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Managerial Accounting

Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Name of Student Mr. Barhate Mangesh Tukaram
Roll No PG/509/MBA(I)/2009J
Institute Silver Bright Institute of Management (SBIM), Pune
Subject Managerial Accounting
Date 10 Jan 2010

MANAGERIAL ACCOUNTING

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

INDEX

- Preamble
- Process of Accounting
- Accounting Cycle
- Accounting Principles and Concepts
- Double Entry System of Accounting
- Types of Accounting
- Accounting Equation
- Recording the Transactions
- Subdivision of Journals
- Concept of Discount
- Ledger
- Balancing of Accounts
- Example of Trail Balance
- Balance Sheet
- Analysis of Financial Statements
- Some Examples of Fanatical Analysis
- Break Even Point Analysis
- Limitations of Financial Analysis
- Wrapping Up

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Preamble
Accounting is a business language which elucidates the various kinds of transactions during the
given period of time. Accounting is defined as either recording or recounting the information of
the business enterprise, transpired during the specific period in the summarized form.

Accounting is broadly classified into three different functions viz

Recording
Classifying and (Transactions of Financial Nature)
Summarizing

Features of Accounting:

1. It is an art of recording the transactions.
2. It is an art of classification of the transactions.
3. It is an art of summarization of the transactions.
4. It records only monetary transactions.
5. It draws conclusions about profitability & financial position of the organization.

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Process of Accounting

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Information generated by accounting:

1. Expenses & losses.
2. Incomes & gains.
3. Assets.
4. Liability.
5. Capital employed.
6. Net profit/loss.
7. Profitability position.
8. Financial position.

Users of accounting information:

1. Management: To take the right decision. To know about profitability & financial position.
2. Shareholder: To know about the return on investment, appreciation in investment, liquidity of
investment, safety of investment.
3. Loan officer: To decide the ability to repay loan, ability to pay interest regularly. Can take right
decision about sanctioning loan.
4. Suppliers: Suppliers of raw materials can verify the credit worthiness of the party.
5. Trade Union Leader: can protect the interest of the workers on the basis of accounting
information.
6. Government officers: Revenue from tax collection. Tax liability.

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

ACCOUNTING PRINCIPLE AND CONCEPTS

ACCOUNTING PRINCIPLE

CONCEPTS: CONVENTIONS:
Basic assumptions on Traditions, customs &
which entire accounting practices established by
is based. the professors.
CONCEPTS:

1. ENTITY CONCEPT:
It says that the proprietor & his business are 2 separate parties i.e. entities. A proprietor
becomes a creditor of the business by the amount invested in the business.

Creditor is a person to whom some amount is payable for supply of goods or services.

Capital is the amount invested by a proprietor in business. Capital is the liability of
business.

Liability is the obligation on business to repay a certain amount OR it is the claim
against the property of business OR Amount payable to others is a liability.

A proprietor becomes a debtor of business by the amount taken from business for
personal expense. Drawing is the amount withdrawn by the proprietor from business for
personal expenses. Profit earned by the business belongs to the proprietor. It increases capital.
As per entity concept, the accountant should record only those monetary transactions
which affect the business. The transactions of the proprietor which don’t affect business
shouldn’t be recorded in accounts.
Entity concept is applicable to all the organizations from accounting point of view.

2. MONETARY CONCEPT:
Financial accounting records only monetary transactions i.e. the transactions which can
be expressed in terms of money.
Non-monetary transactions don’t find place in accounting. The transactions or events
which can’t be expressed in terms of money are non-monetary transactions.
E.g. loss due to death of an efficient manager.

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

3. COST CONCEPT:
As per this concept, business transactions are recorded at cost. Cost is the sacrifice made
for purchase of any goods or services. Cost is the basis of future transactions also.
E.g. purchased goods worth Rs. 10,000 for Rs. 8,000. In this case, the cost of the goods is Rs.
8,000. It will be recorded at Rs. 8,000.
Cost is the basis of future transactions also. Depreciation is provided on permanent assets
on the basis of the cost. If the asset is sold out, the profit/loss on the sale will be calculated on the
basis of cost.

4. GOING CONCERN CONCEPT:
A business organization is a going concern. It has a continuous life. It continues its
activities year after year. There is no intention to close down the business activities after a certain
number of years.
E.g. the proprietor invests huge amount in business, depreciation is provided on fixed assets for
replacement, huge amount is spent on training of employees.

5. ACCOUNTING PERIOD CONCEPT:
Entire life of an organization is divided into small periods for deciding the profit/loss &
ascertaining the financial positioning. Each accounting period is called an Accounting year &
consists of 12 months. Therefore all the organizations prepare their accounts every year.

6. MATCHING CONCEPT:
The concept is employed to find out profit/loss for the year. Profit/loss is decided by
matching income for the year with the expenses for the year. Profit is the excess of income over
expenses for the year & loss is the excess of expenses over income for the year. Before matching
expenses & income it is necessary to make adjustments about the incomes & expenses relating to
the next year.

CONVENTIONS

1. CONVENTION OF CONSISTENCY:
As per this convention, there should be uniformity in the methods of accounting followed
by the organization. Consistency means the same method of accounting should be followed year
after year. The method of accounting should not be changed frequently. Consistency doesn’t
mean that there can’t be a change in method. The method can be changed if there are changes in
circumstances. Due to consistency, comparison between 2 accounting periods becomes
meaningful.
2. CONVENTION OF CONSERVATISM:
The accountant should adopt a conservative approach while preparing the financial
statements. Conservatism doesn’t mean that the accountant must be pessimistic about the future
of the company. Conservatism implies that the accountant should a safe approach while
preparing financial statements. He should select lower values between the 2 values given.
E.g.

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Cost of stock of goods: Rs. 2,00,000
Market value: Rs. 3,00,000

The accountant should consider Rs. 2,00,000 stock for preparing the accounts. All the anticipated
losses must be provided for. Anticipated profits should not be considered while preparing the
accounts.

3. OBJECTIVE EVIDENCE:
Every transaction to be recorded in accounting must have a proper documentary
evidence. The documentary evidence is called a voucher.
E.g. Telephone charges – Telephone bill.
Salary – Salary register.
Cash purchase – cash memo.

4. CONVENTION OF MATERIALITY:
As per this convention, only material information should be disclosed in the financial
statements. Material information means significant information which has effect on decision.
Whether the information is material or not depends on the personal judgment of the accountant.
E.g. it is immaterial to give all the details about the salary in the income statement. Similarly
fraction of the rupee should be rounded up to the nearest rupee. The breakup of the total sales is
material if it affects the decision. Cash sale of Rs. 500 in a total sale of Rs. 1,00,000 is
immaterial.

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

CLASSIFICATION OF ACCOUNTS:

Accounts

Personal A/C
These are the accounts of
individuals, firms, companies, Impersonal A/C
association of people, body of
individuals.

Nominal A/C
Real A/C
These are the accounts of
These are the accounts of
expenses & losses and incomes
assets and properties
& gains

RULES OF RECORDING TRANSACTIONS:

DEBIT CREDIT
PERSONAL A/C Debit the receiver Credit the giver
REAL A/C Debit what comes in Credit what goes out
NOMINAL A/C Debit expenses & losses Credit incomes & gains

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Double Entry System of Accounting:

It is a system of accounting which records double effects of the transactions. According
to this system every transaction has 2 effects & the amount of one effect is always equal to
amount of another effect. It means the amount of debit is always equal to the amount of credit.
An account is a summarized record of transaction relating to an asset, a liability, an expense, a
loss, an income & a gain. An account is divided into 2 sections. The left hand side section is
known as the debit side which is indicated by the abbreviation ‘Dr’. The right hand side is known
as credit side which is indicated by the abbreviation ‘Cr’.
_________________ A/C
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount

To debit the account means to record the transaction on debit side of the account.
To credit the account means to record the transaction on the credit side of the account.

Types of Accounting

Accounting provides information to several groups of people and for different purposes. As a
result, there are several kinds of accounting:

 Financial accounting provides information to external users. Such external users can be
investors, creditors, banks, regulatory bodies (i.e., Securities and Exchange Commission,
Internal Revenue Service, etc.). The information is usually in the form of financial
statements (see more on the financial statements below).
 Managerial accounting provides information to internal users. Such internal users
include a company’s managers and employees. The information accumulated and
presented by managerial accounting function includes sales figures, gross margin
analysis, cost information broken down by product line, etc. As a rule, managerial
accounting information provides more detail than the financial accounting information
and sometimes includes confidential data not available to external users.
 Tax accounting can be distinguished as another kind. Tax accounting deals mainly with
calculation of taxes (i.e., income taxes, sales and use taxes, etc.). Because rules
regulating calculation of taxes are different from those governing financial statements
preparation and presentation, tax accounting should be performed separately and in
parallel to financial and managerial accounting. Usually, there is a tax department with a
company that deals with tax accounting, but works closely with the financial accounting
department.

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Accounting Equation:

ASSETS = CAPITAL + LIABILITIES

Transactions Assets Capital Liabilities
Cash Furniture
Invested in business Rs. 500000 500000 500000

Purchased furniture for Rs. 200000 -20000 20000

480000 20000 500000

Took loan from bank Rs. 200000 200000 200000

680000 20000 500000 200000

Paid for staff salaries Rs. 50000 -50000 -50000

630000 20000 450000 200000

Received commission Rs. 20000 20000 20000

650000 20000 470000 200000

Paid interest on loan Rs. 10000 -10000 10000

640000 20000 480000 200000

RULES OF CREDIT & DEBIT

Debit Credit
Assets A/c + -
Expenses & losses A/c + -
Capital A/c - +
Liabilities A/c - +
Incomes & gains A/c - +

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Recording the Transactions:
Transactions are identified on the basis of documentary evidence. The transactions are
first recorded in the journal on the basis of documentary evident. A journal is a primary book
of account. It is also called as a daily record of transactions. It is maintained in columnar form as
given below:

V. L.
Date No. Particulars F. Amount
Dr Cr
(Rs.) (Rs.)
(1) (2) (3) (4) (5) (6)
2007
July
1

Column 1:
Date of the transaction is recorded systematically. First, the year is mentioned, thereafter, the
name of the month & then the date.
Column 2:
This column mentions the serial no. of the voucher for ready reference. Every transaction is
supported by a voucher. All the vouchers are properly filed & given serial numbers.
Column 3:
In this column names of the accounts affected are mentioned. On the first line, name of the
account debited is mentioned. After the name of the account, the abbreviation ‘Dr’ is to be
mentioned on the same line. On the next line small space is left & thereafter the word ‘To’ is
mentioned followed by the name of the account credited. Below the 2 accounts mentioned, a
brief explanation of the transaction (called as narration) is written. After the narration a line is
drawn in this column to show the completion of the record of transaction.
Column 4:
Ledger folio is the page no. of the ledger on which the particular account appears. It is necessary
to get immediate reference about a particular account.
Column 5:
It mentions the amount of the account debited on the same line.
Column 6:
It mentions the amount of the account credited on the same line.

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Subdivision of Journals:

If the transactions of the enterprise are voluminous, to ease the process of posting the
transactions, the transactions should be classified into two categories. The transactions are
segmented one on the basis of regular and another on the basis of non-regular occurrence. The
regular / frequent occurrence of transactions are recorded only in the separate books which are
known as subsidiary book of accounts or subsidiary journals instead to record in the regular
journal. The infrequent transactions are recorded / posted in the original journal or Journal proper
which do not have any specific subsidiary journal or subsidiary books. The subsidiary journals or
books are developed by the firms only based on the occurrence of the transactions. Normally the
frequent occurrences of the transactions of the firm are major formation of the subsidiary books
of the accounting system. The following are the subsidiary books on the major frequent
occurrence of transactions

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Concept of Discount:

TRADE DISCOUNT:
It is the concession allowed by a seller to a buyer in order to enable him to maintain the
same price & earn reasonable amount of profit. It is also called as a quantity discount because it
is allowed to attract large size orders from the buyers. The amount of trade discount is deducted
from the bill itself & the net amount of the bill is brought in the books of accounts. Therefore
trade discount doesn’t appear in the books of account.

CASH DISCOUNT:
It is a concession allowed by a creditor to a debtor in order to collect the amount
promptly. The debtor may make the payment in order to get discount. Cash discount is a loss to
a creditor & a gain to a debtor. The creditor doesn’t mind sustaining this loss because he
receives the payment from the debtor immediately. It helps him to finance the business activity.
Cash discount is recorded in the books of accounts.

Example:
Purchased goods from A & Co. worth Rs. 20,000 on credit subject to 10% trade discount & 5%
cash discount if the payment is made within 10 days.

V.
Date No. Particulars L. F. Amount
Dr Cr
(Rs.) (Rs.)
2007
July 1 Goods A/C Dr 18000
To A & Co.'s A/C 18000
(Being purchased goods from A & Co. on
credit)

7 A & Co.'s A/C Dr 18000
To Cash A/C 17100
To Discount A/C 900

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Ledger:

After recording the transactions in the journal, they are required to be properly classified
in order to get immediate reference. Therefore a separate book known as ledger is maintained.
Ledger is the second book of accounts. It is a book of accounts which includes all types of
accounts i.e. personal A/c, real A/c & nominal A/c. A separate page is reserved for each account.
Each page of a ledger is properly numbered. The page number of the ledger is known as ledger
folio which is mentioned in the journal for immediate reference. All the transactions recorded in
the journal are transferred to the respective accounts in the ledger. The process of transferring the
transactions from the journal to the respective account in the ledger is called posting.

_________________ A/C
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
(1) (2) (3) (4) (1) (2) (3) (4)
To _______ A/c By ______ A/c
(Name of the (Name of the
account credited) account debited)

Column 1:
Enter the date of the transaction systematically.

Column 2 (Debit side):
Write the word ‘To’ & thereafter mention the name of the account credited in the journal.

Column 2 (Credit side):
Write the word ‘By’ & thereafter mention the name of the account debited in the journal.

Column 3:
Mention the page number of the journal from where the transaction has been transferred.

Column 4:
Write the amount of the transaction.

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Journal entry:

V.
Date No. Particulars L. F. Amount
Dr Cr
(Rs.) (Rs.)
2007
April 1 Cash A/c Dr 1000000
To Capital A/c 1000000

Ledger entry:

Cash A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007
April 1 To Capital A/c 1000000

Capital A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007
April 1 By Cash A/c 1000000

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Balancing of Accounts:

After posting the transactions to various accounts, balancing has to be done. It is a
process of finding out a balance on the account. The process of balancing involves the following
steps.
1. Make a total of debit side & credit side of the account.
2. Find out the difference between the 2 totals.
3. Put the difference on the lighter side of the account as,
“By Balance c/d” OR “To Balance c/d” as the case may be.
4. Make the totals of both the sides equal.
5. Bring forward the balance on the next date as,
“By Balance b/d” OR “To Balance b/d” as the case may be.

Debit balance: Excess of debit over credit is called as a debit balance.
Credit balance: Excess of credit over debit is called as a credit balance.

SOLVED EXAMPLE:
“Pizza & burger huts” is a retail chain having retail outlets in almost all the major cities
in India. It has opened one more branch in Navi Mumbai 3 months ago. The manager of this
branch provides you with the following information for the month of April 2007. you are
required to prepare Journal & Ledger on the basis of the following transactions:
Balances as on 1/4/2007:
Fixed assets Rs. 18,00,000
Stocks of materials Rs. 1,50,000
Debtors Rs. 3,50,000
Capital Rs. 15,00,000
Security deposit Rs. 5,00,000
Bank A/c Rs. 1,00,000
Bank loan Rs. 7,50,000
Creditors Rs. 7,50,000
Local taxes payable Rs. 1,00,000
Cash Rs. 2,00,000

Transactions during April 2007:
April 1 : Paid creditors Rs 1,50,000 by cheque no. 468523.
April 2 : Received cheque no. 124650 from Mr. Mahesh to whom goods were
supplied in the last year Rs. 2,50,000.
April 5 : Received cash from debtors Rs. 1,00,000.
April 10 : Paid local taxes by cheque no. 468524.
April 11: Purchased raw materials from “pizza products ltd.” on credit Rs. 500000
April 25 : Paid wages Rs 2,50,000 in cash. Electricity bill Rs. 50,000. Credit sales Rs.
1,00,000. Cash sales Rs. 7,00,000. Interest on loan paid Rs. 20,000. Miscellaneous expenses Rs.
50,000.

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

LEDGER

Fixed Asset A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 1 To bal. b/d 1800000 April 30 By bal c/d 1800000
1800000 1800000
May 1 To bal. b/d 1800000

Stock of Material A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 1 To bal. b/d 150000 April 30 By bal c/d 150000
150000 150000
May 1 To bal. b/d 150000

Debtor's A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 1 To bal. b/d 350000 April 2 By Bank A/c 250000
25 To Sales A/c 100000 5 By Cash A/c 100000
30 By bal. c/d 100000
450000 450000
May 1 To bal. b/d 100000

Security deposit A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 1 To bal. b/d 500000 April 30 By bal. c/d 500000
500000 500000
May 1 To bal. b/d 500000

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Bank A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 1 To bal. b/d 100000 April 1 By Creditor's A/c 150000
10 By Local taxes A/c 100000
30 By bal c/d 100000
350000 350000
May 1 To bal. b/d 100000

Capital A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2207
April 30 To bal. c/d 1500000 April 1 By bal. b/d 1500000
1500000 1500000
May 1 By bal. b/d 1500000

Cash A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 1 To bal b/d 200000 April 25 By wages A/c 250000
By electric
5 To Debtor's A/c 100000 charges A/c 50000
By Interest on
25 To Sales A/c 700000 loan A/c 20000
By
miscellaneous
expenses A/c 50000
30 By bal. c/d 630000
1000000 1000000
May 1 To bal. b/d 630000

Bank Loan A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 30 To bal. c/d 750000 April 1 By bal. b/d 750000
750000 750000
May 1 By bal. b/d 750000

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Creditor's A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 1 To Bank A/c 150000 April 1 By bal. b/d 750000
April 30 To bal. c/d 1100000 11 By Purchases A/c 500000
1250000 1250000
May 1 By bal. b/d 1100000

Local taxes payable A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 10 To Bank A/c 100000 April 1 By bal. b/d 100000
100000 100000

Purchases A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 11 To Creditor's A/c 500000 April 30 By bal. c/d 500000
500000 500000
May 1 To bal. b/d 500000

Wages A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 25 To Cash A/c 250000 April 30 By bal. c/d 250000
250000 250000
May 1 To bal. c/d 250000

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Electric charges A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 25 To cash A/c 50000 April 30 By bal. c/d 50000
50000 50000
May 1 To bal. b/d 50000

Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 30 To bal. c/d 800000 April 25 By Debtor's A/c 100000
700000
800000 800000
May 1 To bal. b/d 800000

Interest on Loan A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 25 To Cash A/c 20000 April 30 By bal. c/d 20000
20000 20000
May1 To bal b/d 20000

Miscellaneous expenses A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 25 To cash A/c 50000 April 30 By bal. c/d 50000
50000 50000
May 1 To bal b/d 50000

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Balance Sheet:

Balance sheet is the third financial statement which reveals the financial status of the enterprise
through the total amount of resources raised and applied in the form of assets. This is the
fundamental statement of the firm which explores the firm financial stature through the resources
mobilized and investments applied i.e. Liabilities and Assets respectively. From the early,
according to double entry concept or Duality concept, the balance sheet can be divided into two
distinct sides, known as liabilities and assets.
The balance sheet can be disclosed in two different orders

(i) in the order of long lastingness - permanence
(ii) in the order of liquidity
Proforma Balance Sheet as on dated…………………….
(In the order of Long lastingness)

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

Analysis of Financial Statements

The most commonly used techniques of financial analysis are as follows:

1. Comparative Statements: These are the statements showing the profitability and financial
position of a firm for different periods of time in a comparative form to give an idea about the
position of two or more periods. It usually applies to the two important financial statements,
namely, Balance Sheet and Income Statement prepared in a comparative form. The financial data
will be comparative only when same accounting principles are used in preparing these
statements. If this is not the case, the deviation in the use of accounting principles should be
mentioned as a footnote. Comparative figures indicate the trend and direction of financial
position and operating results. This analysis is also known as ‘horizontal analysis’.

2. Common Size Statements: These are the statements which indicate the relationship of
different items of a financial statement with some common item by expressing each item as a
percentage of the common item. The percentage thus calculated can be easily compared with the
results corresponding percentages of the previous year or of some other firms, as the numbers are
brought to common base. Such statements also allow an analyst to compare the operating and
financing characteristics of two companies of different sizes in the same industry. Thus,
common-size statements are useful, both, in intra-firm comparisons over different years and also
in making inter-firm comparisons for the same year or for several years. This analysis is also
known as ‘Vertical analysis’.

3. Trend Analysis: It is a technique of studying the operational results and financial position
over a series of years. Using the previous years’ data of a business enterprise, trend analysis can
be done to observe the percentage changes over time in the selected data. The trend percentage is
the percentage relationship, which each item of different years bear to the same item in the base
year. Trend analysis is important because, with its long run view, it may point to basic changes in
the nature of the business. By looking at a trend in a particular ratio, one may find whether the
ratio is falling, rising or remaining relatively constant. From this observation, a problem is
detected or the sign of good management is found.

4. Ratio Analysis: It describes the significant relationship which exists between various items of
a balance sheet and a profit and loss account of a firm. As a technique of financial analysis,
accounting ratios measure the comparative significance of the individual items of the income and
position statements. It is possible to assess the profitability, solvency and efficiency of an
enterprise through the technique of ratio analysis.

5. Cash Flow Analysis: It refers to the analysis of actual movement of cash into and out of an
organisation. The flow of cash into the business is called as cash inflow or positive cash flow and
the flow of cash out of the firm is called as cash outflow or a negative cash flow. The difference
between the inflow and outflow of cash is the net cash flow. Cash flow statement is prepared to
project the manner in which the cash has been received and has been utilised during an

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Managerial Accounting
Barhate Mangesh
Roll No- PG/509/MBA (I)/2009J

accounting year as it shows the sources of cash receipts and also the purposes for which
payments are made. Thus, it summarises the causes for the changes in cash position of a business
enterprise between dates of two balance sheets.

Some Examples of Fanatical Analysis:

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Break Even Point Analysis:

Break Even Point is the point at which the Total Cost is equivalent to Total Revenue. At the
break even point the business neither earns profit nor incurs a loss. It means that the firm's cost is
recovered at the minimum level of production.

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Limitations of Financial Analysis:
Though financial analysis is quite helpful in determining financial strengths and weaknesses of a
firm, it is based on the information available in financial statements. As such, the financial
analysis also suffers from various limitations of financial statements. Hence, the analyst must be
conscious of the impact of price level changes, window dressing of financial statements, changes
in accounting policies of a firm, accounting concepts and conventions, personal judgement, etc.
Some other limitations of financial analysis are:

1. Financial analysis does not consider price level changes.
2. Financial analysis may be misleading without the knowledge of the changes in accounting
procedure followed by a firm.
3. Financial analysis is just a study of interim reports.
4. Monetary information alone is considered in financial analysis while non-monetary aspects are
ignored.
5. The financial statements are prepared on the basis of on-going concept, as such, it does not
reflect the current position.

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. Management Accounting is based on Financial Accounting
2. It is considered only as tool
3. It can be adopted only big concerns
4. Personal judgment
5. Personal Bias
6. Evolutionary Stage
7. Opposition of Change

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Wrapping Up:
“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-
Anglo-American Council on Productivity:“Management
Productivity 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”.

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