MANAGEMENT ACCOUNTING

FUNDAMENTALS OF ACCOUNTS

An account is a summarised record

of relevant transactions at one place
relatin to a particular !ead" It
records not onl# t!e amount of
transactions $ut also t!eir effect and
direction"

De$it and Credit are simpl# additions

to or su$tractions from an account"
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Fundamentals of Accounts

The three rules of accounting are

De$it t!e receiver and Credit t!e

iver

De$it 1!at comes in and Credit 1!at

oes out

De$it all e2penses and Credit all

ains and profits
Classification of Accounts

&ersonal Account

,eal Account

Nominal Account
Classification of Accounts
3Contd"4
Classification of Accounts
3Contd"4

Assets accounts

Lia$ilities accounts

Capital accounts

,evenue accounts

E2penses accounts

Assets 5 lia$ilities 6 capital 6 profits 7

losses

&rofits 5 revenue 7 e2penses

Losses 5 e2penses 8 revenue

,ules of De$it and Credit

Increase in assets are de$its and

decrease are credits

Increase in lia$ilities are credits and

decrease are de$its

Increase in capital are credits and

decrease are de$its

Increase in e2penses are de$its and

decrease are credits

Increase in revenues are credits and

decrease are de$its
Financial Statements

Financial Statements are compilation

of accountin information for t!e
e2ternal users"

T!e# include

&rofit and Loss Account

*alance S!eet

Sc!edules and Notes formin part of

t!e a$ove
Financial Statements
3Contd"4

Capital E2penditure is t!e amount spent

$# an enterprise on purc!ase of fi2ed
assets t!at are used in t!e $usiness to
earn income and not intended for resale"

Capital e2penditure normall# #ields

$enefits over a period e2tendin $e#ond
t!e accountin period"

,evenue e2penditure is t!e amount spent

on runnin of a $usiness

T!e $enefit of t!e revenue e2penditure is

e2!austed in t!e accountin period in
1!ic! it is incurred"
Distinction $et1een
Capital and ,evenue
Manaement Accountin

Definition

Manaement accountin is t!e

process of identification.
measurement. accumulation.
anal#sis. preparation. interpretation
and communication of information
t!at assists manaers in specific
decision ma9in 1it!in t!e
frame1or9 of fulfillin t!e
orani:ational o$;ectives"
T#pes of Decisions

T!e decisions. manaers are concerned

1it!. can $e cateori:ed as 7

&lannin decisions

Control decisions
&lannin Decisions

&lannin Decisions are concerned

1it! t!e esta$lis!ment of oals for
t!e orani:ation and t!e c!oosin of
plans to accomplis! t!ese oals

Manaement accountin information

is needed to ta9e &lannin decisions
Control Decisions

Control decisions result from implementin

t!e plans and monitorin t!e actual results
to see if oals are $ein ac!ieved

If oals are not $ein ac!ieved. eit!er

corrective steps must $e ta9en resultin in
oal ac!ievement or oals t!emselves
!ave to $e revised to attaina$le levels

Cost accountin data are needed for

ta9in Control decisions
Financial Accountin vs"
Manaement Accountin

Financial Accountin covers t!e process

of $oo9 9eepin. finali:ation of accounts.
preparation of financial statements.
communication of accountin information
to users and interpretation t!ereof

Manaement Accountin is concerned

1it! accountin information t!at is useful
to manaement

Financial Accountin emp!asi:es t!e

preparation of reports of an orani:ation
for e2ternal users 1!ereas Manaement
Accountin emp!asi:es t!e preparation
Financial Accountin vs"
Manaement Accountin

E2ternal users vs" Internal users

,ecord of financial !istor# vs" Emp!asis on

t!e future

GAA& vs" O1n rules

O$;ectivit# and verifia$ilit# vs" Fle2i$ilit#

Emp!asis on accurac# vs"Acceptance of

estimates

Focus on compan# as a 1!ole vs" Focus on

sements of a compan#

*ound $# conventional accountin s#stems

vs" Use of ot!er disciplines suc! as
Economics. Statistics. O,. O*. etc
Cost Accountin vs"
Manaement Accountin

Cost Accountin is mainl# concerned

1it! t!e tec!ni<ues of product costin
and deals 1it! onl# cost and price data"
It is limited to product costin
procedures and related information
processin" It !elps manaement in
plannin and controllin costs relatin
to $ot! production and distri$ution
c!annels" Cost Accountin is a =Line
function>

Manaement Accountin is not confined

Manaement Accountin
Frame1or9
Manaement Accountin
Frame1or9

Data accumulation is done t!rou!

Financial Accountin and Cost Accountin
s#stems" Financial records are maintained
t!rou! financial accountin s#stem and
cost records are maintained t!rou! cost
accountin s#stems

In Manaement Accountin s#stem. data

support is ta9en from financial accountin
and cost accountin and also data
accumulation is carried out from e2ternal
sources" Accumulated data are reclassified
as per t!e re<uirements of t!e
Contents of Manaement
Accountin

Manaement process is a series of

activities involved in plannin.
implementation and control" Eac! p!ase of
manaement process re<uires decision
ma9in

Manaement Accountin supports

manaerial decision ma9in providin t!e
re<uired information

Information enerated in manaement

accountin process includes8
8 Financial Statement Anal#sis
8 Cas! flo1 information
Statements of Financial
Information

*alance S!eet

&rofit and Loss Account

Statement of c!anes in financial

position
8 Cas! flo1 statement
8 Fund flo1 statement
Contents of *alance S!eet

T!e $alance s!eet provides

information a$out t!e financial
standin(position of a compan# at a
particular point in time i"e" as Marc!
?@. ABBC

It is a snaps!ot of t!e financial status

of t!e compan#

T!e financial position of t!e compan#

is valid for onl# one da# i"e" t!e
reference da#
Contents of *alance S!eet

T!e financial position as disclosed $# t!e

$alance s!eet refers to its resources and
o$liations and t!e interests of its o1ners
in t!e $usiness"

T!e $alance s!eet contains information

reardin assets. lia$ilities and
s!are!oldersD e<uit#

T!e $alance s!eet can $e present in eit!er

of t!e t1o forms'
8 t!e account form
8 t!e report form
Assets

Assets are t!e valua$le resources o1ned

$# a $usiness

Assets need to satisf# t!ree re<uirements'

8 t!e resources must $e valua$le i"e" it is
cas! or converti$le into cas! or it can
provide future $enefits to t!e operations of
t!e firm
8 t!e resources must $e o1ned in t!e leal
sense" Mere possession or control 1ould
not constitute an asset
8 t!e resource must $e ac<uired at a cost
Assets

T!e assets in t!e $alance s!eet are

listed eit!er in t!e order of li<uidit#
i"e" promptness 1it! 1!ic! t!e# are
e2pected to $e converted into cas!
or

In t!e reverse order i"e" fi2it# or

listin of t!e least li<uid asset first.
follo1ed $# ot!ers
Assets

All assets are rouped into cateories i"e"

assets 1it! similar c!aracteristics are put
in one cateor#

T!e standard classification of assets

divides t!em into8
8 fi2ed assets ( lon term assets
8 current assets
8 investments
8 ot!er assets
Fi2ed assets

T!ese assets are fi2ed in t!e sense t!at

t!e# are ac<uired to $e retained in t!e
$usiness on a lon term $asis to produce
oods and services and not for resale

T!e# are lon term resources and are !eld

for more t!an one accountin #ear

T!ese assets are sinificant as t!e future

earnins(profits of t!e compan# are
determined $# t!em
Cateories of Fi2ed Assets

Tani$le

Intani$le
Tani$le Fi2ed Assets

T!ese assets !ave a p!#sical e2istence

and enerate oods and services

E2amples are land. $uildins. plant.

mac!iner#. furniture. etc

T!e# are s!o1n in t!e $alance s!eet at

t!eir cost to t!e firm at t!e time of t!eir
purc!ase

T!e cost of t!ese assets are allocated over

t!eir useful life

T!e #earl# allocation is called

=Depreciation>
Tani$le Fi2ed Assets
3Contd"4

As a result of depreciation. t!e amount of

tani$le fi2ed assets s!o1n in t!e $alance
s!eet ever# #ear declines to t!e e2tent of
depreciation c!ared t!at #ear

*# t!e end of t!e useful life of t!e asset.

value $ecomes nil or t!e salvae value. if
an#

Salvae value sinifies t!e amount

reali:a$le $# t!e sale of t!e asset at t!e
end of its useful life
Intani$le Fi2ed Assets

T!ese assets do not enerate oods and

services directl#

T!e# reflect t!e ri!ts of t!e compan#

E2amples 7 patents. cop#ri!ts.

trademar9s. ood1ill. etc

T!e# confer certain e2clusive ri!ts on

t!eir o1ners

Intani$les are also 1ritten off over a

period of time
Current Assets

T!e second cateor# of assets in t!e

$alance s!eet are current assets

In contrast to t!e fi2ed assets. current

assets are s!ort term in nature

As s!ort term assets. t!e# refer to assets (

resources 1!ic! are eit!er !eld in t!e form
of cas! or e2pected to $e reali:ed in cas!
1it!in t!e accountin period or t!e normal
operatin c#cle of t!e $usiness

T!e term =operatin c#cle> means t!e

time span durin 1!ic! t!e cas! is
converted into inventor#. inventor# into
Current assets 3Contd"4

Current assets are also 9no1n as =li<uid

assets>

T!e# include8
8 cas!
8 mar9eta$le securities
8 accounts receiva$les(de$tors
8 $ills receiva$les
8 inventor#
Current Assets 3Contd"4

Cash

Most li<uid form of current asset

Cas! in !and and at $an9

To meet o$liations ( ac<uire assets

1it!out an# dela#
Current Assets 3Contd"4

Marketable Securities

S!ort term investments 1!ic! are

readil# mar9eta$le and can $e
converted into cas! 1it!in a #ear

Outlet to invest temporaril#

availa$le surplus(idle funds

Declared at cost or mar9et value

1!ic!ever is lo1er and t!e ot!er
amount is indicated in t!e financial
statement
Current Assets 3Contd"4

Accounts Receivable

T!e amount t!e customers o1e to

t!e firm. arisin out of t!e sale of
oods on credit

T!e# are called t!e sundr# de$tors

T!e unrecovera$le portion is termed

as $ad de$ts and 1ritten off out of
t!e & E L a(c
Current assets 3Contd"4

Bills Receivable

Amount o1ed $# outsiders for 1!ic!

1ritten ac9no1ledements of t!e
o$liations are availa$le

IOUs are dra1n and e2c!aned

Temporar# credit can $e arraned $#

discountin t!ese IOUs
Current Assets 3Contd"4

Inventory

It includes

T!e oods 1!ic! are !eld for sale in t!e

course of $usiness 3finis!ed oods4

T!e oods 1!ic! are in t!e process of

production 31or9 in proress or semi
finis!ed oods4

T!e oods 1!ic! are to $e consumed in

t!e process of production 3ra1 materials4
Investments

T!e t!ird cateor# of assets is

investments

T!e# represent investment of funds

in t!e securities of anot!er compan#

T!e# are lon term assets outside

t!e $usiness of t!e firm

T!e purpose is to earn a return

and(or to control anot!er comapn#
Ot!er Assets

Included in t!is cateor# are t!e

Deferred C!ares

E2ample' Advertisement. &reliminar#

e2penses. etc
Lia$ilities

Lia$ilities are defined as t!e claims

of outsiders aainst t!e firm

T!e# represent t!e amount t!at t!e

firm o1es to outsiders ot!er t!an t!e
o1ners

T!e assets are financed $# different

sources

Dependin on t!e periodicit# of t!e

funds. lia$ilities are classified into 8
Lon term and s!ort term sources
Lon term Lia$ilities

Sources of funds included in t!is cateor#

are availa$le for periods e2ceedin one
#ear

Suc! lia$ilities represent o$liations of a

firm pa#a$le after t!e accountin period

E2ample' De$entures. *onds. Mortaes.

Secured loans from FIs and $an9s

T!e# !ave to $e redeemed(repaid eit!er

as a lump sum on maturit# or over a
period of time in instalments
Current Lia$ilities or S!ort
term Lia$ilities

T!ese Lia$ilities are pa#a$le to

outsiders in a s!ort period. usuall#
1it!in t!e accountin period or t!e
operatin c#cle of t!e firm

E2ample' Accounts pa#a$le. *ills

pa#a$le. Ta2 pa#a$le. Accrued
e2penses. S!ort term $an9 credit

Accounts and *ills pa#a$le are

considered as Trade Credit
Current Lia$ilities 3Contd"4

Trade Credit

T!e claims of outsiders 1!o !ave sold

oods to t!e firm on credit for a s!ort
period

Usuall# t!ese are unsecured

Suc! lia$ilities e2tended 1it!out an#

1ritten commitment are Accounts &a#a$le
or Sundr# Creditors

Suc! lia$ilities e2tended 1it! formal

areements t!rou! IOUs are *ills pa#a$le
Current Lia$ilities 3Contd"4

Short term Bank Credit

Lia$ilities contracted t!rou! $an9s

for a s!ort period for t!e purpose of
runnin t!e $usiness

E2ample' cas! credit. overdraft.

loans and advances
Current Lia$ilities 3Contd"4

Tax ayable refers to t!e amount

pa#a$le to t!e Government as ta2es

Accrued !x"enses represents

o$liations 1!ic! are pa#a$le and
9ept outstandin $# t!e firm

E2ample' outstandin 1aes.

salaries. rent. commission. etc
O1nersD E<uit# or Capital

T!e ne2t main component of t!e $alance

s!eet is t!e o1nersD e<uit#

It represents t!e residual claim of t!e

o1ners on t!e assets of t!e compan# after
settlin all t!e e2ternal lia$ilities

T!e o1ners of t!e compan# are called t!e

shareholders

T1o t#pes of s!are!olders 7 e<uit# and

preference
&reference Capital

T!ese s!are!olders are entitled to a stated

amount of dividend and return of principal
on maturit#

In t!is sense. t!e# are a9in to t!at of a

lender

*ut. !e is entitled to t!e dividend onl# if

t!e compan# !as made profits

In t!is sense. t!e# are t!e o1ners

E<uit# Capital

T!e# are t!e residual claimants of t!e

profits

After all t!e e2ternal lia$ilit# !olders and

t!e preference s!are!olders !ave $een
paid. t!e $alance amount. if an#. $elons
to t!e E<uit# s!are!olders

Components' &aid up capital 1!ic! is t!e

initial investments made $# t!is roup and
,etained earnins(,eserves and Surplus
1!ic! is t!e undistri$uted part of t!e
residual profits over t!e #ears 1!ic! !as
$een put $ac9 in $usiness
Common Dou$ts

-!# is s!are capital s!o1n as a

lia$ilit#F

Depreciation 7 1!at is its natureF

Accumulated losses 7 treatmentF

Good1ill 7 1!at is its natureF

-!at is t!e sinificance of t!e

auditorDs reportF
Contents of &rofit and Loss
Account

,evenues ' Turnover

Ot!er income
Sale of fi2ed assets

E2penses

&rofit ( Loss
,evenues

,evenue is defined as t!e income

t!at accrues to t!e firm $# sale of
oods and services or t!rou!
investments

Sales Revenue is t!e amount

earned t!rou! sale of
oods(services

Gross sales is t!e total sales. 1!ile

Net sales is ross sales minus t!e
,evenue 3Contd"4

#ther income is earned t!rou!

ot!er sources of investments

E2amples' Interest. dividend. ro#alt#.

commission. fee. etc

Sale of $ixed Assets are t!e

revenues 1!ic! come into t!e
$usiness 1!en unused ( un1anted
assets are sold and mone# recovered
$# t!e compan#
E2penses

T!e cost of earnin t!e revenues are

t!e e2penses

E2amples' varia$le e2penses li9e

cost of manufacture. cost of sellin.
fi2ed e2penses li9e salaries.
administrative e2penses
E2penses 3Contd"4

Cost of goods consumed

T!is is t!e value of t!e inputs used to

manufacture t!e final product

It is calculated as 7

Openin stoc9
6 &urc!ases
8 Closin Stoc9
E2penses 3Contd"4

Manufacturing ex"enses

T!ese include all e2penses related to plant

and manufacturin operations li9e po1er
and fuel. repairs and maintenance. stores
consumed. 1ater consumed. etc

!xcise Duty

T!is is t!e amount paid to t!e Govt" as a

ta2. $efore t!e oods are dispatc!ed from
t!e factor#
E2penses 3Contd"4

Salaries and %ages

T!ese are t!e cost of la$our and

ot!er staff and 1ill also include all
ot!er emplo#ee $enefits and
amenities"

T!e ot!er $enefits include &rovident

Fund. ESI contri$utions. medical
$enefits. LTC. $onus. ratuit#.
pension. ot!er superannuation
$enefits. etc
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