Management Accounting

Basics of Accounting
Its a language of business. Business has its own personality. Accounting = (Identify + Record + Display) Economic Activity A company buys and sells goods with a profit margin. A company has to account for various aspects of accounting: 1. Goods moving in and out of the firm 2. Cash/cheque deposits 3. Withdrawal from the firm 4. Transportation for good leaving from firm premises 5. Travelling expenses 6. Insurance of goods in warehouse 7. Payment of salary 8. Receipt of interests

In order to keep a record of firm, firm needs to maintain records of people, firm, assets, property, expenses and income. Hence accounts are classified into 3 categories: 1. Personal Accounts a. Accounts of individual and firms with which firm deals 2. Impersonal Accounts (relate to other than persons) a. Real account i. Tangible real accounts (which can be seen, touched, felt, measured and sold) 1. Property, Assets and possession of firms (Good, cash, computer, h/w) ii. Intangible real accounts (cant be seen, touched or felt) 1. Goodwill, patent, trademarks (capable of measurement in terms of money) b. Nominal account (do not represent any tangible asset; account for expense for gains, loses and incomes; cant be seen or touched) i. Printing and stationary, Discount, Salaries, Loss of goods by fire

Rules of accounting: From a firms perspective

1. Personal Account: a. Debit the receiver b. Credit the giver 2. Real account: a. Debit what comes in b. Credit what goes out 3. Nominal account: a. Debit all expenses and loses b. Credit all gains and incomes

Important terms in accounting

1. Capital: Investment of money in form of cash, machinery and furniture into firm to commence business. Total monetary value introduced by proprietor from his outside interest is the capital. 2. Drawings: Amount withdrawn by proprietor of the firm for his personal use is drawings. 3. Goodwill: It is an intangible fixed asset with a realizable value. It is the cost of the reputation of the business organization and is the name of the business in the given market. 4. Book of Original Entry: In real life the transactions are recorded in the general or book of journal entry and never entered directly into account. Each General entry has a source document to authenticate it.
3

5. Voucher: A document that provides evidence of the transactions is called the source document or a voucher. Like Salary slip, sales bill or cash memo.

Difference between Financial and Managerial Accounting:

1. Financial accounting focuses on providing information to third party stakeholders like providing balance sheets and income statements to investors, banks and exchange commissions. a. External users need: i. Resources and capabilities of a company statement of financial position ii. Cash situation at a certain point in the company cash flow statement iii. Are business making profit statement of comprehensive income 2. Managerial accounting focuses on providing information to managers within the organization about departments so that they can make right decisions. The steps on how it works: a. Value chain analysis i. Each business should create value. Each product line should add value to the final product. Value chain analysis plans how we add value to the product. b. Identify the costs c. Measure them d. Analyze the data e. Make some decisions f. Monitor the decisions g. Get feedback h. Improvement

Practical example of a Ba er! "#op:

We need to have a rental location to operate business 3 production levels/Manufacturing costs: 1. Prepare the dough: Scaling, Blending and Slicing a. Raw material wheat, milk, sugar, operator 2. Baking
4

a. Raw material gas/fuel, operator 3. Packaging a. Raw material paper, operator Maintenance will intervene at each level is the indirect cost. Gas and Fuel is the direct cost for Baking phase. Rent and Salary is fixed and is called as fixed costs. Gas and Fuel consumption and operator costs are variable depending upon production, so its variable costs.

Aspects of Managerial Accounting:

Costs: 1. Manufacturing costs/Product costs a. Specifically associated with making a product. Costs are not expensed until a product is actually sold. b. Recording raw material as assets on balance sheets; its the debit. 2. Non-Manufacturing costs/Period costs a. Advertising costs we pay agency; we debit expense and credit cash.

Basics of Managerial Accounting

Provides information to managers, which define what managers need to run business. Management Accounting combines accounting, finance and management with the leading edge techniques to drive successful businesses. A management accountant provides information to management to assist them with planning, decision-making and control. Management accountant also helps with formulating strategies.

Roles of a management accountant:

1. Skills and experience 2. High ethical standards

Roles of a management accountant in a societ!:

1. Increase shareholder values: returns to shareholders in terms of dividends/profits and share price growth 2. Meet society needs

$nvironmental costing:
1. Include in price 2. Comply with environmental regulation 3. Ethical reasons to reduce significant impact on environment

Definition of %Prepaid $xpense%

A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received in the near future. While prepaid expenses are initially recorded as assets, their value is expensed over time as the benefit is received onto the income statement, because unlike conventional expenses, the business will receive something of value in the near future.

Investopedia explains %Prepaid $xpense%

Due to the nature of certain goods and services, they must be prepaid expenses. For example, insurance is a prepaid expense, because the purpose of purchasing insurance is to buy proactive protection in case something unfortunate happens. Clearly, no insurance company would sell insurance that covers the occurrence of an unfortunate event, after the fact, so insurance expenses must be pre-paid. An example of expensing prepaid expenses would be if a company had a one-year insurance policy cost of $1200. As each month elapses, $100 of prepaid insurance would be expensed to the income statement until the account is empty at the end of the year.