Financial and

Management
Accounting By:
BITS Pilani Dr. Vaishali Pagaria
vaishali.pagaria@wilp.bits-pilani.ac.in
Work Integrated Learning
Programmes Division
 BITS Pilani
Work Integrated Learning
Programmes Division

Course Outline
Text Books

T1 Financial Accounting – A Managerial Perspective, R.

Narayanaswamy, PHI, 5th edition, 2014/ 6th edition, 2019

T2 Accounting Text & Cases, Robert Anthony, David Hawkins,

Kenneth Merchant, 13th edition, 2013 (For select cases &
Management Accounting)

T3 Fundamentals of Financial Management, Brigham &

Houston, Cengage Learning

BITS Pilani, WILPD

 BITS Pilani
Work Integrated Learning
Programmes Division

1. Introduction to Accounting &

GAAP
Handout Reference
Time Type Sequence in Course Syllabus Content Reference

Pre CH RL Chapter 2 Taxila Course Page > Lecture3

During CH CH2 Basic concepts in accounting: asset, Chapter 2 & 3- T1/T2

liabilities, income and expenses.
Chapter 4/Chapter 2 & 3-T2/T1
Exercise on concepts and
conventions
Introduction to Accounting cycle,
Accounting equation and Analysis of
transactions
Format of Balance Sheet and Profit &
Loss Account.
 

Post CH HW1 CS: Read the case “Ribbons and Chapter 1 – T2

Bows” uploaded in Taxila

08/24/2022 BITS Pilani, WILPD

Nature and Purpose of
Accounting
Understanding the working of Business Organisation

• Business Organisation brings together: material, Lets take

technology, people and money. an
• Typically converts inputs into outputs by applying Example
processes.
• Business organisations are cash generating-cum-
dispensing machines

Unilever is a conglomerate company operates in 190 countries with 400+ brands and 2.5
billion customer base. It has more than 1.5 lakh employees and having a turnover of over
€52 billion in 2019.

The company receives cash from its customers in three ways:

1. For sales made in the past collected in current period
2. For sales made in the current period
3. For sales to be made in the future for which it receives advance payments

08/24/2022 Introduction to Accounting BITS Pilani, WILPD

The Business Organisation as
a Cash Machine
Cash Receipt
from
Customers
Past Sales
Cash Cash Receipt
Payments to from
Government, Customers
Owners Current Sales

Unilever
Cash
Company Cash Receipt
from
Payments
Customers
to Lenders
Future Sales

Cash
Cash
Payments
Payments
to
to Suppliers
Employees

08/24/2022 Introduction to Accounting BITS Pilani, WILPD

Forms of Business
Organisation
Forms of Ownership Decision-making Government Suitability
Organisation Regulation

Sole Proprietorship • Small • Completely • Nominal • Small business

• Single owner flexible • Deficiency in the and not
• Unlimited business to be expected to
liabilities bared by the grow much
owner

Partnership • Small to medium • Largely flexible • Minimum • Small, medium

• Minimum 2; but partners • Indian business
maximum 100 may disagree Partnership Act • Professional
• Partners share among • Partnership practices of
profit and/or themselves agreement is lawyers, CAs
losses equally oral or written
• Each partners • Deficiency in the
has unlimited business to be
liability bared by the
partners
• Insolvency of a
partner ends the
partnership

08/24/2022 Introduction to Accounting BITS Pilani, WILPD

 Forms of Business
Organisation
Forms of Ownership Decision-making Government Regulation Suitability
Organisation
Limited Company • Small to medium • Largely flexible but • Companies Act applies but • Small to
A. Private • Minimum 2 directors may mildly medium
shareholders; disagree • Auditing of financial businesses
maximum 200 statements by Cas • Eg. FANUC
• If co. fall short of its India Pvt.
liabilities, the shareholders Ltd.
have no legal obligation to
make good deficiency
• Share holder is different
from their company

Limited Company • Minimum 7 • Very rigid • Companies Act • Medium to

B. Public shareholders; no • BOD • Extensive documentations large scale
(i) Not Listed maximum limit • Auditing by CAs

Limited Company • Minimum 7 • Very rigid • Companies Act • Large to

B. Public shareholders; no • BOD • Extensive documentations very large
(iI) Listed maximum limit • Independent • Quarterly reporting scale
directors • Auditing by CAs businesses

08/24/2022
Introduction to Accounting BITS Pilani, WILPD
Why Study Accounting?

How valuable is to know Accounting?

• For timely financial information

• Presents the firms’ economic activities
• Financial statements which affects the stock prices
• Helps to value firm
• Helps to evaluate financial health of a business
• Decision making: for investors and stakeholders
• For start-up entrepreneurs
• For top-management

“ Accounting is an information development and communication function that supports

economic decision-making”

08/24/2022 Introduction to Accounting BITS Pilani, WILPD

Need for Information to the
Business Organisation
The accounting information system produces -
financial statements and reports for
• investors,
• Lenders
• Managers, and others

by processing transactions and events applying

accounting principles and standards and legal
requirements.

08/24/2022 Introduction to Accounting BITS Pilani, WILPD

Types of Information

Types of
Information

Nonquantitative Quantitative
Information Information

Accounting Nonaccounting
Information Information
(Monetary) (Nonmonetary)

Operating Financial Management

Tax Accounting
Information Information Accounting

08/24/2022 Introduction to Accounting BITS Pilani, WILPD

Users of Accounting
Information
Users Examples
Investors, Analysts, Retail investors, mutual funds, private equity funds, hedge
Advisers funds, equity and bond analysts, investment banks,
shareholders activists, proxy advisory firms
Lenders Banks, bank depositors, debenture holders, leasing companies
Managers CEO, CFO, COO, Functional Heads
Employees, trade unions Factory and office workers, trade union, trade union
federations
Suppliers, trade Suppliers of materials, services and utilities, short-term
financiers financiers
Customers Present, past and prospective customers
Government, regulatory Income tax, GST, Excise duty, Ministry of Finance, Ministry of
authorities Corporate Affairs, SEBI, RBI, CCI, Stock Exchanges, IRDA
The Public Local community, political parties, public affairs groups,
consumer groups, environmental activists.

08/24/2022 Introduction to Accounting BITS Pilani, WILPD

 The Accounting Information
System

INPUTS PROCESSING OUTPUT USERS

• Business transactions • Accounting principles • Statement of profit and • Shareholders

• External events and standards loss • Equity and
• Management • Statement of retained credit analysts
assumptions and earnings • Banks
estimates • Balance sheet • Managers
• Laws and regulations • Cash flow statement • Suppliers
• Transaction processing • Statement of changes in • Customers
conventions equity • Government
• Explanatory notes • Regulators
• Management
commentary
• Tax returns
• Regulatory filings

08/24/2022 Introduction to Accounting BITS Pilani, WILPD

What is Accounting?

Definition of Accounting

“Accounting is a systematic process of identifying, recording,

measuring, classifying, verifying, summarizing, interpreting and
communicating financial information.”
It reveals profit or loss for a given period, and the value and nature of a
firm’s assets, liabilities and owners’ equity.

Accounting Cycle
The step-by-step process of Accounting

08/24/2022 Introduction to Accounting BITS Pilani, WILPD

Accounting Cycle

Identify
Transactions
Record
Close Books of
Journal
Account
Entries

Ledger
Financial
Posting of
Statements
Entries

Adjusted Trial Unadjusted

Balance Trial Balance

Adjusted
Entries

08/24/2022 Introduction to Accounting BITS Pilani, WILPD

Annual Accounting
Statements
Accounting statement is a periodic summary of account
activity of the firm with a beginning date and an ending
date.

Three basic Accounting/Financial Statements

1. Balance Sheet
2. Income Statement
3. Cash Flow Statement

08/24/2022 Introduction to Accounting BITS Pilani, WILPD

Annual Accounting
Statements
1. Balance Sheet
– Two sides : Assets and Liabilities
– Assets are the Resources
– Liabilities are the Obligations
– Other source of fund is Owner’s Equity
– Always balance: A
= L + OE …….. Called Dual-Aspect Concept
2. Income Statement
– Two items: Income and Expenses
– The basic income statement equation is:
Revenue – Expenses = Net Income
3. Cash Flow Statement
– Cash receipt (Sources) and Cash payments (Uses)
– The difference is called Net Cash Flow

08/24/2022 Introduction to Accounting BITS Pilani, WILPD

Generally Accepted
Accounting Principles (GAAP)
• The set of conventions, rules, and procedures, which
define accepted accounting practices practice, constitute
GAAP
• The sources of IGAAP include Indian Accounting
Standards, The Companies Act 2013, and accounting
profession’s pronouncements.

08/24/2022 Dr. Vaishali Pagaria 19 BITS Pilani, WILPD

 BALANCE SHEET
PRINCIPLES
1. Money Measurement Concept
–
–
Each transaction and event must be expressed in ‘monetary terms’.
Can not record the qualitative events

2. Business Entity Concept

– Business is a separate entity than the owner/s
– A business entity may be in the form of sole proprietorship, partnership or a
corporate entity.
– A set of accounts are kept separately for the business and the owner/s.

3. Going Concern Concept

– Accounting assumes that a business entity is a going concern

4. Cost Concept
– Cost as on acquisition (historical cost or book value) eg. assets like land,
buildings, plant and machinery, etc.

5. Dual Aspect Concept

– Total Assets = Liabilities + Owners’ Equity
– Double-entry system

08/24/2022 Dr. Vaishali Pagaria 20 BITS Pilani, WILPD

Balance Sheet Principles

Total Assets = Liabilities + Owners’ Equity

Assets:
– Economic Resource
– Two types of Assets: Fixed Assets and Current Assets

Liabilities:
– Obligation to transfer assets
– Two types of Liabilities: Long-term liabilities and Current Liabilities

Owners’ Equity
– Owner’s investment in the business entity
– Two types of Owners’ Equity: Shareholder’s Equity and Retained Earnings

08/24/2022 Dr. Vaishali Pagaria 21 BITS Pilani, WILPD

 Garsden Corporation
Balance Sheet as of March 31, 2016
Liabilities Amt Amt Assets Amt Amt
Capital Fixed Assets (less Depreciation)
Share capital Land and Buildings
Retained earnings Plant and Machinery
Equipments

Long-term Liabilities Current Assets

Debentures Cash
Bonds Bank
Long-term loans Marketable securities
Note Accounts receivables (Debtors)
Inventories
Prepaid expenses

Current Liabilities Other Assets

Accounts payables (creditors) Investments
Taxes payables Intangible assets
Accrued expenses
Deferred revenues
Current portion of long-term
debt

08/24/2022 Dr. Vaishali Pagaria 22 BITS Pilani, WILPD

Assets

Real Accounts : All Assets (Fixed and Current)

• Land
• Buildings
• Equipment
• Prepaid expenses
• Trade receivables
• Bills receivables
• Cash
• Intangible assets like copy rights, goodwill, patent, etc.
• Marketable securities

08/24/2022 Dr. Vaishali Pagaria 23 BITS Pilani, WILPD

Liabilities (Long-term and
Current Liabilities)
• Long-term liabilities like debentures loans from banks
and other financial institutions, long-term deposits.
• Bills payables
• Trade payables
• Unearned revenue
• Other short-term liabilities like wages payable, tax
payable, interest payable, dividends payable.

08/24/2022 Dr. Vaishali Pagaria 24 BITS Pilani, WILPD

Owner’s Equity

• Share capital
• Retained earnings
• Revenues and expenses
• Drawings
• Dividends

08/24/2022 Dr. Vaishali Pagaria 25 BITS Pilani, WILPD

Balance Sheet Principles

Exercise 1: Prepare a balance sheet as of June 30, for he J.L. Gregory

Company, using following data
Particulars Amount Particulars Amount
Account payable (Creditors) 241000 Cash 89000
Account receivable (Debtors) 505000 Equipments 761000
Accrued expenses 107000 Estimated tax liability 125000
Accumulated depreciation on 538000 Inventories 513000
buildings
Accumulated depreciation on 700000 Investment in the Peerless 320000
equipment company

Bonds payable 700000 Land 230000

Buildings 1120000 Marketable Securities 379000
Capital stock 1000000 Notes payable 200000
Retained Earnings ?

08/24/2022 Dr. Vaishali Pagaria 26 BITS Pilani, WILPD

 INCOME STATEMENT
CONCEPTS
1. Accounting period concept
2. Conservatism concept
3. Realization concept
4. Matching concept
5. Consistency concept
6. Materiality concept

08/24/2022 Dr. Vaishali Pagaria 27 BITS Pilani, WILPD

Income Statement Concepts

1. Accounting period concept

– Measures economic activities for a specific interval of time, called
accounting period
– One year is the usual accounting period for reporting to outsiders.
– Also known as fiscal period
– Usual accounting period in India is 1st April to 31st March
2. Conservatism concept
– Suggests the period when revenue should be recognized
– Recognize revenues (increase in retained earnings) only when they
are reasonably certain. Eg. account receivables, interest receivables
– Recognize expenses (decreases in retained earnings) only when they
are reasonably possible. Eg. accounts payable, interest payables

08/24/2022 Dr. Vaishali Pagaria 28 BITS Pilani, WILPD

Income Statement Concepts

3. Realization concept
–Amount of revenue that should be recognized from a given sale
–To recognize the revenue, it has to be ‘realized’.
4. Matching concept
–Revenue earned in an accounting year is offset (matched) with all the
expenses incurred in the same period to generate that revenue
5. Consistency concept
–Sticking to the accounting method. Eg. depreciation method, inventory
management method, etc.
6. Materiality concept
– Insignificant events may be disregarded
– Full disclosure of all the important information

08/24/2022 Dr. Vaishali Pagaria 29 BITS Pilani, WILPD

 Garsden Corporation
Income Statement
For the Year Ended March 31, 2018
Particulars Amount Amount
Sales XXX
(less) Cost of Goods Sold XXX
Gross Profit XXX
(less) R & D Expenses XXX
Sales & Distribution Expenses XXX
Administration and General Expenses XXX XXX
Operating Income (EBDIT) XXX
(less) Depreciation XXX
EBIT XXX
(less) Interest XXX
EBT XXX
(less) Tax XXX
EAT or PAT XXX

08/24/2022 Dr. Vaishali Pagaria 30 BITS Pilani, WILPD

Income- Expenditure

• Wages
• Rent
• Commission
• Interest paid
• Interest receive
• Sales revenue….etc..

• All expenses
• All income

08/24/2022 Dr. Vaishali Pagaria 31 BITS Pilani, WILPD

Income Statement Concepts

Exercise 2: Prepare an Income Statement for the year for Worden Corporation
from the below given information

Particulars Amounts (in INR)

Sales Revenue 850000
Cost of Goods Sold 450000
Selling and administrative Expenses 60000
Interest paid 10000
Tax 40000
Depreciation 20000
Also find out profit margin percentage and gross margin percentage.

08/24/2022 Dr. Vaishali Pagaria 32 BITS Pilani, WILPD

HW 1

Selected balance sheet items are shown for the Microtech

Company. Compute the missing amounts for each of the
four years. What basic accounting equation did you
apply in making your calculation? Amounts are in $.
Year 1 Year 2 Year 3 Year 4
Current Assets 113625 ? 85124 ?
Non Current Assets ? 198014 162011 151021
Total Assets 5246000 ? ? 220111
Current Liabilities 56141 40220 ? ?
Non Current liabilities ? ? 60100 30222
Paid-in Capital 214155 173295 170000 170000
Retained Earnings 13785 (3644) 1452 2350
Total Liabilities and Owners’ 5246000 288456 ? 220111
Equity
08/24/2022 Dr. Vaishali Pagaria 33 BITS Pilani, WILPD
HW 2

Selected income statement items are shown for Astrotech

Company. Compute the missing amounts for each of the
four years. What basic accounting equation did you
apply in making your calculations? Amounts are in $.
(Hint: to estimate the Year 4 missing numbers, compute the
typical percentage each expenses item is of sales for
years 1 to 3 and apl the percentage figure for each
expense item to Year 4’s sales)

08/24/2022 Dr. Vaishali Pagaria 34 BITS Pilani, WILPD

HW 2
Particulars Year 1 Year 2 Year 3 Year 4
Sales 12011 ? 11545 10000
COGS 3011 2992 ? ?
Gross Profit ? 8976 8659 ?
Other Expenses 6201 6429 ? ?
EBT 2799 ? 2363 ?
Tax Expenses ? 1019 945 ?
PAT 1679 1528 1418 ?

08/24/2022 Dr. Vaishali Pagaria 35 BITS Pilani, WILPD

 BITS Pilani
Work Integrated Learning
Programmes Division

Ribbon an’ Bows Inc. Case Study

HW 1: Case Study: Ribbon an’
Bows, Inc.

17/08/2019 Generally Accepted Accounting Principles (GAAP) 37 BITS Pilani, WILPD

HW 1: Case Study: Ribbon an’
Bows, Inc.

17/08/2019 Generally Accepted Accounting Principles (GAAP) 38 BITS Pilani, WILPD

HW 1: Case Study: Ribbon an’
Bows, Inc.
Ribbon an’ Bows, Inc.
Assets and Capital Sources List, As on March 31, 2006
Assets Amount Liability Amount
(in $) (in $)

Cash 4000 Cousin’s Loan (Long-term 10000

Loan)
Inventory 3300 Carmen’s Equity 1000
Supplies 100
Prepaid rent 1200
Prepaid advertising 150
Computer & Software 2000
Cash Register Deposit 250
Total 11000 Total 11000

08/24/2022 Dr. Vaishali Pagaria 39 BITS Pilani, WILPD

Case Study: Ribbon an’ Bows,
Inc.
1. How would you report on the three-month operations of Ribbon an’
Bows, Inc., through June 30? Was the company profitable? (ignore
income-taxes).
2. Why did its cash in the bank decline during the three-month
operating period?
3. How would you report the financial condition of the business on
June 30, 2006?
4. Do you believe Carmen’s First three months of operation could be
characterized as “successful”? Explain your answer.

08/24/2022 Dr. Vaishali Pagaria 40 BITS Pilani, WILPD

 BITS Pilani
Work Integrated Learning
Programmes Division

THANK YOU!!!!

08/24/2022