You are on page 1of 65

MANAGEMENT ACCOUNTING

AREAS COVERED
Financial Accounting Management Accounting Cash Flow Statement Fund Flow Statement

FINANCIAL ACCOUNTING

FINANCIAL ACCOUNTING
Introduction to Accounting Importance of Accounting Accounting Concepts and Conventions Double Entry System Accounting Cycle Management Accounting

INTRODUCTION TO ACCOUNTING

MEANING OF ACCOUNTING

Accounting has been defined as a discipline which involves recording, classifying and summarizing transactions in monetary terms

ACCOUNTING TRANSACTION

Accounting Transactions are those events, which involve money & leads to a change in the financial position of any organization

EVENT

Event is an activity observed or recorded at a given place or time. Anything happened around us may be termed as event

EVENT IN A FLOWCHART
EVENT Does it involve money?

Yes(it is a transaction)

No

Is it related to business?

No

Forget It

Yes

It has to be recorded in the Books of Accounts

IMPORTANCE OF ACCOUNTING

ADVANTAGES OF ACCOUNTING
Providing information for decision making Providing information to investors and creditors Knowing financial position

LIMITATIONS OF ACCOUNTING
Historical in nature No impact of inflation No impact of qualitative data

ACCOUNTING CONCEPTS AND CONVENTIONS

CONCEPTS AND CONVENTIONS - MEANING


Generally accepted set of rules Provide uniformity in accounting system

IMPORTANT CONCEPTS AND CONVENTIONS


Business Entity Concept Cost Concept Money Measurement Concept Going Concern Concept Accrual Concept

BUSINESS ENTITY CONCEPT

Separate entity of company and owner of the company

COST CONCEPT
Shows the Asset at cost price Prevents from recording arbitrary figures

MONEY MEASUREMENT CONCEPT

Considers those events, which can be measured in terms of money

GOING CONCERN CONCEPT

Will continue for an indefinitely long period of time

ACCRUAL CONCEPT
States that profit is the excess of revenue over expenses Example: Sale of a Machinery

Costing: Rs. 1,000 (Paid Rs. 600, Due Rs. 400) Sale: Rs. 1,400 (Received Rs. 900, Due Rs. 500) Profit: Rs. 400

DOUBLE ENTRY SYSTEM

DOUBLE ENTRY SYSTEM - MEANING


Every transaction has dual aspect Sum of debit entries must be equal to sum of credit entries

ACCOUNTING EQUATION

Asset = Liability + Capital

CLASSIFICATION OF ACCOUNTS

Personal Account

Natural Person Artificial Person


Property & Possession

Real Account

Nominal Account
Expense Loss Income Gain

GOLDEN RULES

Personal Account

Debit the receiver, Credit the giver


Debit what comes in, Credit what goes out

Real Account

Nominal Account

Debit expenses and losses, Credit incomes and gains

MODERN APPROACH

Income (Source of earning of the business)

Debit when decreases, Credit when increases


Debit when increases, Credit when decreases

Expense (Costs incurred while earning revenues)

Asset (Goods & Property which the firm owns)

Debit when increases, Credit when decreases


Debit when decreases, Credit when increases

Liability (Claims against asset)

CLASSIFICATION OF INCOME
Direct Income Indirect Income

CLASSIFICATION OF EXPENSE
Direct Expense Indirect Expense

CLASSIFICATION OF ASSETS

Fixed Asset: Permanent nature for generating revenue over long period of time

Tangible Asset:

Physical Existence, Seen, Touched No Physical Existence, Not Seen & Touched

Intangible Asset

Current Asset

Expected to be converted into cash within a relatively short period of time

CLASSIFICATION OF ASSETS

Wasting Asset

Limited useful life Diminish in value due to extraction or removal of natural products such as minerals, oil, gas etc. Really not asset Examples: Preliminary Expenses, Debit balance of Profit & Loss Account Depends upon certain event which may or may not happen Example: Claim of income tax refund

Fictitious Asset

Contingent Asset

CLASSIFICATION OF LIABILITIES

Proprietors Equity

Amounts deposited by proprietors


Not to be met within short period of time

Long term Liabilities

Current Liabilities

To be met within short period of time

CLASSIFICATION OF LIABILITIES

Contingent Liability

Depends upon certain event which may or may not happen Example: Parts may be changed within guarantee period

ACCOUNTING CYCLE

ACCOUNTING CYCLE - MEANING


Sequence of accounting procedures Begins with identification of business transactions Ends with preparation of final accounts

ACCOUNTING CYCLE - STEPS


Identification of Business Transactions Recorded in the books of Original Entry Posted to Ledgers Preparation of Trial Balance Preparation of Final Accounts

BUSINESS TRANSACTION
Differentiate between Event and Transaction Whether related to business or not

BOOKS OF ORIGINAL ENTRY


Called as Journal Types

Cash Book Purchase Day Book Sales Day Book Purchase Return Day Book Sales Return Day Book Journal Proper

JOURNAL - FORMAT
In the Books of ..

Journal

Dr. Ledger Folio (LF) No.

Cr.

Date

Particulars

Amount (Rs.)

Amount (Rs.)

LEDGER - FORMAT
In the Books of ..

.. Account

Dr.

Cr.

Date

Particulars

L.F. No.

Amount (Rs.)

Date

Particulars

L.F. No.

Amount (Rs.)

TRIAL BALANCE

Purpose

A statement, verifies whether all the debit entries should be equal to all the credit entries Proves arithmetical accuracy Totals method

Methods

Post the debit side total in debit column and the credit side total in credit column Show only the balances of each account

Balances method

TRIAL BALANCE

Errors

Errors of Omission

Transaction is either wholly or partly unrecorded Transaction is incorrectly recorded Recorded in a fundamentally incorrect manner One error is counterbalanced by another error

Errors of Commission

Errors of Principle

Compensating Error

TRIAL BALANCE - FORMAT


Trial Balance as at ..

Dr.

Cr.

Account

L.F.

Amount (Rs.)

Amount (Rs.)

Total

TARDING ACCOUNT
Showing the Gross Profit Considers Direct Income and Direct Expense

TRADING ACCOUNT - FORMAT


Trading Account of for the year ended .. Dr. Date Particulars Amount (Rs.) Date Particulars Cr. Amount (Rs.)

To Opening Stock To Purchase Less: Purchase Return To Wages To Carriage Inward To all other direct expenses To Gross Profit (Transferred to P/L Account)

By Sales Less: Sales Return By Closing Stock By all other direct incomes By Gross Loss (Transferred to P/L Account)

PROFIT AND LOSS ACCOUNT


Showing the Net Profit Considers Indirect Income and Indirect Expense

PROFIT & LOSS ACCOUNT - FORMAT


Profit & Loss Account of for the year ended ..

Dr. Date Particulars Amount (Rs.) Date Particulars

Cr. Amount (Rs.)

To Trading Account (Gross Loss) To all indirect expenses

By Trading Account (Gross Profit) By all indirect incomes

To Net Profit
(Transferred to Capital Account)

By Net Loss
(Transferred to Capital Account)

BALANCE SHEET
Ultimate objective Showing the financial position of the business A statement of assets and liabilities

BALANCE SHEET - FORMAT


Balance Sheet of as at ..

Liabilities

Amount (Rs.)

Assets

Amount (Rs.)

MANAGEMENT ACCOUNTING

MANAGEMENT ACCOUNTING MEANING

Provides information to the management in a logical manner for better planning and decision making

MANAGEMENT ACCOUNTING FUNCTIONS


Providing Data Modifying Data Analysis and Interpretation Planning and Policy formulation Decision Making Motivating Employees Tax Administration

DIFFERENCE BETWEEN FINANCIAL & MNAGEMENT ACCOUNTING


Compulsory To record transactions to know the financial position Related with historical data Takes only actual figures Concerned with the results of the entire business Useful for internal and external uses

Not compulsory To formulate different policies and plans Deals with projected future data Takes approximate figures also Deals with separate cost centres or departments Only for internal use

CASH FLOW STATEMENT

CASH FLOW STATEMENT MEANING

Showing the inflow and outflow of cash during a particular period

CASH FLOW STATEMENT OBJECTIVE


Show the causes of changes in cash balance between the balance sheet dates Show the factors contributing to the reduction of cash balance

CASH FLOW STATEMENT - USES


Explains the reason for low cash balance Shows the major sources and uses of cash Helps in short term financial decision Helps the management in planning the repayment of loan, credit arrangement etc.

CASH FLOW STATEMENT - STEPS


1.

2.
3. 4.

Preparation of account for non-current items Preparation of Adjusted Profit & Loss Account Comparison of current items Preparation of Cash Flow Statement

CASH FLOW STATEMENT - FORMAT


Cash Flow Statement
Inflow of Cash Amount (Rs.) xxx xxx xxx xxx xxx xxx Outflow of Cash Amount (Rs.) xxx xxx xxx xxx xxx xxx xxx xxx xxx

Opening Cash Cash from Operation Issue of Share & Debenture Sales of Assets Decrease in Current Assets Increase in Current Liabilities

Payment of Tax Payment of Dividend Redemption of Share & Debenture Repayment of Loan Purchase of Assets Increase in Current Assets Decrease in Current Liabilities Closing Cash

xxx

FUND FLOW STATEMENT

FUND FLOW STATEMENT MEANING

Showing the inflow and outflow of fund during a particular period

FUND FLOW STATEMENT OBJECTIVE


Helps to understand the changes in assets Shows the financial strengths and weakness of the company Highlights the changes in the financial condition beteen to balance sheet dates Helps to plan a dividend policy Helps in decision making

FUND FLOW STATEMENT - STEPS


1.

2. 3. 4.

Preparation of schedule of changes in Working Capital Preparation of account for non-current items Preparation of Adjusted Profit & Loss Account Preparation of Fund Flow Statement

FUND FLOW STATEMENT - FORMAT


Fund Flow Statement
Amount (Rs.) Amount (Rs.)

Inflow of Cash

Outflow of Cash

Fund from Operation Issue of Share & Debenture Sales of Assets Decrease in Working Capital

xxx xxx xxx xxx

Payment of Tax Payment of Dividend Redemption of Share & Debenture Repayment of Loan Purchase of Assets Increase in Working Capital

xxx xxx xxx xxx xxx xxx xxx

xxx

DIFFERENCE BETWEEN CASH & FUND FLOW STATEMENT

Concerned with changes in cash position between two balance sheet dates Cash from operation is calculated only by actual receipt of income & payment of expense Inflow of cash indicates definitely inflow of fund Increase in current liabilities or decrease in current assets will increase in cash balance Decrease in current liabilities or increase in current assets will decrease in cash balance More useful as a tool of financial analysis

Concerned with changes in working capital position between two balance sheet dates Fund from operation is calculated by adjusted profit & loss account Sound fund position does not necessarily mean sound cash position Increase in current liabilities or decrease in current assets will decrease in working capital Decrease in current liabilities or increase in current assets will increase in working capital Not more useful as a tool of financial analysis

THANK YOU