
Amount directly deposited by the customers in out bank account
Interest and dividend collected by the bank
Cheques paid into the bank but omitted to be recorded in the cash book

Amity Business School

(B) Items to be deducted: Cheques sent to the bank for collection but not yet credited by the bank
Cheques sent to the bank for collection but dishonored the bank.
Direct payment made by the bank on behalf of customers
Debits made by the bank for Commission, Bank Charges etc
Cheques issued but omitted to be recorded in the cash book
Example 1:
On 31st March 1994, the bank balance as per Rajesh Chauhans cash book was Rs. 17,280
Debit. On comparing the Cash book with the Pass book following differences were found:
1. Cheques for Rs. 8,400 sent for collection have not been cleared by the bank as far.
2. Cheques issued but not yet presented for payment Rs. 5,600.
3. There is a debit of Rs. 80 in the pass book for bank charges, but not recorded in the cash
book
4. Bank has credited Rs. 240 for interest in the pass book but these are also not recorded in
the cash book.
5. A customer deposited Rs. 2,000 direct in the bank but these were recorded only in Pass
Book.

Amity Business School

6. According to standing orders of Rajesh Chauhan, the bank has made the
following payments by debiting his account:Club Fees Rs. 500
Life Insurance Premium Rs. 2,500
These are not recorded the Cash Book.
Prepare a Bank Reconciliation Statement as on 31 st March 1994.

Amity Business School

Suggested Books
Financial Accounting P.C.Tulsian
T.S.Grewal
D.K.Goel