ACCOUNTING FOR MANAGERS

Subject Code : 16MBA13

Module 1: Introduction to Accounting
Introduction
Accounting is aptly called the language of business. This designation is applied to accounting
because it is the method of communicating business information. The basic function of any
language is to serve as a means of communication. Accounting duly serves this function. The task
of learning accounting is essentially the same as the task of learning a new language. But the
acceleration of change in business organization has contributed to increase the complexities in this
language. Like other languages, it is undergoing continuous change in an attempt to discover better
means of communications. To enable the accounting language to convey the same meaning to all
stakeholders, it should be made standard. To make it a standard language certain accounting
principles, concepts and standards have been developed over a period of time. This lesson dwells
upon the different dimensions of accounting, accounting concepts, accounting principles and the
accounting standards.
Evolution Of Accounting
Accounting is as old as money itself. It has evolved, as have medicine, law and most other fields of
human activity in response to the social and economic needs of society. People in all civilizations
have maintained various types of records of business activities. The oldest known are clay tablet
records of the payment of wages in babylonia around 600 b.c. accounting was practiced in india
twenty-four centuries ago as is clear from kautilyas book arthshastra which clearly indicates the
existence and need of proper accounting and audit.
Book Keeping And Accounting
Book-keeping is that branch of knowledge which tells us how to keep a record of business
transactions. It is considered as an art of recording systematically the various types of transactions
that occur in a business concern in the books of accounts. According to spicer and pegler, bookkeeping is the art of recording all money transactions, so that the financial position of an
undertaking and its relationship to both its proprietors and to outside persons can be readily
ascertained. Accounting is a term which refers to a systematic study of the principles and methods
of keeping accounts. Accountancy and book-keeping are related terms; the former relates to the
theoretical study and the latter refers to the practical work.
Definition Of Accounting
Accounting has been defined by the american accounting association committee as: the process of
identifying, measuring and communicating economic information to permit informed judgments
and decisions by users of the information. This may be considered as a good definition because
of its focus on accounting as an aid to decision making.
The American institute of certified and public accountants committee on terminology defined
accounting as: accounting is 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 . of all definitions available, this is the most
acceptable one because it encompasses all the functions which the modern accounting system
performs.

Prof. Chandan D N, Dept of MBA, VVIET, Mysuru.

Another popular definition on accounting was given by american accounting principles board in
1970, which defined it as: accounting is a service society. Its function is to provide quantitative
information, primarily financial in nature, about economic entities that is useful in making
economic decision, in making reasoned choices among alternative courses of action.
H.Chakravorty: Accountancy is the science of recording, classifying and summarizing
transactions so that relation with outsiders is exactly determined and result of operation during a
particular period can be calculated, and the financial position as the end of the period may be
shown.
Taylor and Shearing: "Accounting may be defined as the art and science of recording business
transactions in a methodological manner so as to show: (a) the true state of affairs of a business
of a particular period of time and, (b) the surplus or deficiency which has accrued during a
specific period."
Objectives of Accounting
The broad objects of Accounting may be briefly stated follows:
1. To maintain the cash accounts through the Cash Book and to find out the Cash balance on
any particular day.
2. To maintain various other Journals for recording day-to day non cash transactions.
3. To maintain various Ledger Accounts to find out the exact amounts of incomes and
expenses or gain and losses or receivables and payables.
4. To furnish information regarding Purchases and Sales, both Cash and Credit.
5. To find out the net profit or net loss or surplus or deficit for any particular period.
6. To find out the total capital on a particular date.
7. To find out the positions of assets on a particular date.
Scope And Functions Of Accounting
Individuals engaged in such areas of business as finance, production, marketing, personnel and
general management need not be expert accountants but their effectiveness is no doubt increased if
they have a good understanding of accounting principles. Everyone engaged in business activity,
from the bottom level employee to the chief executive and owner, comes into contact
withaccounting. The higher the level of authority and responsibility, the greater is the need for an
understanding of accounting concepts and terminology. Accounting which is so important to all,
discharges the following vital functions:
Keeping Systematic Records: This is the fundamental function of accounting. The transactions
of the business are properly recorded, classified and summarized into final financial statements
income statement and the balance sheet.
Protecting The Business Properties: The second function of accounting is to protect the properties
of the business by maintaining proper record of various assets and thus enabling the management to
exercise proper control over them.
Communicating The Results: As accounting has been designated as the language of business, its
third function is to communicate financial information in respect of net profits, assets, liabilities,
etc., to the interested parties.
Meeting Legal Requirements: The fourth and last function of accounting is to devise such a system
as will meet the legal requirements. The provisions of various laws such as the companies act,
Prof. Chandan D N, Dept of MBA, VVIET, Mysuru.

income tax act, etc., require the submission of various statements like income tax returns, annual
accounts and so on. Accounting system aims at fulfilling this requirement of law.
1. Identifying the transactions and events: Accounting identifies transactions and events of a
specific firm. A transaction is an exchange in which each participant receives or gives value. An
event is a happening of consequence to a firm. E.g. use of raw materials for production.
2. Measuring the identified transactions and events: Accounting measures the transaction and
events in terms of a common measurement unit that is the ruling currency of a country.
3. Recording: It is concerned with the recording of identified and measured financial transactions
in an orderly manner.
4. Classifying: It is concerned with the classification of the recorded transactions so as to
group the transactions of similar type at one place. E.g. maintaining ledger for each type of
Account.
5. Summarizing: It is concerned with the summarization of the classified transactions in a manner
useful to the users. E.g. Preparing P&L A/c, B/S, Cash Flow & Fund Flow Statements.
6. Analyzing: It is concerned with the establishment of relationship between the various items
or group of items taken from P&L A/c & B/S or both.
7. Interpreting: It is concerned with the explaining the meaning and significance of the
relationship so established by the analysis. The accountants should interpret the statements in a
manner useful to the users, so as to enable the users to make reasoned decisions out of alternative
course of action.
8. Communicating: It is concerned with the transmission of summarized, analyzed and
interpreted information to the users to enable them to make reasoned decisions.
Types of accounting
1. Financial Accounting: Financial accounting information is intended both for owners and
managers and also for the use of individuals and agencies external to the business.
2. Management Accounting: Management accounting employs both historical and estimated data in
assisting management in daily operations and in planning for future operations. It deals with
specific problems that confront enterprise managers at various organizational levels.
3. Cost Accounting: The industrial revolution in england posed a challenge to the development of
accounting as a tool of industrial management. This necessitated the development of costing
techniques as guides to management action.
4. Tax Accounting: Tax accounting covers the preparation of tax returns and the consideration of the
tax implications of proposed business transactions or alternative courses of action.
5. International Accounting: This accounting is concerned with the special problems associated with
the international trade of multinational business organizations.

Prof. Chandan D N, Dept of MBA, VVIET, Mysuru.

Groups Interested In Accounting Information/Users of Accounting Information

There are several groups of people who are interested in the accounting information relating to the
business enterprise. Following are some of them:
1. Shareholders: Shareholders as owners are interested in knowing the profitability of the business
transactions and the distribution of capital in the form of assets and liabilities. In fact, accounting
developed several centuries ago to supply information to those who had invested their funds in
business enterprise.
2. Management: With the advent of joint stock company form of organization the
gap between ownership and management widened. In most cases the shareholders act merely as
renders of capital and the management of the company passes into the hands of professional
managers. The accounting disclosures greatly help them in knowing about what has happened and
what should be done to improve the profitability and financial position of the enterprise.
3. Potential Investors: An individual who is planning to make an investment in a business would
like to know about its profitability and financial position. An analysis of the financial statements
would help him in this respect.
4. Creditors: As creditors have extended credit to the company, they are much worried about the
repaying capacity of the company. For this purpose they require its financial statements, an analysis
of which will tell about the solvency position of the company.
5. Government: Any popular government has to keep a watch on big businesses regarding the
manner in which they build business empires without regard to the interests of the community.
Restricting monopolies is something that is common even in capitalist countries. For this, it is
necessary that proper accounts are made available to the government. Also, accounting data are
required for collection of sale-tax, income-tax, excise duty etc.
6. Employees: Like creditors, employees are interested in the financial statements in view of
various profit sharing and bonus schemes. Their interest may further increase when they hold shares
of the companies in which they are employed.
7. Researchers: Researchers are interested in interpreting the financial statements of the concern for
a given objective.
8. Citizens: Any citizen may be interested in the accounting records of business enterprises
including public utilities and government companies as a voter and tax payer.
Accounting Conventions & Concepts
Nature And Meaning Of Accounting Principles What is an accounting principle or concept or
convention or standard? Do they mean the same thing? Or does each one has its own meaning?
These are all questions for which there is no definite answer because there is ample confusion and
controversy as to the meaning and nature of accounting principles. We do not want to enter into this
controversial discussion because the reader may fall a prey to the controversies and confusions and
lose the spirit of the subject.
The rules and conventions of accounting are commonly referred to as principles. The american
institute of certified public accountants has defined the accounting principle as, a general law or
Prof. Chandan D N, Dept of MBA, VVIET, Mysuru.

rule adopted or professed as a guide to action; a settled ground or basis of conduct or practice. It
may be noted that the definition describes the accounting principle as a general law or rule that is to
be used as a guide to action. The canadian institute of chartered accountants has defined accounting
principles as, the body of doctrines commonly associated with the theory and procedure of
accounting, serving as explanation of current practices and as a guide for the selection of
conventions or procedures where alternatives exist. This definition also makes it clear that
accounting principles serve as a guide to action.
Accounting Concepts
1. Business Entity Concept: It is generally accepted that the moment a business enterprise is started
it attains a separate entity as distinct from the persons who own it. In recording the transactions of a
business.
2. Going Concern Concept: This concept assumes that the business enterprise will continue
to operate for a fairly long period in the future.
3. Money Measurement Concept: Accounting records only those transactions which can be
expressed in monetary terms. This feature is well emphasized in the two definitions on accounting
as given by the american institute of certified public accountants and the american accounting
principles board. The importance of this concept is that money provides a common denomination
by means of which heterogeneous facts about a business enterprise can be expressed and measured
in a much better way.
4. Cost Concept: This concept is yet another fundamental concept of accounting which is closely
related to the going-concern concept. As per this concept:
(i) an asset is ordinarily entered in the accounting records at the price paid to acquire it i.e., at its
cost and
(ii) this cost is the basis for all subsequent accounting for the asset.
5. Dual Aspect Concept (Double Entry System): This concept is the core of accounting. According
to this concept every business transaction has a dual aspect. This concept is explained in
detail below:
The properties owned by a business enterprise are referred to as assets and the rights or
claims to the various parties against the assets are referred to as equities. The relationship between
the two may be expressed in the form of an equation as follows:
Capital = Assets Liabilities
6. Accounting Period Concept: In accordance with the going concern concept it is usually assumed
that the life of a business is indefinitely long. But owners and other interested parties cannot wait
until the business has been wound up for obtaining information about its results and financial
position.
7. Periodic Matching Of Costs And Revenues: This concept is based on the accounting period
concept. It is widely accepted that desire of making profit is the most important motivation to keep
the proprietors engaged in business activities. Hence a major share of attention of the accountant is
being devoted towards evolving appropriate techniques of measuring profits. One such technique is
periodic matching of costs and revenues.
8. Realization Concept: Realization refers to inflows of cash or claims to cash like bills receivables,
debtors etc. Arising from the sale of assets or rendering of services. According to realization
Prof. Chandan D N, Dept of MBA, VVIET, Mysuru.

concept, revenues are usually recognized in the period in which goods were sold to customers or in
which services were rendered. Sale is considered to be made at the point when the property in goods
passes to the buyer and he becomes legally liable to pay.
Accounting Conventions
1. Convention Of Conservatism: It is a world of uncertainty. So it is always better to pursue the
policy of playing safe. This is the principle behind the convention of conservatism. According to
this convention the accountant must be very careful while recognizing increases in an enterprises
profits rather than recognizing decreases in profits. For this the accountants have to follow the rule,
anticipate no profit, provide for all possible losses, while recording business transactions.
2. Convention Of Full Disclosure: The emergence of joint stock company form of business
organization resulted in the divorce between ownership and management. This necessitated the full
disclosure of accounting information about the enterprise to the owners and various other interested
parties. Thus the convention of full disclosure became important.
3. Convention Of Consistency: According to this concept it is essential that accounting procedures,
practices and method should remain unchanged from one accounting period to another. This enables
comparison of performance in one accounting period with that in the past.
4. Convention Of Materiality: The implication of this convention is that accountant should
attach importance to material details and ignore insignificant ones. In the absence of this distinction,
accounting will unnecessarily be overburdened with minute details. The question as to what is a
material detail and what is not is left to the discretion of the individual accountant. Further, an item
should be regarded as material if there is reason to believe that knowledge of it would influence the
decision of informed investor.
Accounting Equation
The accounting equation shows the relationship between the economic resources belonging to a
business and the claims against those resources. Economic resources are termed as assets. Claims
are termed as liabilities and owners claims or owners equity.
Assets = Liabilities + Owners equity
References:
1. Financial Accounting: A Managerial Perspective, Narayanaswamy
2. A Text book of Accounting For Management, Maheswari S.N
3. Some text references from the reputed universities study materials.

Prof. Chandan D N, Dept of MBA, VVIET, Mysuru.