ACCOUNTING

FOR
MANAGEMENT
 UNIT I
FINANCIAL ACCOUNTING
Introduction to Financial, Cost and
Management Accounting- Generally accepted
accounting principles, Conventions and
Concepts-Balance sheet and related concepts-
Profit and Loss account and related concepts -
Introduction to inflation accounting-
Introduction to human resources accounting.
 Introduction
to
Accounting

• Accounting – An Information Process

• Users of Accounting Information
• GAAP
• The Accounting Equation
• Double Entry System
Accounting...

is the language of business.

Communicates the results of
operation and financial position of a
business to various stakeholders
 Accounting –
The Language of Business
Accounting is the information system that...

measures business activities,

processes data into reports, and

communicates results to decision makers.

Meaning
a process of identifying, recording,
summarizing, and reporting economic
information to decision makers in the
form of financial statements.
Definitions of Accounting
“Accounting is an art of recording,
classifying, and summarizing in a
significant manner and in terms of
money transactions and events which
are in part at least of a financial
character and interpreting the results
thereof”.
- American Institute of Certified Public
Accountants(AICPA)
 FEATURES OF ACCOUNTING

1. Recording business transactions.

2. Classifying business transactions.
3. Recorded in monetary transactions and events.
4. Art of summarizing financial transactions.
5. Art of analysis and interpretation of these
transactions.
6. The results of these transactions must be
communicated to the concerned persons.
 Functions of Accounting
• Deal with financial transactions

• Recording:- “Journal”.

• Classifying:- “Ledger”.

• Summarising :- “Trail Balance”

• Interpretation:- “Financial Condition”

• Communicating:- “Profit / Loss”

 Process of Accounting

Recording Journal

Classifying Ledger

Summarizing Trial
Balance

Preparation of Financial
Statements
Accounting — An Information
Process
Identification of Users
 Accounting — An Information
Process
Identification of Users

Economic
Data and User Information Needs
Activities
Accounting — An Information
Process
Identification of Users

User Information Needs

Accounting system
Accounting — An Information
Process
Identification of Users

User Information Needs

Accounting system

Reports
Accounting — An Information Process
Identification of Users

User Information Needs

User Information Needs

Reports

User Decisions
 The Flow of Accounting
Information

User Information Needs

Businesses prepare reports to

Show the results of their
operations

People make decisions

Users of Accounting Information

Individuals

Businesses

Investors and Creditors

Government regulatory agencies

Taxing authorities

Nonprofit Organizations
 • Investors
Financial Accounting • Creditors
EXTRNAL USERS • Regulators
• Customers
• Competitors
Financial Accounting • Owners
INTERNAL USERS • Managers
• Employees
Branches of Accounting

Financial accounting

Cost accounting

Management accounting
 Financial Accounting
It measures and records business
transactions in order to prepare financial
statements

It provides financial statements based

on generally accepted accounting
principles.

Its focus is on reporting to external

parties.
 Scope of Financial
Accounting
1. Recording of information
2. Classification of data .
3. Making summaries
4. Dealing with financial transactions .
5. Interpreting financial information .
6. Communicating results
7. Making information more reliable .
 Cost Accounting
It is the process of accounting for costs

It provides information for both

management accounting and financial
accounting.

It measures and reports financial and

nonfinancial data.
 Scope of Cost Accounting
1. Analysis and ascertainment of costs
2. Presentation of costs for cost reduction & cost
control
3. Planning
4. Accumulation and utilization of cost data
5. Preparation of budgets and implementation of
budgetary control
6. Ascertaining profitability of each product
7. Providing useful data to the management for
taking decisions
 Management Accounting

It measures and reports financial

and non-financial information that
helps managers make decisions to
fulfill the goals of an organization.
Scope of Management
Accounting
● Financial Accounting
● Interpretation of data
● Cost Accounting
● Control procedures & methods
● Financial Management
● Internal audit
● Budgeting & forecasting
● Tax accounting
● Inventory Control
● Office services
● Reporting to management
 The Accounting Equation

Assets = Liabilities + Owner’s

Equity

Economic
Resources Claims to
Economic
Resources
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 Differences Between Financial, Cost &
Management Accounting
Basis Financial Cost Accounting Management
Accounting Accounting
Objects Record Ascertainment, To assist the
transactions & allocation, management in
determine accumulation and decision-
financial accounting for cost making &
position & policy
profit or loss. formulation.

Nature Concerned with Concerned with Deals with

historical data. both past and projection of
present data for the
recorded(historical future
in nature). (futuristic in
nature)
Principle Governed by Certain principles No set
Followed GAAP followed for principles are
recording costs. followed in it.
 Differences Between Financial, Cost &
Management Accounting
Basis Financial Cost Accounting Management
Accounting Accounting

Data Qualitative Only quantitative Uses both

used aspects are not aspect is recorded. quantitative and
recorded qualitative
concepts.

Reportin Generally at As & when desired by As & when

g end of year management desired by
frequenc management
y

Data Qualitative Only quantitative Uses both

used aspects are not aspect is recorded. quantitative and
recorded qualitative
concepts.
 Differences Between Financial, Cost &
Management Accounting
Basis Financial Accounting Cost Accounting Management
Accounting

Publication Published in case of NOT published NOT published

companies

Informatio Monetary transactions Both monetary and Both monetary

n recorded ONLY non-monetary non-monetary
information. information a

Forms of Accounts are These are generally These are

Account prepared to meet the kept Voluntarily to generally kept
legal requirements. meet the Voluntarily to
requirements of meet the
the management. requirements of
the management.
 Generally Accepted
Accounting Principles
 1.Accounting Concepts
•The separate entity concept: company is treated as
a separate economic entity.

•Money Measurement Concept: transactions that

can be expressed, in terms of money

•Dual Aspect Concept: Every transaction should be

debit, there is a corresponding credit.

•The Going concern concept: company will stay

in operation for predictable future.
 1.Accounting Concepts

•The principle of conservatism: are available to

record or report transactions.

•The cost principle: assets and liabilities are

recorded at their transaction cost.

•The matching principle: operational efforts be

matched to the operational accomplishments.
 2. Accounting Conventions

1. Conservatism: This convention holds that

accountant must operate safely.

2. Consistency: Accounting Practices are unchanged, year

after year.

3. Materiality: 'Materiality' denotes to the comparative

significance of an item or event.

4. Full disclosure Convention: all material facts must

be disclosed in the financial statements.
 Concepts for Balance Sheet
Preparation and Its Contents
 Balance Sheet
Meaning
A Balance Sheet is one of the financial
statements. A Balance Sheet is a
statement of assets and liabilities of an
enterprise at a given date. It is also called
Statement of Financial Position.
 Three important sections of
any balance sheet are:
• Assets – Anything that has value and
owned by a company

• Liabilities – This provides a list of

debts a company owes to others

• Capital or Equity- This is the amount

invested by the Shareholders
 Features of Balance Sheet
• A balance sheet is only a statement and not an account.
It has no debit side or credit side. The headings of the
two sides are ‘Assets’ and ‘Liabilities’.
• It is prepared at a particular point of time and not for a
particular period. The information contained in it is true
only at the particular point of time at which it is
prepared.
• It is a summary of balances of those ledger accounts
which have not been closed by transfer to the Trading
and P & L Account.
• It shows the nature and value of assets and the nature
and the amount of liabilities at a given date.
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 Need of Balance Sheet
• To ascertain the nature and value of assets
of a business.
• To ascertain the nature and amount of
liabilities of a business.
• To find out the financial solvency of an
enterprise. An enterprise is considered to
be a solvent if its assets exceed its external
liabilities.
Contents of Balance Sheet
Contents of Balance Sheet
 Profit & Loss Account
• Profit and loss account is the second part
of trading and profit and loss account.

• P&L a/c is prepared with the help of the

trial balance.

• The purpose of preparation of profit and

loss account is to know the actual profit
of the business firm during a particular
period.
• Profit and loss account is like a
statement and contains the following
columns:-
Particulars Amount Particulars Amount
(Expenditure) (Income )
 Profit & Loss Account

Definition:
The profit and loss statement
shows the profit or the loss of a
business during a certain time
period.
 Terms in P&L Account
• Revenue - details of all income from your
primary business activities (i.e. sale of
products and services), any revenue from
secondary activities (e.g. bank interest) and
any other financial gains

• Expenses - details of all expenditure on

primary activities (e.g. material and labour
costs), any secondary expenditure and any
other losses during the period.
 Terms in P&L Account
• What is net income? This is your income minus
the cost of goods sold, expenses and taxes.

• What is gross profit? This is your total

revenue / sales, minus the cost of those goods sold.

• What is operating profit? This is the profit

you have after operating expenses (like rent) are deducted
from gross profit. It doesn’t include interest or tax deductions.

• What is net profit? This is your actual profit. It’s

the amount you’re left with after remaining working
expenses are deducted from gross profit.
 Inflation Accounting

Inflation accounting refers to the

process of adjusting the financial
statements of a company to show the
real financial position of the company
during inflationary period.
 Inflation Accounting
• Involves recording of business
transactions at current value,

• To analyze the impact of changes

in price or business transactions
on:
• Costs and Revenues,
•Assets and Liabilities.
 Objectives of IA
1. To remove the various distortions with
which financial statement based on
historical cost suffer.
2. To provide for more meaningful inter-
period comparison.
3. To improve the meaning and
measurement of income and expenses in
the face of changing the purchasing
power of money.
4. To improve decision making in the
organization.
 Cons of IA
• It is based on actual events and data.
• It is widely used and understood by
all.
• Comparison of figures over a period
of time can be made easily.
• It forms the basis of tax assessments.
• Manipulation of accounting records is
difficult under historical costs.
 Techniques of Inflation
Accounting

• Current Purchasing Power Method

• Current Cost Accounting

• Current Value

• Replacement Cost Accounting

 Techniques of IA
• Current Purchasing Power Method
The financial statements are converted into figures at
current purchasing price. However the values of only
the non-monetary items are converted.

Conversion factor = Price Index at time of conversion / Price

Index at the date of conversion
CPP Value = Conversion Amount or Historical Value x
Conversion Factor

• Current Cost Accounting

– Under this method assets are shown at current costs and
profits are determined on the basis of costs at the date of
sale rather than the actual cost.
 Techniques of IA

• Current Value
– Under this method all assets and liabilities are
measured at current value at which they could be sold
or settled at the current date.

• Replacement Cost Accounting

– Under this method all assets and liabilities are
recorded on a balance sheet according to the cost of
replacing them rather than their historical costs.
 What is Human Resource
Accounting?
• Human Resource Accounting is the process of
identifying and measuring data about Human
Resources and communicating this information
to the interested parties.-American Accounting Society
Committee on HRA

• It is an attempt to identify and report the

Investments made in Human Resources of an
organisation that are currently not accounted
for in the Conventional Accounting Practices
 Objectives of HRA?

• Cost of Human Resources i.e. the

expenditure incurred for recruiting,
staffing and training the Quality of the
Employees and

• Value of Human Resources i.e. the

yield which the above investment
can yield in the future.
 Methods of HRA

Cost Based Models Value Based

Models
PV of Future
Capitalization
Earnings Model
of Historical
Costs Model
Reward Valuation
Replacement
Model
Costs Model

Valuation on
Opportunity
Group Basis
Cost Model
 A. COST BASED MODELS

1. Capitalisation of Historical Cost: costs

related to Human Resources (i.e. Recruitment, Acquisition,
Formal Training, Informal Training and development)

2. Replacement Costs: the costs that would be

incurred to replace its existing human resources by an
identical one.  

3. Opportunity Cost Model: the value of an

employee in its alternative best use, as a basis of estimating
the value of human resources
 B. VALUE BASED MODELS

• Present Value of Future Earnings

Model: the present value of estimated future earnings
discounted by the rate of return on Investment

• Reward Valuation Model: Individual’s Value to

an organisation is determined by the services he is expected to
render

• Valuation on Group Basis: This model of

Human Resource Accounting attempted to calculate
the present value of all existing employees in such in
each rank.