ACCOUNTING FOR MANAGERS MBA/DCC 102

Nature and scope of Accounting

Accounting may be regarded as an art of recording, classifying and summarizing of money

transactions and events

Accounting may be regarded as a science in its being able to use scientific and analytical
techniques for solving managerial problems

Accounting may be regarded as an information system for providing information needed by the
stakeholders

Accounting may be regarded as a service function in being able to serve the society through
social accounting

Accounting may be regarded as a language of the business because the preparers and
interpreters of the financial information should understand the common language of accounting

Limitations of Accounting

Historical information: Accounting reports are based on the past historical information

Financial information: Accounting does not reveal non monetary information like customer
satisfaction, market competition, market share, etc.

Inadequate Cost information: Accounting does not provide cost information to gauge the
product or department-wise profitability

Personal judgment: Financial information is clouded by personal judgment of the preparers like
provisions, valuations, etc.

Role of an Accountant

Oversee accounting function

Interpret the financial information

Arrange and manage working capital

Capital expenditure control

Business decision making

Keep the properties insured

Balance debt and equity of the company

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 Look after stakeholders interests

Identifying as a strategic manager

Involve himself with social accounting

Ensure tax and other statutory compliance

Branches of Accounting

Financial Accounting
Cost Accounting
Management Accounting
Tax Accounting

Distinction between cost accounting and financial accounting

cost accounting financial accounting

1. Deals with collection, recording, classification 1. Deals with the recording, classifying and
and allocation of costs summarizing of income and expenses
2. Financial statements are prepared for
2. Cost reports are prepared for internal use internal and external use
3. Monetary transactions are linked with
3. Costs are linked with products and services
financial statements
4. Maintenance of cost records is not mandatory
4. Maintenance of financial records are
mandatory for companies
unless ordered by government
5. Audit of financial records are compulsory
5. Audit of cost accounts is compulsory when for companies
ordered 6. Financial statements are prepared in
prescribed format
6. No prescribed format for reports 7. It is governed by accounting standards and
GAAP
7. It is governed by cost accounting standards 8. Determines companys profits as a whole

Management Accounting - Scope

(1) Management accounting information helps detection of unprofitable products, services and
departments.

(2) It helps to analyze the costs in the light of the competitors costs and take action for
improvement

(3) Use of activity based costing helps to identify cause-effect relationship of costs with a view to
eliminating the non-value added activities

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 (4) Use of customer profitability analysis enables identification of unprofitable customer for
improvement

(5) It helps locating bottle-necks and constraints in manufacturing operations towards

improvement of profitability

(6) Management accountant helps the organization in planning control and decision making and in
product pricing and inventory valuation.

Financial Accounting Vs. Management Accounting

Financial Accounting Management Accounting

1. Financial statements are used by internal
and external users
2. It deals with monetary transactions of the
company as a whole
3. The data are historical in nature
4. Emphasis is on accuracy of data
5. Concerned with reporting in money value
6. Financial statements are prepared in the
prescribed format
7. The accounts are subjected to audit
1. Management accounting reports are used
by internal managers
2. It deals with product profitability and
future plans
3. It deals with the future projections
4. Past data are accurate and projections are
realistic
5. Concerned with monetary and
quantitative reporting
6. The reports are tailored to the needs of
the managers
7. There is no prescribed audit

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Accounting Postulates

Business entity

Going concern

Money measurement

Accounting period

Accounting Concepts

Matching concept

Revenue realization concept

Accrual concept

Cost concept

Dual aspect concept

Accounting Standards

Scope of accounting standards:

Definition and applicability

Principle based accounting

Conformity with law

IFRS harmonization

Objectives of Accounting Standards

harmonized policies and practices

reliable accounting information

improvement in operational efficiency

quality of verification

Protection to accountants and auditors

conformity with laws

facilitate updating

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 improved presentation of accounts

reduction of cost and time

List of Accounting Standards

AS 1: Disclosure of Accounting Policies AS 2: Valuation of Inventories

AS 3: Cash Flow Statements
AS 5: Net profit or Loss for the period, Prior
period items and Changes in Accounting Policies
AS 7: Construction Contracts
AS 9: Revenue Recognition
AS 11: Accounting for changes in foreign
exchange rates
AS 13: Accounting for Investments
AS 15: Employee Benefits
AS 17: Segment Reporting
AS 19: Leases
AS 21: Consolidated Financial Statements
AS 23: Accounting for investments in associates
in consolidated financial statements
AS 25: Interim Financial Reporting
AS 27: Financial Reporting of Investments in
Joint Venture
AS 4: Contingencies and Events occurring after
balance Sheet date
AS 6: Depreciation Accounting
AS 8: Accounting for Research and development
AS 10: Accounting for Fixed Assets
AS 12: Accounting for government grants
AS 14: Accounting for Amalgamations
AS 16: Borrowing Costs
AS 18: Related Party Disclosure
AS 20: EPS
AS 22: Accounting for Taxes on Income
AS 24: Discontinuing Operations
AS 26: Intangible Assets
AS 28: Impairment of Assets
AS 29: Provisions, contingent Liabilities and
Contingent Assets

International Financial reporting Standards (IFRS

IFRS is a core set of accounting practices used across the globe

It is a global framework and guidance for preparing the financial statements

Global presentation of financial statements should conform to IFRS terminology

Useful for companies having foreign subsidiaries

It will stimulate flow of global capital and competition

Financial Statements

Profit and Loss Account

Balance Sheet

Cash Flow Statement

Schedules relating to profit & loss account and balance sheet

Notes including note on accounting policies.

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Characteristics of Financial Statements

Reliability

Timeliness

Objectivity

Verifiability

Faithfulness

Decision Usefulness

Consistency

Comparability

Preparation Of final Accounts

Trial Balance
Profit and loss Account
Balance Sheet

Trial Balance and Balance Sheet

Trial Balance
1. 1 A list of all ledger balances
2. Purpose is to check arithmetical accuracy
3. Extracted after all transactions have been
posted
4. Shows only opening stock
5. Provides names of various accounts
6. May run in to several pages
7. It is for a period ended
Balance Sheet
1.A list of assets, liabilities and capital
2.Depicts the financial health
3. Prepared after closing entries are passed and
profit and loss account is ready
4. Opening stock found in the previous year
balance sheet
5. Contains assets liabilities and capital
6.A compact statement
7. A snapshot at a point of time

Profit and Loss Account and Balance Sheet

Profit and Loss Account Balance sheet
1. It is for a period ended 1.A snapshot at a point of time
2. Considers all income and expenditure on 2. Provides all assets liabilities and capital
accrual basis 3. Assets and liabilities are arranged from non-
3. Prepared in single or multi-step format liquid to liquid assets
4. Deals with nominal accounts 4. Deals with real, personal and nominal accounts
5. Prepared before balance sheet is prepared 5. Prepared after the profit and loss account is
prepared

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 FORMAT OF TRADING & PROFIT & LOSS A/C and BALANCE SHEET

TRADING & PROFIT & LOSS A/C

The trading account sho ws the result of trading ( i.e., buying and selling of goods) called gross profit or
gross loss. Trading account does not consider the administration, selling and financial expenses incurred
in running the business.
The profit and loss account shows the net profit or net loss (i.e., ultimate profit or loss) of a business for a
particular trading period. It considers all the income and expenses incurred in running the business.

Trading and Profit and Loss Account for the year ended
Debit/Payments/Expenses Credit/Receipts/Incomes
Particulars Amount Particulars Amount
DIRECT EXPENSES: DIRECT INCOMES:
To Opening Stock xxx By Sales A/c Xxx
To Purchase A/c xxx Less: Sales Return A/c (If any) Xxx
Less: Purchase Returns A/c (If any) xxx By Closing Stock A/c Xxx
To Wages A/c xxx By Gross Loss c/d (balancing fig.) Xxx
To Power, fuel & water A/c xxx
To Carriage inward A/c xxx
To Import duty A/c xxx
To Excise duty A/c xxx
To Octroi A/c xxx
To Gross Profit c/d(balancing fig.) xxx _______

To Gross Loss b/d By Gross Profit b/d

INDIRECT EXPENSES: xxx INDIRECT INCOMES: xxx
Office Expenses: xxx By Rent Received A/c xxx
To Salaries A/c By Interest Received A/c xxx
To Rent A/c xxx By Dividend Received A/c xxx
To Printing and stationery A/c xxx By Commission Received A/c xxx
To Postage and telegram A/c xxx By Bad debts recovered A/c xxx
To Office insurance A/c xxx By Discount Received A/c xxx
To Lighting and heating A/c xxx By Profit on sale of property A/c xxx
To Audit fees A/c xxx By Profit on sale of investment a/c xxx
To Legal Charges A/c xxx By Interest on Drawing A/c xxx
Maintains Expenses: xxx By Net Loss (balancing figure) xxx
To Repairs A/c (xxx)
To Depreciation A/c xxx
Selling and distribution expenses: xxx
To Rent of warehouse A/c

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 To Packing charges A/c xxx
To Advertisement A/c xxx
To Carriage outwards A/c xxx
To Bad debts A/c xxx
To Commission paid A/c xxx
To Travelling expenses A/c xxx
Financial Expenses: xxx
To Interest on loan A/c, xxx
To Discount allowed A/c,
To Loss on sale of property A/c, xxx
To Loss on sale of investment A/c xxx
To Net Profit c/d (balancing figure) xxx
xxx
xxx
xxx

BALANCE SHEET
A balance sheet, also referred to as Statement of Financial Position, is a statement that exhibits the assets
and liabilities of a business enterprise prepared at a particular date.
A balance sheet comprises of three parts viz., Assets, Liabilities & Capital
Balance Sheet as on.
Liabilities/To Whom? Assets/What are available?
LIABILITIES Amount ASSETS Amount
Capital: xxx Fixed Assets (Less Depreciation):
Land & Building A/c xxx
Reserves and Surplus xxx Plant & Machinery A/c xxx
Furniture & Fixture A/c xxx
Current Liabilities Typewriter & Computers A/c xxx
Sundry Creditors A/c xxx Vehicles A/c xxx
Bills Payable A/c xxx Goodwill A/c xxx
Bank overdraft(BoD) A/c xxx Patents A/c xxx
Outstanding Expenses A/c xxx Trade Marks A/c xxx
Income Received Advance A/c xxx Copy Rights A/c xxx
Long term Liabilities: Long term Investments:
Long term Loans xxx Investment in shares, debentures, xxx
Debentures xxx government etc xxx
Current Assets:
Cash A/c xxx

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 Bank A/c xxx
Short term investment A/c xxx
Sundry Debtors less Bad Debts A/c xxx
Bills Receivable A/c xxx
Stock A/c xxx
Prepaid Expenses A/c xxx
Outstanding Incomes A/c xxx

The Annual Report Usually Contains...

financial statements which consist of

Balance sheet, Profit & Loss A/c.

Cash Flow Statements.

Notes to the financial statements.

Disclosure of accounting policies.

Chairmans Statement.

Board of Directors & Committees.

Directors Report.

Directors Responsibility Statement.

Auditors Report.

Report on Corporate Governance.

Disclosure regarding Employee Stock options Schemes.

List of employees receiving remuneration exceeding Rs. 60 Lakhs.

Conservation of Energy Reports.

Consolidated Financial Statements.

Subsidiaries Financial Statements.

Management Discussion and Analysis.

Annual General Meeting Notice.