Accounts Notes Unit 1 To 5 With Answers

Department of Management Studies
BA 9206 ACCOUNTING FOR MANAGEMENT

UNIT – I FINANCIAL ACCOUNTING
Introduction to Financial, Cost and Management Accounting- Generally accepted
accounting principles, Conventions and Concepts-Balance sheet and related concepts-
Profit and Loss account and related concepts - Introduction to inflation accounting-
Introduction to human resources accounting.
UNIT – II COMPANY ACCOUNTS

Meaning of Company -Maintenance of Books of Account-Statutory Books- Profit or
Loss Prior to incorporation- Final Accounts of Company- Alteration of share capital-
Preferential allotment, Employees stock option- Buyback of securities.
UNIT – III ANALYSIS OF FINANCIAL STATEMENTS

Analysis of financial statements – Financial ratio analysis, cash flow (as per Accounting
Standard 3) and funds flow statement analysis.
UNIT - IV COST ACCOUNTING

Cost Accounts - Classification of manufacturing costs - Accounting for manufacturing
costs. Cost Accounting Systems: Job order costing - Process costing- Activity Based
Costing- Costing and the value chain- Target costing- Marginal costing including
decision making- Budgetary Control & Variance Analysis - Standard cost system.
UNIT - V ACCOUNTING IN COMPUTERISED ENVIRONMENT

Significance of Computerised Accounting System- Codification and Grouping of
Accounts- Maintaining the hierarchy of ledgers- Prepackaged Accounting software.
TEXT BOOKS
1. M.Y.Khan & P.K.Jain, Management Accounting, Tata McGraw Hill, 2004.
2. R.Narayanaswamy, Financial Accounting – A managerial perspective, PHI Learning,
New
Delhi, 2008.
REFERENCES
1. Jan Williams, Financial and Managerial Accounting – The basis for business
Decisions,
13th edition, Tata McGraw Hill Publishers, 2005.
2. Horngren, Surdem, Stratton, Burgstahler, Schatzberg, Introduction to Management
Accounting, PHI Learning, 2008.
3. Stice & Stice, Financial Accounting Reporting and Analysis, 7th edition, Cengage
Learning, 2008.
4. Singhvi Bodhanwala, Management Accounting -Text and cases, PHI Learning, 2008.
5. Ashish K. Battacharya, Introduction to Financial Statement
AFM Study Material First Semester First Year

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UNIT-I
1. Explain the various accounting concepts and conventions which are used in the
preparation of accounts.
Accounting concepts The term ‘Concept’ is used to mean necessary assumptions and
ideas which are fundamental to accounting practice. The various accounting concepts are
as follows:
Business Entity concept : For accounting purposes, the proprietor of an enterprise is
always considered to be separate and distinct from the business which he/she controls
Dual aspect concept: Every business transaction involves two aspects – a receipt and a
payment. In other words, every debit has an equal and corresponding credit. The dual
aspect concept is expressed as : Capital + Liabilities = Assets. This is known as ‘the
accounting equation’.
Going concern concept: Under this assumption, the enterprise is normally viewed as a
going concern. It is assumed that the enterprise has neither the intention nor the necessity
of liquidation of curtailing materially the scale of its operations. That is why assets are
valued on the basis of going concern concept and are depreciated on the basis of expected
life rather than on the basis of market value.
Accounting period concept: ‘Accounting year’ is the period of 12 months for which
accounts are to be prepared under the Companies Act and Banking Regulation Act.
Money measurement concept: In accounting, every event or transaction which can be
expressed in terms of money is recorded in the books of accounts. This concept does not
record any fact or happening, even though it is important to the business, in the books of
accounts if it cannot be expressed in terms of money. And as per this concept, a
transaction is recorded at its money value on the date of occurrence and the subsequent
changes in the money value are conveniently ignored.
Historical Cost concept : The underlying idea of cost concept is –i) asset is recorded at
the price paid to acquire it, that is, at cost and ii) this cost is the basis for all subsequent
accounting for the asset. Fixed assets are shown in the books of accounts at cost less
depreciation. Current assets are periodically valued at cost price or market price
whichever is less.
Revenue recognition concept: In accounting, ‘revenue’ is the gross inflow of cash,
receivables or other considerations arising in the course of an enterprise from the sale of
goods, from the rendering of services and from the holding of assets. In the case of
revenue, the important question is at what stage, the transaction should be recognized and
recorded.
Periodic matching of cost and revenue concept: After the revenue recognition, all costs,
incurred in earning that revenue should be charged against that revenue in order to
determine the net income of the business.
Verifiable objective evidence concept: As per this concept, all accounting must be based
on objective evidence. In other words, the transactions should be supported by verifiable
documents.
Accrual concept: Under this concept, revenue recognition and costs for the relevant

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period, depends on their realization and not on actual receipt or payment. In relation to
revenue, the accounts should exclude amounts relating to subsequent period and provide
for revenue recognized, but not received in cash. Like wise, in relation to costs, provide
for costs incurred but not paid and exclude costs paid for subsequent period.
2. What are the various methods of measuring human resource accounting?

TECHNIQUES OF VALUATION OF HR
There are around eight techniques for valuation of HR. They are as follows
1. Historical cost Method: This method was developed by Rensis Likert and his
associates and was adopted by R.G.Barry Corporation, Ohio, Colombia, USA, in 1968.
This method involves capitalization of the costs incurred on HR related activities such as
– recruitment, selection, placement, training and learning etc, and amortized over the
expected length of services of the employees. The unexpired cost represents the firm’s
investment in HR. In case an employee leaves the organization before the expiry of the
expected services’ life period, the firm shall write off the entire amount of unexpired cost
against the revenue of the period during which he or she leaves.
2. Replacement Cost Method: This method was initially developed by Hekimian and
Jones. According to this method, a firm’s HR value is its replacement cost. According to
Flamholtz, this replacement cost may be – i) individual replacement cost – which refers
to the cost of replacing an employee with an equivalent substitute in terms of skill, ability
and knowledge and ii) positional replacement cost – which refers to the cost of replacing
the set of services expected to be rendered by an employee at the respective positions
he holds and will hold at present and in future. Thus, the HR value will appear in the
financial statements at its replacement cost.
3. Opportunity cost method: This method has been suggested by Hekimian and Jones and
refers to the valuation of HR on the basis of an employee’s value in alternative uses, i.e.,
opportunity cost. This cost refers to the price other divisions are willing to pay for the
service of an employee working in another division of an organization.
4. Capitalization of Salary method: This method had been proposed by Baruch Lev and
Aba Schwartz in terms of economic value of HR. According to them, the salaries payable
to employees during their stay with the organization may be used in valuing the HR of an
organization. Thus the value of HR is the present value of future earnings of
homogeneous group of employees..
5. Economic valuation method: The values the HR of an organization by considering the
present worth of the employees’ future service expected to be derived during their stay
with the organization. Under this method, the valuation of HR involves 3 steps – 1)
estimation of employee’s future services, 2) multiply step 1 by the employee’s rate of pay
and 3) Multiply step 2 by the rate of return on investment. This would give the present
worth of employee’s service.
6. Return on efforts employed method: Under this method, HR valuation is done on the
basis of the quantifying the efforts made by the individuals for the organizational benefits
by taking into account factors such as –positions an employee holds, degree of excellence
employee achieves, and the experience of the employee.
7. Adjusted discounted future wages method: This model has been developed by
Roger.H.Hermanson. Under this method, HR valuation is done on the basis of relative
efficiency of an organization in the industry. This model capitalizes the extra profit a firm
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earns over and above that of the industry expectations. As such, this model involves 4
steps – 1) estimation of 5 years (succeeding) wages and salaries payable to different
levels of employees 2) finding out the present value of such estimated amount at the
normal rate of return of the industry, 3) determining the average efficiency ratio (the co’s
average rate of return for the past 5 yrs)/ Industry’s average rate of return for the past 5
yrs) for 5 years, 4) finding out the present value of future services of the co’s Hr by
multiplying the discount value (as in 2nd step) by the firm’s efficiency ratio (as
calculated in 3rd step)
8. Reward valuation method: This model has been developed by Flamholtz and is
commonly known as – the stochastic rewards valuation model. It values the HR of a
concern on the basis of an employee’s value to an organization at various service states
(roles) that he is expected to occupy during the span of his working life with the
organization. This model involves – estimation of an employee’s expected service life,
identifying the set of service roles he may occupy during his service life, estimating the
value derived by an organization at a particular service state of a person for the specified
time period, estimating the probability that a person will occupy at possible mutually
exclusive service state at specified future times, quantifying the total services derived by
the organization from all its employees, and discounting the total value thus arrived at to
its present value at a pre determined rate.
3. What is Accounting information system? Who are the users of accounting
information and based on the usage what are different branches of accounting?
DEFINITION OF ACCOUNTING:
The American Institute of certified public accountants (AICPA) defines accounting as
“the art of recording, classifying and summarizing in a significant manner and in terms
of money transactions and events which are in part at least of a financial character and
interpreting the results thereof”.
FUNCTIONS OF FINANCIAL ACCOUNTING
1. Keeping systematic records
2. Protecting the properties of the business
3. Communicating the results to the stake holders of the business
4. Meeting the legal requirements
LIMITATIONS OF FINANCIAL ACCOUNTING

1. Only transactions which can be measured in terms of money can be recorded in
the books of accounts. However events which may be important to the business
do not find a place in the accounts if they cannot be measured in terms of money.
2. According to the cost concept assets are recorded at the cost at which they are
acquired and therefore, the changes in values of assets brought about by changing
value of money and market factors are ignored.
3. There is conflict between one accounting principle and another. For example,
current assets are valued on the basis of cost or market price whichever less
according to the principle of conservatism is. Therefore in one year cost basis
may be taken, whereas in another year market price may be taken. This principle
contravenes the principle of consistency.

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4. The balance sheet is largely the result of the personal judgment of the accountant
with regard to the adoption of accounting policies and as such objectivity factor is
lost.
5. Financial accounting can be understood only by persons who have accounting
knowledge.
6. Inter firm comparison and comparative study of two periods is not possible under
this system as required past information cannot be made available.
7. Financial accounting does not indicate the cost behaviour, therefore cost control
cannot be adopted.
COST ACCOUNTING
DEFINITION: According to the Institute of Cost and Works Accountants (ICWA),
London, Cost accounting is “the process of accounting for costs from the point at which
expenditure is incurred or committed to the establishment of its ultimate relationship with
cost centers and cost units. In its widest usage it embraces the preparation of statistical
data, the application of cost control methods and the ascertainment of the profitability of
activities carried out or planned.”
OBJECTIVES OF COST ACCOUNTING:
1. To aid in the development of long range plans by providing cost data that acts as a
basis for projecting data for planning.
2. To ensure efficient cost control by communicating essential data costs at regular
intervals and thus minimize the cost of manufacturing.
3. Determine cost of products or activities, which is useful in the determination of
selling price or quotation.
4. To identify profitability of each product, process, department etc of the business
5. To provide management with information in connection with various operational
problems by comparing the actual cost with standard cost, this reveals the
discrepancies or variances.
LIMITATIONS OF COST ACCOUNTING
Cost Accounting like other branches of accountancy is not an exact science but is an art
which was developed through theories and accounting practices based on reasoning and
commonsense. These practices are dynamic. Hence, it lacks a uniform procedure
applicable to all the industries across. It has to be customized for each industry, company
etc.
MANAGEMENT ACCOUNTING
DEFINITION: According to M.A.Sahaf, Management Accounting is “a system for
gathering, summarizing, reporting and interpreting accounting data and other financial
information primarily for the internal needs of the management. It is designed to assist
internal management in the efficient formulation, execution and appraisal of business
plans.”
Management Accounting covers not only the use of financial data and a part of costing
theory but extends beyond these aspects. It scope covers
1. Financial accounting
2. Cost accounting
3. Financial statement analysis
4. Budgeting
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5. Inflation accounting
6. Management reporting
7. Quantitative techniques
8. Tax accounting
9. Internal audit
10. Office services
FUNCTIONS OF MANAGEMENT ACCOUNTING:
1. To help the management in planning, forecasting and policy formulation
2. To help in analysis and interpretation of financial information
3. To help in decision making- long term as well as short term
4. To help in controlling and coordinating the business operations
5. To communicate and report the operational results to the share and stock holders
of the business.
6. To motivate the employees by encouraging them to look forward
7. To help the management in tax administration
TOOLS AND TECHNIQUES OF MANAGEMENT ACCOUNTING
1. Financial planning
2. Analysis of financial statements
3. Cost accounting
4. Standard costing
5. Marginal costing
6. Budgetary control
7. Funds flow analysis
8. Management reporting
9. Statistical analysis
ADVANTAGES OF MANAGEMENT ACCOUNTING:
1. It increases efficiency of business operations
2. It ensures efficient regulation of business activities
3. It ensures utilization of available resources and thereby increases the return on
capital employed.
4. It ensures effective control of performance
5. It helps in evaluating the efficiency of the companies’ business policies
LIMITATIONS OF MANAGEMENT ACCOUNTING:

1. It is based on historical data, and it suffers from the drawbacks of the financial
statements.
2. The application of management accounting tools and techniques requires people
who are knowledgeable in subjects such as accounting, costing, economics,
taxation, statistics, mathematics, etc.
3. Though management accounting attempts to analyse both qualitative and
quantitative factors that influence a decision, the elements of intuition in
managerial decision making have not been completely eliminated.
4. The installation of management accounting system is expensive and hence not
suitable for small firms.
4. Explain the concept related to balance sheet.
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Accounting concepts The term ‘Concept’ is used to mean necessary assumptions and
ideas which are fundamental to accounting practice. The various accounting concepts are
as follows:
Business Entity concept : For accounting purposes, the proprietor of an enterprise is
always considered to be separate and distinct from the business which he/she controls
Dual aspect concept: Every business transaction involves two aspects – a receipt and a
payment. In other words, every debit has an equal and corresponding credit. The dual
aspect concept is expressed as: Capital + Liabilities = Assets. This is known as ‘the
accounting equation’.
Going concern concept: Under this assumption, the enterprise is normally viewed as a
going concern. It is assumed that the enterprise has neither the intention nor the necessity
of liquidation of curtailing materially the scale of its operations. That is why assets are
valued on the basis of going concern concept and are depreciated on the basis of expected
life rather than on the basis of market value.
Accounting period concept: ‘Accounting year’ is the period of 12 months for which
accounts are to be prepared under the Companies Act and Banking Regulation Act.
Money measurement concept: In accounting, every event or transaction which can be
expressed in terms of money is recorded in the books of accounts. This concept does not
record any fact or happening, even though it is important to the business, in the books of
accounts if it cannot be expressed in terms of money. And as per this concept, a
transaction is recorded at its money value on the date of occurrence and the subsequent
changes in the money value are conveniently ignored.
Historical Cost concept : The underlying idea of cost concept is –i) asset is recorded at
the price paid to acquire it, that is, at cost and ii) this cost is the basis for all subsequent
accounting for the asset. Fixed assets are shown in the books of accounts at cost less
depreciation. Current assets are periodically valued at cost price or market price
whichever less is.
Revenue recognition concept: In accounting, ‘revenue’ is the gross inflow of cash,
receivables or other considerations arising in the course of an enterprise from the sale of
goods, from the rendering of services and from the holding of assets. In the case of
revenue, the important question is at what stage, the transaction should be recognized and
recorded.
Periodic matching of cost and revenue concept: After the revenue recognition, all
costs, incurred in earning that revenue should be charged against that revenue in order to
determine the net income of the business.
Verifiable objective evidence concept: As per this concept, all accounting must be
based on objective evidence. In other words, the transactions should be supported by
verifiable documents.
Accrual concept: Under this concept, revenue recognition and costs for the relevant
period, depends on their realization and not on actual receipt or payment. In relation to
revenue, the accounts should exclude amounts relating to subsequent period and provide
for revenue recognized, but not received in cash. Like wise, in relation to costs, provide
for costs incurred but not paid and exclude costs paid for subsequent period.
Accounting conventions
The term ‘convention’ is used to signify customs or traditions as a guide to the
preparation of accounting statements. The various accounting conventions are as follows.
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Convention of disclosure: This convention implies that accounts must be honestly

prepared and all material information must be disclosed therein. The term ‘disclosure’
implies that there should be a sufficient disclosure of information which is of
material interest to proprietors, potential creditors and investors. This concept also
applies to events occurring after the balance sheet date and the date on which the
financial statements are authorized for issue, which are likely to have a substantial
influence on the earnings and financial position of the enterprise. Their non-disclosure
would affect the ability of the users of such statements to make proper evaluations and
decisions.
Convention of materiality: As per this convention, financial statements should disclose
all items which are material enough to effect evaluations or decisions. The American
Accounting Association (AAA) defines ‘materiality’ as “an item should be regarded as
material if there is reason to believe that knowledge of it would influence the decision of
informed investor”. Unimportant items can be either left out or merged with other items.
Sometimes, items are shown as footnotes or in parentheses according to their relative
importance.
Convention of consistency: Consistency, as used in accounting means that persistent
application of the same accounting procedures or method by a given firm from one time
period to the next so that the financial statements of different periods can be compared
meaningfully. This convention thus implies that in order to enable the management to
draw important and meaningful conclusions of performance over a period or between
different firms, accounting practices should remain unchanged for a fairly long time.
Convention of conservatism: According to this convention, the accountant should be
conservative in his/her approach in his opinions and selection of procedure. In
accounting, conservatism refers to the early recognition of unfavorable events. For
instance, all possible and expected losses must be provided for. On the other hand, gains
and other financial benefits should not be provided for unless they are realized. In other
words, ‘anticipate no profit and provide for all possible losses’.
5. Discuss the concept of Human Resource Accounting. Explain its importance in

the present context.
According to the American Accounting Association (1973), HR Accounting is ‘the
process of identifying and measuring data about human resources and communicating the
information to interested parties’. In the words of Stephen Knauf – HR Accounting is ‘the
measurement and quantification of human organization inputs, such as recruiting,
training, experience and commitment’.
• To provide relevant information about the human resource to the management and
aid in its decision making
• To help management in evaluating the performance of its personnel and calculate
its return on investment
• To help the management in planning and controlling the various functions or
activities related to its human resource such as – man power planning, recruiting,
training and retirement etc.
6. Differentiate between financial accounting and management accounting.

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Management accounting and financial accounting comprise the two main branches of
accounting in general. To those unfamiliar with field, such a distinction may seem
gratuitous. However, the distinctions accounting are not merely nominal. Generally, data
related to events, transactions and activities within an organization form the common
source of information for management and financial accounting. There are six major
differences between them.
= Purpose =Financial accounting is designed to state the financial position of an
organization and provide information about its revenue generation/profits to stakeholders.
It is geared towards external information users- primarily regulators, government and
owners. Management accounting has an internal focus, on the other hand.
Accountants/accounting clerks prepare such information for internal managers, who use
it to aid and facilitate planning, decision-making and control.
= Legal requirement Mgt. accounting is optional - used solely at the discretion of an
organization’s managers. External stakeholders usually do not even view management
accounts. This is because there is no legal requirement for any organization to prepare
management accounts. Financial accounts are for external users. However, only limited
liability companies bear the legal obligation to produce these accounts.
= Format and standards =The formats of management accounts are exclusively at the
discretion of managers. However, financial reports must adhere to International Financial
Reporting Standards and International Accounting Standards. This makes financial
reports virtually standardized while management accounting formats and systems vary
widely among and within organizations.
= Scope =Financial accounts represent an aggregate of entities, activities and operations
for the whole organization, including any subsidiaries. The focus of management
accounts is far more specific, as it deals with particular activities, sections or
departments. Therefore, it has an inherently narrower focus than financial accounting.
= Content =Financial reports usually deals with financial information. In other words,
most things in a financial report are of a monetary nature (having a dollar value).
Management accounts incorporate both monetary and non-monetary measures, i.e.
financial and non-financial information. This does not mean that financial reports are not
complete- just that data needs to be transformed to monetary figures for financial reports.
After all, financial reports do not account for productivity or employee morale.
= Period covered =By nature, financial accounts provide a historical representation of an
organization’s operations for a defined period. Management accounts can provide aspects
of past operations and projections for future operations, since they are also planning and
decision-enabling tools.
The differences between te two types of accounting is significant to management and
accountants. Since information has objectives that information users define, production of
management accounts and financial accounts consider the needs of these users, whether
internal or external. Since financial reports for limited liability companies are mandatory
and regulated, it merely requires conformity.
7. Define Human Resources Accounting. Explain their uses and abuses?
HR Accounting is ‘the process of identifying and measuring data about human resources
and communicating the information to interested parties’. In the words of Stephen Knauf
– HR Accounting is ‘the measurement and quantification of human organization inputs,
such as recruiting, training, experience and commitment’.
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The various advantages a firm can enjoy by establishing HR Accounting are as follows:
• Its adoption acts as a motivating factor for the employees of the concern as it is
reflected in its financial statements
• It helps the management in identifying and controlling several problems related to
human resources
• It enables the management in efficiently using its man power by providing
quantified information about its HR
• By considering HR as an asset in its financial statements, it provides a measure of
profitability
• It helps the investors or potential investors in assessing the true value of a firm by
providing realistic information about its HR.
At the same time, a firm may also face certain limitations in implementing HRA such as:
1. HR as an asset cannot be owned by any firm.
2. Quantification of HR value is subjective in nature and there is no common
valuation model which can be used across the industries or by all the companies
in the same industry
3. As its establishment and implementation involves huge cost, it may not suit small
firms.
4. The concept of HRA is not recognized by tax authorities and has only academic
value.
5. There is no objective procedure to be followed in the valuation of the HR, hence
comparative analysis may not be possible, and even if possible, may not be
reliable.
8. Differentiate between management accounting and cost accounting.
Point of difference Cost accounting Management Accounting

Objectives The objectives of cost The objective management
accounting is the accounting is to help the
ascertainment and control management in decision
of products or services making, planning, and
control.
Scope Cost accounting deals But management
primarily with cost data. accounting deals with both
cost and revenue.
Data used In cost accounting only Management accounting
those transaction which can uses both quantitative
be expressed in figures are information and qualitative
taken. Only quantitative information.
aspect is recorded in cost
accounting.
Nature Cost accounting uses both Management accounting is
past and present figures. concerned with the
projection of figures for
futures.

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UNIT-II
1. What is inventory? Describe the various methods of pricing issue of materials.
The term inventory includes stock of (i) finished goods (ii) work-in-progress and (iii) raw
materials and components. In case of a trading concern, inventory primarily consists of
finished goods while in case of a manufacturing concern; inventory consists of raw
materials, components, stores, work-in-process and finished goods.
Methods of valuation of inventories or Pricing Issues of Material:
Materials issued from stores should be valued at the rate they are carried in stock. The
various methods for pricing material issued from stores are classified as follows:
1) Specific identification method
This method is applicable to materials purchased for a particular job, order or process,
and identified when received either in stores or in the shop floor directly. Such materials
are usually non-standard and actual cost is charged to the job/order/process concern. No
question of difference arises out of such pricing.
2) First in First out (FIFO)
This method assumes that materials are used in the order in which they are received in
stores (chronologically). Hence the price of the first lot is charged to all issues till the
stock lasts. As a result closing stock will be valued at latest purchase price. This method
is useful in the slow moving or less frequently used materials of bulk items and high unit
costs.
3) Last in First out (LIFO)
This method assumes that the last receipt of stock is issued first. Hence issues are priced
at current prices, while stock remains at historical cost. This method is useful under the
inflationary conditions of the market. This method is useful for materials used less
frequently and under inflationary conditions.
4) Highest in First out (HIFO)
Under this method issues are valued at their highest price i.e. costliest items are issued at
first, and inventory is kept at lowest possible prices. Thus a secret reserve is created by
undervaluing stock. This method is complicated to administer if there are numerous
purchases within a short period. This method is mainly used for monopoly products or
cost plus contracts.
5) Base Stock Method
This method assumes that a minimum stock is always carried at original cost. The issues
are priced using one of the conventional method like FIFO, LIFO, etc, at actual costs.
This method will be suitable for tanning, smelting, oil refineries, etc. which use basic raw
materials like hides, non-ferrous metal, and crude oil for their products.
6) Next in First out (NIFO)
Under this method issues are valued at the price expected the next purchase i.e. price of
material which has been ordered but not yet received. Problem may arise if the price
ruling at the time of supply differs from the purchase order price. However this method
attempts to value issues at nearest to current market prices.
7) Weighted Average Price Method

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This method gives due importance to quantities received also. Issue prices are calculated
at average cost price of materials in hand i.e. by dividing the value of materials in stock
by the quantities in stock. Weighted average price remains the same till the next issue is
received. Thus issue prices are derived at the time of receipt but not at the time of issues.
This method is suitable where wide fluctuation of prices occurs as it evens out prices over
the accounting period.
2. Explain proforma of a final account.
TRADING ACCOUNT
Dr Cr
TO BY
OPENING STOCK
PURCHASE XXX SALES XXX
LESS: PURCHASE RETURN XXX LESS: SALES RETURN XXX XXX
XXX XXX CLOSING STOCK XXX
WAGES XXX GROSS LOSS XXX
CARRIAGE INWARD XXX TRANSFERRED TO PROFIT
FUEL AND POWER XXX AND LOSS ACCOUNT
DIRECT EXPENSES XXX
GROSS PROFIT XXX
HEATING AND LIGHTING XXX
TRANSFERRED TO PROFIT XXX
AND LOSS ACCOUNT XXX
XXX

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PROFIT AND LOSS ACCOUNT

Dr
Cr
TO BY
SALARIES XXX GROSS PROFIT XXX

RENT XXX DISCOUNT RECEIVED XXX
INSURANCE XXX COMMISSION RECEIVED XXX
CARRIAGE OUTWARDS XXX REDUCTION IN PROVISION FOR XXX
TELEPHONE XXX BAD DEBT XXX
PROVISION FOR XXX PROFIT ON SALE OF FIXED ASSET XXX
DEPRECIATION XXX NET LOSS TRANSFERRED TO
BAD DEBTS WRITTEN OFF XXX CAPITAL XXX
ADD: INCREASE IN BAD DEBTS XXX ACCOUNT
COST OF SAMPLES XXX
ADVERTISING XXX
INTEREST ON LOAN XXX
DISCOUNT ALLOWED XXX
TO NET PROFIT
TRANSFERRED TO CAPITAL XXX
ACCOUNT
XXX XXX

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BALANCE SHEET
Dr
Cr
LIABILITIES RS RS ASSETS RS RS
LONG TERM FIXED ASSETS :
LIABILITIES:
XXX PLANT AND MACHINERY XXX
OWNER'S CAPITAL LESS : PROVISION FOR
ADD: NET PROFIT FROM XXX DEPRECIATION XXX XXX
P&L ACCOUNT XXX XXX FURNITURE AND XXX
LESS : DRAWINGS XXX FIXTURES
BANK OVERDRAFT LESS : PROVISION FOR XXX
DEPRECIATION
CURRENT LIABILITIES:
XXX CURRENT ASSET :
SUNDRY XXX XXX
CREDITORS XXX STOCK XXX
BILLS PAYABLE XXX SUNDRY DEBTORS
OUTSTANDING LESS : PROVISION FOR XXX
EXPENSES BAD XXX
AND DOUBTFUL XXX
DEBT XXX
BILLS RECEIVABLE XXX
CASH AT BANK
CASH IN HAND
PREPAID EXPENSES
XXX XXX
T T
UNIT-III
1. What are the accounting ratios? Explain its uses and limitations.
A ‘Ratio: is defined as an arithmetical/quantitative/ numerical relationship between two
numbers. Ratio analysis is a very important and age old technique of financial analysis.
Uses of Ratio Analysis: There are various uses of Ratio analysis, some of which are as
follows:
• It helps in managerial decision making.
• It helps in financial forecasting and planning.
• It helps in communicating the financial strength of a concern.
• It helps in control.
• It is an essential part of budgetary control and standard costing.
• It helps an investor/prospective investor in decision making.
• It provides information to the creditors about the solvency of the firm.

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• It helps the employees by providing information about the profitability of the

concern.
• It helps the government in policy making by providing financial information
about the industry/firm etc.
• It facilitates inter-firm; intra-firm; and firm-industry comparison.
Limitations of Ratio Analysis: In spite of the various uses of ratio analysis, it suffers
from certain limitations, some of which are given below.
1. Limited use of a single ratio: A single ratio does not convey any meaning. Ratios
are useful only when calculated in sufficient nos.
2. Lack of adequate standards: It is difficult to set ideal ratios for each firm/industry.
And also setting of standard ratios for all the firms in every industry is also
difficult.
3. Inherent limitations of accounting: As Ratio analysis is based on financial
statements, the analysis suffers from the limitations of financial statements.
4. Change of accounting procedure: If different methods are followed by different
firms for their valuation, comparison will practically be of no use.
5. Window dressing: Ratios based on dressed up (manipulated) financial information
are not of much use as they show unreliable position of the firm
6. Personal bias: Different people will interpret the same ratio in different ways.
Thus, there is always the possibility that interpretation of the data may be
different for different people, and this in turn may result in many inferences for
the same data, which may be confusing.
7. Price level changes are not provided for in ratio analysis which may lead to a
misleading interpretation of business operations.
8. Ignorance of qualitative factors: Ratios are tools of quantitative analysis only and
normally qualitative factors which may generally influence the conclusions, (ex –
a high current ratio may not necessarily mean sound liquid position when current
assets include a large inventory consisting mostly of obsolete items) are ignored
while they are calculated.
2. State the uses and significance of cash flow statement.

Uses of cash flow statements:
1. It enables the effective planning and coordination of financial operations.
2. It enables proper allocation of cash among the various activities of the firm.
3. It aids the management in its investment decision.
4. It enables the management in properly analyzing the past business activities and plan
for future.
5. It gives the liquidity picture of the concern.
3. Differentiate fund flow statements and cash flow statements.
Cash Flow Statement Vs Funds Flow Statement: Both the Funds Flow Statement and the
Cash Flow Statement give almost similar picture of the firm. They don’t differ much
from each other. However, some of the differences between each other are as follows:
1. The Funds Flow Statement is much wider in purview than the Cash Flow Statement as
it indicates the changes in the Working Capital whereas the Cash Flow Statement

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indicates the inflow and outflow of cash which is only one of the components of the
Working Capital.
2. Funds Flow Analysis is based on mercantile system of accounting whereas Cash Flow
Analysis is based on cash system of accounting.
3. Funds Flow Analysis is useful for long term planning as it provides more
comprehensive information than the Cash Flow Analysis which is more useful for short
term planning.
4. Funds Flow Analysis traces the inflows and outflows of funds whereas Cash Flow
Analysis traces the inflows and outflows of cash within the firm.
5. Funds Flow Analysis analyses the changes in the Working capital under a separate
statement known as schedule for changes in working capital whereas in Cash Flow
Analysis, the changes in both current and non-current items are done in a single
statement.
4. Explain the methods of financial statement analysis.
There are around five techniques of analyzing the Financial Statements. They are:
1. Comparative Financial Statements
2. Common size Financial Statements
3. Trend Analysis
4. Ratio Analysis
5. Funds Flow and Cash Flow Analysis
5. Draw a specimen form of fund flow statement.
SCHEDULE OF CHANGES IN WORKING CAPITAL
Particulars Previous Year Current Year Increase Decrease

Current Assets
Current Liabilities
Increase/Decrease
in Working Capital
FUNDS FROM OPERATION OR ADJUSTED PROFIT & LOSS ACCOUNT

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TO BY
GOODWILL XXX OPENING BALANCE XXX

GENERAL RESERVE XXX REFUND OF TAX XXX
PRELIMINARY EXPENSES XXX DIVIDEND RECEIVED XXX
DISCOUNT ON ISSUE OF SHARE XXX PROFIT ON SALE OF FIXED ASSET XXX
DEPRESSION OF FIXED ASSET XXX
LOSS ON FIXED ASSET XXX FUND FROM OPERATION XXX
DISCOUNT ON ISSUE OF XXX
DEBENTURES XXX
PROVISION FOR TAX XXX
PROPOSED DIVIDEND XXX
CLOSING BALANCE
XXX XXX
STATEMENT OF SOURCES AND USES
SOURCES : USES :
FUNDS FROM OPERATION XXX INCREASE IN WORKING CAPITAL XXX

DECREASE IN WORKING XXX LOSS FROM OPERATION XXX
CAPITAL XXX REDEMPTION OF SHARES XXX
ISSUE OF SHARES XXX REDEMPTION OF DEBENTURES XXX
ISSUE OF DEBENTURES XXX PAYMENT OF TAX XXX
SALES OF FIXED ASSET XXX PAYMENT OF DIVIDEND XXX
BORROWING FROM BANK PURCHASE OF FIXED ASSETS XXX
DRAWINGS XXX
XXX XXX
UNIT-IV
1. What is budget? Explain various types of budgets.
A BUDGET is a quantitative expression of a business plan for a specified future period,
usually a year.
BUDGET is the planned future course of action
BUDGET is a plan of action expressed in financial or non financial terms.
BUDGET is a financial or quantitative statement prepared prior to a defined period of the
policy to be pursued during the period for that purpose of attaining a given objective -
ICMA.
DEFINITION OF BUDGET
According to the Institute of Cost & Management (ICMA), London, a BUDGET is ‘a
financial and / or quantitative statement, prepared and approved prior to a defined period

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of time, of the policy to be pursued during that period for the purpose of attaining a given
objective. It may include income, expenditure and the employment of capital’.
CLASSIFICATOIN OF BUDGETS
Budgets can be classified on the basis of many bases. There are three popular bases for
classifying budgets. They are – time, functions and flexibility. Apart from these
classifications, several other budgets can also be found in practice such as – performance
budget, ZBB, control ratios etc
ON THE BASIS OF TIME
• Long term budget: According to National Association of Accountants, America, a
long term budget is, a systematic and formalized process for purposeful directing and
controlling future operations towards a desired objective for periods extending
beyond one year.
• Short term budget : Short term budget covers a budget period of one year or less.
• Current budget : These budgets cover a very short period such as a month or a
quarter. They are essentially short term budgets adjusted to current conditions or
prevailing circumstances.
ON THE BASIS OF FUNCTIONS

• Functional / Subsidiary budgets: A Functional budget is a budget of income or
expenditure appropriate to or the responsibility of functions, such as production,
sales, purchase etc. Each functional department prepares its own budget, and all these
functional budgets are integrated into the Master budget.
Sales budget: It gives details about volume, price and sales mix. It also gives details
about the quantity of sale, month-wise or quarter-wise, market-wise, area-wise and on
whatever other basis be important to the organization. The responsibility for
preparation of this budget falls on the sales manager. While preparing this budget,
he/she has to consider certain influencing factors such as – past sales figures and
trend, salesmen’s estimates, plant capacity, general trade practice, orders in hand,
proposed expansion or discontinuance of products, seasonal fluctuations, potential
market, availability of material and supply, finance etc.
Production budget: It includes details about the types, quantity and cost of goods
and services produced in the organization. The responsibility of preparing this budget
falls on the Works manager or departmental Works managers.
Production cost budget: It is divided into material cost budget, labour cost budget
and overhead cost budget, because cost of production includes material, labour and
overheads.
Materials budget: It includes details about the kinds and quantity of material
required, price paid for it, cost of transportation and storage, etc
Labor budget: It includes details about the types and number of workers, the number
of hours required, the wage rates and other allowances, the welfare and other facilities
provided and cost thereof etc.
Overheads budget: It gives details of items of factory overhead expenses, their
quantity and cost.

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Research and Development budget: Every organization of some size, particularly, of

a manufacturing or technical type, has a Research and Development Department.
Expenses incurred by it are parts of operating cot, until efforts lead to some findings
that can be used for improvement of quality of product technology improvement,
and/or for producing something new, at which stage all expenses incurred are
capitalised.
Capital expenditure budget: This budget shows the estimated expenditure on fixed
assets such as land and buildings, plant and machinery, etc. It is a long term budget.
This budget is prepared to plan for replacement of old machines, increased demand of
products, expansion of activities, etc.
Cash budget: A Cash budget deals with cash, including its equivalent, like bank
balance and bills receivable. It shows the inflows of cash and outflows of cash during
a particular period of time. It can be prepared for a year, but for better control and
management of cash, it is normally prepared on monthly basis. It takes into account
only cash transactions.
• Master budget: This budget is prepared from, and summarizes the various functional
budgets. It is also called as summary budget. It generally includes details relating to
production, sales, stock, debtors, cash position, fixed assets etc, in addition to
important control ratios.
ON THE BASIS OF FLEXIBILITY

• Fixed budget: A Fixed budget is designed to remain unchanged irrespective of the
volume of output or turnover attained. The budget remains fixed over a given period
and does not change with the change in the volume of production or level of activity
attained.
• Flexible budget: It is also known as variable budget. A Flexible is designed to
change along with the changes in the output or turnover. It changes according to the
levels of activity.
2. What is meant by budgetary control system? Describe the essential steps of a
budgetary control system.
BUDGET ARY CONTROL is the system of management control and accounting in
which all operations are forecasted as far as possible and are planned ahead and actual
results are compared with planned & forecasted ones - J.A.SCOTT.
STEPS IN BUDGETARY CONTROL

1. Quantification of plans in relation to production, sales, distribution and finance in
terms of goals and objectives set by the management. i.e., Prepare budgets for
each section of organization
2. Record actual performance
3. Compare actual & budgeted performances
4. Remedial action to be taken if there is any difference
5. Revise budgets if necessary
ESSENTIALS OF SUCCESSFUL BUDGETARY CONTROL
1. Top management support
2. Clearly defined organization structure

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3. Efficient accounting system

4. Reporting of deviations
5. Motivation
6. Realistic targets
7. Participation of all departments concerned
8. Flexibility
3. Explain the application of marginal cost analysis for managerial decision making.
Marginal cost means the cost of the marginal or last unit produced. It is also defined as
the cost of one more or one less unit produced besides existing level of production. In this
connection, a unit may mean a single commodity, a dozen, a gross or any other measure
of goods.
For example, if a manufacturing firm produces X unit at a cost of 300 and X+1 units at a
cost of 320, the cost of an additional unit will be 20 which is marginal cost. Similarly if
the production of X-1 units comes down to 280, the cost of marginal unit will be 20
(300–280).
Features of Marginal Costing
The main features of marginal costing are as follows:
1. Cost Classification
The marginal costing technique makes a sharp distinction
between variable costs and fixed costs. It is the variable cost on
the basis of which production and sales policies are designed
by a firm following the marginal costing technique.
2. Stock/Inventory Valuation
Under marginal costing, inventory/stock for profit
measurement is valued at marginal cost. It is in sharp contrast
to the total unit cost under absorption costing method.
3. Marginal Contribution
Marginal costing technique makes use of marginal contribution
for marking various decisions. Marginal contribution is the
difference between sales and marginal cost. It forms the basis
for judging the profitability of different products or
departments.
Advantages and Disadvantages of Marginal Costing Technique
Advantages
• By not charging fixed overhead to cost of production, the effect of varying
charges per unit is avoided.
• It prevents the illogical carry forward in stock valuation of some proportion of
current year’s fixed overhead.
• The effects of alternative sales or production policies can be more readily
available and assessed, and decisions taken would yield the maximum return to
business.
• It eliminates large balances left in overhead control accounts which indicate the
difficulty of ascertaining an accurate overhead recovery rate.

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• Practical cost control is greatly facilitated. By avoiding arbitrary allocation of

fixed overhead, efforts can be concentrated on maintaining a uniform and
consistent marginal cost. It is useful to various levels of management.
• It helps in short-term profit planning by breakeven and profitability analysis, both
in terms of quantity and graphs. Comparative profitability and performance
between two or more products and divisions can easily be assessed and brought to
the notice of management for decision making.
Disadvantages
1. The separation of costs into fixed and variable is difficult and
sometimes gives misleading results.
2. Normal costing systems also apply overhead under normal
operating volume and this shows that no advantage is gained
by marginal costing.
3. Under marginal costing, stocks and work in progress are
understated. The exclusion of fixed costs from inventories
affect profit and true and fair view of financial affairs of an
organization may not be clearly transparent.
4. Volume variance in standard costing also discloses the effect of
fluctuating output on fixed overhead. Marginal cost data
becomes unrealistic in case of highly fluctuating levels of
production, e.g., in case of seasonal factories.
5. Application of fixed overhead depends on estimates and not on
the actual and as such there may be under or over absorption of
the same.
6. Control affected by means of budgetary control is also
accepted by many. In order to know the net profit, we should
not be satisfied with contribution and hence, fixed overhead is
also a valuable item. A system which ignores fixed costs is less
effective since a major portion of fixed cost is not taken care of
under marginal costing.
7. In practice, sales price, fixed cost and variable cost per unit
may vary. Thus, the assumptions underlying the theory of
marginal costing sometimes becomes unrealistic. For long term
profit planning, absorption costing is the only answer.
4. Indicate the uses and abuses of standard costing. Discuss in detail.
Definition
The CIMA, London has defined standard cost as “a predetermined cost which is
calculated from management’s standards of efficient operations and the relevant
necessary expenditure.” They are the predetermined costs on technical estimate of
material labor and overhead for a selected period of time and for a prescribed set of
working conditions. In other words, a standard cost is a planned cost for a unit of product
or service rendered.
The technique of using standard costs for the purposes of cost control is known as
standard costing. It is a system of cost accounting which is designed to find out how
much should be the cost of a product under the existing conditions. The actual cost can be
ascertained only when production is undertaken. The predetermined cost is compared to
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the actual cost and a variance between the two enables the management to take necessary
corrective measures.
Advantages
Standard costing is a management control technique for every activity. It is not only
useful for cost control purposes but is also helpful in production planning and policy
formulation. It allows management by exception. In the light of various objectives of this
system, some of the advantages of this tool are given below:
1. Efficiency measurement-- The comparison of actual costs with
standard costs enables the management to evaluate
performance of various cost centers. In the absence of standard
costing system, actual costs of different period may be
compared to measure efficiency. It is not proper to compare
costs of different period because circumstance of both the
periods may be different. Still, a decision about base period can
be made with which actual performance can be compared.
2. Finding of variance-- The performance variances are
determined by comparing actual costs with standard costs.
Management is able to spot out the place of inefficiencies. It
can fix responsibility for deviation in performance. It is
possible to take corrective measures at the earliest. A regular
check on various expenditures is also ensured by standard cost
system.
3. Management by exception-- The targets of different
individuals are fixed if the performance is according to
predetermined standards. In this case, there is nothing to worry.
The attention of the management is drawn only when actual
performance is less than the budgeted performance.
Management by exception means that everybody is given a
target to be achieved and management need not supervise each
and everything. The responsibilities are fixed and every body
tries to achieve his/her targets.
4. Cost control-- Every costing system aims at cost control and
cost reduction. The standards are being constantly analyzed
and an effort is made to improve efficiency. Whenever a
variance occurs, the reasons are studied and immediate
corrective measures are undertaken. The action taken in
spotting weak points enables cost control system.
5. Right decisions-- It enables and provides useful information to
the management in taking important decisions. For example,
the problem created by inflating, rising prices. It can also be
used to provide incentive plans for employees etc.
6. Eliminating inefficiencies-- The setting of standards for
different elements of cost requires a detailed study of different
aspects. The standards are set differently for manufacturing,
administrative and selling expenses. Improved methods are
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used for setting these standards. The determination of

manufacturing expenses will require time and motion study for
labor and effective material control devices for materials.
Similar studies will be needed for finding other expenses. All
these studies will make it possible to eliminate inefficiencies at
different steps.
Limitations of Standard Costing

1. It cannot be used in those organizations where non-standard
products are produced. If the production is undertaken
according to the customer specifications, then each job will
involve different amount of expenditures.
2. The process of setting standard is a difficult task, as it requires
technical skills. The time and motion study is required to be
undertaken for this purpose. These studies require a lot of time
and money.
3. There are no inset circumstances to be considered for fixing
standards. The conditions under which standards are fixed do
not remain static. With the change in circumstances, if the
standards are not revised the same become impracticable.
4. The fixing of responsibility is not an easy task. The variances
are to be classified into controllable and uncontrollable
variances. Standard costing is applicable only for controllable
variances.
For instance, if the industry changed the technology then the system will not be suitable.
In that case, we will have to change or revise the standards. A frequent revision of
standards will become costly.
5. Explain the elements of Costs.

Elements of costs
The cost of any product or service is the sum of various segments of the cost. Such
segments are treated as elements of cost e.g. the cost of a chair prepared out of a piece of
wood involves following cost elements:
Cost of raw materials (piece of wood)
Labor cost (wages paid to operator)
Overhead cost (Building and other services required for manufacturing chairs)
In general all types of manufacturing involve the following elements of cost:
1) Direct material cost, 2) Direct labor cost 3) Direct expenses, 4) Overhead cost; (i)
Factory overheads, (ii) Administrative overheads, (iii) selling and distribution overheads.
Direct materials cost: Direct material cost in the cost of material (may be raw material
unprocessed material fully or partly processed material, components etc) used for the
manufacture of the units. It is directly traceable to the production units. The direct
material cost includes the purchase price as well as incidental expenses such as freight,
insurance, loading and unloading expenses, import duties etc. the expenses incurred or
the primary packing materials are also treated a direct material cost. The expenses
incurred for grease and oil, nails, etc leaning materials other consumable stores etc of
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common nature which are not traceable to any point of production. So, they are treated as
direct material cost which forms a part of the overhead cost.
Direct labor cost: Direct labor cost consist of wages paid to the operators directly
engaged in the manufacturing of the product. It also includes the wages paid to all such
workers who are solely engaged in a particular type of production, job or contract which
are directly attributable to that specific cost unit e.g. wages paid to the worker engaged in
handling the product inside the department. Wages paid to the time keeper watchman
sweeper etc are common nature expenses and are treated as indirect labor expenses. They
are treated as indirect expenses and are treated as overhead costs.
Direct expenses are such expenses other than those incurred on direct material and direct
labor which can be directly attributed to the cost unit. Such expenses are specially
incurred on a particular job, contract or work order, e.g. cost of trial units, cost of special
designs drawings molds of patterns cost of hiring special tools and equipment,
consultancy for specific job etc.
It should be noted that direct cost, direct labor cost and direct expenses are collectively
known s prime cost.
Overhead costs: are the indirect costs which cannot be directly attributed to any particular
cost unit (i.e. a product, a job contract etc). They are also referred as overheads.
Aforesaid materials direct labor and direct expenses are treated as direct cost and all
expenses other than direct cost are treated as overheads or indirect expenses
Overheads are classified into the three groups: (1) Factory overheads (2) Administrative
overheads, and (3) Selling and distribution overheads
Factory overhead: Factory overheads include all indirect expenses which are incurred in
connection with the manufacture of a product. They are also known as works overheads,
or factory burden or works burden. Factory overheads may be fixed or variable. Fixed
factory overheads are those costs which do not vary with the volume of production e.g.
rent on factory building salary of watchman, time keeper, supervisor, expenses on labor,
welfare activities etc. Variable factory overheads vary directly with the volume of
production. They include cost of fuel and power, cost of repair and maintenance cost of
normal idle time of normal wastage and silage etc.
Administrative overheads include all those indirect expenses which are incurred in
respect of general administration and management of an enterprise. These expenses are of
common nature and are incurred for the business as a whole. They are apportioned
among cost units on some appropriate basis. Like factory overheads, administrative
overheads also tends be fixed and variable. The fixed administrative overheads include
rent and rates on office buildings, salaries to clerical staff, salaries to executives, salaries
to Managing director and directors’ legal charges audit fees etc. The variable expenses
may include items like stationery postage, telephone charges, Lighting and heating
expenses. They are more of a semi-variable mature.
Selling and distribution expenses are indirect costs which pertain to the marketing the
product or services. They are not directly related to the cost of the products, jobs,
contracts or services. Sometimes selling and distribution costs are separated with a view
to apportion these overheads on some accurate basis. Like other overheads they also
comprise on variable elements.

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UNIT-V
1. What are the functions performed by the accounting system?
Accounting Information Systems (AISs)
Accounting Information Systems (AISs) combine the study and practice of accounting
with the design, implementation, and monitoring of information systems. Such systems
use modern information technology resources together with traditional accounting
controls and methods to provide users the financial information necessary to manage their
organizations.
AIS TECHNOLOGY
Input The input devices commonly associated with AIS include: standard personal
computers or workstations running applications; scanning devices for standardized data
entry; electronic communication devices for electronic data interchange (EDI) and e-
commerce. In addition, many financial systems come "Web-enabled" to allow devices to
connect to the World Wide Web.
Process Basic processing is achieved through computer systems ranging from individual
personal computers to large-scale enterprise servers. However, conceptually, the
underlying processing model is still the "double-entry" accounting system initially
introduced in the fifteenth century.
Output Output devices used include computer displays, impact and nonimpact printers,
and electronic communication devices for EDI and e-commerce. The output content may
encompass almost any type of financial reports from budgets and tax reports to
multinational financial statements.
MANAGEMENT INFORMATION SYSTEMS (MIS)
MISs are interactive human/machine systems that support decision making for users both
in and out of traditional organizational boundaries. These systems are used to support an
organization's daily operational activities; current and future tactical decisions; and
overall strategic direction. MISs are made up of several major applications including, but
not limited to, the financial and human resources systems.
Financial applications make up the heart of an AIS in practice. Modules commonly
implemented include: general ledger, payables, procurement/purchasing, receivables,
billing, inventory, assets, projects, and budgeting.
Human resource applications make up another major part of modern information
systems. Modules commonly integrated with the AIS include: human resources, benefits
administration, pension administration, payroll, and time and labor reporting.
AIS—INFORMATION SYSTEMS IN CONTEXT
AISs cover all business functions from backbone accounting transaction processing
systems to sophisticated financial management planning and processing systems.
Financial reporting starts at the operational levels of the organization, where the
transaction processing systems capture important business events such as normal
production, purchasing, and selling activities. These events (transactions) are classified
and summarized for internal decision making and for external financial reporting.

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Cost accounting systems are used in manufacturing and service environments. These
allow organizations to track the costs associated with the production of goods and/or
performance of services. In addition, the AIS can provide advanced analyses for
improved resource allocation and performance tracking.
Management accounting systems are used to allow organizational planning, monitoring,
and control for a variety of activities. This allows managerial-level employees to have
access to advanced reporting and statistical analysis. The systems can be used to gather
information, to develop various scenarios, and to choose an optimal answer among
alternative scenarios.
DEVELOPMENT
The development of an AIS includes five basic phases: planning, analysis, design,
implementation, and support. The time period associated with each of these phases can be
as short as a few weeks or as long as several years.
Planning—project management objectives and techniques The first phase of systems
development is the planning of the project. This entails determination of the scope and
objectives of the project, the definition of project responsibilities, control requirements,
project phases, project budgets, and project deliverables.
Analysis The analysis phase is used to both determine and document the accounting and
business processes used by the organization. Such processes are redesigned to take
advantage of best practices or of the operating characteristics of modern system solutions.
Data analysis is a thorough review of the accounting information that is currently being
collected by an organization. Current data are then compared to the data that the
organization should be using for managerial purposes. This method is used primarily
when designing accounting transaction processing systems.
Decision analysis is a thorough review of the decisions a manager is responsible for
making. The primary decisions that managers are responsible for are identified on an
individual basis. Then models are created to support the manager in gathering financial
and related information to develop and design alternatives, and to make actionable
choices. This method is valuable when decision support is the system's primary objective.
Process analysis is a thorough review of the organization's business processes.
Organizational processes are identified and segmented into a series of events that either
add or change data. These processes can then be modified or reengineered to improve the
organization's operations in terms of lowering cost, improving service, improving quality,
or improving management information. This method is appropriate when automation or
reengineering is the system's primary objective.
Design The design phase takes the conceptual results of the analysis phase and develops
detailed, specific designs that can be implemented in subsequent phases. It involves the
detailed design of all inputs, processing, storage, and outputs of the proposed accounting
system. Inputs may be defined using screen layout tools and application generators.
Processing can be shown through the use of flowcharts or business process maps that
define the system logic, operations, and work flow. Logical data storage designs are
identified by modeling the relationships among the organization's resources, events, and
agents through diagrams. Also, entity relationship diagram (ERD) modeling is used to
document large-scale database relationships. Output designs are documented through the
use of a variety of reporting tools such as report writers, data extraction tools, query tools,

Page 26
and on-line analytical processing tools. In addition, all aspects of the design phase can be
performed with software tool sets provided by specific software manufacturers.
Reporting is the driving force behind an AIS development. If the system analysis and
design are successful, the reporting process provides the information that helps drive
management decision making. Accounting systems make use of a variety of scheduled
and on-demand reports. The reports can be tabular, showing data in a table or tables;
graphic, using images to convey information in a picture format; or matrices, to show
complex relationships in multiple dimensions.
There are numerous characteristics to consider when defining reporting requirements.
The reports must be accessible through the system's interface. They should convey
information in a proactive manner. They must be relevant. Accuracy must be maintained.
Lastly, reports must meet the information processing (cognitive) style of the audience
they are to inform.
Reports are of three basic types: A filter report that separates select data from a database,
such as a monthly check register; a responsibility report to meet the needs of a specific
user, such as a weekly sales report for a regional sales manager; a comparative report to
show period differences, percentage breakdowns and variances between actual and
budgeted expenditures. An example would be the financial statement analytics showing
the expenses from the current year and prior year as a percentage of sales.
Screen designs and system interfaces are the primary data capture devices of AISs and
are developed through a variety of tools. Storage is achieved through the use of
normalized databases that assure functionality and flexibility.
Business process maps and flowcharts are used to document the operations of the
systems. Modern AISs use specialized databases and processing designed specifically for
accounting operations. This means that much of the base processing capabilities come
delivered with the accounting or enterprise software.
Implementation The implementation phase consists of two primary parts: construction
and delivery. Construction includes the selection of hardware, software and vendors for
the implementation; building and testing the network communication systems; building
and testing the databases; writing and testing the new program modifications; and
installing and testing the total system from a technical standpoint. Delivery is the process
of conducting final system and user acceptance testing; preparing the conversion plan;
installing the production database; training the users; and converting all operations to the
new system.
Tool sets are a variety of application development aids that are vendor-specific and used
for customization of delivered systems. They allow the addition of fields and tables to the
database, along with ability to create screen and other interfaces for data capture. In
addition, they help set accessibility and security levels for adequate internal control
within the accounting applications.
Security exists in several forms. Physical security of the system must be addressed. In
typical AISs the equipment is located in a locked room with access granted only to
technicians. Software access controls are set at several levels, depending on the size of
the AIS. The first level of security occurs at the network level, which protects the
organization's communication systems. Next is the operating system level security, which
protects the computing environment. Then, database security is enabled to protect

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organizational data from theft, corruption, or other forms of damage. Lastly, application
security is used to keep unauthorized persons from performing operations within the AIS.
Testing is performed at four levels. Stub or unit testing is used to insure the proper
operation of individual modifications. Program testing involves the interaction between
the individual modification and the program it enhances. System testing is used to
determine that the program modifications work within the AIS as a whole. Acceptance
testing ensures that the modifications meet user expectations and that the entire AIS
performs as designed.
Conversion entails the method used to change from an old AIS to a new AIS. There are
several methods for achieving this goal. One is to run the new and old systems in parallel
for a specified period. A second method is to directly cut over to the new system at a
specified point. A third is to phase in the system, either by location or system function. A
fourth is to pilot the new system at a specific site before converting the rest of the
organization.
Support The support phase has two objectives. The first is to update and maintain the
AIS. This includes fixing problems and updating the system for business and
environmental changes. For example, changes in generally accepted accounting
principles (GAAP) or tax laws might necessitate changes to conversion or reference
tables used for financial reporting. The second objective of support is to continue
development by continuously improving the business through adjustments to the AIS
caused by business and environmental changes. These changes might result in future
problems, new opportunities, or management or governmental directives requiring
additional system modifications.
ATTESTATION
AISs change the way internal controls are implemented and the type of audit trails that
exist within a modern organization. The lack of traditional forensic evidence, such as
paper, necessitates the involvement of accounting professionals in the design of such
systems. Periodic involvement of public auditing firms can be used to make sure the AIS
is in compliance with current internal control and financial reporting standards.
After implementation, the focus of attestation is the review and verification of system
operation. This requires adherence to standards such as ISO 9000-3 for software design
and development as well as standards for control of information technology.
Periodic functional business reviews should be conducted to be sure the AIS remains in
compliance with the intended business functions. Quality standards dictate that this
review should be done according to a periodic schedule.
ENTERPRISE RESOURCE PLANNING (ERP)
ERP systems are large-scale information systems that impact an organization's AIS.
These systems permeate all aspects of the organization and require technologies such as
client/server and relational databases. Other system types that currently impact AISs are
supply chain management (SCM) and customer relationship management (CRM).
Traditional AISs recorded financial information and produced financial statements on a
periodic basis according to GAAP pronouncements. Modern ERP systems provide a
broader view of organizational information, enabling the use of advanced accounting
techniques, such as activity-based costing (ABC) and improved managerial reporting
using a variety of analytical techniques.
2. What are the features of computer or computerized accounting?
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Computer and its characteristics

Computer is an electronic device that can perform a variety of operations in accordance
with a set of instructions called programme. It is a fast data processing electronic
machine. It can provide solutions to all complicated situations. It accepts data from the
user converts the data into information and gives the desired result. Therefore, we may
define computer as a device that transforms data into information. Data can be anything
like marks obtained in various subjects. It can also be name, age, sex, weight, eight, etc.
of all the students, savings, investments, etc., of a country. Computer is defined in terms
of its functions. Computer is a device that accepts data, stores data, processes data as
desired, retrieves the stored data as and when required and prints the result in desired
format.
Characteristics of computer
A Computer is better than human being. It possesses some characteristics.
These are as follows:
Speed
It can access and process data millions times faster than humans can. It can store data and
information in its memory, process them and produce the desired results. It is used
essentially as a data processor. All the computer operations are caused by electrical
pulses and travels at the speed of light. Most of the modern computers are capable of
performing 100 million calculations per second.
Storage
Computers have very large storage capacity. They have the capability of storing vast
amount of data or information. Computers have huge capacity to store data in a very
small physical space. Apart from storing information, today’s computers are also capable
of storing pictures and sound in digital form.
Accuracy
The accuracy of computer is very high and every calculation is performed with the same
accuracy. Errors occur because of human beings rather than technological weakness;
main sources of errors are wrong program by the user or inaccurate data.
Diligence
A computer is free from tiredness and lack of concentration. Even if it has to do 10
million calculations, it will do even the last one with the same accuracy and speed as the
first.
Computer can perform wide range of jobs with speed, accuracy, and diligence. In any
organization, often it is the same computer that is used for diverse purposes such as
accounting, playing games, preparing electric bills, sending e-mail and so on.
Communication
Computers are being used as powerful communication tools. All the computers within an
office are connected by cable and it is possible to communicate with others in the office
through the network of computer.
Processing Power
Computer has come a long way today. They began as mere prototypes at research
laboratories and went on to help the business organizations, and today, their reach is so
extensive that they are used almost everywhere. In the course of this evolution, they have
become faster, smaller, cheaper, more reliable and user friendly.
3. What are the limitations of computerized accounting system?
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The limitations of computer are depending upon the operating environment they work in.
These limitations are given below as:
1. Cost of Installation
Computer hardware and software needs to be updated from time to time with availability
of new versions. As a result heavy cost is incurred to purchase a new hardware and
software from time to time.
2. Cost of Training
To ensure efficient use of computer in accounting, new versions of hardware and
software are introduced. This requires training and cost is incurred to train the staff
personnel.
3. Self Decision Making
The computer cannot make a decision like human beings. It is to be guided by the user.
4. Maintenance
Computer requires to be maintained properly to help maintain its efficiency. It requires a
neat, clean and controlled temperature to work efficiently.
5. Dangers for Health
Extensive use of computer may lead to many health problems such as muscular pain,
eyestrain, and backache, etc. This affects adversely the working efficiency and increasing
medical expenditure.
4. What are the difference between manual accounting and computerized
accounting?
Point of difference Manual accounting Computerized accounting
1. Recording Recording of financial Data content of these
transactions is through transactions is stored in well
books of original entry. designed data base.
2. Classification Transactions recorded in the No such data duplications is
books of original entry are made. In order to produce
further classified by posting ledger accounts the stored
them into ledger accounts. transaction data is
This results in transaction processed to appear as
data duplicity. classified so that same is
presented in the form of
report.
3. Summarizing Transactions are The generation of ledger
summarized to produce trial accounts is not necessary
balance by ascertaining the condition for trial balance.
balances of various
accounts.
4. Adjusting entries Adjusting entries are made There is nothing like
to adhere to the principle of making adjusting entries for
matching. errors and rectifications.
5. Financial statements The preparation of financial The preparation of financial
statements assumes the statements is independent of
availability of trial balance. producing the trial balance.

Page 30
5. Enumerate the basic requirements of any computerized accounting system.

Need and requirements of computerized accounting:
The need for computerized accounting arises from advantages of speed, accuracy and
lower cost of handling the business transactions.
1. Numerous Transactions
The computerized accounting system is capable of handling large number of transactions
with speed and accuracy.
2. Instant Reporting
The computerized accounting system is capable of offering quick and quality reporting
because of its speed and accuracy.
3. Reduction in paper work
A manual accounting system requires large physical storage space to keep accounting
records/books and vouchers/ documents. The requirement of stationery and books of
accounts along with vouchers and documents is directly dependent on the volume of
transactions beyond a certain point. There is a dire need to reduce the paper work and
dispense with large volumes of books of accounts. This can be achieved by introducing
computerized accounting system.
4. Flexible reporting
The reporting is flexible in computerized accounting system as compared to manual
accounting system. The reports of a manual accounting system reveal balances of
accounts on periodic basis while computerized accounting system is capable of
generating reports of any balance as when required and for any duration which is within
the accounting period.
5. Accounting Queries
There are accounting queries which are based on some external parameters. For example,
a query to identify customers who have not made the payments within the permissible
credit period can be easily answered by using the structured query language (SQL)
support of database technology in the computerized accounting system. But such an
exercise in a manual accounting system is quite difficult and expensive in terms of
manpower used. It will still be worse in case the credit period is changed.
6. On-line facility
Computerized accounting system offers online facility to store and process transaction
data so as to retrieve information to generate and view financial reports.
7. Scalability
Computerized accounting systems are fully equipped with handling the growing
transactions of a fast growing business enterprise. The requirement of additional
manpower in Accounts department is restricted to only the data operators for storing
additional vouchers. There is absolutely no additional cost of processing additional
transaction data.
8. Accuracy
The information content of reports generated by the computerized accounting system is
accurate and therefore quite reliable for decision-making. In a manual accounting system
the reports and information are likely to be distorted, inaccurate and therefore cannot be
relied upon. It is so because it is being processed by many people, especially when the
number of transactions to be processed to produce such information and report is quite
large.
Page 31
9. Security
Under manual accounting system it is very difficult to secure such information because it
is open to inspection by any eyes dealing with the books of accounts. However, in
computerized accounting system only the authorized users are permitted to have access to
accounting data. Security provided by the computerized accounting system is far superior
compared to any security offered by the manual accounting system.

Page 32
FREQUENTLY ASKED QUESTIONS (FAQS)

BA 9206 ACCOUNTING FOR MANAGEMENT
UNIT-I
1. Explain the various accounting concepts and conventions which are used in the
preparation of accounts.
2. What are the various methods of measuring human resource accounting?
3. What is Accounting information system? Who are the users of accounting information
and based on the usage what are different branches of accounting?
4. Define Human Resources Accounting. Explain their uses and abuses?
5. Discuss the concept of Human Resource Accounting. Explain its importance in the
present context.
UNIT-II
1. Explain proforma of a final account.
2. Explain various methods of pricing the Inventory?
3. Evaluate any two methods of Calculating depreciation.
4. What are the various types of ESOP?
5. Explain the concept related to balance sheet.
UNIT-III
1. Define Ratio Analysis. Indicate uses and abuses?
2. Discuss the importance of Financial Statements.
3. Explain the cash flow statement. How is it prepared? What is the importance of this
statement?
4. State the uses and significance of cash flow statement
5. Differentiate fund flow statement and cash flow statement.
UNIT-IV
1. Explain the differences between Job costing and Process costing.
2. Explain the advantages of standard costing.
3. “Marginal costs are primarily used in guiding decision yet to be made.” Explain the
statement giving examples.
4. Define Budgetary Control. Explain the Organization for Budgetary control.
5. Discuss various basis of classification of cost and various types of costs.
UNIT-V
1. Enumerate the basic requirements of any computerized accounting system.
2. What are the difference between manual accounting and computerized accounting?
3. What are the limitations of computerized accounting system?
4. Discuss the significance of Computerized Accounting System.
5. Explain the advantages of Prepackaged Accounting Software.

Page 33

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Department of Management Studies

BA 9206 ACCOUNTING FOR MANAGEMENT

UNIT – II COMPANY ACCOUNTS

UNIT – III ANALYSIS OF FINANCIAL STATEMENTS

UNIT - IV COST ACCOUNTING

UNIT - V ACCOUNTING IN COMPUTERISED ENVIRONMENT

AFM Study Material First Semester First Year

AFM Study Material First Semester First Year

2. What are the various methods of measuring human resource accounting?

LIMITATIONS OF FINANCIAL ACCOUNTING

AFM Study Material First Semester First Year

LIMITATIONS OF MANAGEMENT ACCOUNTING:

Convention of disclosure: This convention implies that accounts must be honestly

5. Discuss the concept of Human Resource Accounting. Explain its importance in

AFM Study Material First Semester First Year

Point of difference Cost accounting Management Accounting

AFM Study Material First Semester First Year

AFM Study Material First Semester First Year

AFM Study Material First Semester First Year

PROFIT AND LOSS ACCOUNT

SALARIES XXX GROSS PROFIT XXX

AFM Study Material First Semester First Year

AFM Study Material First Semester First Year

• It helps the employees by providing information about the profitability of the

2. State the uses and significance of cash flow statement.

AFM Study Material First Semester First Year

SCHEDULE OF CHANGES IN WORKING CAPITAL

Particulars Previous Year Current Year Increase Decrease

FUNDS FROM OPERATION OR ADJUSTED PROFIT & LOSS ACCOUNT

AFM Study Material First Semester First Year

GOODWILL XXX OPENING BALANCE XXX

STATEMENT OF SOURCES AND USES

FUNDS FROM OPERATION XXX INCREASE IN WORKING CAPITAL XXX

AFM Study Material First Semester First Year

ON THE BASIS OF FUNCTIONS

AFM Study Material First Semester First Year

Research and Development budget: Every organization of some size, particularly, of

ON THE BASIS OF FLEXIBILITY

STEPS IN BUDGETARY CONTROL

AFM Study Material First Semester First Year

3. Efficient accounting system

AFM Study Material First Semester First Year

• Practical cost control is greatly facilitated. By avoiding arbitrary allocation of

used for setting these standards. The determination of

Limitations of Standard Costing

5. Explain the elements of Costs.

AFM Study Material First Semester First Year

AFM Study Material First Semester First Year

AFM Study Material First Semester First Year

AFM Study Material First Semester First Year

Computer and its characteristics

AFM Study Material First Semester First Year

5. Enumerate the basic requirements of any computerized accounting system.

AFM Study Material First Semester First Year

FREQUENTLY ASKED QUESTIONS (FAQS)

AFM Study Material First Semester First Year

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