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Financial Accounting “Accounting is 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 thereto.” Functions of Financial Accounting 1. Recording the financial transactions 2. Classification 3. Summarizing 4. Concerned only with financial transactions 5. Interpretation Principles of financial accounting A. Accounting Concepts 1. 2. 3. 4. 5. 6. 7. 8. Business Entity Concept Going concern concept Cost Concept Concept of Dual Aspect Money Measurement Concept Accounting Period Concept Realisation Concept Matching of Cost and Revenue Concept B. Accounting Conventions 1. Convention of Disclosure 2. Convention of consistency 3. Convention of Conservation 4. Convention of Materiality
Limitations of Financial Accounting 1. Provides only historical data 2. Provides only limited information 3. Provides only quantitative information 4. It will not help for price fixation 5. It will not provide tools for cost control 6. It will not possible to measure the comparative performance
7. It will not provide information to management for planning and decision making.
8. It is possible to manipulate accounts
COST ACCOUNTING Cost Accounting emerged as an accounting system to face high competition in the business. In order to withstand competition the concerns have to supply goods at low prices. Companies could be able to supply goods at low prices only be reducing the cost of production. Cost Accounting as a subject is designed to provide many methods and techniques to reduce the cost of production through various stages of production. 1. Costing 2. Cost Accounting 3. Cost Accountancy Classification of Costs 1. 2. 3. 4. 5. 6. 7. Element – wise classification Functional – wise classification On the basis of identifiability Behaviour – wise classification On the basis of Controllability On the basis of time On the basis of relevancy
Element Wise Classification a. Material Cost b. Labour Cost c. Expenses Functional – wise Classification a. Production Cost b. Administration Cost c. Selling and Distribution Cost On the basis of Identifiability a. Direct Cost b. Indirect Cost Behaviour –wise Classification of Costs a. Fixed Cost b. Variable Cost c. Semi-Variable Cost On the basis of Controllability a. Controllable Costs b. Uncontrollable Costs
On the basis of Time a. Historical Costs b. Pre-determined Costs On the basis of Relevancy a. Relevant Costs b. Irrelevant Costs
III MANAGEMENT ACCOUNTING
Management Accounting is concerned with the accounting to management. Financial Accounting and Cost Accounting are not able to provide the relevant information to management for managerial planning and decision making. Financial Accounting is providing the historical data in account form of Profit and Loss Account and Balance Sheet. Cost Accounting analyses the different elements related to the cost of production. But these information are not sufficient for managerial planning and control. Hence, a new accounting system called Management Accounting. According to Anglo-American Council on Productivity:“Management Accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and the day-to-day operation of an undertaking”. Functions of Management Accounting 1. 2. 3. 4. 5. 6. 7. Provision of Data Modification of Data Analysis and interpretation of Data Communication Function Fix standards at all level Function of Control Provides Qualitative information
Scope of Management Accounting 1. Financial Accounting 2. Cost Accounting 3. Statistical Methods 4. Revaluation Accounting 5. Budgetary Control 6. Inventory Control 7. Interim Reporting 8. Internal Audit 9. Taxation 10. Financial Management
Utility of Management Accounting 1. 2. 3. 4. 5. 6. Planning Organising Co-ordinating Motivating Communicating Controlling
Tools and techniques of Management Accounting 1. 2. 3. 4. 5. 6. 7. 8. 9. Financial Statement Analysis Fund Flow Analysis Cash Flow Analysis Marginal Costing Standard Costing Budgetary Control Revaluation Accounting Management information System Management Reporting
Installation of Management Accounting System 1. Preparation of Organisational Manual 2. Appointment and Training of Employees 3. Preparation of forms and Returns 4. Classification and codification of accounts 5. Formulating a suitable system for integration of cost and financial data 6. Setting up of suitable budgetary control system 7. Formulating suitable techniques for standard costing 8. Formulating suitable operational research techniques Limitations of Management Accounting 1. 2. 3. 4. 5. 6. 7. Management Accounting is based on Financial Accounting It is considered only as tool It can be adopted only big concerns Personal judgement Personal Bias Evolutionary Stage Opposition of Change
Management Accounting and Financial Accounting
1. Management Accounting is concerned with the preparation of various statement meant fir
managerial planning, control and decision making. Hence, it is future oriented. But financial Accounting is concerned with the recording the past events only. 2. Management Accounting aims at providing information for the management. Financial Accounting aims at providing information external to the management, like shareholders, debenture holders, creditors, Government etc.
3. There is no limit in the preparation of accounts and statements in Management Accounting. It may be prepared for 15 days or 1 month, 2 months,3 months, etc., as per the requirements of the management. But, Financial Accounting is prepare only for one year. The profit and los account and the balance sheet are prepare at the end of the financial year. 4. Management accounting is concerned with quantitative and qualitative information. But Financial Accounting is concerned only with quantitative information. 5. There is no compulsion for the preparation of Management Accounting. Financial Accounting is compulsory according to the companies act 1956. 6. Reports of the Management Accounting are not circulated to external parties. It only provided for the management to take managerial decisions. But the reports of the Financial Accounting including the Profit and Loss Account and Balance Sheet are circulated to the external parties also. Management Accounting and Cost Accounting
The purpose of Management Accounting is to provide information to the management for decision making. The purpose of cost accounting is ascertainment of cost of each stages for production. Management Accounting purely aims at the future on the basis of past information. Cost Accounting is prepared mainly on the basis of past and less emphasis is given for the future. Management Accounting is prepared without adopting any specific and rigid rules. It may be prepared according to the will of the managerial personnel. But cost Accounting is prepared on the basis of some rules and regulations prescribed by the ICWAI The reports of the Management Accounting are not subject to statutory audit. But the report of the cost accounting is subject to statutory audit. The reports of the Management Accounting are useful only for the internal parties. But the reports of the Cost Accounting are useful both to the internal and external parties.