Ch 1 PPT (1)

Course: MSL302
Managerial Accounting and

Financial Management
Course Coordinator: Dr. Smita Kashiramka

Sem I, 2023-2024
Chapter 1
Accounting: The Language

of Business
2
Topics to be Covered
• Meaning of Accounting
• Accounting and Financial Accounting
• Accounting System
• Accounting as an aid to decision making
• Financial Statements
• Types of accounting Information
• Managerial Finance, Financial Accounting and Management
Accounting
• Types of Ownership
• Balance Sheet Transactions and Transaction Analysis
• Role of Auditing
3
Accounting: A means to an end
• Accounting - a process of identifying, recording,

summarizing, and reporting economic information to
decision makers in the form of financial statements.
• Financial accounting - focuses on the specific needs of
decision makers external to the organization, such as
shareholders, suppliers, banks, and government
agencies, etc.
4
The Accounting System
• The accounting system is a series of steps performed to analyze, record,
quantify, accumulate, summarize, classify, report, and interpret economic
events and their effects on an organization and to prepare the financial
statements.
• Consists of the personnel, procedures, technology and records by an

organization:
(1) to develop accounting information,
(2) to communicate this information to decision makers
• Accounting systems are designed to meet the needs of the decision makers who
use the financial information.
• Every business maintains some type of accounting system.

• These accounting systems may be very complex or very simple, but the real
value of any accounting system lies in the information that the system
provides.
5
Who use Accounting information to make decisions?
• Managers want to know if a new product will be profitable.
• Investors want to know if a company is a good investment.
• Creditors want to know if they should extend credit, how much

to extend, and for how long.
• Regulators want to know if the required rules and procedures

are being followed or not
6
Accounting as an Aid to Decision Making
• Accounting helps in decision-making by showing where and

when money has been spent, by evaluating performance,
and by showing the implications of choosing one plan
instead of another.
• Fundamental relationships in the decision-making process:
Accountant’s
Financial
Event analysis and Users
statements
recording
7
Financial Accounting
• The primary questions about an organization’s success

that decision makers want to know are:
What is the financial picture of the organization on a

given day?
How well did the organization do during a given period?
8
• Accountants answer these primary questions with
three major financial statements.
1. Balance Sheet – shows financial picture on a

given day
2. Income Statement/ Profit and Loss Account –
shows performance (in terms of profit/loss) over
a given period.
3. Statement of Cash Flows – shows performance
(in terms of cash flows) over a given period
9
Annual Report
• Annual report - a document prepared by

management and distributed to current and
potential investors to inform them about the
company’s past performance and future prospects.
• The annual report is one of the most common sources of

financial information used by investors and managers.
10
Annual Report
• The annual report usually includes:
• A letter from corporate management

• A discussion and analysis by management of recent economic
events
• Footnotes that explain many elements of the financial
statements in more detail
• The report of the independent auditors
• A statement of management’s responsibility for preparation
of the financial statements
• Other corporate information
11
Financial Management,
and
Management Accounting
12
Financial Management
(Managerial Finance/ Corporate Finance)
• Financial Management is concerned with the duties of the
financial manager in the business firm.
• The financial manager actively manages the financial affairs of

any type of business, whether private or public, large or small,
profit-seeking or not-for-profit.
• Increasing globalization has complicated the financial management

function. Changing economic and regulatory conditions also complicate the
financial management function
13
Relationship of Financial Management with Economics
and Accounting
• Managers must understand the economic framework within which

they operate in order to react or anticipate changes in conditions.
• Accounting provides basic input to financial management.
14
Financial Management, Financial Accounting
and Management Accounting
Financial Financial Management

Management Accounting Accounting
Concerned with Records and Meetsinternal

summarizes financial accounting needs
duties of the transactions for
finance manager various user group
Involvesestimates
Said to meet external
and forecasts
accounting needs
Subjectto regulatory
framework
15
Types of Ownership
Three basic forms of ownership:
1. Sole Proprietorships
2. Partnerships
3. Corporations/Company
form of organizations
16
1. Sole Proprietorship
• An organization with a single owner.
• Owner is also the manager of the organization.
• Tend to be small retail establishments and individual

professional or service business.
• Unlimited liability of the sole proprietor.
17
2. Partnership
• An organization that has two or more individuals who act as co-

owners and also manage the business.
• Dentists, doctors, attorneys, and accountants tend to conduct

their activities as partnerships.
• Unlimited liability of partners (except in limited liability

partnerships)
• In India, Partnership Act, 1932 governs them- Maximum 10 partners

and 20 partners in case of banking and non-banking business respectively.
• Partnerships can be gigantic businesses.

18
3.Corporation/ Company/ Joint Stock Company
• A company form of organization is an “artificial legal entity” created by law.
• Separation of ownership and management- Shareholders are the owners but they
are managed by Board of Directors.
• It has a perpetual existence and a common seal.
• Can sue and be sued in its own name.
• Corporations have limited liability - corporate creditors have claims against

corporate assets only.
• Individual investors are at risk only up to the amount they have invested in the
corporation. Creditors cannot hold investors liable for the corporation’s debts.
• In India, company form of organization is governed by Companies Act 2013.

19
3.Corporation/ Company/ Joint Stock Company
• Company form of organizations can be Publicly owned (Public

Ltd.) or Privately owned (Private Ltd.).
• Public Ltd. companies are owned by public at large.
• Private Ltd. companies are owned by families, small group of

people or even a single individual. (also called as unlisted/
closely-held companies).
20
Concept of Capital
• Capital- In accounting, Capital refers to the money invested by the

owners in the business.
• In case of Sole Proprietorship and Partnership, money invested by

the owner in the business is called capital.
• In case of Companies, money invested by the owner in the

business is called:
Equity
Stockholders’ Equity
Shareholders’ Equity
Owners’ Equity
Common Stock,
i.e., the owners of a company are called equity shareholders/
equity stockholders. 21
THE
BALANCE SHEET
(Statement of Financial Position/
Statement of Financial Condition)
22
The Balance Sheet
 Statement of Financial Position

 Shows financial status of companies at a
particular instant in time
Two counterbalancing sections
Resources of Claims against

firm resources
(Assets) (Liabilities)
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.
Elements of the Balance Sheet
I. Assets
•Economic resources
•Help generate future cash inflows
•Reduce or prevent future cash outflows
•Everything the firm owns
24
Elements of the Balance Sheet
II. Liabilities
• Economic obligations to outsiders

• Claims against assets by outsiders
• Everything the firm owes
III. Owners’ equity

• Owners’ claim on assets
• Equal to total assets less total liabilities
• Debt holders have first claim on assets
25
The Balance Sheet Equation
The elements in balance sheet form the balance sheet

equation:
Assets = Liabilities + Owners’ Equity

or
Owners’ Equity = Assets - Liabilities
26
Balance Sheet Transactions
• TRANSACTION: It is any event that affects both the financial

position of an entity and can be reliably recorded in money
terms.
• The balance sheet is affected by every transaction that an

entity encounters.
• Each transaction has counterbalancing entries that keep total

assets equal to total liabilities and owners’ equity, i.e., the
balance sheet equation and the balance sheet must always be
balanced.
27
The Balance Sheet Equation
 Residual, or leftover, nature of owners’

equity is expressed as:
Owners' Equity = Assets – Liabilities
 Shows owners’ claims are the amount left over

after deducting liabilities from assets
 Net assets: Another term for owner’s equity
1-28
Balance Sheet Transactions
• A balance sheet could be prepared after every transaction, but

this practice would be awkward and unnecessary.
• Therefore, balance sheets are usually prepared monthly or

on some other periodic schedule.
• Every transaction affects balance sheet

• At least two entries are recorded
• Total assets = Total liabilities + Owners’ equity
• Compound entry - a transaction that affects more than two
accounts
• Called double-entry accounting system
• As single entries cannot maintain balance in balance sheet 29
Transaction Analysis
•Transactions are recorded in Accounts,

which are summary records of the changes
in particular assets, liabilities, or owners’
equity.
•The account balance is the total of all

entries to the account.
30
Some Examples of Accounts
I. Asset Accounts:
- Land and Building Account
- Machine Account
- Investments
- Accounts Receivables Account/ Debtors
- Prepaid expenses Account
- Inventory Account
- Cash Account
- Bank Account
II. Liability Accounts:

- Bonds/ Debentures Account
- Bank Loan Account
- Notes payable Account
- Other long term borrowing Account
- Accounts Payable Account/ Creditors
- Outstanding Expenses Account
31
Some Examples of Accounts
III. Stockholders Accounts/ Owners Equity :

- Equity Account
- Retained Earnings Account
- Revenues Account
- Expenses Account
- Dividend Account
32
Some definitions to remember:
• Inventory/ stock - goods held by a firm for sale to customers
• Note payable- promissory notes that are evidence of a debt/ borrowing and
state the terms of payment.
• Account payable/ Creditors - a liability that results from the purchase of

goods or services on account/ credit
- one to whom money is owed by the organization/company.
• Debtor/ Accounts Receivables - one who owes money to the organization/

company.
33
• For each transaction, the accountant

determines:
1. Which specific accounts are affected

2. Whether the account balances are increased or
decreased
3. The amount of the change in each account
34
Transaction analysis using balance sheet equation
1. Lopez started business of manufacturing bicycles by depositing $ 400,000

in the business bank account.
2. He also went on taking a bank loan by signing a promissory note for $
100,000.
3. He purchased miscellaneous store equipment for $ 15,000 in cash.
4. He purchased inventory worth $ 120,000 using cash.
5. Additionally, he purchased inventory worth $ 10,000 on credit. He then went
on to purchase inventory worth $ 30,000 out of which cash was only paid for $
10,000.
6. Lopez sold $ 1,000 worth of store equipment for cash.
7. $ 800 worth of inventory, which was purchased on credit was returned to the
supplier.
8. Lopez paid $ 4,000 to the creditors of the business using cash.
35
Transaction analysis using balance sheet
equation (Covered in Ch-2)
• Sales on credit : $1,60,000; COGS: $1,00,000
• Cash collected from debtors: $5,000
• Paid 3 months’ rent in advance in cash: $6,000
• Recognition of expiration of rent expenses of $2,000 and
depreciation expense of $100
36
The Balance Sheet Equation Illustrated
 Investment of $400,000 in business

owned by Lopez
 Borrowing $100,000 from a local bank
Assets Liabilities and Owners’ Equity

Cash $500,000 Liabilities (note payable) $100,000
Lopez, capital 400,000
Total assets $500,000 Total liabilities and owners’ equity $500,000
1-37
Transaction 1 - Initial Investment
 Investment of $400,000 by owner in a

business bank account
Assets = Liabilities + Owners' Equity

Cash Lopez, Capital
(1) +400,000 = +400,000
 Effects
 Increase in asset, cash
 Increase in owners’ equity
1-38
Transaction 2 - Loan from Bank
 Signed a promissory note for $100,000

Owners'
Assets = Liabilities +
Equity
Lopez,
Cash
Capital
Bal. +400,000 = +400,000
(2) +100,000 = +100,000
Bal. 500,000 = 100,000 + 400,000
500,000 500,000
 Effects
 Increase in liability, notes payable
1-39
Transaction 3 - Acquire Store Equipment
for Cash
 Long-lived asset/ Fixed Assets/ Long

term assets: An asset that a company
expects to use for more than 1 year.
 E.g.- Land, Building, factory, machines,

equipment, etc.
 Acquired miscellaneous store equipment

for $15,000 cash
Transaction 3 - Acquire Store Equipment
for Cash
Owners'
Assets = Liabilities + Equity
Store Notes Lopez,
Cash Equipment Payable Capital
Bal. 500,000 = 100,000 + 400,000
(3) –15,000 +15,000 =
Bal. 485,000 15,000 = 100,000 + 400,000
500,000 500,000
 Effects
 Increase in long term asset, store equipment
 Decrease in asset, cash
1-41
Transaction 4 - Purchase Inventory for
Cash
 Inventory: Goods held by a company for

the purpose of sale to customer.
 Inventory is also called stock/ merchandise

inventory.
 Acquired products from vendor for

$120,000 cash
1-42
Transaction 4 - Purchase Inventory
for Cash
Owners'
Merchandise Store Notes Lopez,
Cash Inventory Equipment Payable Capital
Bal. 485,000 15,000 = 100,000 + 400,000
(4) –120,000 +120,000 =
Bal. 365,000 120,000 15,000 = 100,000 + 400,000
500,000 500,000
 Effects
 Decrease in assets, cash
 Increase in assets, inventory
1-43
Transaction 5 - Purchase Inventory on
Credit
 Open account: Buying or selling on credit,

usually by just an authorized signature of
the buyer.
 Account payable: A liability that results

from a purchase of goods or services on
open account
1-44
Transaction 5 - Purchase Inventory on
Credit
 Purchased parts (merchandise inventory) for
$10,000 on credit
Owners'
Merchandise Store Notes Accounts Lopez,
Cash Inventory Equipment Payable Payable Capital
Bal. 365,000 120,000 15,000 = 100,000 + 400,000
(5) +10,000 = +10,000
Bal. 365,000 130,000 15,000 = 100,000 10,000 + 400,000
510,000 510,000
 Effects
 Increase in liability, account payable
 Increase in asset, merchandise inventory
1-45
Transaction 6 - Purchase Inventory for
Cash Plus Credit
 A compound entry: Affects more than two

balance sheet accounts.
 Bought inventory from vendor for $30,000

 Cash down payment of $10,000 and remaining
on credit of 30 days
1-46
Transaction 6 - Purchased Inventory for
Cash Plus Credit
Owners'
Bal. 365,000 130,000 15,000 = 100,000 10,000 + 400,000
(6) –10,000 +30,000 = +20,000
Bal. 355,000 160,000 15,000 = 100,000 30,000 + 400,000
530,000 530,000
 Effects
 Increase in asset, merchandise inventory
 Increase in liability, accounts payable
1-47
Transaction 7 - Sale of Asset for Cash
 Sold store equipment for $1,000

Owners'
Bal. 355,000 160,000 15,000 = 100,000 30,000 + 400,000
(7) +1,000 –1,000 =
Bal. 356,000 160,000 14,000 = 100,000 30,000 + 400,000
530,000 530,000
 Effects
 Decrease in assets, store equipment
1-48
Transaction 8 - Return of Inventory to
Supplier
 Returned to supplier $800 worth of goods
purchased on credit
Owners'
Bal. 356,000 160,000 14,000 = 100,000 30,000 + 400,000
(8) –800 = –800
Bal. 356,000 159,200 14,000 = 100,000 29,200 + 400,000
529,200 529,200
 Effects
 Decrease in asset, merchandise inventory
 Decrease in liability, accounts payable
1-49
Transaction 9 - Payment to Creditor
 Paid $4,000 to vendor for credit purchase

Owners'
Bal. 356,000 159,200 14,000 = 100,000 29,200 + 400,000
(9) –4,000 = –4,000
Bal. 352,000 159,200 14,000 = 100,000 25,200 + 400,000
525,200 525,200
 Effects
 Decrease in liability, accounts payable
1-50
Accounting for Owners’ Equity
Sole Proprietorships and Partnerships vs. Corporations
• Owners’ equities for sole proprietorships and

partnerships are called capital.
• Owners’ equity for a company/ corporation is called

stockholders’ equity or shareholders’ equity.
51
Types of Shares
Types of Shares
Equity Shares/
Common shares/ Preference Shares/
Common Stock/ Preferred Stock
Ordinary shares
52
Equity Shares
• Equity shareholders are the owners of the company.
• Equity shares carry VOTING RIGHTS.
• Equity shareholders have RESIDUAL OWNERSHIP of the

corporation.
• No fixed or assured dividend.

53
Preference Shares
• Usually carry a fixed rate of dividend.
• NO VOTING RIGHTS (except in certain cases).
• Carry a preferential right over equity shareholders in

terms of payment of dividends and repayment of capital
in the event of liquidation of the company.
54
Owners’ Equity
Proprietorship & Partnership Corporation/ Company
Labeled as: Capital Stockholders’ equity or

Shareholders’ equity
Shown as: Capital invested by owners Paid-in capital/ Paid up
capital
Paid-in capital
Common stock at par Paid-in capital in excess

value of par value
1-55
The Meaning of Par Value
•Par value (stated value) - a rupee amount printed
on each share/stock certificate
•Shares are usually issued and sold at more than
par value.
•Paid-in capital in excess of par value - the
difference between the total amount received for
the stock (issue price or sales price) and the par
value- called Premium.
56
• The following formulas show the components of total paid-in capital:
Total paid-in Capital stock Paid-in capital

= +
capital at par in excess of par
Capital stock Number of Par value

= x
at par shares issued per share
57
• The following formulas show the components of total paid-in capital:
Paid-in capital Total paid-in Capital stock

= –
in excess of par capital at par
Total paid-in Number of Average issue

= x
capital shares issued price per share
58
Stockholders and the Board of Directors
•In the corporate form of business, management
activities and ownership activities are kept
separate.
•The board of directors is the link between the
owners (stockholders) and the actual managers.
•The board has the responsibility to ensure that
management acts in the interests of the
stockholders.
59
Stockholders and the Board of Directors
• The relationship among owners, managers, and the board of

directors:
Stockholders
Elect
Board of
Directors
Appoint
Managers
60
Credibility and the Role of Auditing
•Corporate management prepares the financial
statements.
•In some cases, management may have
incentives to make the company’s
performance look better than it actually is.
•Investors must be able to rely on the financial

statements to show an accurate picture
of the company.
61
Credibility and the Role of Auditing
• One way to solve the credibility problem is to introduce an

honorable, expert third party, called the Auditor.
• The auditor examines the information that managers use to prepare the
financial statements and provides assurances about the credibility of the
statements.
• These assurances should make the investors more comfortable about using
the information to guide their investing activity.
• An audit includes tests of the accounting records, internal control systems,

and other audit procedures as deemed necessary.
• The audit is described in the auditor’s opinion (independent auditor’s report).
• The auditor’s opinion is included in the annual reports of organizations.
62

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Course: MSL302

Managerial Accounting and

Course Coordinator: Dr. Smita Kashiramka

Accounting: The Language

• Accounting - a process of identifying, recording,

• Consists of the personnel, procedures, technology and records by an

• Every business maintains some type of accounting system.

• Managers want to know if a new product will be profitable.

• Investors want to know if a company is a good investment.

• Creditors want to know if they should extend credit, how much

• Regulators want to know if the required rules and procedures

• Accounting helps in decision-making by showing where and

• Fundamental relationships in the decision-making process:

• The primary questions about an organization’s success

What is the financial picture of the organization on a

1. Balance Sheet – shows financial picture on a

• Annual report - a document prepared by

• The annual report is one of the most common sources of

• A letter from corporate management

• The financial manager actively manages the financial affairs of

• Increasing globalization has complicated the financial management

• Managers must understand the economic framework within which

• Accounting provides basic input to financial management.

Financial Financial Management

Concerned with Records and Meetsinternal

Three basic forms of ownership:

• An organization with a single owner.

• Owner is also the manager of the organization.

• Tend to be small retail establishments and individual

• Unlimited liability of the sole proprietor.

• An organization that has two or more individuals who act as co-

• Dentists, doctors, attorneys, and accountants tend to conduct

• Unlimited liability of partners (except in limited liability

• In India, Partnership Act, 1932 governs them- Maximum 10 partners

• Partnerships can be gigantic businesses.

• A company form of organization is an “artificial legal entity” created by law.

• It has a perpetual existence and a common seal.

• Can sue and be sued in its own name.

• Corporations have limited liability - corporate creditors have claims against

• In India, company form of organization is governed by Companies Act 2013.

• Company form of organizations can be Publicly owned (Public

• Public Ltd. companies are owned by public at large.

• Private Ltd. companies are owned by families, small group of

• Capital- In accounting, Capital refers to the money invested by the

• In case of Sole Proprietorship and Partnership, money invested by

• In case of Companies, money invested by the owner in the

 Statement of Financial Position

Two counterbalancing sections

Resources of Claims against

• Economic obligations to outsiders

III. Owners’ equity

The elements in balance sheet form the balance sheet

Assets = Liabilities + Owners’ Equity

• TRANSACTION: It is any event that affects both the financial

• The balance sheet is affected by every transaction that an

• Each transaction has counterbalancing entries that keep total

 Residual, or leftover, nature of owners’

Owners' Equity = Assets – Liabilities

 Shows owners’ claims are the amount left over

• A balance sheet could be prepared after every transaction, but

• Therefore, balance sheets are usually prepared monthly or

• Every transaction affects balance sheet

•Transactions are recorded in Accounts,

•The account balance is the total of all