Accounting and Finance for Managers

PART I: CONTEXT OF
ACCOUNTING.
Introduction to Accounting
Introduction
This chapter introduces accounting and
provides a short history of management
accounting.
It describes the early role of the management
accountant and recent
developmentsthathaveinfluencedtheroleofnon
-financialmanagersinrelationto the use of
financial information.
The chapter concludes with a critical
perspective on accounting history.
Introduction (Contd…)
Businesses exist to provide goods or
services to customers in exchange for a
financial reward.
Public-sector and not-for-profit
organizations also provide services,
although their funding comes not from
customers but from government or
charitable donations.
Accounting: Definition
The American Accounting Association
defined accounting in 1966 as:
◦ The process of identifying, measuring and
communicating economic information to
permit informed judgements and decisions by
users of the information.
Accounting (Contd…)
This is an important definition because:
◦ it recognizes that accounting is a process: that process is
concerned with capturing business events, recording their
financial effect, summarizing and reporting the result of
those effects, and interpreting those results;

◦ It is concerned with economic information;

◦ its purpose is to support ‘informed judgements and

decisions’ by users:
Accounting (Contd…)
Accounting is a collection of systems and
processes used to record, report and
interpret business transactions
Accounting is generally termed as the
language of business throughout the
world.
Accounting (Contd…)
According to, American Institute of
Certified Public Accountants(AICPA),
“ Accounting is the art of recording, classifying
and summarising in a significant manner and in
terms of money, transactions and events which
are, in part at least, of financial character and
interpreting the results thereof .”
Definition of Accounting(Cond.)
The art of recording involves putting into
writing or in print the transactions of
financial character, reasonably soon after
occurrence, in the records maintained by
the company e.g. cash book, day books,
journals, memoranda books, etc.
Accounting(Cond.)
The art of summarizing in a significant
manner consists of presenting the
classified data in a manner which is useful
to the internal and external end-users of
accounting statements.
Accounting(Cond.)
The final function of accounting is the
interpretation of the summarized data in
such a manner that the end-user can make
meaningful judgments about the financial
condition or the profitability of the
business operations or can use the data in
preparing future plans and laying down
policies to execute such plans.
A Short History of Accounting
Accounting has evolved through different stage
of development at different parts of the world
and at different periods of time depending on
the economic development of the society.
The gradual increase in production and
economic transactions from time to time has,
depending on technological enhancement,
created difficulty to memorize and manage all
these economical events and compel people to
record.
…. History of accounting
 According to Alexander (2002), people started
recording economic transactions for the first time
on clay in Mesopotamia and then advanced to
record on Papyrus in Egypt.
 In the 5th century B.C., Greece used "public
accountants" to allow its citizenry to maintain real
authority and control over their government's
finances.
 Perhaps the most important Greek contribution to
accountancy was its introduction of coined money
about 600 B.C.
… History of Accounting
 The innovative Italians of the Renaissance
(14th -16th century) are widely
acknowledged to be the fathers of modern
accounting.
Luca Pacioli was an Italian man, who is
known as the father of modern accounting,
invented the double-entry system and
published in book entitled Summa de
arithmetica, geometria, Proportioni et
proportionalita in 1494.
Functions of Accounting
Accounting is expected to perform the following,
besides book-keeping and reporting functions:
 To provide the means of guiding and controlling the business
activities;
 To analyze and interpret the results enabling the management to find
out what has happened, what is happing, what is going to happen in the
future and what ought to happen in the interest of the company;
 To look into the future by providing the guidelines for making wise
decisions to achieve the corporate objective, etc.
Functions of Accounting (Contd…)
Accounting as a recordkeeping device :
Accounting as an information system:
Accounting as a service activity
Nature of accounting
Accounting as a process:
Stewardship function
Accounting as a means to an end:
Objectives of Accounting
 To measure the resources held by the
entity,
Protection of equities, i.e., to measure the
claim against those resources by the
owners and out-siders, and
To measure the results and financial
condition of business
The General Objectives of Accounting:
According to APB
1. To provide quantitative financial information about a business enterprise that is useful to
the users, particularly the owners and creditors, in making economic decisions.
2. To provide reliable financial information about economic resources and obligations of a
business enterprise.
3. To provide reliable information about changes is not resources of an enterprise that
result from its profit directed activities.
4. To provide other needed information that assists in estimating the earning potential of
the enterprise.
5. To provide other needed information about changes in economic resources and
obligation.
6. To disclose, to the extent possible, other information related to the financial statements
that is relevant to the user.s needs.
Qualitative Characteristics of Acct
Information
i) relevance, (ii) understandability, (iii)
verifiability, (iv) neutrality, (v) timeliness,
(vi) comparability, and (vii)
completeness.
Branches of Accounting
According to the purpose and level of
objectives, thus the general branch of
accounting may be classified into the following:
 Financial accounting,
 cost accounting,
 management accounting,
 social accounting, etc.
Financial Accounting:

It is a branch of accounting which aims at

the supply of information to the interested
parties or decision makers who are external
to the organizations including the owners
and the employees.
◦ The internal parties (management) can also
use these bits of information
Financial Accounting(Contd..)
However, financial accounting is
primarily concerned with the recording of
day-to-day transactions –
◦ both financial and operational –
◦ and also the preparation of financial
statements(viz., Profit and Loss account, and
Balance Sheet) which form a prominent and
compulsory part of external reports(i.e.
Annual Reports
 Cost Accounting
According
to the Chartered Institute of
Management Accountants (CIMA),
◦ Cost accounting is the process of accounting for
cost from the point at which expenditure is
incurred or committed to the establishment of its
ultimate relationship with the cost centers and
cost units.
◦ In its widest usage, it embraces the preparation of
statistical data, the application of cost control
methods and the ascertainment of the profitability
of activities carried out or planned.
Managment Accounting
The process of identification,
measurement, accumulation, analysis,
preparation, interpretation and
communication of financial information
used by management to plan, evaluate and
control within organisation and to assure
appropriate use of and accountability for
its resources.
Management Accounting(Contd…)
It deals with the internal reporting and
primarily with the furnishing of required
and relevant data to the managerial
personnel for the purpose of planning,
controlling, and decision making.
The type of accounting information
required by the management differs
◦ from one type of decision to another, and
◦ also from one level of management to another.
The Role of Management Accounting
 Management Accounting deals with specific problems that
confront enterprise managers at various organizational levels.
The management accountant is frequently concerned with
identifying alternative courses of action and then helping to
select the best one.
 Generally management accounting information is used in
three important management functions:
1. Control
2. Co-ordination and
3. Planning.
 Marginal costing is an important technique of management
accounting which provides multi dimensional information
that facilitates decision making.
Financial Vs Cost Accounting
Boththe Financial Accounting and Cost
Accounting are concerned with
◦ the provision of financial information to
different parties
◦ with the systematic accounting for various
transactions and presenting of information
derived from them to the interested parties.
◦ both use the same set of transactions and both
follow the Double-Entry Principle.
◦ both express the transactions in monetary terms.
Users of Accounting Information
There are two types of users
◦ External Users
◦ Internal Users
Scope of Accounting
It can be used to deal with
◦ any organisational unit, whether business,
Governments, nations or individuals and
◦ it can be concerned equally with the
measurement of the flow of socio-economic
activities, whether or not expressed in
financial terms.
Uses of Accounting
Managerial Decisions
Managerial Planning
Managerial Control
Performance Evaluation
Assistance to External Parties
Fundamental Accounting Concepts and Principles

“Accounting” is based on a number of rules or

conventions, which have evolved over time.
These principles are known as Generally
Accepted Accounting Principles (GAAPs).
Generally Accepted Accounting Principles
(GAAP) may be defined as those rules of
action or conduct, which are derived from
experience and practice, and when they prove
useful, they are accepted as principles of
accounting.
IFRSs
InternationalFinancial Reporting
Standards include:
◦ IAS issed by IASC (from 1973 to 2001)
◦ IFRS being issied by IASB(since 2001
I. Assumptions
A. Business Entity
B. Going-Concern
C. Monetary Unit measurement
II. Concepts
A. Accounting Period Concept
B. The Objectivity Concept
C. The Dual-Aspect Conept
III. Principles
A. Historical Cost Principle
B. Revenue Realization Principle
C. Matching Principles
D. Full-Disclosure Principles
IV. Constraints
A. Materiality
B. Consistency
C. Conservatism
D. Cost-Benefit
Basis of Accounting
A basis of accounting can be defined as the
time various financial transactions are
recorded.
1. Cash Basis of Accounting
2. Accrual Basis of Accounting
3. Hybrid Basis of Accounting
1.9. Basic Financial Statements
The term financial statement refers to an
organized collection of data on the basis of
accounting principles and conventions to
disclose its financial information. The following
are the four basic financial statements:
1. Income Statements (or Profit and Loss
Account)
2. Balance Sheet
3. Statement of Retained Earnings
4. Statement of Cash Flow
Objectives of Financial Statements
The following are, among others, the important objectives of
financial statements:
 1) To provide adequate information about the source of finance
and obligations of the finance firm.
 2) To provide reliable information about the financial
performance and financial soundness of the concern.
 3) To provide sufficient information about results of operations of
business over a period of time.
 4) To provide useful information about the financial conditions of
the business and movement of resources in and out of business.
 5) To provide necessary information to enable the users to
evaluate the earning performance of resources or managerial
performance in forecasting the earning potentials of business.
Thank You!!!