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Marginal costing – Distinction between absorption costing and marginal costing-. Cost volume profit (CVP) Analysis- Break Even Analysis- Margin of safety.
Typology: Exams
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Objectives: The purpose of this course is to impart basic knowledge of both financial and cost accounting so that students are able to understand financial statements and reports to make decisions.
Unit I
Purpose and Scope; changing role of Accountant in profession, industry and as a consultant; Basic accounting concepts and postulates and their implications. Accounts Records and Systems; the journal and other subsidiary books. The Ledger and account, debit and credit, adjusting and closing entries, ruling and balancing accounts. The trial balance. Construction of Profit and Loss Account and Balance Sheet of joint stock companies as per companies act requirement.
Unit II Cost concepts, determination of costs, elements of Cost-cost classification- Preparation of cost sheet, tender. Unit III
Overheads, Allocation, Apportionment, Absorption, Control over Factory, administration, selling and distribution Overheads, valuation of Inventories.
Unit IV Marginal costing – Distinction between absorption costing and marginal costing- Cost volume profit (CVP) Analysis- Break Even Analysis- Margin of safety. Unit V
Budget and budgetary control - Objectives- Advantages and limitations- Production budget - Sales budget- Cash budget and Flexible budget. Recommended Text books
1. Management Accounting – My Khan & P K Jain. Tata Mcgraw hill. 2. Management Accounting – Paresh shaw – Oxford University Press. 3. Management Accounting – A. Murthy and S. Gurusamy – By Tata Mcgraw Hill. 4. Management Accounting – NM Singhvi and Ruzbeh J. Bodhanwala PHI learning PVT Ltd., 5. Management Accounting, Principles and Applications – HUGH Coombs, David Hobbs and Ellis Jenkuis – By Sage www.sagepublications.com
Suggested Readings
1. Advanced Management Accounting Jawaharlal, S. Chand & Co 2. Managerial Accounting – Indian Edition Ronald W.Hicton, G. Ramesh and M. Jayadev by Tata Mcgraw Hill.
outside the organisation for their effective decision making. Hence, the primary role of accounting information is to provide useful and reliable information for decision-making purposes. As every one knows that the business deals with a number of transactions in every day, it is difficult to remember all those transactions. A well developed accounting system is required to cater to the needs of the users. Hence, we may call that the accounting is the language for the modern business which serves as means of communication about the business operations and financial position to various interested parties through financial statements or reports. To make communication effective, the recipient should understand the message that the sender intends to convey. In the same way, as a management student, you must learn the meaning of accounting and its related aspects thoroughly which are necessary for interpreting the accounting data in a meaningful manner.
In a simple way, business means something that is carried on with a motive to earn profit/income which is inherent in any business. It does not mean that that every business generates profits, but the motive behind every act/transaction in a business would be making profit. This may be classified into;
Public sector organizations are part of, or owned by, central, or state government. Example- Indian Oil Corporation (IOC), BHEL, State Bank of India and so on.
Private sector means that organisations are owned by private individuals which can be classified as under:
Sole Traders : An individual who has set up in business on their own. Here decision making is completely flexible to an individual concern. Partnership : Two or more individuals join together to run a business are called partnership. Minimum two and maximum 20 members join together and do the business. If you are interested to register under the partnership Act, you have to follow the government regulation. It is good for all. Private Limited Companies: It refers to a company that is permitted to offer its securities for sale to the private with the maximum of 50 members. Capital is divided into small parts and the same has been mobilised through known circle viz. Employees, family, relatives and friends. In other words, this type of company share does not go for public offer for fund mobilisation. In India names must end in the Private Limited. Example: General Motors India Private limited. Here it is required to register under the Companies Act and submit the annual report at the year ending. Public Limited Companies: It refers to a company that is permitted to offer its securities for sale to the general public, typically through a stock exchange. In simple words, Capital is divided into small parts which are known as shares and the same has been mobilised through Public. It can be further classified into listed and not listed companies. It should register under the Companies Act and submit the report at the end of the financial year. In India names must end in the Limited (Ltd.). Example: Ashok Leyland Limited.
Non-Profit Organisation: It is a legally constituted organisation whose primary motive is to render the service without any commercial or monetary benefits. Example: Education institutions, charities, health care and so on.
We hope that you are now aware of the types of organisation and hence let us discuss the relevance of accounting.
A business involves some amount capital. Often the owner of the capital expects to earn profit out of their operations. To know the profit level, the organization has to maintain the recording, classifying,
summarizing the transaction happened during the period. In a sole proprietorship concern, the owner may act as a manager and look after the all the business activities. He knows about all the transactions made during the period. Even if he has not maintained any record it will not give much problem. Where more than one individual or interest is involved in an organization, question of equity commonly arise. The failure to maintain a proper record of all transactions may result in the exploitation of equity to the advantage of another. The importance of proper accounting is clearly seen when it is noted that the rights of the partners control, investment, income etc., differ widely. Hence, it is mandatory of the organisation to have the proper system of accounting.
I hope that you have learned about the types of organisation and its relevance of accounting. Let us define accounting and its role in making business and economic decisions.
1.3.1 Definition of Accounting
Accounting is defined as ‘the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are of financial character and interpreting the result thereof” – American Institute of Certified Public Accountants (AICPA).
Each and every word has the meaning. An analysis of the above definition brings out the following functions of accounting. Let us discuss one by one.
Accounting is an Art An art is that part of knowledge, which helps us in attaining our aim or object. It shows the way which we may reach our objective in the best possible manner. In this context, our objective is to ascertain the financial position at given point of time. This is possible by way of recording (Journal), classifying (grouping the similar nature of in one head is known as Ledger), summarizing the business transactions (trial balance). Hence the accounting is an art.
Recording, Classifying and summarizing
Recording business transactions is the first step in accounting mechanics. The transactions that are systematically recorded in accounting records are called subsidiary books and journal.
Financial information is essential for any economic decision, because financial accounting information focuses on actual events that are useful in making number of decisions. For the purpose of decision making, the past is used as a guide to future estimates of the developing various different alternatives. According to international Accounting Standards Board gives examples of decisions that are based on accounting information include the following:
It helps the investors’ to decide when to buy, hold or sell their securities of a company It helps to mobilise the funds through capital market Assessing the stewardship or accountability of management Assessing the ability of the company’s operational efficiency To determine the taxation policy, dividend policy of the company Regulating the company’s activities in a proper way
As we discussed above, the purpose of accounting is to provide the information to various interested parties depending on their needs. To fulfil the ever increasing demands of the users, the various branches have come into reality.
1.4.1 Financial Accounting
It involves recording, classifying and summarizing the business events and transactions occurred during the particular period of time to the users in order to help them for making sound economic decisions about the performance and financial position. The purpose of this process is to ascertain the profit and loss of a business operations and financial position (balance sheet) during the particular period of time- Generally end of the financial year (1st^ April to 31st^ March). Accounting information is related to past event; hence, it is historical in nature. That is why it is also called historical accounting or post-mortem accounting. Yet, it is not enough information to the management for planning and control of the business activities, for efficient running of business. Hence it requires two more forms of accounting viz. cost and management accounting.
The main functions of financial accounting are as follows: It helps the user to assess the financial position and based on to forecast for future activities of a business It helps to find out the operating efficiency in generating profitability of the business. It is the language of business It helps to prepare the financial statements which is the mandatory documents for registered company It helps for managerial decision making to compare with the predetermine standard.
1.4.2 Cost Accounting
It helps to discover the cost of goods produced goods or services rendered by the business. Also it helps in controlling the cost by way of identifying the excess expenses, avoidable loses, wastes and so on. The emphasis is on historical costs as well as future decision-making costs.
The functions of cost accounting are summarised as follows: It helps to ascertain the cost of an output in tern to develop the standard. It facilitates the date for determination of selling price or quotation. It helps to minimise the cost by way of comparing with the standards.
It helps to determine the profitability of each product, process, department and so on It is useful in controlling the operations of a business in a broad sense.
1.4.3 Management Accounting
It deals with the processing of financial and cost accounting data for managerial decision making. It is concerned with providing information to management in an organisation to enable them to carry out their planning, controlling and decision-making responsibilities. This also helps the manager to discharge their duties more efficiently and effectively.
The important functions of management accounting are as: It helps in achieving the organisational objective by way of formulating policies, execute plans. Interpretation of the available data in a meaningful manner in order to control the performance It is a medium of communication at different levels. Coordinating the different departments for achieving the desired goal of the organisation.
Accounting is an information system which provides the useful information for making business decisions. Accounting provides “information that is useful in making business and economic decisions for making reasoned choices among alternative uses of scarce resources in the conduct of business & economic activities”. (Stamford, Connecticut: Financial Accounting Standards Board, 1978)
Figure 1 The Accounting information system Inputs Processing Outputs Users
Business Transaction And events
Accounting Principles Standards & Procedures
Financial Statements/Reports 1.Trading Account 2.Profit and Loss Account 3.Balance Sheet
Investors, Lenders Management, Suppliers Government Security Analysts & Advisors Employee & Trade Unions The Public
First, let us define who is an accountant? The person who is responsible for supplying the accounting information to the management is known as Accountant. yet many people assume that the process of recording the business transactions i.e. Book-keeping is a part of Accountant job. Apart from this, he/she is designing the efficient information system, budgeting, tax planning, auditing and so on. They play an important role in any organization. Today’s accountant is a key member of the management team for all private, public, non-profit and governmental organizations. He/she is known by different names by different organization viz. controller, Comptroller, Chief Accountant, Financial Advisor, Financial controller and so on.
Accountant performs a wide variety of roles within an organization. The designation of accountants depends on the functional roles they perform. He or she will be concerned with specific tasks within the branches of accounting, such as fixed assets, cash, payroll, inventory, billing, general ledger and so on. For this, it is better to be specializing in which he/she likes to perform. Depending on the hierarchy, the roles will vary. Whatever may be the role, he/she should be able to recognize valid data, make required inputs, perform functional manipulations, generate reports, and interpret results. From the above discussion, we may get the following qualities to become a good accountant:
The modern business environment has expanded the roles of accountants in many ways.
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Accounting opens the door to many diverse career opportunities. This is discussed below: A. Public Accounting: It is a segment which offers the wide variety of services to the public like auditing, tax services, consulting (management advisory) services. B. Private accounting: It refers to the person who provides the services for employing company alone. They occupy the good position and do the specialized services like management accounting, internal auditing, and information system. C. Government Accounting: The person who renders services to the government department and agencies. For example, Indian railway, Post Office, Income Tax Department and so on. D. Not- for-profit Accounting: the person who may choose education as a career or like to work in hospitals, charities and societies. These types of institutions are established for providing services to the public.
The accounting system depends upon the size of operations, nature of the organisation. In a small concern, the management accountant is directly under the owner or sometimes owner itself acts as an accountant. But in a big concern, the duties and responsibilities are classified into different compartment and assigned their duties and responsibilities as under:
Figure 2 - Organization of Accounting and Finance Function President (or CEO)
Company Secretary and Legal Advisor
Vice President- Marketing
Vice President- Production
Vice President- HR
Vice President- Finance
Controller Treasurer
Financial Accounting Manager
Cost Accounting Manager
Tax Manager
Credit Manager
Cash Manager
Capital Budgeting Manager
Fund Raising Manager
Data Processing Manager
Accounting is defined as ‘the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are of financial character and interpreting the result thereof Financial information is essential for any economic decision, because financial accounting information focuses on actual events that are useful in making number of decisions. Financial accounting involves recording, classifying and summarizing the business events and transactions occurred during the particular period of time to the users in order to help them for making sound economic decisions about the performance and financial position. Cost accounting helps one to discover the cost of goods produced goods or services rendered by the business. Management Accounting deals with the processing of financial and cost accounting data for managerial decision making. the primary role of accounting information is to provide useful and reliable information for decision- making purposes for various groups The person who is responsible for supplying the accounting information to the management is known as Accountant Accountant performs a wide variety of roles within an organization Accounting opens the door to many diverse career opportunities The accounting system is fully depending upon the size of operations, nature of the organisation Ethics in accounting is an important one, because of the decision maker who rely the information available in the financial statements is highly competent, reliable, and objective. Based on this, decision makers are taking decision
Accounting: It is the process of recording, classifying, summarising and reporting the economic business events in a proper manner.
Cost Accounting: it is concerned with the computation of the aggregate cost of products manufactured and for services provided.
Management Accounting: It relates to use the financial and cost accounting data for the purpose of evaluating the performance, reviewing policies and planning.
Owner: Those who have contributed the capital for starting the business.
Accountant : The person who is responsible for supplying the accounting information to the management is known as Accountant
1.9 Learning Objectives
1.10 Introduction
1.11 Meaning and Criteria for Accounting Principles
1.12 Accounting Principles
Accounting Concepts and its applications Accounting Conventions
1.13 Accounting Standards in India
Benefits of Accounting Standards Standard setting in India Scope of Accounting Standards
1.14 System of Accounting
1.15 Book Keeping
Definition System of Book-keeping Types of accounts and accounting rules Accounting Terms
1.16 Accounting Equation and Transaction Analysis
Summary Glossary Test your understandings References and further Readings
1.9 Learning Objectives: After studying this chapter, you will learn: The basic accounting Concepts Conventions Accounting Standards System of accounting and book keeping
true ‘substance” of the business and the results of its operation. The theory of accounting has developed the concept of a "true and fair view". The true and fair view is applied in ensuring and assessing whether accounts do indeed portray accurately the business' activities. To achieve the "true and fair view" content in the financial statements, accounting has adopted certain concepts and conventions which help the finance mangers to ensure that accounting information is presented accurately and consistently. It can be categorised based on the relevance of financial statements viz. balance sheet and income sheet related concepts. It is given in the figure 2.1. Another way of classification is fundamental and non- fundamental concepts.
1. Business entity concept / Enterprise Concept : This concept is important and implies that a business is separate and distinct from the persons who supplied capital to the organization. (Owner). The concept is applicable to all type of organization. It insists on entering all the business transactions in the books of the business from the point of business and not from owners’ point of view. For example, the owner provides the money to the business as capital to initiate the business. In the business point of view, the owner is treated as a creditor because the business has received money from the owner and the business is liable to repay to the owner in future. Hence capital is a liability. Example: if the owner has purchased some material for house renovation is it necessary to enter in the books? The answer is no. Only business transactions are recorded not the personal transactions. 2. The Money Measurement concept : As we discussed in chapter 1, only those transactions expressed in monetary terms are recorded in accounting. It helps us for better understanding of the business transactions. Let us take an example ; you would like to know the assets of XYZ limited company. The company provides the information to you like we have two cars, one building and cash balance of Rs.5000. Is it possible to know/interpret this statement meaningfully? Instead, the report can state that the value of building is Rs 5 lakhs, cars worth Rs. 4 lakhs and cash balance is Rs. 5000. Now we can say the total assets of a company is Rs.9,05,000/- 3. Going concern concept (or) Continuity concepts: Recording the business transactions and preparation of the financial statements is based on the assumption that the company exist for longer period. The concept does not apply if the company goes in to liquidation or insolvency.
Concepts related to Balance sheet
Concepts related to Income Statement
Accounting Concepts
4. Cost concept: All fixed assets are recorded in the accounts books at the price at which they are acquired. The price paid to acquire the assets is termed as cost and this cost is the basis for all the subsequent accounting of the assets. For example. The value of building is Rs. 5 lakhs as on 31.03. XXXX. It reflects the book value (acquisition value) minus depreciation. 5. Dual aspect concept (or) Accounting equation concept: According to this concept, every transaction has two aspects i.e. receiving aspect and giving aspect. For example, you have decided to start the business with a capital of Rs. 10,000. Now the business owns the asset worth Rs.10000. at the same time, the business has obligation to repay the amount received from you i.e. Rs. 10000. Thus this can be represented in the equation form as Capital (owner’s equity) = Assets (cash) Rs. 10000 = Rs. 10000 Let us assume that you would like to expand your business. But you do not have funds and hence have borrowed Rs.5000 from your friend Mr. Kavi and invested the same in the business. The loan received from your friend increases the assets as well as liability (repayment obligation to your friend in future). Thus Capital (owner’s equity) + Creditors = Assets (cash) Rs. 10000 + 5000 = Rs. 15000 6. Accounting period concept: As we discussed above, the business is going to operate for an indefinite period. The objective of any business is to make profits consistently. Every businessman wants to know the result of is his investment. Profit is the true of measure of operational efficiency, and the difference between capital at the time of commencement and end of the business is known as profit or loss. But, the owner of the business is not interested to wait for a long or indefinite period. Not only that, belated ascertainment of profit or loss does not serve any purpose. Therefore owner and other interested parties are interested to know the results at frequent interval for that they have shorter period i.e 12 months which is fair and helps to know the position. The period for which the statements are presented is called accounting period. 7. Matching concept: It is necessary to match the expenses incurred during the accounting period with the revenues recognized during the period. From that we can find the amount of income or profit during the period. The concept emphasizes that the cost is reported as expenses in the accounting period in which the revenue associated with those costs is reported. For example, when the sales value of some goods is reported as revenue in a year, the cost of those goods would be reported as an expense in the same year. 8. Realization or Revenue Recognition Concept: This concept deals with the point of time at which the revenue is taken as earned. According to this concept, revenue is realized when goods and services produced by a business are transferred to the customer. For example, you have received an order from your customer. Till the execution of the order, you should not report as revenue realized. Suppose, assume that you received an order along with advance payment. It is also not treated as revenue realized till the order is executed. 9. Objectivity Concept: It implies that all accounting transactions should be evidenced and supported by the documents. It is subject to verification by auditors. The documentary evidence should be objective which indicates the evidence is free from any bias. This concept ensures the credibility and dependability.
A. The Institute of Chartered Accountants of India (ICAI), recognizing the need to harmonise the diverse accounting policies and practices in use in India, constituted the Accounting Standards Board (ASB) on 21st April, 1977. B. The composition of the ASB is fairly broad-based and ensures participation of all interest-groups in the standard-setting process. Apart from the elected members of the Council of the ICAI nominated on the ASB.
Institutions that influence that Indian GAAP : the following are the important institute that influence the Indian GAAP
Institutes of Charted Accountant of India (ICAI) Department of Company Affairs (DCA) The Securities &Exchange Board of India (SEBI) Central Board of Direct Taxes (CBDT) Reserve Bank of India (RBI) Comptroller and Auditor General (CAG) of India
So far, 29 Indian Accounting Standards on the following subjects have been issued by the Institute:
