You are on page 1of 40

ACCOUNTING FOR MANAGEMENT

MEANING OF ACCOUNTING: Accounting is a process of recording of business transactions to run the business efficiently, reporting its state of affairs and results of operation. PROCESS OF ACCOUNTING: Recording Classifying Summarizing Interpreting

OBJECTIVES OF ACCOUNTING:

1. 2. 3. 4.

To maintain accounting records To calculate the results of operations To ascertain the financial position To communicate the information to the users
Business Entity Concept Going Concern Concept Money Measurement Concept Accounting Period Concept

ACCOUNTING CONCEPT:

5. 6. 7. 8. 9. 10.

Dual Aspect Concept Cost Concept Matching Concept Realization concept Accrual Concept Objective Evidence Concept

ACCOUNTING STANDARDS:
Comparability of accounts prepared by different firms in a particular period and by the same firm over several accounting periods is possible only when some uniform principles and practices are adopted. To achieve such uniformity in preparation of financial statements, concerted efforts started in the 1970s to develop standardized accounting practices, called Accounting standards.

Accounting Conventions:
In order to make the profit and loss account and the balance sheet more clear and meaningful. Convention of consistency Convention of disclosure Convention of conservation

Branches of Accounting
Financial Accounting Cost Accounting Management Accounting

Difference between financial accounting & cost accounting Maintenance of account Cost control Period Compulsion Valuation of stocks Monetary & non-monetary items Fact & estimate Reference Providing information Expenses External & internal transaction

Inflation Accounting or Accounting for price level changes: Recording of all items of financial statements at their current values is called inflation accounting. Inflation accounting recognizes the fact that purchasing power of money decreases during inflation of states the financial position of the business at prevailing current prices. Advantages of inflationary accounting: Computation of correct profit Maintenance of physical capital True and fair value Comparison of profitability More meaningful information Realistic ROI Realistic profits

Limitation of inflationary accounting: Lack of approval from income tax department Complex calculations Against the concept of depreciation Never ending process Unrealistic profit Not suitable during deflation

Human Resource Accounting (HRA): HRA means Accounting for people as an organization resource. HRA is the measurement of the cost and value of people to a firm. It involves measuring costs incurred by firms to recruit, select, hire, train and develop employees and their economic value to the organization. Cost incurred on human resources is an asset and it is to be capitalized as it result in future benefits measurable in monetary terms. Objectives of HRA: To furnish information for management decision To monitor effective usage Asset control To aid in development of management principles To recognize the nature of all resources To evaluate return on investment

Advantages of HRA:
Useful in proper interpretation of ROI Helpful in managerial decision making Renders social purpose Efficient utilization of economic resource Increased productivity Contribution to humanity H.R being a prime factor of production Helpful in investment decisions

Disadvantages of HRA:
No specific guide lines Uncertain life of HR Dehumanizing and manipulations Non ownership of human resources Opposition form trade unions No consensus in the accounting treatment Non recognition by tax laws

Meaning of Company: A company is a voluntary and autonomous association of certain persons with capital divided into numerous transferable shares formed to carry out a particular purpose in common. It is an artificial person created by law to achieve the object for which it is formed. Characteristics of a company: Statutory body Limited liability Perpetual succession Transfer of shares Common seal Artificial person Voluntary association

Books of Account: Every company is required to keep at its registered office books of account. Maintained receipt & voucher for income and expenditure All sales and purchases of good of the company All assets and liabilities of the company Statutory Books: Statutory books are those which a limited company is under statutory obligation to maintain at its registered office. The main statutory books are Register of investments held and their names Register of charges Register of members Register of debentures holders Annual returns Minutes books Register of contracts Register of directors Register of shareholdings of the directors Register of loans to companies under the same management Register of investment in the shares of other companies

The division of share capital:


Nominal or registered or authorized capital (company intend to be registered) Issued capital (offered to the public for subscription) Subscribed capital (capital for which applications are received from the public) Called up capital (shares which is actually demanded by the company) Paid up capital (actually paid by the members) Reserve capital (Company will maintain the capital for emergency)

Statutory Report: A statutory report is sent by the board of directors to every member at least 21 days before the date of holding the statutory meeting. A statutory meeting is held only once in the life time of certain types of companies. The meeting is held within a period of not less than one month and more than six months from the date of which the company is entitled to commence of business. The holding of statutory meeting provides an opportunity to the shareholders to know all important facts relating to the new company and so approve or modify the contracts mentioned in the prospectus.

Buy Back of securities: The company, which has issued shares to the public, repurchases its own shares. Advantages of buy back of securities: A company with capital, which cannot be profitably employed, may get rid of it by resorting to buy back Restructure its capital Improve the EPS Surplus cash may be utilized To avoid undesirable persons Avoid the payment of dividend tax

Profit prior to incorporation: The business unit is purchased first, and the registration of the acquiring company takes place later. For example, ABC company is incorporated on 1st October, 2008 to take over the running business of Balaji Bros. form 1st January, 2008. the profit earned during the pre incorporation period (1st January to 30th October, 2008) is called profit prior to incorporation.

Share capital means the capital raised by the issue of shares. The amounts invested by the shareholders towar4ds the face value of shares are collectively known as SHARE CAPITAL. Types of Shares: Equity Shares Preference Share Cumulative Preference share Non-cumulative Preference share Redeemable Preference share Irredeemable Preference share Nominal Shares

SHARE CAPITAL:

DEBENTURES: Debentures includes debentures, stock, and bonds. Debenture represents a debt. KINDS OF DEBENTURES: SECURED DEBENTURES: Debentures, which are secured either on a particular asset or on all the assets of the company. UNSECURED DEBENTURES: Debentures, which are not secured on any assets. REDEEMABLE DEBENTURES: Debentures, which are repayable after the specified period. IRRDEEMABLE DEBENTURES: Debentures, which are not redeemable during the lifetime of the company. CONVERTIBLE DEBENTOURES: The holders, which have a right to convert them into shares. NON-CONVERTIBLE DEBENTURES: The holders of which do not have a right to convert into shares. PUBLIC DEPOSITS: The period of deposits accepted ranging from 6 months to 7 years and fairly high rates of interest.

FINANCIAL STATEMENT:
Formal and original statements prepared by a business concern to disclose its financial information. Financial statements are prepared for the purpose of presenting a periodical review or report on the progress by the management and deal with The status of Investments in the business and The results achieved during the period under review. Objectives of financial statement: To provide information To provide financial condition To provide earning capacity To provide other relevant information Financial Statements are briefly discussed below: PROFIT AND LOSS ACCOUNT (or) INCOME STATEMENT SURPLUS STATEMENT (or) RETAINED EARNINGS SUPPLEMENTARY SCHEDULES BALANCE SHEET:

TECHNIQUES (or) TOOLS OF FINANCIAL STATEMENT ANALYSIS


RATIO ANALYSIS CASHFLOW ANALYSIS FUND FLOW ANALYSIS COMPARATIVE FINANCIAL STATEMENTS COMMON SIZE STATEMENTS NETWORKING CAPITAL ANALYSIS TREND ANALYSIS

STEPS IN RATIO ANALYSIS: Selection of relevant information Comparison of Calculated Ratios Interpretation and Reporting ADVANTAGES OF RATIO ANALYSIS: Forecasting Managerial Control Facilitates Communication Measuring Efficiency Facilitating Investment Decisions Useful in measuring financial solvency Inter firm comparisons. LIMITATIONS OF RATIO ANALYSIS: Practical Knowledge Inter-relationship Non availability of standards or norms Accuracy of financial information Consistency in preparation of financial statements Change in price level.

Uses of Fund Flow Statement (FFS): Analysis of financial operations. Evaluation of the firms financing. Answers to Intricate questions. Allocation of Scarce Resources. Helps in working capital requirements. Acts as a guide to future. Helps in Financial Institutions. Limitations of FFS: It is not a substitute for an Income Statement/Balance Sheet. Changes in cash are more important for financial management than the working capital. It is not an original statement. It is essentially historic nature. It cannot reveal continues changes.

Uses of Cash Flow Statement (CFS): It helps to reason for low cash balance. It helps in short-term financial decisions. It shows major sources and uses of cash. It helps management in planning the repayment of loans, replacement of assets, credit arrangements etc. It helps in planning for investment of surplus/meeting the deficit. It helps understanding the variation and control of cash expenditure.

Various Sources and Uses/Application of Funds: Sources of Funds: Issue of shares/Debentures. Rising of Long-term loans. Income from Investments. Sale of Fixed Assets and Long-term Investments. Fund from Operations. Uses/Application of Funds: Redemption Preference Shares /Debentures. Repayment of loans. Purchase of Long-term Investments. Purchase of Fixed Assets. Payment of Taxes and Dividend. Drawings (in case of proprietorship and partnership business) Loss of cash by embezzlement. Fund Lost in Operation.

Objectives of cost accounting: To know the cost per unit To know the profitability Advising to management Valuation of stock Preparation of budget Cost reduction programme Finding out sources of wastages Guide to incentive

Methods of costing: Job costing (printing press) Process costing (paper mill) Contract costing (building or road) Batch costing (medicine) Service costing (ticket charge) Multiple costing (assembling) Types of cost accounting (techniques) Uniform costing Marginal costing Standard costing Direct costing Historical costing Absorption costing

Advantages of Cost Accounting: Measuring efficiency Provide the information for tenders Guiding future production policies Maximization of profits Comparison of cost Helpful to government Helpful to investor Helpful to consumer Understand the efficiency of workers Identify the reason for increase or decrease in profit

Techniques of marginal costing: cost control fixation of selling price closure of a department or discounting a product selection of a profitable product mix profit planning decision to make or buy decision to accept a bulk order introduction of a new product choice of technique evaluation of performance choice of technique decision making maintaining a desired level of profit level of activity planning alternative method of production introduction of product line Advantage of marginal costing: fixation of selling price accepting bulk order or foreign order make or buy decision selecting a suitable product mix maintaining a desired level of profit alternative method of production evaluation of performance decision making

Cost volume profit analysis: It is a technique for studying the relationship between cost and volume of profit. Each and every firm is to obtain maximum profit. Some factors can affect the profit. That factor is following selling price of the product cost of production variable cost & fixed cost volume of sales Advantages of cost volume profit analysis: How much to be produce? How much sales should be made to avoid losses? How much sales should be made to earn desired profits? Which product or product mix is most profitable? Whether make or buy the component part.

Advantages of Budgetary control: Controlling the activities of various department of a business unit. Helps to fix the targets to each departments It secure proper coordination among the activities of various departments Helps to fix the responsibility to each department It helps the management to reduce wasteful expenditure It facilitates centralized control and decentralized activities It facilitates introduction of standard costing It aids in obtaining bank credit It helps in smooth running of the business unit It helps to solve the problem without delay Disadvantages of budgetary control: The accurate position of the business cannot be estimated Budget is only management tool. But not a substitute for management Budget is not suitable to small concern The success of budgetary control depends upon co-operation & team work.

Zero base budgeting: ZBB was originally developed by peter A. Pyhrr at texas instrument.s Peter A . Pyhrr has defined ZBB as an operating, planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch (hence zero base) and shifts the burden of proof to each manager to justify why we should spend any money at all. Features of Zero Base Budgeting: Zero based budgeting starts without any base Evaluation Prioritization of activities Process of zero base budgeting: Specification of decision units Development of decision packages Prioritization of activities, project and programmes Approval and allotment of funds

Advantages of zero base budgeting: Optimum use of financial resources Welding out of wastage Participation by all concerned Flexibility in budget Realistic targets Limitations of zero base budgeting: Time consuming Lack of skilled managerial personnel Limited application

Break Even Point (BEP): No Profit & No Loss Point is called BEP. Assumptions of BEP: Total Cost = fixed cost + Variable cost Total cost = total Revenue Fixed cost will not change when the production changes Variable cost will change when the production changes No changes in selling price No changes in business activities No changes in demand & supply of the product No opening stock & closing stock of raw material.

Advantages of BEP: Help to product mix decision Choosing most profitable alternatives Determining optimum sales mix Deciding on changes in capacity Calculation of profit at various sales level Calculation to sales volumes to meet proposed expenditure Determine the sales to reduce price Calculation of selling price per unit Limitations of BEP: Difficult to separate fixed & variable cost Some semi variable cost cannot consider in the analysis Variable cost are estimated basis, problem of over recovery & under recovery cannot be eliminated Price fixation and comparison between two jobs cannot be done without considering fixed cost It ignores time element as over a long period all costs change. Therefore, comparison of performance is not possible Since stock is undervalued in marginal cost Acceptance of order will affect local market Capital doest not taken into account In long run all factors will change Only limited information are existed

Meaning of Computer Accounting: Manually maintained accounting system may not be able to provide all these facilities. In recent times computers are being used to maintain the accounting records and for the preparation, analysis, and interpretation of accounting statements. Hence, the system operated through computers is called as computerized accounting. Special features of computerized accounting system: Quick preparation of accounts, accounting statements and records in time It ensures control over accounting work and records Minimize the errors and mistakes in computerized accounting Uniform maintenance of accounting statements and records is possible Easy access and reference of accounting information is possible Standardization in maintaining accounts It involves less clerical work It is very neat and more accurate

Objectives of computerized accounting:


Labor savings (annual savings in labor cost) Time saving (job should be completed in a time like pay rolls and statement of account) Accuracy (helps to locate the errors and frauds very easily) Minimization of fraud Effect on personnel (reduce the hardness of work and fatigue)

Advantages of computerized accounting: Better quality of work Lower operating costs Improved efficiency Facilitates better control Greater accuracy Relieve monotony Facilitates standardization

Disadvantages of computerized accounting: Reduction of manpower High cost (small firm cannot buy the computer) Require special skill (computer operators are very costly) Frequent repair Power failure Data Coding: Coding is a convenient representation of each value of an item of data. It is done in order to make the communication possible between a computer and the user. The coding is done in roder to convert numeric and alphanumeric information in terms of binary digits 0 and 1 and to transmit correct data to the computers.

Basic requirements of data coding: The code should be designed to identify the characteristic of the item of data it represents. Each code should represent one and only one value of the data The code should minimize the error The code should be so designed as to be secure in the case of sensitive data Advantages of data coding:
Codes occupy less computer storage space Coding enables to save time in entering the data It helps to save time and cost in data transmission It reduces the chances of error in entering the data It facilitates classification, grouping and selection of data Coding provides consistency and unique identification for date entries

Components of Computerized Accounting Software: Preparation of accounting documents Recording of transactions Preparation of Trial Balance and Financial Statements Need and Requirements of Computerized Accounting: Numerous Transactions Instant reporting Reduction in paper work Flexible reporting Accounting queries On line facility Scalability Accuracy security

Basic Requirements of the computerized accounting system: Accounting framework Operating procedure

Accounting Problems to be concentrated: Final Accounts Company final accounts Issue of share capital Inflation accounting Ratio analysis Fund flow & cash flow statement Process Costing Marginal costing with decision making problems Fund flow statement & cash flow statement Budgetary control Standard costing