FMA - Session 1 - 2 - 31

BITS Pilani
presentation
BITS Pilani Dr. Sonia Antil
Department of Eco & Fin
Pilani Campus
BITS Pilani
Pilani Campus
< MBA ZC415/PDFI ZC415, Financial & Management Accounting >

Lecture No. 1
MBA ZC415/PDFI ZC415, Financial &

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Management Accounting
From Business Strategy to Business Activities to
Financial Statements
You need mechanism to

Market (industry/ Business account for and convert
sector) Structure Activities business activities into report?
& Govt Policies
Financial Statements
Accounting System for internal and
Business Own (GAAP & external
Strategy Practices) stakeholders
Statement of income and

GAAP expenditure,
Statement of Sources &
Application of funds
Funds Flow Statement

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BITS Pilani, Pilani Campus
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Participants Enrollment Details
Count of ID
Row Labels number
MBA Business Analytics HCL 24
MBA FinTech HCL 6
MBA in Business Analytics 348
MBA in Consultancy Management 57
MBA in Finance 57
MBA in FinTech 59
MBA in Hospital & Health Systems
Management 180
MBA in Manufacturing Management 67
MBA in Quality Management 37
PG Diploma in Finance 11
#N/A 1
(blank)
Grand Total 847

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Application of Financial and Management
Accounting in Business Analytics
 financial forecasting and reporting;
 operational performance metrics tracking; and
 analyzing financial data and creating financial

models based on historical results.

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Application of Financial and Management
Accounting in Business Analytics
 improve the financial decision-making strategies of the

business (Financing Decisions – components of Debt &
Equity, Sources and Timing of financing, and Rewarding
Decisions – Dividend vs. Capital Gains);
 focus on managing the tangible assets of the business

(Investment Decisions : ROI vs Risk Adjusted Cost of
Capital) and provide deeper insight of the business.

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Role of Financial and Management Accounting – MBA in Finance
(Assessing Business Performance from Internal Perspective) and
MBA in Manufacturing Management (Investment in Physical Assets)
Inv. Funds Flow

CG
Financial Investment Decisions
Assets- Risk
& Return Financial Risk Maximize
(DFL) Business
Investment Value
Decisions
WC
Operating Risk
Physical (DOL)
Assets
(capex). Output Dividend
TV
M Operating Rewarding
CFs Decisions
Financing Decisions
RE Loan Fin. Funds Flow
Equity
BITSPilani, Pilani Campus

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Role of Financial and Management Accounting –
MBA in Finance (Assessing Business
Performance from Investment Perspective)
 Business Analysis and Valuation (Business and Securities –

Equity & Debt using DCF and Free Cash Flow Methods)
 Risk Assessment and Management
 Managing High Net Worth Clients

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Role of Financial and Management Accounting – MBA
in FinTech – Financial Modelling and Automation
MBA in FinTech (Focus on efficiency, cost effective, etc):

Deals with how innovative technologies such as Blockchain,
Artificial Intelligence, Internet of Things, Cloud Computing, Data
Analytics using R and Python will enable firms to provide new
solutions to consumers and investors.

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Importance of Accounting (Fin & Mgt ) in
Hospital and Health System Management?
Preparing and monitoring a healthcare organization’s budget,
working capital management, measuring and analysing inputs
(cost of providing service) in relation to outputs (revenue) or
vice versa.

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Role of Financial and Management Accounting in
MBA in Consultancy Management
Analyzing the financial situation of the firm is a fundamental skill in

consulting. It helps consultant to understand the current situation of the
firm, identify problems, and estimate potential savings.
During many consulting projects, you will have to analyze financial

statements (balance sheet, income statement, cash flows) and draw
conclusions about a specific company. This is especially true during due
diligence, strategic projects, and turn-arounds.

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Role of Financial and Management Accounting in
MBA in Quality Management
 ROI of Research & Development Expenditure – (EBIT/Total

Assets) Recording Income (EBIT) and Total Investment
 Cost of Poor Quality (Loss of Revenue and Rework Cost)

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Business Objectives
Business is an economic activity undertaken with the motive of

earning profits from operation and to maximize the wealth for the
owners (Shareholders Wealth Maximization and Share Price
Maximization.
The business activities require resources (which are limited & have
multiple uses) primarily in terms of capital, material, labour,
machineries and other services.
The success of business depends on how efficiently and effectively

these resources are managed. Therefore, there is a need to ensure
that the businessman tracks the use of these resources.
The resources are not free and thus one must be careful to keep an
eye on cost of acquiring them as well.
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Need for Accounting (Business Language)
Purpose of business is to make profit from operation, one must

keep an ongoing track of the activities undertaken in course of
business. Two basic questions would have to be answered:
(a) What is the result of business operations? This will be

answered by finding out whether it has made profit or loss.
(b) What is the position of the resources acquired and used for
business purpose? How are these resources financed? Where the
funds come from?

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Conti..
The answers to these questions are to be found continuously and

the best way to find them is to record all the business activities.
Recording of business activities has to be done in a scientific

manner so that they reveal correct outcome.
The science of book-keeping and accounting provides an effective

solution. It is a branch of social science.

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Conti..
This course aims at giving a platform to understand basic

principles and concepts, which can be applied to accurately
measure performance of business.
After going through this course, you should be able to apply the
principles / rules, conventions and practices to different business
situations like trading, manufacturing or service, and cost of
products and services

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Accounting Definition
The field of accounting is generally sub-divided into:

(a) Financial Accounting (Journal Entries, Ledger,
Trial Balance and Financial Statements – P/L Account,
B/S and Cash Flow Statement)
(b) Management Accounting (Financial and Cost
Accounting)

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Financial Accounting - Concept
Financial Accounting is recording business transactions,

expressed in terms of money from organization
perspective, in a set of books further processing and
reporting of financial information which will be useful to
all stakeholders of the business. Recording and reporting
financial transactions has to be as per GAAP.

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Financial Accounting -
Process
The first step in the cycle of

accounting is to identify
transactions that will find
place in books of accounts.
Transactions having financial
impact only are to be
recorded from business point
of view.

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Financial Accounting - Process
2. Secondly, the recording of the business transactions (Journal

Entry) is done based on the Golden Rules of Accounting
Sample of Journal Entries
More than 200 examples will be discussed during Journal Entry session
Seats A/C Dr. 30Cr

To Cash A/C 30Cr
(Being Seats purchased for cash Rs.50K).
Seats A/C Dr. 50Cr

To Johnson Controls Limited 50Cr
(Being Seats Rs,50Cr purchased by credit from Johnson Controls

Limited )

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Transaction of similar nature are grouped together and

recorded accordingly (Ledger or Books of Accounts). e.g.
Sales Transactions, Purchase Transactions, Cash
Transactions etc.
One has to interpret the transaction and then apply the

relevant Golden Rule to make a correct entry thereof
and group similar transaction into ledger.

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Types of Accounts
Types of Accounts Golden Rule
Debit the receiver or who owes

to business.
Personal Account Credit the giver or to whom
business owes.
Debit what comes into business

Real Account
Credit what goes out of business
Debit all expenses or losses

Nominal Account Credit all income and gains

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Types of Accounts
Personal Account:
These accounts types are related to persons. These persons may

be natural or artificial persons (Companies / firms)
A few examples of personal accounts include debtors, creditors,

banks, outstanding /prepaid accounts, accounts of credit
customers, accounts of goods suppliers, capital, drawings, etc.

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Types of Accounts
Personal Accounts Golden Rule:

Debit the receiver or who owes to business.
Credit the giver or to whom business owes.
Debiting increases liabilities and vice versa

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Types of Accounts
Real Account: Real Accounts are related with assets .
Real Accounts can be of two types:

Tangible Real Accounts (Tangible Assets) – Cash, Consumables,
Fixed Assets (Land, Building, Equipment / Machines). These assets
have physical existence
Intangible Real accounts (Intangible Assets): Goodwill.
These are found in the balance sheet under assets.

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Types of Accounts
Real Account Golden Rule:
Debit what comes into business
Credit what goes out of business
Debiting increases assets and crediting decreases assets.

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Types of Accounts
Nominal Account:
A Nominal account is pertaining to all Incomes & gains and

Expenses & losses.
Example: Revenue (sales), Revenue, Interest Received, sale of

old assets (Gain), Interest Expense, Purchase of inputs, bad
debt loss.

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Types of Accounts
Nominal Account Rule:

Debit all expenses or losses
Credit all income and gains
Debiting reduces profits and crediting increases profit

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Types of Accounts
Real Account vs. Nominal Account:
The main difference between real and nominal

accounts are the type of accounts each hold.
Nominal accounts (Incomes & Gains and Expenses &

Losses) are recorded in the income statement while
the real accounts (deals with assets) are recorded in
the balance sheet. ...
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Identify similar transactions and
prepare Ledge for each category
Ledger: Seats Book (Cr.)
Dr. Cr.
To Cash 30
To Johnson
Controls Limited 50
Total 80
By Balance
To Balance B/d 80 C/d 80
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3. Thirdly, as the transactions

increase in number, it will be
difficult to understand the Sample of Trial Balance
Dr. Cr.
combined effect of the same
Particulars Debit Balance Credit Balance
by referring to individual Seats 80
records. Cash 30
Creditors (Johnson
Controls Limited) 50
Hence, the art of accounting
also involves the step of
summarizing (Trial Balance)
them and reporting in terms of
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financial statements. Management Accounting
Lastly, the accounting process provides the users with financial

statements which will describe what has happened to the business.
Remember the two basic questions we talked about, one to know
whether (1) business has made profit or loss and (2) the other to
know the position of resources that are used by the business.
1. Statement of Income & Expenditure

2. Statement of Sources & Application of Funds
3. Statement of Cash Flow

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Outcomes of Financial Accounting
Outcome of Financial Accounting:
1. Statement of Income & Gains and Expenses

& Losses,
2. Statement of Sources & Application of Fund
and
3. Cash Flow Statement

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Outcomes of Financial Accounting
Statement of Income & Gain and Statement of Sources & Application of Fund
Expenses & Losses (P/L). (B/S).
Shows Financial Performance during a Shows Financial Position on a particular
period. date since inception
Profit & Loss

(P/L) Balance
Sheet (B/S)
CF
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Statement of Income and Revenue Expenditure (P/L A/C)
Income : Income from operation (Sale of goods & Services - Revenue)

Gains: Sale of old assets, Interest and dividend received.
Expenses (Revenue Expenditures): Expenses incurred to produce

goods and services.
Losses: Loss which are unproductive
Statement of Sources & Application of Funds
Sources of Funds: Equity capital contributed by the owner(s), Debt

capital provided by the lenders, Short-term debt from
lenders.
Application of Funds: Assets (Fixed and Current).

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TATA MOTORS
P/L Account for the year 2020-21

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TATA MOTORS
B/S as on 31st March 2021

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TATA MOTORS
Sources of Funds
Total Creditors
Liabilities =
19752+26251
= 46003

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TATA MOTORS
B/S as on 31st
Application of Funds March 2021
(Assets =
Liabilities +
Owners Capital)
65059 = 46004+
19055
Application
of Fund =
Sources of
Funds

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BASIC ACCOUNTING TERMS –
Owner’s Capital + Creditors 'Liabilities
Owners Capital (Owners Liabilities) – What business owes to its

owner
(a) Owners’ Liability /
Equity Capital : These
represent owners
/shareholders /
proprietor’s equity, i.e.
all those amount which
are entitled to the
proprietor, e.g., Capital,
Reserves, undistributed
Profits, etc.
(b) Net worth : Equity Paid-up Capital + reserves & Surpluses termed as
Owner’s Equity. A profit making business will result in increase in the owner’s
equity whereas losses will reduce it.

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BASIC ACCOUNTING TERMS
Drawings : It represents an amount of cash, goods or

any other assets which the owner (Equity Shareholder)
withdraws from business for his or her personal use.

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Long Term Creditors 'Liabilities : (What business owes to
others…. Long term)
Depending upon the period of holding, these obligations could be

further classified into Long Term on non-current liabilities and
Short Term or current liabilities.
The fixed
financial
obligation of
interest and
principal payable
to the lender

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BASIC ACCOUNTING TERMS – Short term Creditors’
Liabilities which business owes to others
(c) Short-term Creditors Liability: It represents amount of money

that the business owes to the other parties. E.g. when goods are
bought on credit, the firm will create an obligation to pay to the
supplier the price of goods on an agreed future date or when a loan
is taken from bank, an obligation to pay interest and principal
amount is created.

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Short Term Creditors Liabilities
Short-term or Current
Liabilities – A liability shall be
classified as Current when it
satisfies any of the following :
(i) It is expected to be settled
in the Company’s normal
Operating Cycle,
(ii) It is held primarily for the
purpose of being traded,

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BASIC ACCOUNTING TERMS – Short
term creditors liabilities
(c) It is due to be settled within 12 months after the Reporting

Date, or
(d) The Company does not have an unconditional right to defer

settlement of the liability for at least 12 months after the reporting
date

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BASIC ACCOUNTING TERMS – Short
term creditors liabilities
Short-term or Current Liabilities –

Concept: Which are due either within an operating cycle or within
an year (FY).
Significance: Shows liquidity position (Ability to pay vs.
willingness to pay.
Examples: Account payable / Trade Creditors, Expense
outstanding,

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BASIC ACCOUNTING TERMS – Assets
(Application of FUNDS)
(e) Asset: Asset is a resource owned by the business

with the purpose of using it for generating future
profits. On the basis of physical existence, Assets can
be Tangible and Intangible.

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Tangible (Fixed) Assets
Tangible Assets are the

capital assets which have
some physical existence.
They can, therefore, be seen,
touched and felt, e.g. Plant
and Machinery, Furniture and
Fittings, Land and Buildings,
Books, Computers, Vehicles,
Furniture, fixtures and office
appliances, Plant, machinery

and equipment etc. - Writing
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of Tangible Fixed Asset is Management Accounting
49 49
Intangible Assets
These intangible assets

cannot be seen although they
help to generate revenue in
future, e.g. Goodwill,
Patents, Trade-marks,
Copyrights, Brand Equity,
Designs, Intellectual
Property, etc.
Writing off of Intangible fixed
asset is known as
Amortization
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Long-term Financial Assets
Long term
Investments (Financial
Long-term Assets) :
Non-current
Investments are held
beyond the current
period as to sale or
disposal.
Examples: investment
in other company’s
shares and debenture,
Fixed Deposit for 5
years.
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Management Accounting BITS Pilani, Pilani Campus
Current Assets
Assets can also be classified (on
the basis of maturity) into
Current Assets (Short-term)
Short lived assets - (Current
Assets): An asset shall be
classified as Current when it
satisfies any of the following :
(a) It is expected to be realized

in, or is intended for sale or
consumption in the
Company’s normal
Operating Cycle and
(b) It is held primarily for the

purpose of being traded ,

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Short-term financial Assets
(c) It is due to be realized within 12 months after the Reporting Date,

or
(d) It is Cash or Cash Equivalent (cash or nearness to cash Prepaid
Expenses, Short-terms loans & Advances).
Non-Current Assets – All other Assets shall be classified as Non-Current

Assets. e.g. Machinery held for long term etc.

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Current Assets
Concept: Cash or nearness to cash
Life: Less than one year or within an operating cycle which ever is
earlier
Significance: Shows liquidity position of an organization.
Examples: Cash in hand & bank, Inventories, Accounts Receivable,

Prepaid expenses, Loans & Advances, etc.

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Short-term Financial Assets
Short-Term Financial Assets
Short-term loans and advances

Inter Corporate Deposits (ICDs)
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Management Accounting BITS Pilani, Pilani Campus
These debtors may again be classified as under:
(i) Good debts : The debts which are sure to be realized are
called good debts.
(ii) Doubtful Debts : The debts which may or may not be realized
are called doubtful debts.
(iii) Bad debts : The debts which cannot be realized at all are
called bad debts.

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BASIC ACCOUNTING TERMS:
Contingent Liability
(d) Contingent Liability : It represents a potential

obligation that could be created depending on the
outcome of an event.
Example: E.g. if supplier of the business files a legal
suit, it will not be treated as a liability because no
obligation is created immediately.

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Gross Working Capital = Total Current Assets
This concept of working capital is known as Net

Working Capital which is a more realistic concept.
Working Capital (Net) = Current Assets – Currents
Liabilities.

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BASIC ACCOUNTING TERMS – Capital
Expenditure (Capex)
Capital Expenditure : This
represents expenditure
incurred for the purpose of
acquiring a fixed asset (Non-
Current Assets, Non-
Recurring) which is intended
to be used over long term for
earning profits there from. e.
g. amount paid to buy a
computer for office use is a
capital expenditure.

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BASIC ACCOUNTING TERMS – Revenue
Expenditure (Capex)
Revenue expenditure : This
represents expenditure
incurred to earn revenue of the
current period.
The benefits of revenue

expenses get exhausted in the
year of the incurrence. e.g.
repairs, insurance, salary &
wages to employees, travel etc.
These expenses are recurring in
nature
The revenue expenditure

results in reduction in profit or
surplus. It forms part of the
Income Statement.

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BASIC ACCOUNTING TERMS – Operating
Expenditure (Revenue Expenditure or Expense)
TATA MOTORS
Revenue Expenditure
are:
a) Recurring
b) Variable and fixed
c) Cash and non-
cash (refer to the
next slide)

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Cash vs. Non-Cash Expense)
TATA MOTORS
Non-Cash
Expense will
impact profit but
not cash flow

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Trade Discount
Trade Discount: It is the discount usually allowed by the wholesaler to the

retailer computed on the list price or invoice price. e.g. the list price of a
refrigerator set could be Rs.15000. The wholesaler may allow 20%
discount thereof to the retailer. This means the retailer will get it for
Rs.12000 and is expected to sale it to final customer at the list price.
Thus the trade discount enables the retailer to make profit by selling at
the list price. Trade discount is not recorded in the books of accounts.
The transactions are recorded at net values only. In above example, the
transaction will be recorded at Rs.12000 only.

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BASIC ACCOUNTING TERMS – Cash
Discount
Cash Discount : This is allowed to encourage prompt payment by

the debtor. This has to be recorded in the books of accounts. This is
calculated after deducting the trade discount. e.g. if list price is
Rs.15000 on which a trade discount of 20% and cash discount of 2%
apply, then first trade discount of Rs.3000 (20% of Rs.15000) will
be deducted and the cash discount of 2% will be calculated on
Rs.12000 (Rs.15000 – Rs.3000). Hence the cash discount will be Rs.
240/- (2% of Rs.12000) and net payment will be Rs.11,760
(Rs.12,000 – Rs.240)

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Management Accounting – Concept & Difference
with Fin Accounting
Management Accounting (was coined in 1950) is concerned with the

use of Financial and Cost Accounting information to managers
within organizations, to provide them with the basis in making
informed business decisions that would allow them to be better
equipped in their management and control functions.
Management accounting includes tools and techniques used by

management to analyze and interpret the financial health of an
organization and other business decisions.

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Importance of Management Accounting
Basically, Management Accounting aims to facilitate

management in formulating strategies, planning and
constructing business activities, making decisions,
optimal use of resources, and safeguarding assets of
business.

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Cost Accounting - Concept
Involves principles, methods and techniques for

 ascertaining and controlling/managing cost,
 ascertaining profit; and
 presenting information for the purpose of managerial
decision-making.”

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Significance of Cost Accounting
Cost Accounting is frequently used to facilitate internal decision

making and provides tools with which management can appraise
performance and control costs of doing business.
It primarily involves relating the costs to the different products

produced and sold or services rendered by the business.

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Financial Accounting vs.Cost Accounting
While Financial Accounting deals with

(1) recording and reporting
(2) monetary business transactions (at a broader level) as per
(3) statutory requirements (GAAP),
Cost Accounting aims at further breaking it up to the last possible

level to identify costs with products and services.

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OBJECTIVES OF ACCOUNTING
(a) To ascertain the amount of profit or loss made by the business

i.e. to compare the income earned versus the expenses incurred and
the net result thereof.
(b) To know the financial position of the business i.e. to assess what
the business owns and what it owes.
(c) To provide a record for compliance with statutes and laws

applicable.
(d) To enable the readers to assess progress made by the business

over a period of time.
(e) To disclose information needed by different stakeholders.

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Accounting Concepts, Principles, and
Conventions

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Separate Business Entity
Money Measurement Concept
Periodicity Concept
Accounting Accrual Concept

Concepts, Matching Concept
Principles, and Going Concern Concept
Conventions
Cost Concept
Realisation Concept
Dual Aspect Concept

Conservatism
Consistency
Materiality
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Separate Business Entity
It states that a business enterprise is a

separate identity apart from its owner.
The entity concept requires that all the
transactions are to be viewed,
interpreted, and recorded from a
‘business entity’ point of view.
Business is separate from the

owner.

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Going Concern or Continuity
Concept
The basic principle of this concept is that business is

assumed to exist for an indefinite period and is not
established with the objective of closing it down.

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Money Measurement
Concept
3.
A business transaction will
always be recoded if it can be
expressed in terms of money.
The advantage of this concept is
that different types of
transactions could be recorded
as homogenous entries with
money as a common
denominator.

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Periodicity Concept or the
Accounting Period Concept
This is also called the concept of definite accounting period. As
per going concern concept an indefinite life of entity is
assumed.
Now if we were to assess whether the business has made profit
or loss, should we wait until this indefinite period is over?
Would it mean that we will not be able to assess the business

performance on an ongoing basis?
Does it deprive all stakeholders the right to the accounting

information?
To circumvent this problem, the business entity is supposed to

be paused after a certain time interval. This time interval is
called an accounting MBA
08/08/2022 period.
ZC415/PDFI ZC415, Financial &
77
Accrual Concept
The accrual concept is based on the recognition of both
cash and credit transactions.
A transaction should be recorded at the time when it takes

place and not when the cash is realized.
Irrespective of cash received against sale or cash paid

against expense, transactions must be recorded.
A financial statement prepared on an accrual basis informs

users not only of past events involving payment and
receipt of cash but also obligations to pay cash in the
future and of resources that represent cash to be
received in future. MBA ZC415/PDFI ZC415, Financial &
08/08/2022 78
Dual Aspect Concept
This concept is the core of double-entry book-

Keeping. Every transaction or event has two aspects:
According to this concept, every transaction has two
aspects a debit aspect and a credit aspect.
Due to these two aspects, the total amount debited is
always equal to the total amount credited (i.e. total
assets are equal to total liabilities).
Assets = Liabilities + Capital

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Dual Aspect Concept
In other words,
Cash brought in by Mr. Suresh (Rs.25 lakhs) = Liability of

business towards Mr. Suresh (25 lakhs)
We know that liability of the business could be towards
owners and parties other than owners, this equation
could be re-written as:
Assets = Liabilities + Owner’s equity

Cash Rs.25,00,000 = Liabilities Rs. (0) + Mr. Suresh’s
equity Rs. 25,00,000

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Historical Cost Concept/Cost
Concept
According to this concept, the value at which the various
assets shall be recorded in the books shall be the
historical cost or acquisition cost.
This concept says that the assets shall be recorded at cost

at the time of its purchase and its value shall be reduced
systematically by charging depreciation.
It helps to keep the statements free from personal bias or

judgements.

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The Revenue Realisation
Concept
According to this concept, revenue is recognized only when
the sale is made.
Any change in the value of assets is to be recorded only
when the business realizes it.
This concept prevents business firms from inflating their
profits by showing expected incomes. (which have not
yet materialized).
E.g. An increase in the value of an asset cannot be
considered as a profit until and unless the asset is sold
and profit is realized.

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The Matching Concept
Sale of goods has two effects: (i) a revenue effect,

which results in increase in owner’s equity by the
sales value of the transaction and (ii) an expense
effect, which reduces owner’s equity by the cost of
goods sold, as the goods go out of the business.
The net effect of these two effects will reflect either

profit or loss. In order to correctly arrive at the net
result, both these aspects must be recognized
during the same accounting period. Example:
Depreciation

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The Matching Concept
One cannot recognize only the revenue effect thereby

inflating the profit or only the expense effect which
will deflate the profit.
Both the effects must be recognized in the same

accounting period. This is the principle of the matching
concept.
To generalize, when a given event has two effects – one

on revenue and the other on the expense, both must be
recognized in the same accounting period.

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Verifiable Objective Evidence
Concept
Accounting data must be verified.
In other words, documentary evidence of transactions must
be made which are capable of verification by
independent respect.
In the absence of such verification, the data which will be
available will neither be reliable nor be dependable, i.e.,
these should be biased data.
Verifiability and objectivity express dependability, reliability,
and trustworthiness that are very useful for the purpose
of displaying the accounting data and information to the
users

08/08/2022 85
The Conservatism Concept
The concept underlines the prudence of understating than over-

stating the net income of an entity for a period and the net
assets as on a particular date. This is because business is
done in situations of uncertainty. For years, this concept was
meant to “anticipate no profits but recognize all losses”. This
can be stated as
(i) Delay in recognizing income unless one is reasonably sure
(ii) Immediately recognize expenses when reasonably sure

08/08/2022 86
The Conservatism Concept
Golden rule of current asset valuation ‘cost or market

value whichever is lower’ originated from this concept
Example: Valuing stock at lower cost or market value,

making provision for doubtful debts in anticipation of
debts becoming bad, are done to comply with the
convention of conservatism.

08/08/2022 87
The Concept of Consistency
According to this convention, accounting practices once selected
and adopted should be applied consistently year after year.
This convention helps in the comparison of financial
statements.
Consistency does not mean that accounting principles once
adopted can never be changed. They can be changed if the
change is desirable.
Lack of consistency would result in the financial information
becoming non-comparable between the different accounting
periods.
The insistence of this concept would result in avoidance of
window dressing the results by choosing the accounting
method by convenience and thereby either inflating or
understating net income.
08/08/2022 88
Full Disclosure Concept
According to this convention, all significant information

should be fully and fairly disclosed in the financial
statements.
Ensuring this convention increases the relevance and

reliability of financial statements.
Accounting data should properly be clarified, summarized,

aggregated, and explained for the purpose of presenting
the financial statements which are useful for the users of
accounting information.

08/08/2022 89
The Concept of Materiality
According to the convention of materiality, the accountant should

record only those transactions which may have a material
effect on the profitability or financial status of the business
and ignore all insignificant items.
An item is said to be material if it is likely to influence the

decision of the users. (like investors etc.)
For e.g., Depreciation on small items like books , calculator etc.

is taken as 100 % in the year of purchase though used by the
entity for more than a year. This is because the amount of
books and calculators is so small to be shown in the B/S
though it is the assets of the company.
08/08/2022 90
Timeliness Concept
Under this principle, every transaction must be recorded

in proper time.
In short, transactions should be recorded date-wise in the

books.
Delay in recording such transactions may lead to

manipulation, misplacement of vouchers,
misappropriation, etc. of cash and goods.
This principle is followed particularly while verifying day-

to-day cash balance.
08/08/2022 91
Industry Practice
As there are different types of industries, each industry has its

own characteristics and features. There may be seasonal
industries also. Every industry follows the principles and
assumptions of accounting to perform its own activities. Some
of them follow the principles, concepts, and conventions in a
modified way.
The accounting practice which has always prevailed in the

industry is followed by it. e.g Electric supply companies,
Insurance companies maintain their accounts in a specific
manner. Insurance companies prepare Revenue Account just
to ascertain the profit/loss of the company and not Profit and
Loss Account. Similarly, non-trading organizations prepare
Income and Expenditure Account to find out Surplus or Deficit.
08/08/2022 92
08/08/2022 93

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BITS Pilani

< MBA ZC415/PDFI ZC415, Financial & Management Accounting >

MBA ZC415/PDFI ZC415, Financial &

You need mechanism to

Statement of income and

MBA ZC415/PDFI ZC415, Financial &

MBA ZC415/PDFI ZC415, Financial &

 financial forecasting and reporting;

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 focus on managing the tangible assets of the business

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Inv. Funds Flow

MBA ZC415/PDFI ZC415, Financial &

 Business Analysis and Valuation (Business and Securities –

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MBA in FinTech (Focus on efficiency, cost effective, etc):

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Preparing and monitoring a healthcare organization’s budget,

working capital management, measuring and analysing inputs

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Analyzing the financial situation of the firm is a fundamental skill in

During many consulting projects, you will have to analyze financial

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 ROI of Research & Development Expenditure – (EBIT/Total

 Cost of Poor Quality (Loss of Revenue and Rework Cost)

MBA ZC415/PDFI ZC415, Financial &

Business is an economic activity undertaken with the motive of

The success of business depends on how efficiently and effectively

Purpose of business is to make profit from operation, one must

(a) What is the result of business operations? This will be

MBA ZC415/PDFI ZC415, Financial &

The answers to these questions are to be found continuously and

Recording of business activities has to be done in a scientific

The science of book-keeping and accounting provides an effective

MBA ZC415/PDFI ZC415, Financial &

This course aims at giving a platform to understand basic

MBA ZC415/PDFI ZC415, Financial &

The field of accounting is generally sub-divided into:

MBA ZC415/PDFI ZC415, Financial &

Financial Accounting is recording business transactions,

MBA ZC415/PDFI ZC415, Financial &

The first step in the cycle of

MBA ZC415/PDFI ZC415, Financial &

2. Secondly, the recording of the business transactions (Journal

Seats A/C Dr. 30Cr

Seats A/C Dr. 50Cr

(Being Seats Rs,50Cr purchased by credit from Johnson Controls

MBA ZC415/PDFI ZC415, Financial &

Transaction of similar nature are grouped together and

One has to interpret the transaction and then apply the

MBA ZC415/PDFI ZC415, Financial &

Types of Accounts Golden Rule

Debit the receiver or who owes

Debit what comes into business

Debit all expenses or losses

MBA ZC415/PDFI ZC415, Financial &

These accounts types are related to persons. These persons may