Professional Documents
Culture Documents
UNIT 1 Shareholders
Accounting Process Management
The process of accounting involves Potential Investors
recording classifying and summarizing of Creditors
past events and transactions of financial Government
nature, with a view to enabling the user of Employees
accounts to interpret the resulting Researchers
summary. Citizens
Definition of Accounting Accounting Concepts
Accounting has been defined by the Business Entity Concept
American accounting association Going Concern Concept
committee as: “Accounting is the art of Money Measurement Concept
recording, classifying and summarizing, in Cost Concept
a significant manner and in terms of Dual Aspect Concept (Double
money, transactions and events which are, Entry System)
in part at least, of a financial character and Accounting Period Concept
interpreting the results”.
Periodic Matching of Costs and
Functions of accounting are: Revenues
Maintaining Systematic Records
Realization Concept
Communicating the Financial
Results Accounting Conventions
Meeting Legal Requirements Convention of Conservatism
Protecting Business Assets Convention Of Full Disclosure
Assistance to Management Convention Of Consistency
Advantages of Accounting Convention Of Materiality
Complete and Systematic Record Accounting Equation
Determination of Selling Price Meaning of an Accounting Equation
Valuation of the Business An Accounting Equation is a
Helps in Raising Loan mathematical expression which shows that
Evidence in Court of Law the assets and liabilities of a firm are
In Compliance of Law equal.
Inter-Firm or Intra-Firm The claims, also known as equities. are of
Comparison two types:
Facilitates Audit 1. Owner's equity or capital, and
2. Outsiders Equity (Liabilities or
Effective Management
amounts due to outsiders).
Limitations of accounting
We can express Accounting Equation as
Accounting policies
follows:
Estimates a) Assets = Liabilities + Capital
Professional judgment or
Verifiability b) Liabilities = Assets – Capital
Using historical costing or
Measurability c) Capital = Assets – Liabilities
Predictive value Accounting Cycle
Fraud & Errors Accounting Cycle 9 steps are-
Cost benefit compromises 1. Analyze
Users of accounting information 2. Journalize
The money coming into the business is Items under the financing activities
called cash inflow, and money going out section include:
from the business is called cash outflow. Dividends paid
Operating activities Sale or repurchase of the
Operating activities include company's stock
the production, sales and delivery of the UNIT-4
company's product as well as collecting Meaning and Scope of Cost
Accountancy
payment from its customers.
The term cost accountancy is wider than
Receipts for the sale of loans, debt or
the term cost accounting. Accountants,
equity instruments in a trading
London, cost accountancy means, “the
portfolio
application of costing and cost accounting
Interest received on loans principles, methods and techniques to the
Payments to suppliers for goods and science, art and practice of cost control
services Cost Accounting: Cost accounting is the
Payments to employees or on behalf of process of accounting for costs. It is thus
employees the formal mechanism by means of which
Interest payments costs of products or services are
Buying Merchandise ascertained and controlled.
Investing activities Costing: Costing is “the technique and
Investing activities are process of ascertaining costs.”
Purchase or Sale of an asset (assets Cost Control: According to the Institute
can be land, building, equipment, of Cost and Works Accountants of India,
marketable securities, etc.) cost control means “The act of power of
Loans made to suppliers or received controlling or regulating or dominating or
from customers commanding costs through the application
Payments related to mergers and of management tools and techniques”.
Objectives of Cost Accounting
acquisition.
Financing activities 1. Ascertaining Costs: -
2. Determining Selling Price:
Financing activities include the inflow of 3. Measuring and Increasing
cash from investors such Efficiency
as banks and shareholders, as well as the 4. Cost Control and Cost Reduction
outflow of cash to shareholders 5. Cost Management
6. Ascertaining Profits
as dividends as the company generates 7. Providing Basis for Managerial
income. Decision – Making
Payments of dividends Methods of costing:
Payments for repurchase of company Different industries follow different
shares methods for ascertaining cost of their
For non-profit organizations, receipts products.
of donor-restricted cash that is Methods of costing
limited to long-term purposes • Job Costing
• Contract Costing
• Batch Costing Financial accounting
• Process Costing Provides information to users who
• Service (Operating) Costing are external to the business
• Operation Costing It reports on past transactions to
• Multiple Costing draw up financial statements
Techniques of Costing The format are governed by law
• Marginal Costing and accounting standards
• Standard Costing established by the professional
• Historical Costing accounting policies
• Direct Costing Management Accounting
• Absorption Costing Comprises all cost accounting
Role of Cost Accounting functions
Price fixation The accounting for product and
Helps in estimate service costs, management
Helps in channeling production accounting extends to use various
Wastages are eliminated internal accounting reports for
Costing makes comparison possible planning, control and decision
Provides data for periodical profit making
and loss accounts Cost accounting
Determining and enhancing Is concerned with internal users of
efficiency accounting information, such as
Helps in inventory control operation managers
Helps in cost reduction The generated reports are specific
Assists in increasing productivity to the requirement of the
Elements of Cost management
There are three broad elements of cost
The reporting can be in any format
(a) Material
which suits the user
Direct Material
Indirect Material
(b) Labour
Direct labour
Indirect labour
(c) Expenses
Direct expenses
Indirect expenses
(d) Overheads
Manufacturing (works, factory or
production) expenses:-
Office and Administrative
expenses
Selling and Distribution Expenses:-
Financial accounting Vs Management
Accounting Vs Cost accounting
RAJIV GANDHI INSTITUTE OF MANAGEMENT AND SCIENCE, KAKINADA Page 9
Accounting for Managers
By Controllability
1. Controllable
2. Uncontrollable
By Normality
1. Normal cost
2. Abnormal cost
By time
1. Sunk Cost
2. Estimated cost
Cost Sheet: Meaning
Cost sheet is a statement, which shows
various components of total cost of a
product. It classifies and analyses the
components of cost of a product.
Cost sheet is prepared on the basis of:
Cost Classification
Historical Cost
Costs can be classified based on the
following attributes: Estimated Cost
Importance of Cost Sheet
By Nature
1. Direct cost Cost ascertainment
2. Indirect cost Fixation of selling price
By Behavior Help in cost control
1. Fixed cost Facilitates managerial decisions
2. Variable cost Cost Sheet – Format
Opening Stock of Raw Material
3. Semi variable cost
Add: Purchase of Raw materials
By Elements Add: Purchase Expenses
1. Material cost Less: Closing stock of Raw Materials
2. Labor cost Raw Materials Consumed
3. expenses Direct Wages (Labour)
By Functions Direct Charges
Prime cost (1)
1. Production cost Add: - Factory Over Heads:
2. Administrative cost Factory Rent
3. Selling cost Factory Power
Indirect Material
4. Distribution cost
Indirect Wages
5. R&D cost Supervisor Salary
6. Pre production cost Drawing Office Salary
7. Conversion cost Factory Insurance
Factory Asset Depreciation
8. Prime cost Works cost Incurred
Add: Opening Stock of WIP
1. What is accounting? Explain accounting cycle. 6. How do you prepare final accounts of a trader?
Accounting Cycle steps are- Explain.
Final accounts:
10. What is ratio analysis? Classify ratios with 13. Explain the differences between cost accounting
examples. and financial accounting and management
accounting.
Example: 1
Mr. Nirmal has the following transactions in the month of April. Prepare Journal Entries
and Ledgers and Trail Balance for the transactions.
01st April : Commenced business with a capital of 1,00,000
11th April : Purchased goods from Veeru for 20,000
13th April : Purchased Goods for Cash 15,000
14th April : Purchased Goods from Abhiram for cash 9,000
16th April : Bought Goods from Shyam on credit 12,000
17th April : Sold goods worth 15,000 to Tarun
19th April : Sold goods for cash 20,000
20th April : Sold goods to Utsav for cash 6,000
21st April : Cash deposited into bank 60,000
22nd April : Paid cash to Veeru 20,000
23rd April : Cash received from Tarun 12,000
25th April : Goods taken by the proprietor for personal use 1,000
26th April : Bought Land for 50,000
27th April : Purchased machinery for cash 45,000
28th April : Withdrew from bank 5,000
28th April : Cash sales 15,000
29th April : Cash purchases 22,000
30th April : Paid wages 12,000 and Paid salary to Mr. Charan 12,000
Example: 2 From the following balances prepare Final Accounts as on 31st December, 2010.
Rs. Rs.
Opening Stock 1,53,100 Capital 25,00,000
Purchase 8,24,000 Drawings 4,80,000
Sales 25,60,000 Sundry Debtors 5,70,000
Returns (Dr.) 40,000 Sundry Creditors 1,40,000
Returns (Cr.) 24,000 Depreciation 42,000
Factory Rent 1,80,000 Charity 5,000
Custom Duty 1,15,000 Cash Balance 44,600
Coal, Gas and Power 60,000 Bank Balance 40,000
Wages & Salary 3,66,000 Bank Charges 1,800
Discount (Dr.) 75,000 Establishment Expenses 36,000
Commission (Cr.) 12,000 Plant 4,20,000
Bad-Debts 58,500 Leasehold Building 15,00,000
Bad-Debts Recovered 20,000 Goodwill 2,00,000
Patents 1,00,000 Trade Marks 50,000
Productive Expenses 26,000 Loan Cr. 2,50,000
Unproductive Expenses 50,000 Interest on Loan 30,000
Carriage 87,000
The value of Closing Stock on 31st December, 2010 was Rs. 2, 54,000.
Example: 3 The following information is given about MIs Gowda Ltd. for the year ending
Dec. 31't 2003:
(a) Share Capital Rs. 8,40,000 (b) Bank Overdraft Rs. 50,000
(c) Working Capital Rs. 2,52,000 (d) Current Ratio = 2.5 :1
(e) Quick Ratio = 1.5 : 1 (f) Gross Profit Ratio = 20 % on sales
(g) Stock Turnover Ratio = 5 times (h) Sales for 2003 Rs. 5,00,000
(i) Trade Debtors Rs. 70,000 (j) Opening Creditors Rs. 40,000
(k) Closing Creditors Rs. 30,000 (I) Closing Stock is Rs. 20,000 higher than the opening stock
Find Out
(a) Current Assets and Current Liabilities. (b) Cost of goods sold, Average stock and Purchases.
(c) Creditor's Turnover Ratio. (d) Creditor's Payment Period.
(e) Debtor's Turnover Period. (f) Debtor's Collection Period.
(g) Working Capital Turnover Ratio.
Example: 8
Ashok Ltd. finds that while the cost of making a component No. X5 in its own workshop is Rs. 8
each, the same is available in the market at Rs. 6.50. Give your suggestions whether to make or
buy this component. Give also your views incase the supplier reduces the price from 6.50 to
5.50. The cost data are:
Materials 3.00
Direct Labour 2.00
Other variable exp. 1.00
Depreciation and other fixed exp. 2.00
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8.00
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Example: 9
The cost records of Alcos Ltd. Shows the following:
Product X Product Y
Direct Material 25.00 30.00
Direct Wages 15.00 15.00
Selling price 75.00 125.00
Variable overheads: 100% of direct wages, fixed overheads Rs. 10,000 per annum.
Prepare a contribution statement and recommend which of the following sales mix should be
adopted.
1. 450 units of X and 300 units of Y 2. 900 units of X only
3. 600 units of Y only 4. 600 units of X and 200 unit of Y