1 FINANCIAL MANAGEMENT AND ACCOUNTING DBMA104 MANIPAL UNIVERSITY JAIPUR

1 a) Briefly explain the concept of accounting.

b) Briefly explain the users of accounting information.

Accounting concepts are the basic rules, assumptions, and conditions that define the
parameters and constraints within which the accounting operates. In other words,
accounting concepts are the generally accepted accounting principles, which form the
fundamental basis of preparation of universal form of financial statements consistently.

Accounting Concepts

Accrual Concept According to this, the transaction is recorded on a mercantile basis. In

other words, transactions are to be recorded as and when they occur, not as and when the
cash is received or paid, and for the period to which the transaction pertains .Examples sales
on credit, purchase on credit.

Money Measurement Concept It states that only those transactions are recorded and
measured in monetary terms. In simple words, only financial transactions are recorded in
books of accounts. In other word the money measurement concept states that a business
should only record an accounting transaction if it can be expressed in terms of money.

Periodicity Concept Periodicity concept states that the entity or the business needs to carry
out the accounting definite period, usually the financial year. The period for drawing of
financial statements can vary from monthly to quarterly to annually. It helps in identifying
any changes occurring over different periods.

Matching Concept is linked to the Periodicity concept and Accrual concept. The matching
concept states that the period for which revenue has been considered, the entity needs to
account for expenses only relating to that period. It means that the entity has to record
revenue and expenses for the same period.

Going Concern Concept is an assumption that the business will be carried on an ongoing
basis. Thus, the books of accounts for the entity are prepared such that the business will be
carried on for years to come.

Cost Concept Cost concept states that any asset that the entity records shall be recorded at
historical cost value, i.e., the acquisition cost of the asset.

Dual Aspect Concept This concept is the backbone of the double-entry bookkeeping system.
It states that every transaction has two aspects, debit and credit. The entity has to record
every transaction and give effect to both the elements of debit and credit.

Users of accounting information Users of accounting information are internal and external.

External users are creditors, investors, government, trading partners, regulatory agencies,
international standardization agencies, journalists and internal users are owners, directors,

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managers, employees of the company. Let us look at who are the internal and external users
of account information and why they use it.

Internal users of Accounting Information Internal users are that individual who runs,
manages and operates the daily activities of the inside area of an organization. Internal
users of account information;

Owners Investors use accounting information to determine their return on investment,

based on the reported cash flows being generated by the business. Depending on the
outcome, investors may alter their level of investment in the business, either selling from
their current positions or acquiring additional shares from others.

Employees If employees have access to accounting information (which is not always the
case), they can use it to estimate the ability of the firm to pay them an adequate level of
compensation, as well as to fund any pension plan that the organization offers them. This
can result in decisions to remain with the firm or seek employment elsewhere.

Unions can use a firm’s accounting information to determine its level of profitability and
debt load. This information is useful for deciding how hard to push for a wage and benefits
increase in the next contract negotiations. If the company is reporting marginal results, then
the union might be inclined to push less hard, and vice versa.

Managers, Managerial accounting identifies, measures, analyses and communicates the

financial information needed by management to plan, control, and evaluates a company’s
operations for the internal users. Accounting goal is to provide necessary information for
the management or also can be defined as Internal users.

External users of Accounting Information External users are those individuals who take
interest in the account information of an organization but they are not part of the
organization’s administrative process.

Trading partners Business needs business to do business, it is the truth. associate trading
companies look at the financial information and decide to trade with the particular
economic entity.

Government Regulatory Agencies The financial information is vital for government

regulatory agencies as it allows them to monitor the economy and market.

Lawmakers and economic planners It is important to keep a nation’s economic structure

up-to-date with global changes. It is a job for lawmakers and economic planners.

Creditors or lenders use the accounting information to find out the ability of the borrower
to repay the loan, the number of assets and liabilities of the borrower, evidence of income,
economic position, etc. before he or she lend the money to the economic entity.

Investors are the capital providers of a business .Before investing, an investor sees the
financial report for figuring out the possibilities of the business in the future. Financial

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information is important for an investor for making sure that the investment is secure. The
accounting information provides information that is necessary for making changes to the
existing laws at the right moment for the economy and society betterment.

2. Differentiate between: (With examples)

a) Cash discount & trade discount. b) Tangible assets & intangible assets

c) Accounting & book-keeping. d) Errors of omission & errors of commission

e) Accrued income & income received in advance

a) Cash discount & trade discount

A trade discount is one that is allowed by the wholesaler to the retailer, calculated on the
list price of the product, whereas cash discount is allowed to stimulate instant payment of
the goods purchased. The main difference between trade discount and cash discount is that
ledger account is opened for a cash discount, but not for a trade discount.
One of the easiest ways to increase sales and so boost profit, used by various traders,
businessman, and shopkeepers all around the world, is to offer a discount. It is simply a
reduction in the selling price of the goods, which not only attracts customers, but also
persuades them to make more sales. It is classified as trade discount and cash discount.
Comparison Chart

BASIS FOR
TRADE DISCOUNT CASH DISCOUNT
COMPARISON

Meaning A discount given by the seller to A deduction in the amount of invoice

the buyer as a deduction in the list allowed by the seller to the buyer in
price of the commodity is trade return for immediate payment is
discount. cash discount.

Purpose To facilitate a bulk sale. To facilitate a prompt payment.

Invoice It is shown in invoice as a It is not shown in invoice.

deduction itself.

When allowed? At the time of purchase. At the time of payment.

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BASIS FOR
TRADE DISCOUNT CASH DISCOUNT
COMPARISON

Allowed to all Yes No

customers

Entry in books No Yes

Vary with Quantity of goods purchased or Time period, when payment is made.
amount of purchases made.

b)Tangible assets & intangible assets

Tangible Assets with a physical existence that can be touched and felt are tangible assets.
They are used primarily in the operation of the business to produce products or services.
Since tangible assets are often purchased, they are much more easily valued than intangible
assets.
Intangible Assets do not have a physical character. Yet, they are essential to the continued
operation of a business. These types of assets can have either a definite or indefinite life
depending on the type of asset. Examples of intangible assets include goodwill, intellectual
property (patents, copyrights and trademarks), brand names, customer relationships,
contracts and non-compete agreements. Intangible assets have the ability to appreciate in
value.
Difference Between Tangible and Intangible Assets

Tangible Assets Intangible Asset

Tangible assets are depreciated Intangible assets are amortized

They have a physical existence They don’t have a physical existence.

Are generally much easier to liquidate due to
their physical presence.
The cost can be easily determined or
evaluated
Examples: vehicle, plant & machinery, etc
Are not that easy to liquidate and sell in the
market
The cost is much harder to determine for
Intangible assets
Examples: Software, logo, patent, etc.

c) Accounting & book-keeping

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Accounting is the systematic process of recording, measuring and communicating

information about the financial transaction taking place in a business. Accounting helps in
determining the financial position of a firm and present the same to stakeholders .It helps a
business in short- and long-term decision making and also conveys the credibility of a
company to the market .It is also known as the language of business .The aim of accounting
is to provide a clear view of financial statements to its users, which includes investors,
creditors, employees, and government

Bookkeeping is the process of systematic recording and classification of financial

transactions of an organisation. Book keeping is said to be the basis of accounting, whereas
accounting forms a part of the broader scope in finance .The most important focus of
bookkeeping is to maintain an accurate record of all the monetary transactions of a
business. Companies use this information to take major investment decisions. The
bookkeeper maintains bookkeeping records. Accurate bookkeeping is critical for business as
it gives a piece of reliable information on the performance of a company.

Let us look at the most important points of difference between bookkeeping and accounting
in the following table:

Key Points Bookkeeping Accounting

Definition Bookkeeping deals with Accounting refers to the process of

identifying and recording summarising, interpreting and
financial transactions communicating the financial data of an
only organisation.

Decision making Data provided by Management can take important decisions

bookkeeping is not based on the data obtained from
sufficient for decision accounting
making

Preparation of Not done in the case of Financial statements are a part of the
Financial bookkeeping accounting process
Statement

Analysis No analysis is required in Accounting analyses the data and creates

the bookkeeping insights for the business

Persons Involved The person concerned The person concerned with accounting is
with bookkeeping is known as an accountant

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known as a bookkeeper

Determining Bookkeeping does not Accounting helps in showing a clear picture

Financial show the financial of the financial position of a business
Position position of a business

Level of Learning No high-level learning High-level learning required for

required understanding and analysing accounting
concepts.

d) Errors of omission & errors of commission

Errors of Omission An error of omission is termed as the error in which a transaction is

partially or fully unavailable when it comes to recording them in the books. So, based on the
further classification of errors, an error of omissions are further categorized into complete
omission and partial omission. Error of omission is divided into two parts i.e., Complete
omission of transactions and partial omission of transactions. In case of error of complete
omission, a transaction is completely omitted to be recorded in the books of accounts. An
accountant forgets to record such entry in the subsidiary books. For Example – omission to
record goods sold to a vendor, omission to record asset purchased etc. In case of partial
omission, the transaction is recorded at the debit side and omitted to be recorded at the
corresponding credit side. Partial omissions affect only one account. For Example – Goods
purchased from Mr. X, recorded in purchase book but no entry made in Mr. X’s account.

Errors of Commission An error of commission covers the errors where a transaction is

recorded in the books, but in an incorrect manner. These types of errors are concerned with
arithmetical accuracy. These errors constitute the following errors

Posting incorrect amount in ledger accounts.

Incorrect totalling of ledger balances.

Posting at the wrong side of ledger accounts

Recording wrong amount in subsidiary books

Wrong totalling of subsidiary books.

Key differences between the error of omission and error of commission:

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 An error of omission can occur due to any mistake but the error of commission is the
result of carelessness, lack of proper knowledge and/or negligence.

 Well, there’s a chance to correct both of them. The error of omission can be
corrected by just rewriting the entry properly and error of commission can be
rectified by debiting or crediting the wrong account and transferring it to the right
account.

 As in case of error of omission, the trial balance allows when there’s a complete
omission but not when its partial omission. On the contrary, the trial balance may or
may not agree in case of an error of commission. These are some of the main
differences between error of omission and error of commission.

e)Accrued income & income received in advance

Accrued income is income which has been earned but not yet received. Income must be
recorded in the accounting period in which it is earned. Therefore, accrued income must be
recognized in the accounting period in which it arises rather than in the subsequent period
in which it will be received. As income will be credited to record the accrued income, a
corresponding receivable must be created to account for the debit side of the transaction.
The accounting entry to record accrued income will therefore be as follows:

Income received in advance Sometimes earned revenue that belongs to a future accounting
period is received in the current accounting period, such income is considered as income
received in advance. It is also known as Unearned Revenue, Unearned Income, Income
Received but not Earned because it is received before the related benefits are provided. This
revenue is not related to the current accounting period, for example, Rent received in
advance, Commission received in advance, etc

3(a) An income statement for the month of June 2020.

3(b) A balance sheet as at 30 June 2020

John started his own delivery service. The following transactions took place in June 2020:
S.no Date Particulars

01-06-2020 John as a stockholder has invested $25,000 cash in business. 2. 02-06-2020 John
purchased a used van for $ 13000 for deliveries. He paid $ 2,000 cash and signed a note
payable for the remaining balance. 5+5 10Directorate of Online Education.3. 03-06-2020 He
paid $ 900 for office rent for the month. 4. 05-06-2020 Services worth $ 3,000 were
performed on account. 5. 12-06-2020 Purchased supplies for $ 400 on account. 6. 15-06-
2020 Received a cash payment of $ 750 for services provided on June 5. 7. 17-06-2020
Purchased gasoline for $ 350 on account .8. 20-06-2020 Received a cash payment of $ 350
on account for services provided on June 5. 9. 23-06-2020 Received a cash payment of $
1900 on account for services provided on June5. 10 26-06-2020 Paid $450 for utilities.11 29-

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06-2020 Paid for the gasoline purchased on account on June 17. 12 30-06-2020 Paid $ 600
for employee salaries.

An income statement for the month of June 2020

Particulars Amount ($) Particulars Amount ($)

To Office Rent A/C 900 By Service A/C 3000

To Staff Salary A/C 600

To Gasoline A/C 350

To Utility A/C 450

To Net Profit A/c 700

Total 3000 Total 3000

A balance sheet as at 30 June 2020

Equity &Liabilities Equity Amount Assets Non-Current Assets Amount

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Equity and Liabilities 25,000 Van 13,000

Retained Earnings 700 Cash 23,700

Notes Payable 11,000 Supply 400

Trade Payable 400

Total Equity and Liabilities 37,100 Total Assets 37,100

********************THANK YOU ************************

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