Management Management Accounting.Accounting.

Meaning and definition of Meaning and definition of Accounting.Accounting.

MeaningMeaning :- :- The Language of business.The Language of business. Accounting refers to a set of practices and a Accounting refers to a set of practices and a

systematized body of knowledge.systematized body of knowledge. It is the It is the artart of of recordingrecording and and summarizingsummarizing business business

transactions and of interpreting their effects on transactions and of interpreting their effects on the affairs and activities of any economic unit.the affairs and activities of any economic unit.

Accounting refers to :Accounting refers to :a) a procedure of writing financial transaction.a) a procedure of writing financial transaction.b) a system of recording, classifying, summarizing, b) a system of recording, classifying, summarizing, reporting periodically, in terms of money which reporting periodically, in terms of money which provides necessary financial information. provides necessary financial information.

Definition :-Definition :-

According to American Institute of According to American Institute of Certified Public Accountant ,Certified Public Accountant , “Accounting “Accounting is the art of recording, classifying and is the art of recording, classifying and summarizing in a significant manner and summarizing in a significant manner and in terms of money, transactions and in terms of money, transactions and events, which are, in part at least, of a events, which are, in part at least, of a financial character and interpreting the financial character and interpreting the results thereof.”results thereof.”

Branches Of Accounting.Branches Of Accounting.

Accounting

FinancialAccounting

Management

Accounting

Cost Accounti

ng

Social Accounti

ng

Primarily deals with the provisions of Primarily deals with the provisions of information for managers and for information for managers and for outsiders including shareholders, outsiders including shareholders, suppliers, customers, employees, suppliers, customers, employees, government, and general public as well.government, and general public as well.

The information is expressed in two main The information is expressed in two main types of financial statements- types of financial statements- i)i) The profit and loss account.The profit and loss account.ii)ii) The Balance Sheet.The Balance Sheet.

Financial AccountingFinancial Accounting :- :-

The concept was first introduced in the The concept was first introduced in the year 1950, by year 1950, by Anglo-American Council Anglo-American Council of productivity Management of productivity Management AccountingAccounting..

The preparation of accounting information The preparation of accounting information in such a way as to assist management in in such a way as to assist management in the creation of policy and in the day-to-the creation of policy and in the day-to-day operation of undertaking.day operation of undertaking.

It is oriented primarily towards It is oriented primarily towards managerial control and other decision-managerial control and other decision-making groups inside the organization.making groups inside the organization.

Management AccountingManagement Accounting :- :-

Cost AccountingCost Accounting :- :- It is that branch of accounting which deals It is that branch of accounting which deals

with classification, recording allocation, with classification, recording allocation, summarization and imparting of current summarization and imparting of current and prospective costs.and prospective costs.

Includes the design and operation of cost Includes the design and operation of cost systems and procedures the systems and procedures the determination of costs by departments, determination of costs by departments, functions, responsibilities, activities, functions, responsibilities, activities, products, territories, periods and other products, territories, periods and other units.units.

Deals with a group of accounts Deals with a group of accounts constituting the records of production and constituting the records of production and distribution activities.distribution activities.

Social AccountingSocial Accounting :- :-

It is concerned with the application of It is concerned with the application of double entry system of book-keeping double entry system of book-keeping to socio-economic analysis, with the to socio-economic analysis, with the construction estimation and analysis construction estimation and analysis of national and international income, of national and international income, national and international balance national and international balance sheet.sheet.

Parties or Users Interested In Parties or Users Interested In AccountingAccounting

Member of Public Accounts Committee & Estimate

Committee

Creditors, Bankers & other lending Institutes.

Management Parties / Users

Interested in Accounting

Regulatory Agencies

Employees

Researchers

Owners / Proprietors and partners

Potential Investors

Government

Creditors, Bankers and other Lending Creditors, Bankers and other Lending InstitutionsInstitutions :- Their Interest lie in the :- Their Interest lie in the ultimate solvency and liquidity position of ultimate solvency and liquidity position of a firm and in the interest cover.a firm and in the interest cover.

Member of Public Accounts Committee & Estimate Committee : They analyse and interprete the functions of state enterprise and to see whether efficient working system is being used or not, which are supplied by the accounting reports and statements.

Management : Management is interested about profitability and efficiency in financial management which are supplied by accounting information.

Government : Government is interested in profit earning capacity and in the effective utilization of firms capacity which are also supplied by the accounting statement.

Owners / Proprietors and partners : They are interested to know the rates of return on capital employed, the long term solvency of the firm and the rates of dividends among others.

Regulatory Agencies : Various government departments and agencies (i.e. Company law board, Registrar of companies including tax authorities) use accounting reports for the purpose of tax assessment.

Potential Investors : Investors use accounting information while determining the relative merits of various investment opportunities.

Employees :They are interested in the earning capacity of the firm since their remuneration depends on it. At present Trade Unions use the financial statements to support their demands.

Researchers :Research scholars use the accounting data in their research work.

Meaning & Definition of Management Meaning & Definition of Management Accounting Accounting

Management Accounting is a system for Management Accounting is a system for gathering, summarizing, reporting and gathering, summarizing, reporting and interpreting accounting data and other financial interpreting accounting data and other financial information primarily for the internal needs of information primarily for the internal needs of management. It is designed to assist internal management. It is designed to assist internal management in the efficient formulation, management in the efficient formulation, execution and appraisal of business plans.execution and appraisal of business plans.

According to ICMA, London “ Management According to ICMA, London “ Management accounting is the application of professional accounting is the application of professional knowledge and skill in the preparation of knowledge and skill in the preparation of accounting information in such a way as to assist accounting information in such a way as to assist management in the formation of policies and in management in the formation of policies and in the planning and control of the operations of the the planning and control of the operations of the undertaking.”undertaking.”

Accounting Concepts :-Basic Accounting Concepts :-Basic assumption or conditions upon which assumption or conditions upon which science of accounting is based.science of accounting is based.i)i) Business Entity Concept.Business Entity Concept.ii)ii) Going Concern Concept.Going Concern Concept.iii)iii) Cost Concept.Cost Concept.iv)iv) Accounting Period Concept.Accounting Period Concept.v)v) Dual Aspect Concept.Dual Aspect Concept.vi)vi) Matching Concept.Matching Concept.vii) Realisation Concept.vii) Realisation Concept.viii) Money Measurement (monetary viii) Money Measurement (monetary Expression ) concept.Expression ) concept.

Accounting Concepts and Accounting Concepts and Conventions.Conventions.

i) i) Business Entity ConceptBusiness Entity Concept :- Under this concept it is :- Under this concept it is assumed that the business is distinct and assumed that the business is distinct and completely separate from its owners. Accounting completely separate from its owners. Accounting records of business must be maintained in a records of business must be maintained in a manner which is free from any bias to any manner which is free from any bias to any particular section of people related to it. The affairs particular section of people related to it. The affairs of business must not be mixed up with the private of business must not be mixed up with the private affairs of owners or other persons associated with affairs of owners or other persons associated with it. This concept helps to give a true and fair picture it. This concept helps to give a true and fair picture of the financial condition of a business.of the financial condition of a business.

ii) ii) Going Concern ConceptGoing Concern Concept :- Undertaking or institution :- Undertaking or institution will last for a long time. The business entity will will last for a long time. The business entity will remain existing indefinitely. Under this concept remain existing indefinitely. Under this concept business is viewed as mechanism for continuous business is viewed as mechanism for continuous additions of value to the resources or utility used additions of value to the resources or utility used by such unit. The going concern concept is by such unit. The going concern concept is applicable to all business situation except where a applicable to all business situation except where a business is about to be sold or liquidated or closed business is about to be sold or liquidated or closed out. Since the assets are not for sale, they are out. Since the assets are not for sale, they are recorded at cost price in books and not at market recorded at cost price in books and not at market priceprice

iii) iii) Cost ConceptCost Concept:- The cost concept states that all :- The cost concept states that all goods and services should be recorded at goods and services should be recorded at historical cost and should appear on the financial historical cost and should appear on the financial statement at such cost. From the Historical record statement at such cost. From the Historical record of cost one can ascertain the progress. As this of cost one can ascertain the progress. As this concept ignores the market value which depends concept ignores the market value which depends on subjective views of accountants , accounts are on subjective views of accountants , accounts are maintained properly. But on other hand it ignores maintained properly. But on other hand it ignores the effect of inflation.the effect of inflation.

iv) iv) Accounting Period ConceptAccounting Period Concept:- Is also called as :- Is also called as periodicity concept. This concept makes it periodicity concept. This concept makes it obligatory to divide the life of business concern obligatory to divide the life of business concern into specific time intervals for periodic reporting. into specific time intervals for periodic reporting. This method helps to measure the income This method helps to measure the income generated during the specific accounting period generated during the specific accounting period which also helps to distribute the same which also helps to distribute the same periodically. This method reveals a clear periodically. This method reveals a clear demarcation of accrued or deferred items of demarcation of accrued or deferred items of income and expenses. The performance can be income and expenses. The performance can be measured by matching cost with revenues. The measured by matching cost with revenues. The segregation of expenditure between capital & segregation of expenditure between capital & revenue arises from this concept.revenue arises from this concept.

v) v) Dual Aspect ConceptDual Aspect Concept :Under this concept every :Under this concept every transaction has got a two fold aspect – a) receiving transaction has got a two fold aspect – a) receiving of benefit and b) giving of that benefit. According to of benefit and b) giving of that benefit. According to this concept the debit aspect of transaction has a this concept the debit aspect of transaction has a corresponding credit aspect & the same must be corresponding credit aspect & the same must be reflected in the accounting records in order to reflected in the accounting records in order to maintain a equilibrium between assets and maintain a equilibrium between assets and liabilities of business.liabilities of business.

vi) vi) Matching ConceptMatching Concept :The expenses which are :The expenses which are incurred during a specific period in order to earn incurred during a specific period in order to earn revenue for the said period must MATCH against revenue for the said period must MATCH against the revenue of related period. This concept is basis the revenue of related period. This concept is basis for preparation of Profit and loss A/c. This for preparation of Profit and loss A/c. This arrangement is made particularly for those arrangement is made particularly for those expenses that don’t have corresponding revenue expenses that don’t have corresponding revenue but are essential for the operation of the business but are essential for the operation of the business e.g. taxes, donation. (exception – Preliminary exp., e.g. taxes, donation. (exception – Preliminary exp., exp. On issue of shares and debentures or some exp. On issue of shares and debentures or some other capital expenditure. Revenues earned on long other capital expenditure. Revenues earned on long term contracts.)term contracts.)

vii) vii) Realisation ConceptRealisation Concept : According to this concept, : According to this concept, revenue is considered as earned on the date when revenue is considered as earned on the date when it is realised. Revenue realised during an it is realised. Revenue realised during an accounting period should only be taken in the accounting period should only be taken in the income statement. Unearned /unrealised revenues income statement. Unearned /unrealised revenues should not be taken into A/c. e.g. when goods are should not be taken into A/c. e.g. when goods are sold to customer, they are legally liable to pay, i.e. sold to customer, they are legally liable to pay, i.e. as soon as the property of goods passes from the as soon as the property of goods passes from the seller to the buyer, means only receipt of order seller to the buyer, means only receipt of order doesn’t mean the revenue is realised.doesn’t mean the revenue is realised.

viii) viii) Money Measurement (monetary Expression ) Money Measurement (monetary Expression ) conceptconcept: In accounting all transactions are : In accounting all transactions are expressed and interpreted in terms of money. The expressed and interpreted in terms of money. The basic purpose of using money is to implement an basic purpose of using money is to implement an element of uniformity among diversity. e.g. land, element of uniformity among diversity. e.g. land, furniture are not expressed in terms of area or furniture are not expressed in terms of area or quantity but in value i.e. monetary terms. But this quantity but in value i.e. monetary terms. But this method doesn’t recognise the changes in the method doesn’t recognise the changes in the purchasing power of monetary unit.purchasing power of monetary unit.

Accounting ConventionAccounting Convention :- :- Convention is nothing but rule, Convention is nothing but rule,

method. It is an accounting method. It is an accounting procedure followed by the procedure followed by the accounting community on the basis accounting community on the basis of long-term customs.of long-term customs.a) a) Convention of Disclosure.Convention of Disclosure.b)b) Convention of Materiality.Convention of Materiality.c)c) Convention of Consistency.Convention of Consistency.d)d) Convention of Conservation.Convention of Conservation.

a) a) Convention of DisclosureConvention of Disclosure :- :-The doctrine of disclosure emphasizes on all The doctrine of disclosure emphasizes on all financial events which occur during a financial events which occur during a particular financial period should fairly and particular financial period should fairly and completely be reported in the financial completely be reported in the financial statements. It involves proper classification, statements. It involves proper classification, summarization, aggregation and explanation summarization, aggregation and explanation of accounting data in the published financial of accounting data in the published financial statements which are of material interest of statements which are of material interest of the users. Besides the above, the reporting the users. Besides the above, the reporting made by means of comments, footnotes, made by means of comments, footnotes, descriptive captions, supplementary descriptive captions, supplementary schedules in periodical statements which may schedules in periodical statements which may also require clarification. This convention is also require clarification. This convention is applicable to all business situations applicable to all business situations particularly when a firm changes its reporting particularly when a firm changes its reporting or recording procedure, otherwise the users or recording procedure, otherwise the users may misinterpret the information.may misinterpret the information.

b) b) Convention of MaterialityConvention of Materiality :- :- Materiality means “relative Importance”. Materiality means “relative Importance”.

American Accounting Association (AAA) American Accounting Association (AAA) defines Materiality as – “ An item should defines Materiality as – “ An item should be regarded as material if there is reason be regarded as material if there is reason to believe that knowledge of it would to believe that knowledge of it would influence the decision of informed influence the decision of informed investors.” 2 types of materiality – investors.” 2 types of materiality – a) Materiality of Information; anda) Materiality of Information; andb) Materiality of amounts.b) Materiality of amounts.

The material Info. Helps management to The material Info. Helps management to avoid unnecessary wastage of time & avoid unnecessary wastage of time & money on principal matters. In short, money on principal matters. In short, material items should separately be material items should separately be disclosed whereas immaterial items may disclosed whereas immaterial items may not be disclosed separately but may be not be disclosed separately but may be combined in a consolidated form in the combined in a consolidated form in the published financial statement.published financial statement.

c) c) Convention of ConsistencyConvention of Consistency :-The doctrine :-The doctrine implies that accounting rules, practices and implies that accounting rules, practices and conventions should be continuously observed & conventions should be continuously observed & applied. Comparison of result among different applied. Comparison of result among different years is meaningful & significant only when the years is meaningful & significant only when the accounting rules, procedures & Practices are accounting rules, procedures & Practices are continuously adhered from year to year.3 types of continuously adhered from year to year.3 types of consistencies-consistencies-i) i) Vertical consistencyVertical consistency – where same principles, – where same principles, methods are adopted within the interrelated methods are adopted within the interrelated financial statements of the same date. financial statements of the same date. ii) ii) Horizontal ConsistencyHorizontal Consistency – it helps to make a – it helps to make a proper comparison of the operation of a company proper comparison of the operation of a company from one period to another.from one period to another.

iii) iii) Third Dimension ConsistencyThird Dimension Consistency – It helps to make – It helps to make a proper comparison of the operations between a proper comparison of the operations between two firma within the same industry. two firma within the same industry. In short, it helps to eliminate personal bias of an In short, it helps to eliminate personal bias of an accountant, helps an accountant to use his own accountant, helps an accountant to use his own judgment and also helps to prepare a periodical judgment and also helps to prepare a periodical financial statement which is more dependable, financial statement which is more dependable, reliable and comparable.reliable and comparable.

d) d) Convention of ConservationConvention of Conservation :-The :-The conservation principle calls for conservatism conservation principle calls for conservatism approach on the part of accountant in his approach on the part of accountant in his estimated, opinion & selection of procedure. estimated, opinion & selection of procedure. In accounting conservation refers to the In accounting conservation refers to the early recognition of unfavorable events. e.g. early recognition of unfavorable events. e.g. losses should be recognized & reflected in losses should be recognized & reflected in financial record if reasonable likelihood financial record if reasonable likelihood exists that they may occur. On the other exists that they may occur. On the other hand anticipated gains shouldn’t be hand anticipated gains shouldn’t be recorded unless & until realised in cash. The recorded unless & until realised in cash. The conservative approach may make the conservative approach may make the business appear to be in a more unfavorable business appear to be in a more unfavorable financial position than is actually the case. financial position than is actually the case. The conservatism approach to financial The conservatism approach to financial reporting is a result of the uncertainty of reporting is a result of the uncertainty of events and historical experiences.events and historical experiences.

Distinction between Management Distinction between Management Accounting and Financial Accounting. Accounting and Financial Accounting.

Distinction.docDistinction.docPoints of Points of DistinctionDistinction

Financial AccountingFinancial Accounting Management Management AccountingAccounting

AuditAudit Audit of financial Audit of financial documents is compulsory. documents is compulsory.

Not Compulsory.Not Compulsory.

Statutory Statutory ObligationObligation

Financial accounting is Financial accounting is guided by statutes.guided by statutes.

M.A. is Not StatutoryM.A. is Not Statutory

ClassificatiClassification of on of AccountsAccounts

In Financial Accounting In Financial Accounting A/c’s are classified into A/c’s are classified into Personal A/c, Real A/c, Personal A/c, Real A/c, Nominal A/cNominal A/c

No such classification is No such classification is followed in M.A.followed in M.A.

DependencDependencyy

F.A. is not dependent on F.A. is not dependent on Management AccountingManagement Accounting

M.A. is dependent on M.A. is dependent on F.A. for vital F.A. for vital information.information.

Approach Approach F.A. is Historical in F.A. is Historical in approachapproach

M.A. is Predictive in M.A. is Predictive in approach.approach.

PreparatioPreparation of Annual n of Annual Report Report

Annual financial reports Annual financial reports are required to be are required to be prepared.prepared.

Depends upon the Depends upon the requirement of requirement of Management.Management.

Points of Points of DistinctioDistinctionn

Financial AccountingFinancial Accounting Management AccountingManagement Accounting

ObjectiveObjective The Primary objective of The Primary objective of F.A. is to ascertain profit F.A. is to ascertain profit & financial status of a & financial status of a concern. concern.

Supplying accounting Supplying accounting information to management information to management for taking proper decisions.for taking proper decisions.

ApplicatioApplication of n of AccountinAccounting g PrinciplesPrinciples

Follows accounting Follows accounting principles. principles.

Accounting principles are not Accounting principles are not considered.considered.

ControlControl It does not lay emphasis It does not lay emphasis on control.on control.

M.A. controls performance of M.A. controls performance of the organization by preparing the organization by preparing performance report for each performance report for each responsibility centre.responsibility centre.

Valuation Valuation of Stockof Stock

Stocks are valued on the Stocks are valued on the principle of “cost or principle of “cost or market price whichever market price whichever is lower.”is lower.”

No such principle is followed.No such principle is followed.

CHAPTER 1 IS OVERCHAPTER 1 IS OVER

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