Ma 1.2 fundamentals of managerial accounting

Dr. Varadraj BapatDr. Varadraj Bapat 11

Module 1.2

Fundamentals of Managerial Accounting


Management Accounting

Money Measurement Concept Double Entry System Single Entry System Forms of organisation Stakeholders


Money Measurement Concept

Money is the medium of exchange and the standard of economic value. Hence money measurement concept requires that only those transactions which are capable of being measured in terms of money are to be recorded in books of accounts.


Transactions that cannot be Transactions that cannot be expressed in terms of money are expressed in terms of money are not recorded in books.not recorded in books.

Example1Example1

Successful meeting with a Successful meeting with a prospective customer may be very prospective customer may be very important but can not be recorded important but can not be recorded in the books of accounts.in the books of accounts.


Example2Example2

employees are the valuable employees are the valuable resources of the organisation but resources of the organisation but their measurement in monetary their measurement in monetary terms is not possible therefore, not terms is not possible therefore, not recorded in books.recorded in books.


Double Entry

Dual aspect concept is the core of Dual aspect concept is the core of double entry book-keeping system.double entry book-keeping system.

According to it, every transaction has According to it, every transaction has two aspects and both aspects are to two aspects and both aspects are to be recorded in the books of be recorded in the books of accounts.accounts.


Double entry system of book-keeping Double entry system of book-keeping means that all transactions are means that all transactions are recorded in two aspect one involving recorded in two aspect one involving the receiving benefit and other giving the receiving benefit and other giving benefit in the accounts system. benefit in the accounts system.

For instance, buying a machinery for For instance, buying a machinery for Rs.25,000 would be entered as a Rs.25,000 would be entered as a decrease in the cash account, and as decrease in the cash account, and as an increase in the ‘machinery’ account. an increase in the ‘machinery’ account.


The advantage of a double entry The advantage of a double entry system is that it is comprehensive. system is that it is comprehensive.

It will give you an accurate picture of It will give you an accurate picture of your true financial position, not just your true financial position, not just your cash position. As non-cash your cash position. As non-cash transactions can be huge, this is transactions can be huge, this is extremely important for robust extremely important for robust financial management.financial management.

The disadvantage of double entry The disadvantage of double entry bookkeeping is that it needsbookkeeping is that it needs


significant details for regular significant details for regular maintenance of books and not maintenance of books and not always easy to use.always easy to use.

It generally needs a qualified It generally needs a qualified accountant to run it. accountant to run it.

Every transaction has two aspects:Every transaction has two aspects: i) it increases one asset and i) it increases one asset and decreases other assetdecreases other asset ii) it increases an asset and ii) it increases an asset and increases other liabilityincreases other liability


iii) it decreases an asset and iii) it decreases an asset and

decreases a liabilitydecreases a liability

iv) it decreases one liability and iv) it decreases one liability and

increases other liabilityincreases other liability


It is difficult to define single entry system because, in fact, there exists no system like single entry system. Broadly speaking, it is a defective double entry system. Any system that falls short of complete double entry method is called single entry system. Under this method, sometimes both the aspects of transactions are recorded,

Single Entry


sometimes only one aspect is recorded or sometime no aspects of transactions is recorded in the books.

In short single entry system may be called a mix of double entry, single entry and no entry.

For instance, buying a Machinery for Rs.25,000 would be entered as a payment in a cashbook.


It has the advantage of being simple,

and spontaneous to use. However, it may not account for non-

cash (or non-bank) transactions. These are transactions that will have a significant effect on the accounts, but do not immediately cause a change on the cash or bank accounts


Example

Goods sold on one months credit are Goods sold on one months credit are not be recorded in the system at the not be recorded in the system at the time of sale of goods. This will create time of sale of goods. This will create a situation where a businessman can a situation where a businessman can not anticipate exact cash position of not anticipate exact cash position of the particular month and therefore the particular month and therefore wrong planning.wrong planning.


Example of a non-cash transaction is ordering a Machinery for Rs.25,000. The machinery might take a month to arrive. During that month, a single entry system would not record the transaction on the formal accounts. This would mean that the accounting system has not shown liability of Rs.25,000 payable to machinery suppliers: a dangerous situation.


• Sole Proprietorship• Hindu Undivided

Family • Partnership• Company• Co-operative Society

Forms ofBusiness Organization


• it is a business owned and usually carried on by a single person known as proprietor.

• When the ownership and management of business are in control of one individual, it is known as sole proprietorship.

Sole ProprietorshipSole Proprietorship


Advantages:•Ease of formation•Better Control•Prompt Decision Making •Retention of Business Secrets•Personal Attention to Consumer NeedsDisadvantages:•Limited life•Unlimited liability•Limited Financial Resources•Limited Capacity of Individual


Hindu Undivided Family (HUF) business is a form of business organisation found only in India. In this form of business, all the members of a Hindu undivided family own the business jointly. The affairs of business are managed by the head of the family, who is known as the “KARTA” (can be male or female).

Hindu Undivided FamilyHindu Undivided Family


HUF business comes into existence as per the Hindu Inheritance Laws of India. The membership is limited up to three successive generations. Thus, an individual, his child(ren), and his grandchild(ren) become the members of a HUF by birth. They are called Co-parceners. A daughter can also be a coparcener.


A partnership is a relationship between the persons who have agreed to share the profits. It is a business owned and carried on by a group of people.

Each member of such a group is individually known as partner and collectively the members are known as a partnership firm.

Partnership


These firms are governed by the Indian Partnership Act, 1932. Registration of partnership is not compulsory. But since registration entitles the firm to several benefits, it is considered desirable.


Advantages:Advantages: Ease of formation Less regulations Sharing of Risk No corporate income tax

Disadvantages:Disadvantages: Unlimited liability Difficult to raise capital Lack of Harmony


Limited Liability Partnership (LLP) can be formed by any two or more person, associated for carrying on a lawful business with a view to profit, may by subscribing their names to an incorporation document and filing the same with Registrar.

Limited Liability Partnership


• Limited Liability Partnership (LLP) is a separate legal entity.

• Liability of the partners is limited to their agreed contribution in the LLP.

• A firm, private company and unlisted public company is allowed to be converted into LLP in accordance with Provisions of the LLP Act 2008.

• The Indian Partnership Act 1932 is not applicable to LLPs.


Company

Unlimited Limited

Private Public

Unlisted Listed


Company form of business organisation is a voluntary association of persons to carry on business. Normally, it is given a legal status and is subject to certain legal regulations. It is an association of persons who generally contribute money for some common purpose. The money so contributed is the capital of the company.

Company / Corporation


The persons who contribute capital are its members. The proportion of capital to which each member is entitled is called his share, therefore members of a joint stock company are known as shareholders and the capital of the company is known as share capital.

The companies are governed by the Indian Companies Act, 1956. The Act defines a company as an artificial person created by law, having separate entity, with perpetual succession and a common seal.


Advantages:• Unlimited life• Professional Management• Limited liability• Ease of raising capital• High possibility of wealth maximization

Disadvantages:• Dividend Tax burden• High cost of set-up and report filing• More regulation


Any ten persons can form a co-operative society. It functions under the Co-operative Societies Act, 1912 and other State Co-operative Societies Acts. A co-operative society is entirely different from all other forms of organisation discussed above in terms of its objective. The co-operatives are formed primarily to render services to its members.

Co-operative Society


Every member has a right to take part in the management of the society. Each member has one vote. Generally the members elect a committee known as the Executive Committee to look after the day to day administration and the said committee is responsible to the general body of members.


The liability of the members is limited to the extent of capital contributed by them.

Registration of a society under the Co-operative Societies Act is a must. Once it is registered, it becomes a body corporate and enjoys certain privileges just like a joint stock company.


Some of the privileges are: The society enjoys perpetual

succession. It has its own common seal. It can own property in its name. It can enter into contract with

others. It can sue others in court of law.


Generally it also provides some service to the society. The main objectives of co-operative society are:

(a) rendering service rather than earning profit,

(b) mutual help instead of competition, and

(c) self help in place of dependence.


On the basis of objectives, various types of co-operatives are formed :

Consumer co-operatives Producers co-operatives Producers co-operatives Marketing co-operatives Housing Co-operatives Credit Co-operatives Forming Co-operatives


Advantages :• Democratic management• Assistance from the government• Elimination of middlemen’s profit• Fairly stable life Disadvantages :• Limited capital• Lack of managerial talent• Lack of motivation• Lack of secrecy• Dependence on the government


Stakeholder

Stakeholder is a person who has a legitimate interest in an entity.Investors

Management of enterpriseCreditors / LendersGovernmentEmployees


Consumers Local Community


Investor

Investor study the Financial Statement of the company before deciding upon whether to buy or not a business or shares.If they intend to buy, then the fair value of business or shares is also determined on the basis


of the detailed analysis of the Financial Statement.

Prospective investors make use of financial statements to assess the viability of investing in a business.


Management

Managers are the main users of the Financial Statement. They use the financial statement

To make the inter firm and inter period comparison

To study trends in sales, expenses etc.

To understand the relationship


among various items of financial statement

To know movement of funds through Fund Flow Analysis


Creditors/ Lenders

Creditor or Lender study the Financial statement of the borrower before advancing credit or loan. Thereafter also the creditors and lenders analysis the Financial statement to find out whether the business is solvent (in position to repay the loan).


Government

The amounts payable by concern by way of taxes levied by Government such as Income Tax, Sales Tax, Excise etc. are examined on the basis of the data in Financial Statement.


Employees

Employees also use Financial Statements in making collective bargaining agreements with the management, in the case of labour union or for individuals in discussing their compensation, promotion and rankings.

Documents

Ma 1.2 fundamentals of managerial accounting