Accounting for Managerial Decision making

Basic course

Trainer name : Vishalam Lamba 1

 Management Accounting
Accounting

Interpreting & Other stake holders

Management
Reporting like shareholders,
Information For their
creditors etc
required to respective
make use
decisions Summarizing

Management Accounting Classifying Financial Accounting

Recording

Financial transactions

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 Financial Accounting v Management Accounting

Financial Accounting Management Accounting

Reports to those outside the organization owners, Reports to those inside the organization for planning,
lenders, tax authorities and regulators. directing and motivating, controlling and performance
evaluation.

Emphasis is on summaries of Emphasis is on decisions affecting the future.

financial consequences of past activities.

Objectivity and verifiability of data are emphasized. Relevance of items relating to decision making is
emphasized.
Precision of information is required. Timeliness of information is required.

Only summarized data for the entire organization is Detailed segment reports about departments,
prepared. products, customers, and employees are prepared.

Must follow Generally Accepted Accounting Principles Need not follow Generally Accepted Accounting
(GAAP) Principles (GAAP).

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 Important Accounting Concepts

Money Measurement Concept

Only those transactions which can be expressed in terms of money can

be considered for accounting.

Business Entity Concept

Business has a separate and distinct entity from its owner.

Going Concern Concept

Business will continue its operations indefinitely.

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 Important Accounting Concepts
Dual Aspect Concept

Every transaction has a dual aspect and has to be recorded at two places

Matching Concept

Expenses incurred during an accounting period should be matched with

the revenue during that period.

Realization Concept

Revenue is recognized when realized

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 Important Accounting Concepts

Full Disclosure Concept

All material facts concerning financial performance of business must be

fully and completely disclosed.

Consistency Concept

Accounting policies and practices should be consistent over the periods.

Conservative/ Prudence Concept

Profit should be adopted consciously and may not be overstated.

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 Accounting Equation

Capital + Liabilities = Assets

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 Types of Accounts
Elements or accounts
Real Accounts
representing assets.
Tangible/ Intangible

Elements or accounts
Personal Accounts representing any persons
(Individual/ enterprise)

Elements or accounts
Nominal Accounts representing expense/
loss, incomes/ gains.

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 Rules of Debit and Credit

Real Accounts: Debit what comes in and credit what goes out.

Examples

Personal Accounts: Debit the receiver and credit the giver

Examples

Nominal Accounts: Debit all expenses and losses and credit all incomes
and profits.
Examples

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 Example- Real Accounts
XYZ Limited purchases machinery by issue of Cheque.

Debit : Machinery Account (what comes in)

Credit : Bank Account (money goes out)

ABC Limited purchases stock in exchange of machinery

Debit : Stock Account (what comes in)

Credit : Machinery Account (what goes out)

Back to Rules
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 Examples- Personal Accounts
In books of ABC Ltd:
WERT Ltd owes Rs 10 lacs to ABC Ltd.
ABC Ltd owes Rs 10 lacs to XYZ Ltd.
ABC Ltd requests WERT Ltd to pay Rs 10 lacs to XYZ Ltd in settlement
of both accounts.

Debit : XYZ Ltd (the receiver)

Credit : WERT Ltd (the giver)

Back to Rules
11
 Examples- Nominal Accounts

XYZ Ltd pays rental of the office building through issue of cheque.

Debit : Rent Account (Expense)

Credit : Bank Account (What goes out)

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 Practice- It makes a man perfect

Ram started a business with Dr Cash Account 100,000

a capital of Rs 1,00,000 Cr Capital Account 100,000

Dr Bank Account 50,000

Opened Bank Account with
Rs 50,000. Bank Charges Dr Bank Charges 500
paid Rs 500.
Cr Cash Account 50,500

Purchases stock amounting Dr Purchases Account 25,000

to Rs 25,000 from ABC Ltd
Cr ABC Ltd 25,000
on credit.

Accounting eq
Ledger-1 Ledger-2 Ledger-3 13
 Practice- Continued

Makes a sales of Rs 12,500 to Dr Great Ltd 12,500

Great Ltd Cr Sales Account 12,500

Takes office space on monthly

rental of Rs 2,000 per month. Pays Dr DHF Ltd 6,000
three months advance to DHF Ltd Cr Bank Account 6,000
through cheque.

Dr Cash Account 10,000

Makes cash sales of Rs 10,000.
Cr Sales Account 10,000

A/c eq
Ledger-1 Ledger-2 Ledger-3 14
 Practice- Continued

Payment received from Great Ltd Dr Bank Account 12,500

cheque of Rs 12,500 Cr Great Ltd 12,500

Makes payment to ABC Ltd of Rs Dr ABC Ltd 25,000

25,000 by cheque.
Cr Bank Account 25,000

Makes adjustment of rental against Dr Rental Account 2,000

advance rent.
Cr DHF Ltd 2,000

A/c eq Ledger-1 Ledger-2 Ledger-3 15

 Practice- Continued

Pays salary of Rs 1,500 to Dr Salary Account 1,500

office boy Cr Cash Account 1,500

Dr Electricity charges 800

Pays electricity bill of Rs 800
through cheque. Cr Bank Account 800

Purchases stationery worth Dr Stationery A/c 350

Rs 350. Cr Cash Account 350

A/c eq
Ledger-1 Ledger-2 Ledger-3 16
 Practice Accounting Equation

Capital Liabilities Assets

100000 100000
99500 99500
99500 25000 124500
105750 25000 130750
105750 25000 130750
112000 25000 137000
112000 25000 137000
112000 112000
110000 110000
108500 108500
107700 107700
107350 107350

Back 17
 Some more practice

Introduction of capital Rs 10 lacs Dr Cash 1,000,000

by cash and Rs 2 lacs worth of Dr Stock 200,000
stock.
Cr Capital 1,200,000
Bought machinery from L & T for Dr Machinery 1,25,000
Rs 125,000. Paid cash Rs 20,000. Cr Cash 20,000
Cr L & T Ltd 105,000
Purchased goods worth Rs 2 lacs Dr Purchase 200,000
from Goodie Ltd. Pays Rs 1 lac at Cr Cash 100,000
the time of purchase.
Cr Goodie Ltd 100,000
Took a loan of Rs 2 lacs from ABC
Dr Bank 200,000
Ltd.
Cr ABC Ltd 200,000

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 Some more practice

Sold goods for Rs 60,000 to XYZ Dr XYZ Ltd 54,000

Ltd. Offered discount of 10%. Dr Discount 6,000
Cr Sales 60,000
Insurance premium of Rs 10,000 Dr Insurance 10,000
was paid.
Cr Bank 10,000

Taken building on rent which is

jointly owned by Ram & Shyam in Dr Prepaid Rent 50,000
60:40 ratio. Pays advance of Rs Cr Bank 50,000
50,000 in that ratio.
Salary of Rs 15,000 to Manager Dr Salary 15,000
held up. Cr Outstanding 15,000
Salary
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 Some more practice

Recognises monthly interest in Dr Interest 2,000

accounts amounting to Rs 2,000.
Cr ABC Ltd 2,000

Pays EMI of loan of Rs 10,000. Dr ABC Ltd 10,000

Cr Bank 10,000

Took maintenance contract for Dr Maintenance 5,000

machinery for 3 yrs. Pays fee of Dr Advance main 10,000
15,000.
Cr Bank 15,000
Sold goods to Sabic for Rs Dr Sabic 65,000
65,000.
Cr Sales 65,000

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 Some more practice

Sabic returns the goods worth Rs Dr Sales return 20,000

20,000.
Cr Sabic 20,000

Sabic disputes the payment. Dr Bank 36,000

Ultimately settles on 20%
discount. Dr Discount 9,000
Cr Sabic 45,000

Purchased machinery from France

from French Ltd for $ 1,00,000. Dr Machinery 4,750,000
The exchange rate Rs 45. 10%
cash down and balance payable in Cr French Ltd 4,050,000
two six monthly instalments.
Cr Instt Ltd 200,000
Transportation cost: Rs 50,000
Cr Bank 500,000
Installation cost : Rs 200,000 21
 Some more practice
Take insurance on machinery for 3 Dr Insurance 20,000
years. Pays premium Rs 60,000.
Dr Prepaid Insurance 40,000
Cr Bank 60,000
Appoints ABC & Co as Tax
consultant. Agreed retainer ship May not be expressed in terms of
fee of Rs 5,000 per month. money. Not to be accounted.

Money Measurement concept

Bought air ticket for son’s air travel
Dr Drawing 25,000
from Tui Travels for Rs 25,000.
Cr Tui Travels 25,000

Pays instalment for purchase of Dr Exchange Loss 22,500

machinery. Exchange rate 45.50.
Dr French Ltd 2,025,000
Cr Bank 2,047,500 22
 Some more practice

Hires Media Ltd as advertisement May not be expressed in terms of

consultant. Billing on actual basis. money. Not to be accounted.

Gets campaign designed . Bill Dr Advertisement 450,000

received from Media Ltd Rs Cr Media Ltd 50,000
50,000. From HT Rs 100,000.
From DD Rs 300,000. Cr HT 100,000
Cr DD 300,000
Purchases goods from Ten Ltd Dr Purchases 500,000
amounting to Rs 500,000.
Cr Ten Ltd 500,000
Finds goods to be faulty. Returns Dr Ten Ltd 510,000
the goods and charges damages
Cr Purchase return 500,000
of Rs 10,000.
Cr Damages Recd 10,000 23
 Some more practice
Makes payment to Media Ltd, DD
and HT after deducting TDS @ Dr Media Ltd 50,000
1%. Dr HT 100,000
Dr DD 300,000
Cr TDS payable 3,500
Cr Bank 346,500

Makes balance payment for Dr Exchange Loss 45,000

machinery. Exchange rate Rs 46.
Cr Ten Ltd 2,025,000
Cr Bank 2,070,000

Exchange loss transferred to Dr Machinery 67,500

machinery account.
Cr Exchange Loss 67,500
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 Ledger Posting
Capital Account Bank Account
Description Amount Description Amount Description Amount Description Amount

Balance 100,000 By Cash 100,000 To Cash 50,000 By DHF Ltd 6,000

        Great Ltd
To 12,500   ABC Ltd
By   25,000
By Electricity
800
Balance 30,700
         charges  
  100,000
     100,000     62,500    62,500

Cash Account Bank Charges Account

Description Amount Description Amount
Description Amount Description Amount
To Capital By Bank 50,000 To Cash 500 Balance 500
100,000
By Bank charges 500      
To Sales
  10,000 By
  Salary   1,500
Balance 57,650
By Stationery
350
     
     
110,000     500     500
      110,000
 

17 18
Back 1 Back-2 Back-3 Back-4 25
 Ledger Posting
Sales Account Purchase Account
Description Amount Description Amount Description Amount Description Amount

To ABC Ltd 25,000 Balance

Balance 22,500 By Great Ltd 12,500 25,000
           
By Cash 10,000

           
  22,500
     22,500     25,000     25,000

DHF Limited Great Limited

Description Amount Description Amount Description Amount Description Amount
To Bank 6,000
By Rent 2,000
To Sales 12,500 By Bank 12,500
           
Balance 4,000

           
    6,000    6,000    
12,500
 
12,500
 

16 18

Back 1 Back 2 Back 3 Back 4

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 Ledger Posting
Rent Account ABC Limited
Description Amount Description Amount Description Amount Description Amount

To DHF Ltd 2,000 Balance To Bank 25,000 By Purchases 25,000

     2,000      

           
    2,000    2,000   25,000
     25,000

Salary Account Electricity/ Stationery Expenses

Description Amount Description Amount Description Amount Description Amount

To Cash 1,500 Balance 1,500 To Bank 800 Balance 1,150

     
     
To Cash 350

     
     
    1,500    1,500
    1,150    
1,150

16 17

Back 1 Back 2 Back 3 Back 4

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 Trial Balance

Particulars Amount Particulars Amount

Bank 30700 Capital 100000
Cash 57650 Sales 22500

Bank Charges 500  

Purchase 25000  

DHF Limited 4000  

Rent 2000  

Salary 1500  
Electricity & Stationery 1150    
Total 122500   122500
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 Trading and Profit & Loss Account
Particulars Amount Particulars Amount
To Purchases 25000 By Sales 22500
Gross Profit 12500 By closing Stock 15000
  37500   37500
To Salary 1500 Gross Profit 22500

To Rent 2000  

To Electricity 800  

To Bank charges 500  

To Stationery 350  

Net Profit 7350  

Total 12500   12500

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 Balance Sheet

Liabilities Amount Assets Amount

Capital 100,000 Bank 30,700

Profit 7,350 Cash 57,650

    Stock 15,000

    DHF Limited 4,000

Total 117,350   117,350

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Questions

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