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Management Accounting

Management Accounting

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Published by: DebojyotiSahoo on Jan 27, 2010
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03/30/2012

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MBA-Finance Management Accounting
UNIT –IMANAGEMENT ACCOUNTINGINTRODUCTION:
A business enterprise must keep a systematic record of what happens from day-tot-day events so that it can know its position clearly. Most of the business enterprisesare run by the corporate sector. These business houses are required by law toprepare periodical statements in proper form showing the state of financial affairs.The systematic record of the daily events of a business leading to presentation of acomplete financial picture is known as accounting. Thus, Accounting is thelanguage of business. A business enterprise speaks through accounting. It revealsthe position, especially the financial position through the language calledaccounting.
MEANING OF ACCOUNTING:
Accounting is the process of recording, classifying, summarizing, analyzing andinterpreting the financial transactions of the business for the benefit of managementand those parties who are interested in business such as shareholders, creditors,bankers, customers, employees and government. Thus, it is concerned with financialreporting and decision making aspects of the business.The American Institute of Certified Public Accountants Committee on Terminologyproposed in 1941 that accounting may be defined 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 andinterpreting the results thereof”.
BRANCHESOF ACCOUNTING:
Accounting can be classified into three categories:
 
MBA-Finance Management Accounting1. Financial Accounting2. Cost Accounting, and3. Management Accounting
FINANCIAL ACCOUNTING:
The term ‘Accountingunless otherwise specifically stated always refers to‘Financial Accounting’. Financial Accounting is commonly carries on in the generaloffices of a business. It is concerned with revenues, expenses, assets and liabilitiesof a business house. Financial Accounting has two-fold objective, viz,1. To ascertain the profitability of the business, and2. To know the financial position of the concern.
NATURE AND SCOPE OF FINANCIAL ACCOUNTING:
Financial accounting is a useful tool to management and to external users such asshareholders, potential owners, creditors, customers, employees and government. Itprovides information regarding the results of its operations and the financial statusof the business. The following are the functional areas of financial accounting:-
1. Dealingwithfinancial transactions:
Accounting as a process deals only with those transactions which are measurable interms of money. Anything which cannot be expressed in monetary terms does notform part of financial accounting however significant it is.
2. Recordingof information:
Accounting is an art of recording financial transactions of a business concern. Thereis a limitation for human memory. It is not possible to remember all transactions of the business. Therefore, the information is recorded in a set of books called Journaland other subsidiary books and it is useful for management in its decision makingprocess.
 
MBA-Finance Management Accounting
3. Classificationof Data:
The recorded data is arranged in a manner so as to group the transactions of similarnature at one place so that full information of these items may be collected underdifferent heads. This is done in the book called ‘Ledger’. For example, we mayhave accounts called ‘Salaries’, ‘Rent’, ‘Interest’, Advertisement’, etc. To verifythe arithmetical accuracy of such accounts, trial balance is prepared.
4.MakingSummaries:
The classified information of the trial balance is used to prepare profit and lossaccount and balance sheet in a manner useful to the users of accountinginformation. The final accounts are prepared to find out operational efficiency andfinancial strength of the business.
5. Analyzing:
It is the process of establishing the relationship between the items of the profit andloss account and the balance sheet. The purpose is to identify the financial strengthand weakness of the business. It also provides a basis for interpretation.
6. Interpretingthefinancial information:
It is concerned with explaining the meaning and significance of the relationshipestablished by the analysis. It should be useful to the users, so as to enable them totake correct decisions.
7. Communicatingtheresults:
The profitability and financial position of the business as interpreted above arecommunicated to the interested parties at regular intervals so as to assist them tomake their own conclusions.
LIMITATIONSOF FINANCIAL ACCOUNTING:
Financial accounting is concerned with the preparation of final accounts. Thebusiness has become so complex that mere final accounts are not sufficient in

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