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    Accounts Unit 1

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    Nirmala Pooraja

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    of 14
    & Managemen it Management Accounting (Chaplet 1) ‘Chapter 4 Introduction to Financial & Management > ——— eM en tid. Meaning and Definition of Accounting sing is use as the language of business. Accounting the procedure of recording the financial inion in the books of aecounis which ae helpfl to jas users. for analysing and interpreting the financial i Moness of business. The process of “Financial seaming’ involves the presentation as well as the aesprecton of the financial results of & company’s imeft wih a view to make an assessment ofits financial mance. Financial Accounting provides the requisite etalon necessary for tking investment decisions. jccording to American Institute of Certified Public Accountants (AICPA), Accounting is “The art of recording, classifying, and summarizing in a significant vreet and in terms of money, transactions and events ich are, in part, at least, of a financial character and jnterpreting the results thereof”. ‘With greater economic development, the meaning of the tem ‘Accounting’ has gradually become broader. ‘According to American Accounting Association (AAA), ‘Accounting i, “The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information”. involves ‘According to Bierman and Derbin, “Accounting may be defined as the identifying, measuring, recording and communicating of financial information”. According to R. N. Anthony, “Accounting system is a means of collecting, summarizing, analyzing, and reporting inmonetary terms the information of the business”, 11.2, Features of Accounting ‘The ‘Accounting’ is characterised by following salient features: 1) Monetary Transactions: In ‘Financial Accounting’, ‘only those business transactions, which can be expressed taee, terms, are taken into account. Transactions Mohan importance from business point of view, the pes aitet be expressed in monetary terms, are out of view of the ‘Financial Accounting’. cee av 3) 4 3) 6) D Accounting Historical Nature: Transactions which are likely to take place in future cannot be captured and recorded under the system of ‘Financial Accounting’. Thus, only those transactions which have already taken place in past (i.e. are historical in mature) are taken into account under financial accounting. Legal Requirement: ‘Financial Accounting’ is a statutory requirement. For a company, itis mandatory to have a proper record of all the “monetary transactions taken place during the course of its business and prepare ‘Financial Statements’ like “Profit and Loss Account’, ‘Balance Sheet’, etc. at the year end. ‘These ‘Financial Statements’ are subject to audit also, if the level of a company's business is beyond a prescribed threshold limit. External Use: ‘Financial Statements’ prepared on the basis of ‘Financial Accounting’ is useful even for those stakeholders, who happen to be external to the business organisation, like customers, suppliers, lenders (banks and other financial institutions), investors, regulators, etc. ‘They can assess the financial health of the organisation on the basis of ‘Financial Statements” and thereby take a correct decision for investment purpose, Disclosure of Financial Status: The ‘Financial Statements’ of a company reveal its performance during a particular period (Profit & Loss Account) and financial status/health (Balance Sheet) as on a particular date. Interim Reports: ‘Financial Statements’ are the end result of the process of ‘Financial Accounting’ However, they are not considered as ‘Final Reports’, as they are interim in nature. Financial Accounting Process: The various steps involved in the process of ‘Financial Accounting’ vary according to the accounting policies adopted by various companies. Such accounting policies generally pertain to: i) Valuation of inventories, and ii) Calculation of depreciation on assets, for which number of options are available for the companies. et ‘ eater raccountiny se nen 1.3. 5 or ide ranging 4 113 See The Sa slow iE Rey cn Sus sige Fe a ‘of the Business edping in Realisation of Debs ___——} sl pee Helpful to Management is interested 1) Basiness Forecasting: A business en ier? in ascertaining its future level of busines onthe BESS cof its past as well as present level of business activities. Soch forecasting enables it to chalk out strategies (like Sion, diversification etc.) in advance, wis 2 with regard to the level of existing ete cs if a manufacturing unit ‘activities. For example, . ‘engaged in the manufacturing of ‘Sports Shoes’ wants 4 liversification of its to go ahead for expansion and diversi th ‘activities imo manufacturing of formal shoes, the ‘Accounting’ may prove to be extremely helpful for taking appropriate forecasting decision. 2) Proper Decision-Making: A company is frequently required to take important decisions regarding: — i) Fixing the price of finished goods on the basis of their cost, fi) Investment level in new projects, ii) Increase in salary and wages of its cemployeesflabours, iv) Distribution of dividends/bonus, etc, ‘Such decisions need to be taken very carefully, as any ‘wrong decision may land the company into financial trouble, coming out of which may not be that easy. An efficient and effective ‘Accounting System’ of the ‘company may be of immense help in taking crucial decisions by the management. 3) Correct Taxation; A company has to fulfil its obligations with regard to liabilities on account of various govemment taxes, eg. service tax, income ‘tax, sales tax, excise duty, customs, ete. The amount of such taxes is decided on the basis of financial results ‘reflected through financial records, "An eee ee TUne System: prevailing in the mmpany facilitates determination of ac ofeach catego etrminaton of accurate amount 4) Replacing Memory: A busines number of financial transaction: and diversified in nature. It is business enty to memarise ev entity enters into a 8, Which ae compe, Ot posible for any ery single tansy Hon is rece 9), Aas each tennsaction is recorded in writing ty “coun Sym the ned nt Mg, single anstetion fs 0 required, set 5) Analysing the Performance of iy, Maintenance of & Proper FeCOrd OF eye, transaction through = Accounting Nables ascertain the performance of & company jo oe ‘income’, ‘Expenditure’, “Profitabitity’, 4, is Analysis of various sub-head items can ayy, ut and necessary steps may be taken toy performance of a company. eat nalysing the Financial Status of the » 8) em dyals (maioly ‘Profit and Loss Account ‘Balance Sheet’) of a company prepared on the 5° of various resords of busines transactions yg status of the business. While the “Profit qgq°t Account’ reflects the profit made oF Ios ing during particular financial year, the ‘Balanoy sy" reflects the position of ase and libies op et company on a specific date. 1) Documentary Evidence: Records maining through accountng have the legal sanctity tog, Tey can be produced as a proof in the court of Jay, to verify the necessary business claims. AS the recog of business transactions are based on documen evidence and each and every entry is supporteg authentic vouchers, they are accepted by the cour ot law as evidence. 8) Helping in Realisation of Debts: As part of accouinting process, the personal ledger accounts ofa] the parties, with whom a company deals with, are prepared. These accounts reveal the accurate amount due-from the debtors as well as the amount payable tp the creditors. They may be forwarded to the debtors for confirmation of the entries and early payment of the debts. Timely payment to the creditors may also be ensured by the company. 9) Preventing and Detecting Frauds: An efficient accounting system and effective internal control mechanism safeguards against a possible pilferage of goods and cash, In an unfortunate case of fraudulent cheating, theft or embezzlement having taken place in a coinpany, their detection, assessment of losses and fixing of accountability, etc, are facilitated through accounting. In fact, prevalence of an appropriate “Accounting System’ prevents the employees from ‘committing any of such acts, 10) Helpful to Management: The records mainiained and Financial Statements’ prepared. by the ‘Accounting System’, enables the management ofa company to: i) Have a glance of the ‘company’s performance .,. during a particular year, 'D Know the assets and liabilities of the business as ona particular date, = fil) ‘Understand the so ications of funds in the business, tnt SPPlications of 1) Compare the achieve ited ones, 1 with the projected of haptet 1) rangement Accom (CHP Mom ciencies in the ses. and deficienci weston ined boss Nios pertaining tO liquidity, ie various ith a view to evaluating am ete. Ste f fil ag Taxing corective actions, i oe he ting soctives of Accounting A. Objective ‘been summarised in the j4- og of accountine . el 3 the conduct of fete se oe ganas poses 2 number ro memorise all the transection, [as it 8 HOt DOSS ed them. Maintenance of a proper rea eed 0 Tera pins transactions is ssh jective of ‘Financial Accounting’. ae oe Profit and Loss: Preparation of "cose Account’ or ‘Income and ‘statement’ by a business entity helps to objective of ‘Financial Accounting’, i., achieve MeN The figure of profit eamed or loss weg an Accum YE ‘rem certain Financial Position: One of the most objectives of ‘Financial Accounting’ is to sment of a business entity to ascertain ena be positon ofthe business, ic, where the the feta, what sowed by it and what it owes, vier to achieve this objective, a balance sheet is e at the end of a financial year. The balance ‘feet depicts the statement of assets and liabilities of a business entity as on a particular date, the id Profit am Expendion 3) To 4 To Communicate the Information: ‘Financial ‘Accounting’ is helpful to the management of a company, majorly in the decision-taking process by providing financial data and other vital jnformation/facts to different stakeholders, viz., owners, creditors, employees, investors, regulators, tax/other government authorities, etc. Thus, communicating the information of financial data is equally important, than other objectives of "Financial Accounting’. 1.1.5. Functions of Accounting The step-wise functions of accounting are in the following order: 1) Identifying: Identification of the transactions relating ‘to the business directly from the root documents. 2) Recording: Once the business transactions are identified, the next step involves proper recording thereof in terms of money. Such recording of business transactions. is carried-out in a book termed as ‘Journal’, which may be further sub-divided, for convenience sake, into various ‘Subsidiary Books’. Classifying: Various business ‘transactions recorded in ‘Joumal’ (or the subsidiary books) are further classified on the basis of their nature. Such classification of similar items is followed by their Posting in another set of books termed as ‘Ledger’. d ‘Journal’ enties are simply seceny business: transactions without aan whereas the ‘Ledger’ Posting is done ach entry under appraprine (om ‘ier after cast t head. Vor east tially transactions pertaining 4 ee 3 expenditure sre recorded datesyise nm records are, thereafter, classified ied imo income (like sale of goods, comm, bank deposits, ete.) — and ‘expenditure (like purchase of raw materials, saarieswages, rent, electricity charges, taxes, transportation, advertisement, etc.) before their ‘Ledger Postings. A glance at the ‘Ledger’ of a particular head enables one to know the total expenditure incurred or income eamed under that head fora specific period 4) Summatising: ‘The ‘summarised. information relating to the business ‘transactions of an organisation is very useful for the stakeholders, both intemal to the specific business as well as those who are extemal to the: ‘business. Intemal users are generally the management and employees of the organisation, whereas the external users are the credit HS, investors, regulators, ‘axmen, labour unions trade associations, eta,” 5) Analysing: An in-depth anal ‘statements, viz, ‘Profit and Loss Account” and ‘Balance Sheet” of an organisation helps in ‘identifying the financial strengths and weaknesses of the organisation. Such analysis facilitates 4g overcoming the weaknesses and making utilisation of the strength forthe betterment ofthe organisation, 6) Interpreting: Interpretation of the financial statements is helpful for the management in decision-making process and formulating future business strategy with regard to growth, expansion and diversification. Other stakeholders are also benefited from such data in taking decisions from their perspective. 7) Communicating: Communicating the duly surnmarised and analysed financial data to other stakeholders, enables them to interpret the same in their own way, taking their interests into consideration for taking decision-making a their level Figure Lis Functions of Accounting lysis of financial 1.1.6. Advantages of Accounting ‘Accounting’ has, over a priod of tine, bine an integral part of a business organisation, without wh i business entity can survive. Broadly, the advantages of i llows: : through the process of ‘Accountancy’ enables the 16 Unit 1) to perform their job in an ning, monitoring of the business management of a company efficient manner by appropriate plan and taking decisions to the advantage organisation. 2) Substitute to Memory: ‘Accounting™ necessitates recording of all the business transactions in @ sciemtific and classified manner. This eliminates the need to ‘memorise all the transactions’ entered into by a business organisation. 3) Comparative Study: The end products of ‘Accounting’ are financial statements in the form of “Profit and Loss Account’ and ‘Balance Sheet’, which allows the management of a company to compare the annual result of a year and initiate requisite actions, necessary for the growth of the business. 4) Settlement of Taxation Liability: Proper maintenance of books of accounts ensures hassle-free assessment of tax liabilities by various Government Departments, especially ‘Income Tax’, ‘Service Tax’ and ‘Sales Tax’ authorities. 5) Evidence in Court: A systematic record of all the business transactions may be produced as evidence in the court of law. Courts are inclined to accept such recards as “Good Evidence’. 6) Sale of Business: In case a businessman decides to dispose of his business, maintenance of proper and accurate books of accounts become handy in estimating the cost of the business set-up and finalisation of the "Purchase Price’ by the purchaser. 7) Assistance to an Insolvent Person: Tn the event of an individual becoming insolvent, he is required to explain a number of business activities undertaken during the conduct of business by him. This process becomes extremely smooth, if proper books of accounts were maintained by him. 1.1.7. Disadvantages of Accounting Despite the advantages of accounting, its process also suffers from certain limitations, which may be considered as the disadvantages of accounting. ‘They are as follow: 1) Non-Monetary lems Overlooked: Under the ‘Accounting System’ all the business transactions, which can be expressed in terms of money, are recorded. Business transactions, which are ‘non- monetary in nature, are completely out of the purview of the existing ‘Accounting System’. 2) Original Cost: ‘The original cost is taken into consideration, while recording the-details of fixed assets. The amount spent on them, Which logically should be added to their acquisition cost, is not taken into account. As a result, their true value is not reflected in the “Balance Sheet’ of the business entity 3) Possibility of Manipulation: The ‘Accounting Systemy’ envisages profit to be the only parameter to assess the 4) 5) MBA First Semester (Accounting for Decision Magin Me) Ay performance of the company’s managemen, concept is illogical and need not be cont irustworthy, as certain major items especialy” 4. relating to Research and Development, Adverse etc, are excluded, Further, the possibility of = manipulations cannot be ruled out. in Bases on Estimates: Accounting data recone ny pooks of accounts are sometimes based on estimain instead of the actual. Such data need not be cones and reliable. Rule of Consistency: Some of the companies, a times, fail to observe the basic tenets of accounting ‘The underlying principles are compromised in cerin cases, This is especially true in the case of depreciation on fixed assets, as few companies tend ig frequently change their policy relating tp ‘depreciation on fixed assets’ from year to year Inconsistency arising due to following the policy of ‘Straight Line Method’ (SLM) during one year and ‘Written Down Value Method’ (WDVM) during the next year results in failure in depicting correct picture of the company’s performance. 1.1.8. Accounting: Science or Art? “Whether ‘Accounting’ is an art or science” has been a matter of debate over a long period of time, which goes on and on, even today. Various authorities have varying opinions on the subject, but it has remained inconclusive whether ‘Accounting’ is a science or art, due to perhaps the reason that it depicts some features of ‘Science’ on one hand and some features of ‘Art’ on the other hand, as may be seen from the following: Accounting is an Art ‘The term “Art” means diverse range of human activites and study of these activities. However, it has been often misunderstood to refer exclusively to painting, film the well-established coll in i collect ing nal Presenting methods, oad Photography, sculpture, etc. Basically ‘Art’ is using the skills or techniques of any field. Accounting may be considered as an art because there ate certain principles, concepts and methods on which it is founded and it has got limit study of implying scientific methods to practical use Accounting is an art, as the established rules Principles of accounting are applied in book-keeping Process of a business entity, tions. Further, ‘Art’ is the Accounting is a Science Accounting financial dat nancial data of a business entity by observing, detect 8s the science of recording and presenting ‘igating and identifying various transactions trove ing a ‘The financial findings are the results of following * implement i ones ating of universally accepted methods, _ Accounting Principles (GAAP). viz. @ entry system, and Gi). Generally Accent? ‘systematic and cience fO1IOWE NY ike sce ae economic sats of the pti : coat 0 Maing Knowledge throng a cn Se ctying observation, study, practice, entanate PO extigation. Like Seience, Accounting soins ane edge about the Economie status of spemieto ait wis te Aystematc tly users of Accounting 11.9. formation, especially “Financial Statements? atin i ¢ 2 company ae glators. f sel. Rosales. ¢ pe groaped usr discuss of immense utility not only for the aT owners, but other stakeholders, which ment ae business, viz. Government agencies, smal Wena! investors, potential business E'Such users of ‘Accounting Information’ under two broad categories, ie. ‘External erateral Users’. The details of these users are ae oe ® ced in the following points: Users of Accounting Toteral Users Owners ie. Shareholders, parmers and Proprictors Management Employees External Users| Creditors Prospective Investors Goverment Agencies Customers Researchers Foreigners Others 1) Internal Users: The internal users of ‘Accounting Information’ are as under: i) Owners ie, Shareholders, Partners and Proprietors: They are the driving force behind the conduct of any business activity, as itis their ideas as well as the funds, which works for the efficient and convenient flow of business, its growth, development, diversification, etc, Some of the factors on their priority lists are enhanced turnoter, improved profitability, better dividend distribution, healthy financial indicators, growth/expansion of business, better future prospects regarding camings, etc. This sub-category of “Internal Users’ are contended with published annual results, like ‘Profit and Loss Account’, ‘Balance Sheet” and other miscellaneous statements. Management: The accounting data is useful for all the three tiers of a company's management, viz. “Top Management’ (Board of Directors), ‘Middle Management’ (Senior Executives) and ‘Lower Management (Supervisory Staff). The data facilitates in finalisation of policy statement at "Top Management’ level, implementation of such policies at ‘Middle Management’ level and discharge of supervisory functions at ‘Lower Management’ level. 2) External Users: The Setting up gg “Objectives a thereof, hee ‘omnes, Provided by aceay and technig budget, cash be effective and reports 8 “Viskan con i Mpany and Prnethle thie haa ining. y, de ts WCE ‘elating to N budget and ates get etion 'y willed on the Provided hy Employes: For a susie 8 business entity, mutiat urge ‘elationship between the ere ne ; isthe basic requirement. Mane can haye a wholesome, ind (between the ‘Management on Union onthe other throats committed and motivated er san it he bly of stare of ON the f iti) a tment of a tot which i y by “Accounting Information" Mal users of regulators, Goverment agencies cmd researchers, foreigners, etc, are dicen Pues following paragraphs: iscussed in the }) Creditors: Suppli (in the case of: term credit to their understanding that te ene pant gt : ie payment would ‘made within a stipulated imettame, Such Wied or credit is termed as “Trade Credit’, Su ich trade creditors or the suppliers have concems with Tegard to the timely receipt of their dues Therefore, itis important for them to ascertain the ‘Short-term Solvency’ of their customers (to whom supplies have been made). The status of ‘Liquidity’ or ‘Short-term Solvency’ of a ‘company can easily be found out with the help of “Accounting Statements’. The creditors can frame their policy of extending short-term “Trade Credit’ on the basis of financial data, ii) Prospective Investors: The prospective investor may include, besides individuals, banks, and insurance/finance/mortgage companies. The vil guiding factors behind any investment decision taker by potential invest ae: cof funds invested, 7 Pesan ens inthe frmof dividends an c) Possible capita gain. These factors can be determined though r study and analysis of nancial os profitability, dividend policy, and het historical background for he lst FY accounting sstemen's als em en investor to eset tars project, future growth (Unit) : The — accounting i) Goverment ABE ovement agen information is required by Gover : Tike tax-authores, Company Law Board. (CLB), Registrar of Companies (RoC), Securities eu Exchange Board of India (SEBD, Ministry of Trade and Commerce (MoTC), etc. with a view to ensuring that a company has complied with all the guidelines, directions, rules and regulations issued by the respective Govemment agencies. For example, CLB may be interested in. knowing whether all the provisions of Companies Act, 2013 have been complied with or not. Similarly, SEBI would be interested in ensuring thatthe interests of investors and public in general are protected. iv) Customers: The interest of a customer or normal citizen lies in knowing the factors like monitoring mechanism prevailing in the company regarding production, selling and other expenses, which affect the ‘market price of the finished goods. Accounting Statements are helpful in ascertaining. such factors. Of late ‘Customer Protection Groups" have started exercising some supervision over the business and industry and also creating awareness about the concept of ‘Corporate Social Responsibility’ (CSR). v) Researchers: Analysis and interpretation of financial statements of a company by researchers may lead to some unexpected and surprising results and innovative ideas, which may be used by different entities in different ways, For example: a) The Government agencies may use such resultsfideas to amend their existing policies and come out with the new ones, 'b) The regulators may use them to improve their regulatory regime, and c) Management of the company may use them as a guiding factor for reviewing their current policies. The accounting statements are, therefore, very important for the research scholars, as they serve ‘two purposes, viz. research in accountancy, and ‘improving the business standards and systems, vi) Foreigners: Foreigners are interested in ‘accounting data of a company because of their exposure in “Joint Ventures’ (IVs), ‘Foreign Direct Investments’ (FDIs), etc. Further, there are increasing number of cases of merger and acquisition of Indian Companies with Multi- National Companies (MNCs), vii) Others: Entrepreneurs, trade associations, stock exchanges, media, political panies, etc, are some of the other stakeholders, who are keen on well. being of a business emtity and its growth, ete ‘They also undertake the stu ct on : idy of impact financial and social business environment. ©" Thus, it is clear that the uses and accounting information are multi-di various agencies use them in their o benefits of imensional and ‘wn manner, MBA First Semester (Accounting for Deci Se on Making Aye 1.1.10. Branches of Accountin, Various stakeholders of a business entity tog financial data with different perspectives, prepared from the business transact the process of ‘Accounting’ have di different people. With a view to fulfil of different stakeholders, several branches of have developed with the passage of ti broadly categorised as mentioned below: at t nancial ns Fecorded thy erent meaning: account 1. They can jp Branches of [| Management Accounting Cost Accounting, Financial Accounting] 1) Financial Accounting: ‘It is that accounting, which deals with the past data of the business, which is generally for one year and end; with the preparation of ‘Financial Statements" like: i) ‘Profit and Loss Account’, indicating the profi eared or losses incurred during a particular period, and ii) ‘Balance Sheet’, indicating the financial position, i.e. assets and liabilities held as on the last day of the accounting period, branch of ‘The ‘Financial Statements’ are prepared on the basis of Generally Accepted Accounting Principles (GAAP) articulated by the accounting profession and other statutory provisions and accounting standards Such statements are more useful for the stakeholder and outside the business entity, vic, taxmen. regulators, and other Government agencies. The essence of financial accounting lies in the fact that it highlights the ‘Stewardship’ (involved in responsible planning and arrangement) aspect of the accounting (and not the ‘Decision-making’ aspect of the accounting). 2) Management Accounting: It is that branch of accounting, which is ‘Forward Looking’ até ‘Futuristic’ in nature rather than dealing with historical data and generally involves °Co Accounting’ and ‘Budgeting’, Its aim to provide inside reporting to the manager of a company. While Preparing various statements under _managemt accounting, it is not necessary to ensure compliane? with the provisions of Generally AcceP Accounting Principles (GAAP) articulated by tM Sccounting profession and other statutory provisio™ and accounting standards, Zhe essence of !Management Accounting? lies in fe that it highlights the ‘Control’, "Prandin! as the, mgtemaking’ aspect of the accounting (aNd met Tene ENED” sapect of" ecountng) et: management accounting is spec cult {0 Serve the requirement of a. partic! company's management, Introduction To Financial & Manogei ent Accounting (Chapter 1) 3) Cost Accounting: It is that branch of accounting, which deals with costing aspect of the business transactions. All the costs, ic., present and future, are recorded, classified and reported under ‘Cost ‘Accounting’. It is an accounting process. used to determine cost of production of a business entity by analysing input and fixed cost of production. It also captures the cost of operations of a business. Cost is ‘measured by using various tools and techniques t: i) Define various constituents of ‘Material’, ‘Labour’ and *Overheads’, ii) Determine the basis of cost measurement, and iii) Establish the basis for the use of alternate “Cost Measurement Techniques", i COST ACCOUNTING Cost Accounting may be defined as, “the process of accounting for cost", The process involves recording as well as controlling of various costs, This is a formal system of accounting which ascertains and controls costs related to various products and services. cost, viz According to the ICMA, London, cost accounting is “the process of accounting for cost which begins with the recording of income and expenditure and ends with the preparation of periodical statements and reports for ascertaining and controlling costs”. According to L.C. Cropper, “cost accounting means a specialized application of the general principles of accounting in order to ascertain the cost of producing and marketing any unit of manufacture or of carrying out any particular job or contract”. Detailed in Unit 1 1.3. MANAGEMENT te a ced 13.1. Meaning & Definition of Management Accounting The term ‘Management Accounting’ is composed of two Words, “Management” and ‘Accounting’. It may be interpreted as the ‘Accounting for the Management’. lanagement Accounting’ is a modern approach to Sccounting. Its tools / techniques facilitate the ‘management of an organization in the process of “Decision Making’. This system involves interpretation of accounting data. It envisages presentation of ‘Management Accounting’ in such a manner that the management is able ‘0 reap maximum benefit from it in “Decision Making Process’, ‘Policy Formulation’, ‘Planning & Budgeting’, Exercising Control over the Execution’, and other Tanagerial functions. It is of immense ‘help to the “Management’ in discharging its various funetions in an effective manner. 9 According to Anglo-American Council on Productivity, “Management accounting is the presentation of accounting, stich a way as to assist management in the policy and in day-to-day operation of an undertaking’ According to T.G. Rose, “Management accounting is the tation and analysis of accounting information and its mnosis and explanation in such a way as to ass ment”. According to the Institute of Chartered Accountants of England & Wales, “Any form of accountancy which enables a business to be conducted more effectively can be regarded as Management Accounting”. According to the American Accounting Association, “Management accounting includes the method and concepts necessary for effective planning, for choosing among alternative business actions and for control through the evaluation and interpretation of performances”. 1.3.2. Nature of Management Accounting ‘The nature of ‘Management Accounting’ may be summarised as under: 1) Providing Accounting Information: The basic responsibility of an ‘Accounts Department’ of any organisation is to record, collect and classify the data relating to the business transactions. Such information is redesigned by the ‘Management Accounting’ functionaries and presented to the ‘Management’ in a form so as to enable them (the Management) to make ‘optimum utilisation thereof in ‘Decision Making Process’, ‘Policy Formulation’, ‘Planning & Budgeting’, and similar management functions. 2) Cause and Effect Analysis: This is one of the most important features of ‘Management Accounting”. Cause. and effect of any activity in a business is subjected to a study under the ‘Management Accounting’. For example, if the business suffered a loss in a particular year, the reasons thereof are examined and similarly in case of huge profits, the Teasons behind such profitability are also looked into and analysed. The factors leading to profitability or business loss are studied and necessary actions, wherever needed, are taken, 3) Vital Decisions-Making: ‘Management Accounting’ furnishes the required inputs in the form of financial data to the management, which in tum becomes the basis for the management's ‘Decision Making Process’. The ‘Historical Data’ supplied by the “Management Accountants’ is further analysed by the Management with a view to see its effect on future decision, 4) Achievement of Objectives: The _ information ved from ‘Management Accountants’. ours historical in nature, fucilitates in achiew"® “Organizational Objectives’ I also fies in sore er new ‘Goals & Objectives’ and making sre ay chieving the same. The break-up. Fg a poivnitD a the sadividual departments. against perforant the management t a8 tage! Fn ae_weakrsses and take requisite petit! measures if needed, smeiency: The inputs received from the in Ecioney: Te input receive corks, would definitly result in enhancement of the anisation’s overall efficiency. It is, however, ceary co fix sargets for each department and monitor their performance separately, so that the management may identify the efficient and inefficient departments and take appropriate action timely, 1.3.3, Objectives of Management Accounting ‘The objectives of ‘Management Accounting’ may be put under three main categories, viz. 1) Measuring Performance:: ‘Management Accounting’ acts as a yardstick to measure the performance of business enterprise. Such performance evaluation may be caried out at two levels: one is atthe organisational level and the other is at individual level, At “Organisational Level’, such measurement assess the efficiency at which various resources like ‘Capital’, “Raw Materials’, ‘Manpower’, etc. are put to use. At ‘Individual Employee Level’, the assessment is made with regard to ‘Output Efficiency’, ‘Achievement of ‘Targets’, etc. Assessment at both the above levels is made by using various ‘Accounting Techniques’. 2) Assessing Risks: Various kinds of risks are associated with the conduct of any business; avoiding risks altogether in carrying out a business are impossible. However, the level of risk may be managed by having a proper control over the risks and their efficient mitigation, with a view to ensuring that the business is exposed to the bare minimum risk and the objective of "Maximisation of Profit’ is also achieved. Taking risks, which is unavoidable, works like a double-edged sword; it may result either in losses or gains for the business organisation. The underlying ideal ‘Mantra’ in this regard ‘Goes for the measured risks”, ‘Management Accounting’ is very helpful in assessing the risk element involved in any ew project or in the normal business operations Such assessment facilitates the ‘Decision Making Process’ by the management: depending upon their policy regarding ‘Risk Exposure’. 3) Allocating Resources: Various resources, &., “Capital”, ‘Manpower’, ‘Raw Material’, ete. is the ‘packbone of any business organisation, Their allocation in prudent-manner is of paramount importance, especially in cases where such resources are scarce, i.e. their availability is limited, “Management Accounting’ acts as a guiding factor in this regard, as it determine the quantum of different resources to be channelled / diverted to various projects / departments, so that the corporate objective ‘of 'Maximization of Profit’ is achieved. , 13.4. Scope of Management A, “Management Accounting’ has a wide branches of accout Financial Accounting H Statistical Methods H MBA First Semester Accounting fg For example, the “Management manufacturing unit isin a position 4 tas elfcient “Product Portfolio” for the ot identification mn Availability of and nt has access 10 the ideologies, er rom ya icy and management, Scope of Management Ace: 1) 2) 3) 4) a Operstions Rea Financial Accounting: It is the con \ onal recording and presenting various bya"? transitions, The Information put forvard dee it ‘Financial Accounting’ are historical in nature. © past data disclosed through the “Finang Accounting’ are, however, made use for forecast, of a business organisation. : For example, the historical data revealed by thy “Financial Statements’ may be taken as a basis fog planning future strategy with regard to the various business parameters, viz. ‘Amount of Sale/Purchase' ‘Level of the Debtors / Creditors’, “Inventory Level’ ‘Liquidity required to be maintained by the enterprise to meet it day-to-day business obligations’ etc. Cost Accounting: Cost accounting is a process through which the information regarding the costing ‘of goods produced and / or services rendered is collected, analyzed and interpreted. Such information is obtained through the application of various tools and techniques like ‘Marginal Costing’, “Standard Costing’, ‘Process Costing’, “Unit Costing’, and “Batch Costing’. etc. On the basis of the advice received from the “Cost Accountants’, the future course of action, including policy formulation, is determined by the management with regard to cost efficiency and capabilities. Statistical Methods: ‘Statistical Methods’, which are yet an important tool of “Management Account portray the accounting “data through “Charts, “Tables’, ‘Graphs’, ‘Diagrams’, etc. Operations Research: “Operations Research’ is @ iscipline, which deals withthe usage of modem and vance analytical techniques (like “Tree Analysis, simulation’, ‘Mathematical Optimization’, “Queuine ‘Theory’, etc.) to facilitate the “Decision Making Process". It is an innovative tool of “Management » Accounting’, Introduction To Financial & Manggement Accounting (Chapter 1) 13.5. Functions of Management Accounting The role of “Management Accounting’ in a business eanisation is a crucial one. 1 performs the follow functions: 1) Planning and Fo ‘Planning’ — and ‘Forecasting’ are integral part of the corporate sirategy for achieving overall “Organisational Objectives’. With a view to achicving the abov targets are prescribed for various departiments, ides necessary inputs ‘Management Accounting’ pro inthis regard, which facilitates the management of the ‘organisation in “Planning’, and ‘Forecasting’ in the short-term as well as long-term perspective. ‘The basic accounting data provided by the “Financial Accounting’ are subjected fo rearrangement and modification of the “Management Accounting’ and thereafter reported in such a manner that it becomes “Ready to Use’ for the ‘management of the organisation. 2) Modification of Data: 3) Financial Analysis and Interpretation: |The information provided by the traditional ‘Financial “Accounting” is generally ‘Raw’ and rather “Technical’ in nature. The job of the ‘Management Accountant’ is to make it ‘Simple’, ‘Easy to interpret’ and ‘Ready to be used! by the management of the organisation. 4) Facilitates Managerial Control: Through various ‘Accounting Tools’, the ‘Management Accountant’ monitors the performance of _different departments/individual employees and ensures that the targets prescribed for them by the management are achieved. On the basis of the feedback received from the ‘Management Accountant’ in this regard, necessary corrective measures / steps, wherever required, are initiated by the management. 5) Communication: The system of ‘Management Accounting’ acts as a communication link, not only within the organisation (between the “Management” and ‘Others"), but also between the ‘Organisation’ on ‘one hand and the “Outside World! on the other. Use of Qualitative Information: In addition to the collection, simplification, interpretation, and analysis of financial data received through the ‘Financial Statements” (which are quantitative in nature), the job of a “Management Accountant” includes collection, simplification, interpretation and analysis of non- monetary data also (which are qualitative in nature). 8) 7) Coordinating Various Departments: A proper coordination and synchronisation between different departments of an organisation is necessary for. its hassle-free operation and smooth sailing. The system of ‘Management Accounting” acts as a coordinator in this regard. Through ‘Budgeting’ and. *Financial" reporting system, the ‘Management Accountant’ is fable to maintain co-ordination amongst all the departments. ‘i 8) %» 1.3.6. Importance/Advantages 24 Helpful in taking Strategic Decision: The analytical ition provided by the system of ‘Management ‘Accounting’ empowers the management of an ‘organisation with various options for taking “Strategic Decisions’. The data made available to the management ly indicates the ‘Pros’ and Cons’ of each option formation to Various Levels of Management: In every organisation, there are different levels of management, e.g. ‘Lower Management’, ‘Middle Management’, ‘Top Management’, etc. Their expectations from the system of “Management. ‘Accounting’ also vary, as the information useful for the ‘Lower Management” may not be that useful for the ‘Middle Management’ or ‘Top Management’ Similarly, the data crucial for the ‘Top Management’ ‘may be of littl use for the ‘Middle Management’ or the ‘Lower Management’. The data of extreme import for the ‘Middle Management’ may be of less value for the “Top Management’ or the ‘Lower Management’. It is, therefore, very vital that the information is furnished at the appropriate time and appropriate level of the management, so that the management may perform its job efficiently. Supplying, of Management Accounting In rol the context of present day business environment, the le of ‘Management Accounting’ is very important, as ‘may be seen from the following: |Importance/Advantages of Management Accounting Increasing Efficiency Prover Plannine ‘Measurements of Performance Maximizing Profitability Improves Service to Customers ) 2 3) Effective Management Control Increasing Efficiency: Under the system of “Management Accounting’, each department is brought under the purview of the “Performance Budgeting” exercise; targets are prescribed in advance and performance is monitored on an on-going basis, As the efficiency of all the departments is measured through the system, there is significant improvement in their performance. Better performance of departments results in overall improved efficiency of the organisation, Proper Planning: ‘The inputs and feedbacks received through the various techniques applied by the system ‘of ‘Management Accounting” are of immense help t0 the management of the organisation especially in the area of *Forecasting” and ‘Future Planning’ Measurements of Performance: There are certain tools under the "Management Accounting’, through Which the performance "of departments of an organisation may be measured, They are @) Bud} Ceieeicand ip Sundard Goatngs ea 1) Bodgetary Controls This tool forecast target for departments in advance, against” which thelr 22(Unit ; 2 1 in Any. shontal eis monitored ay Performan of the targets is treated as neBANNE achievement “rhe individual/concemed departmen performance 0 this technique. Standard Costing: Under : step) 1) SMndanis’ with regard 10 costing of cach step is prescribed ous activities igvolved in various tivities is preseniet teforehand and all the ‘Actual’ costs. incurred ost’. Any deviation compat rainst that ‘Standard Co y dev in ie vara! Cost’ from the ‘Standard Cost" is: not considered favourable by the management. 4) Maximizing Profitability: Various techniques of the ” “Management Accounting’ focus on controlling the costs involved in different steps of production cycle. This leads to reduction in the cost of production and efficiency boosting in respect of each department, The final outcome is the ‘Maximization of Profit’ for the business organisation. 5) Improves Service to Customers: Once the cost of 6 L production is curbed through the techniques of “Management Accounting’, the organisation finds itself in 2 position to reduce the prices of finished goods. Further, the quality of goods produced is also maintained because of the application of “Standard Costing’ technique. As a result, the organisation is able to supply good quality products to its customers at a fair price without compromising with its ‘Profitability’. It is a ‘Win Win’ situation both for the enterprise and its customers. ) Effective Management Control: Various techniques and tools applied under the system of ‘Management Accounting’ acts as a major support for. the management in discharging its core functions like ‘Coordinating’, Controlling’, ‘Planning’, ‘Forecasting’ etc. The “Standard Costing’ technique, which envisages setting “Standard” and comparing the same with the ‘Actual’ performance, is an example of “Management by Exception’, 1.3.7. Disadvantages Management Accounting “Management Accounting’ plays an important role as a support system for the management of a business enterprise. However, it is deficient in certain respect, some of which are as follows: 1) Based on Accounting Information: The entire gamut of "Management Accounting’ is based on the vancial ‘Statements’, viz. “Profit & Loss Account’ and “Balance Sheet’ prepured under the system of ‘Financial Accor It is expected that the data furnished through the ‘Financial Statements? ure reliable. In case of any doubt in the authenticity of such data, the whole ‘exercise becomes meaningless and futil 2) Lack of Knowledge: ‘work relating to “Management Accounting” of sn te none nc oni “Manse, 1 3 condition, the fee furnished tothe management would be of so jee - : fot mich as it Would lack the ‘quality and. ‘authenticity, = MBA First Semester (Accounting for Decision Making, Uy Totuitive Decisions rH Do Not Provide Alternative ‘Top Heavy Structure Evolutionary Stage Personal Bias Psychological Resistance i 3) Intuitive Decisions: The information furnished by “Management Accounting’ is backed by facts, figures ang 1 thorough scientific analysis using various techniques However, at times it has been found that the managemeng tends to make decisions spontaneously (which may involve an easy and convenient course) ignoring the feedback received through the ‘Management Accountant’ (which may involve a lengthy and complicated course), Such a tendency deprives the management benefits of ‘Management Accounting’. 4) Do Not Provide Alternative to Administration: The information provided by the management accounting system is generally advisory in nature and is not a substitute of ‘Administration’. 5) Top Heavy Structure: A sophisticated and detailed ‘Organisational Structure’ needs to be in place for the system of ‘Management Accounting’ to function properly. Further, a number of rules and regulations are also needed to be introduced so as to ensure that the system works in an efficient and effective manner. In a nutshell, the system of ‘Management Accounting’ is a costly affair, which can be afforded by the well established business enterprises only. For the newly set up enterprises and enterprises of smaller sizes, it is rather difficult to introduce this system due to the cost factor. 6) Evolutionary Stage: The ‘Management Accounting’ is system of recent origin and it is still in a process development and yet to establish fully. At times, the outcomes of different techniques differ from each other. ‘The conclusions arived on the basis of analysis and interpretations may also vary. Perhaps it will take quite some time for the “Management Accounting’ (0 evolve fully and get the recognition as a well-established system. 7) Personal Bins; ‘There is certain amount of Subjectivity in the analysis and interpretation of data received’ through the ‘Financial Accounting’. 2 personal prejudices, and biases of the analyst plays important roles in management accounting. Psychological Resistance: Setting up of the system Of the “Management Accounting’ in an organisation entails a major change in the ‘Organizational Setup’: Introduction of new rules and regulations in ‘ystem generates some resistance from the groups of Gatisfied personnel. This results in some problems during the introduc . be soted tt duction of the system, which need f0 8) srosvtion To Finacial & Management Accounting (Chapter 1) nirodoet 2% 4.3.8. Difference between Management, Cost and Financial Accounting A Management Accounting st Accounting Financia Accounting aso ; Diller Management Accounting is concemed | Cost Accounting is concemed with aia seeoating te comered Trorientaton | Mareen Somme aa fromthe | money asa mcasure of commercial | wih funds 5 : at angler imespectve of te | acviles ofthe busines rgaisauon. | Ye cash Raeeticter the some i nontay or me nonmone a € scope of financial accounting Se i oung cover | The sope of Cow accoming aloes the | The scope TS Maman mnaion system, which | measurement. of the econo | deals‘with the nancial aspect of & il ‘Ses tnanil secouning a well as | perfomance of various cost cers, It | busines eniy. Its done by preparing eS aT yn to other | provides appropriate data for the | Trading anc fit and Loss A/c for a cost secomig, He Aanagement It | meauemeal ofthe, economie spite prod (oecouning yea) and facts OF Sipe paanagement in| perfomance ofostcenues/costunis. | Balance Sheet of 8 Sector is various dete decison making and srhaton of ia eee Be ‘ection, | Financial accounting focuses on spelen cs | Con actountng Tcunes on colin caning TS Tits oF | Manveonent seeing SOP ine | claifcston and ana of os das, | recording, casifeation, sommariing Performance | focus on various ered submit reports ‘and analysis of financial cin elton 1 Teearng te poformancs een of tbe business anisaton. Ss with the | Financial accounts focus on past and > ang Tow | Coe acoumng_W conse WAT | Fn scons TO 6 4) Time Factor | ture It pays more attention on future | data pertaining to the past and current | present ope Seraon prota operations See ae aay | Maintenance of cons poraning wo the | Financh ; on Mar ere Perea | costing also not compulsory under the | forall the companies due 10 legal Compson | pa view. failing the | law. Such records are maintained witha | provision rangement in discharging some ofits | view to fling the requirement of te base fnctons eg. decision making. | management. waShaltlgeting: budgetary conte, | However the latest Companies” Act has | Se However Gere Ir no, sory | made’ it mandatory to Keep the cost Conpulsion of having a imanagerct | recon for’ some manufsctring | eonanag sven jedi 1.4. GENERALLY [ACCEPTED ACCOUNTING PRINCIPLES of Accepted Accounting Principles (GAAP)/Accounting Principles The ‘Principle’ may be defined as “The fundamental generalisation that is accepted as true and that can be used & & basis for conduct", However, in the present context ‘Accounting Principles’ means the rules and guidelines, companies are required to follow while reporting the financial data. Such principles differ from one country to ‘another around the world, and each country usually has its ae of Generally Accepted Accounting Principles ‘According to American Institute of Certified Public Ascountants (AICPA) in their Accounting Terminology ‘ulletin defines the Principles as “A general law or rule. ‘opted oF proposed as a guide to action, a settled. ground, or basis of conduct or practice”. Accounting principles may be defined as, “Those rules of ‘ction or conduct which are adopted by the accout Universally while recording accounting transactions is also known as ‘Generally Accepted Accounting Principles’ (GAAP). Generally Accepted Accounting Principles may be defined as, “Those rules of action or conduct which are derived from experience and practice and when they prove useful, they become accepted as principles of accounting”. ‘The accounting principles or practices are acceptable if they fulfil the following basic criteria: 1) Relevance: Application of a principle should be relevant to the interested users of accounting information if it is meaningful and practical. Objectivity: ‘Objectivity’ is another criterion for the acceptance of an accounting principle. It means the Presence of ‘dependability and integrity’ and absence of ‘subjectivity, (personal prejudices)’. Further, there should be some way to ensure the validity and accuracy of the reported financial data. Feasibility: The feasibility of an accounting principle is ascertained on the basis of its simplicity. easiness, cost-effectiveness and convenience with which it may be implemented. 1.42. Features of Accounting Pers Alll the accounting principles essentially following features: sme foundation of 1) Based on General Rules: general ele meee pn eoeees Er ats aemargons” eonenien! 2) 3) the 24 (Unit) by all the stakeholders, viz, accountants, auditors, managers, regulators, and various Government ‘agencies, It is worthwhile to highlight the fact that the accounting principles cannot be considered perfect and there is no way to ensure their correctness. the Basis of Logic and Experience: * have no statutory background ‘and, as mentioned earlier, they are based on general ‘logic’, ‘conventions’ and ‘certain assumptions’. Formulation of accounting principles are dependent upon the practical expectations/requirements of all the stakeholders, viz. creditors, shareholders, regulators, tax-authorities, law enforcement and other Government agencies. 2) Launched “Accounting Principl Of the most important features 3) Widely Accepted: One nl es of accounting principles is__—_thei facknowledgementrecognition by all the stakeholders. tion to have some Itis very common for an orga deviations from the common accounting practices (0 suit its requirements, which is accepted by all ‘Hire-Purehase" company has an set Accrual Method!” or “Total for accounting hire-purchase For example, a option to use either * Cash Price Method’ transactions. Note: Asset Accrual Method means, “The revenue & company earns over a period of time but has not collected by the end of a reporting period. In its financial statement, the company would list that amount as its accrued assets”. ‘Total Cash Price Method means, “Cash costs are costs that businesses pay for when using cash, or a cheque, but not credit. On a cash accounting basis, the costs paid for by using credit would not be recorded in the ‘general ledger until the actual cash has been paid”, 1.4.3. Need/Utility of Accounting Principles ‘The accounting principles are necessary in view of the following advantages: 1) Accounts and financial data prepared on the basis of accounting principles depict the accurate and authentic picture of a business. 2) Accounting process carried out on the foundation of the accounting principles make it a science. 3) Accounting statements prepared on the basis of these principles (accounting principles) are more authentic, significant, candid and comparable. : 4) Financial results of two companies can be compared only, if both of them have prepared their accounts on the basis of the same accounting principles, 1.4.4. Limitations of Accounting Principles Following are the limitations of accounting pri 1) Absence of Complete Set of Principles: Aces principles don’t have a set pattem of solution: rte Problem which are used in every business in a sua rea Semester (Aceon or Dston Making) Aue ‘The nature of business is dynamic gy ecienges i orety Ging usiness faces new cl e ee) So the basins Hs Mp SVEUMSNEES fa sling ec popes in he sts, reement: Accounting does 2) Lack of General opted pincples. The pense hhave universal are called the “generally accepteg seve a steve js not accepted by businesses. j principles, Dut ot of the business have diffe Muse of the every ve diferent st approaches for a patticuly management, aPPrcne, Most of the times, the two iSavftessmen dealing in same type of industry also dy sine common principles. Mostly businesses used Pacipes as per their convenience and suitability, the Application of Principles; Pitt rene wo. different businesses. adopt siniler somnting principle but there is change in the seetetion ‘of that accounting principle. The application of the same principle differs from sep untant to accountant. So the result comes out are digo not same from these principles. For Example, the calculation of depreciation is based on the value of the assets but different accountant apply different method of depreciation as per their company requirements and convenience. circumstances. 3) Differences in 1.4.5. Classification of Accounting Principles ‘Accounting rests on a small set of fundamental assumptions and principles, These fundamentals are referred to as the ‘Generally Accepted Accounting Principles’ (GAAP). Understanding the principles gives context and makes accounting practices easier 1 implement. The underlying objective of ‘Accounting Statements’ is the true, fair and authentic reflection of the business operations and its results, This objective is achieved through the support of ‘Accounting Concepts’ and ‘Accounting Conventions’, which are the two components of the accounting principles. Accounting principles can be categorised into two parts: 1) Accounting Concepts, and 2) Accounting Conventions, Requirements/Signifi i " Beg cee ficance of Accounting ConceP! Bre accounting concepts and conventions play a major accom Ratton of financial statements during 3 ning period. The time period required for determining Such as mine Activities are called as accounting Pet monthly, quarterly, and annually. The fou i i See aitost important financial statements ie dD facome Statement: Income statement helps 10 60 (he financiat Position during an accounting peri ' ube mathematically expressed as: venues - Expenses = Inconie * cot Accounting (Chapter 1) 1 Manage _roFinancl in the hee tps 1028 cee at the end of essed A ol pes Oe ean Been ing es + Equity ; ch flow statement helps t0 and outflow of cash in an » 1: This. statement Earnings: This. statemen stom of dividend payable to vo the eamings of the companics runt which is kept as reserve by ent of Retain 4 eles to ascertat the colders fr ps th a0 ing Concepts and Conventions bette Aes af iereness. between a and conventions: in count sae eating [ Basis of a Caner Conventions ferences. ig concepis are} The general reas |S a ect foe ti | [assumptions and _are|basis for accounting | cigs | —sesedenee [Accounting concepts are| Accounting 2 Ineaded by —_—the|conventions are not| esting conventions ieded by tl | eteclaiaas salon wl Personal piss [Rese [iSen no ecount wile one ofthe impor oF limplementing factors in| Panic ee. _lerienaaia per omens inenal eosin neal pene aut coceps. in accom 5) Tara [Tee exis afore doer S00 a Pee ae eno ‘Application Jaccounting concepts. | applications off soning convents. 7 ga Sas |Ascouming covey we Accnunng omally formed on elconventoms ar [basis of law. formed on the basis| cr commen I ste. 1.5. ACCOUNTING CONCEPTS/ASSUMPTIONS The word ‘Concept’ may be defined as “a general idea or Umderstanding of thought”. It is an idea of what thought is or how it works. “Accounting concepts” are the hecessary assumptions, conditions or postulates upon Which the accounting is based. They are developed to fecititate communication of the accounting and financial information to all the readers of Financial Statements, Sothat all readers can interpret the statements with the same meaning and context, a Following ate the account iD concepts broadly accepted by nccountana ting hich have heen het] Going Concom ie | Mme Meme Ome | mm | ‘Acerual Concept 15.1. Separate Entity Concept There is a presumption under that as far as accounting is concerned the “ounen oP business organisation’ and the “busing 7 itself? are two independent and ‘Sey business transactions undertaken by the owner are altogether separate from the personal transacting undertaken by him. For example, the capital invested by the owner in a business is record e ‘ led as a liability for the business. Similarly, if any asset (including cash or gods) belonging to the business is taken by the owner for hig personal use, it is not considered as business expenditure, instead it is treated as ‘withdrawal’ or ‘drawing’ by the owner. This isthe comerstone of ‘Accounting Concepts. ‘Separate Entity Concept” 88 organisation parate entities. The 15.2. Going Concern Concept Going concem is one of the fundamental assumptions in accounting on the basis of which financial statements are prepared. The assumption is that a business entity will continue to operate in the foreseeable future without the need or intention on the part of management to liquidate the entity and it will realise its assets and settle its obligations in the normal course of the business, In simple ‘words, it means that every business entity has continuity of life and it will not be dissolved in the near future. The assumption of going concern is the basis of all the financial transactions of a business entity like entering into long-term contracts with other parties, obtaining loans from banks/financial institutions, extending loans, investing in long-term securities, purchasing bonds/debentures, etc. This concept also enables a business entity to defer some of their costs like prepaid expenditure, closing stocks, etc. which are required 10 be charged against future incomes. Even the deprecation on fixed ases is che ote assumption of continuation of the busines. ied act are shown in the balance sheet at acquisition mf depreciation charged. They are not shown a value, due to the going concern concept. In WT iy this concept, it would not have been Pe assets into ‘Fixed Assets’ wn income measurement techniques ¢2 the basis of assumption of ‘Going Il Disclosure 16.2 Blaney implies that there must be. @ Mhicien exposure of information which is of materia imerest to all the stakeholders, viz, owners eres lender, investors, publi ants andthe financial statements of an catty should declose fll e fac snformation to the beneficiaries in oner to enable orTect opinion on the performance of sch informed them to for them entity, which in tara would allow them to and comect decisions For example, the Accounting Principles that have been followed for” preparation “of the. Financial. Statements should be disclosed alongwith the Financial Statements for proper understanding and interpretation of the same. Fuster any’ ether information relevant to the uses of the “al Statements should also be disclosed. Such may pertain to the period covered by the is} statement or may even those pertain to the period sebsequent io the finalisation of the balance shect. ‘This convention may be understood in a better way by an example 1) Lf & business organisation has raised substantial smount of bank finance immediately after the balance stest date but before the finalisation of its balance sheet, it needs w be disclosed appropriately in the Statements. For example, if the balance shect data is 31* March, 2014, and the business has svailed finance on 25" April, 2014, then the amount of bank finance will be disclosed to the period subsequent ie., 31* March, 2015. 2), The figures of the sundry debtors should necessarily be accompanied by the figure of Bad and Doubtful Debts (BDDs) and the provisions made against such BDDs, 1.6.3. Convention of Conservatism (or Prudence) This convention means a cautious approach or policy of having a conservative approach, According to. this ity. In other words, all the prospective {esses are taken into consideration, wily: no doubtful income is taken into consideration in recording of transactions by an entity, This convention also states that the fj Should be made on verifiable evidence, Qe numerous examples of the Conservatism’, which are adopted and inancial_ statement ‘Convention of Practiced by many MBA First Sem the business one aSH0N8 SOME OF than the following points toe rouiding forthe Bad and Doubtry Debs ays th », pation of some ebtorinabinghs on uation of thé

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