chapter 1 management accounting
DESCRIPTION
Compiled by Prof At MEt Nashik CollegeTRANSCRIPT
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Management Accounting
Financial Accounting
Concepts & Conventions
Chapter 1:
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Power of Accounting
“Accounting provides a very selective but powerful representation of the corporate identity..”
“The detailed language of assets, liabilities, costs, profits provide a range of corporate imagery and vocabulary …….”
“Accounting provides the categories through which organisational participants perceive both themselves and the organisation.”
Mike Powers
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Definition of Financial Accounting
• Financial accounting is the process of identifying, measuring and communicating economic information about a business organisation in order to permit informed judgements by users of that information.
[American accounting association]
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The Process of Financial Accounting
SUMMARISING
IDENTIFYING
COMMUNICATING
& classifying the assets, liabilities, capital, income & expenses
recording each transaction of the business
in the form of periodic financial statements
to users/stakeholders in the business
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Who are the Stakeholders ?
Accounting information
Suppliers
Shareholders/
investors
Employees
Competitors
Customers Government
Lenders/
creditors
General public
Investment analysts
Managers
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Necessary qualities of financial information.
Accounting Information
consistency
clarity accuracy
reliability
timeliness relevance
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Main forms of business enterprise [entity].
Business organisation
Public limited liability company [plc]
Non - profit co-op charity public body
Sole trader
partnership
Private limited liability company
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What is Management Accounting?
• It is that field of accounting which deals with providing information to managers for their use in
planning, Decision making, performance evaluation, control, Management of cost, Financial Reporting.
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Planning Acting
Feedback
Controlling
The Functions of Management
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Origin • This concept was not known to the
business world until 1950. • The term was first formally
described in a report entitled ‘Management Accounting’ in 1950.
• The report was published by the Anglo American Council of Productivity Management Accounting Team after its visit to US in first quarter of 1950
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Definition of Management Accounting
“ The process of identification, measurement,
accumulation, analysis, preparation & communication
Of financial information used by management to Plan, Evaluate & Control Within the organisation
& to assure appropriate use & accountability for its resources.”
-National Association of Accountants [USA]
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Management Accounting and Financial Accounting
Internal managers of the business
Investors, Creditors, Government authorities
Primary Users
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Management Accounting and Financial Accounting
Help managers plan and control business operations
Help investors, creditors, and others make investment, credit, and other decisions
Purpose of Information
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COMPARING MANAGERIAL AND FINANCIAL ACCOUNTING
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Phases in the evolution of Accounting
?
HRA Inflation
Acct. Social
Respon. Acct. Management Accounting
Cost Accounting
Financial Accounting
Stewardship Accounting
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Scope of Management Accounting 1. Financial Accounting 2. Cost Accounting 3. Financial Statement Analysis 4. Forecasting & Budgeting 5. Cost Control Techniques 6. Inflation Accounting 7. Management Reporting 8. Quantitative Techniques 9. Taxation 10. Internal Audit.
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Functions of Management Accounting
• Planning & Forecasting • Furnishing Information • Not confined merely to financial data • Analysis & Interpretation • Coordinating • Communication • Establishing standard of performance • Undertaking special studies • Controlling
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Accounting Concepts
• The term concept denotes the basic assumptions or pro or conditions upon which accounting is based.
• Accounting concepts are such ideas that are commonly associated with the theory and practice of accountancy.
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Accounting Period
Accrual
Realization
Matching Cost
Attach
Cost
Going concern
Money Measurement
Dual Aspect
Business Entity
Accounting Concepts
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Accounting Conventions
• Conservatism
• Consistency
• Materiality
• Disclosure
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1. Conservatism
• This convention put forth the concept that, “Anticipate no profit & provide for all possible losses.”
• This indicate that think & provide for all probable losses and expense but do not credit any probable future profit.
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Conservatism
On this basis, • Closing stock is valued at cost or market
price whichever is less. • Creating a provision for doubtful debts, • Fixed assets are shown at cost less dep. • Amortizing intangible assets • Providing for discount on debtors.
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2. Consistency
• Accounting policies, methods, rules and practices should remain unchanged from one year to another year.
• Then only the results of business concern can be compared from one year to another
• Consistency has to be followed in following various accounting policies.
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Examples of Accounting policies
• Method of charging depreciation. • Valuation of inventories • Valuation of Investments & Fixed assets • Treatment of contingent liabilities • Treatment of goodwill • Treatment of revenue & capital
expenditure.
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3. Materiality
• Materiality means relative importance and is related to the convention of disclosure.
• Disclosure is necessary in financial accounts only for material facts.
• Materiality depends not only on the size of the amount spent but also on its nature.
• Ultimately, what is material in one accounting period may not be material in next accounting period & what is material for one business may not be material to another business.
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4. Disclosure
• All the material facts should be disclosed in the final accounts.
• The object of disclosure is to make the financial statements more useful & to five less scope for misinterpretation.
• Even significant events occurring after the end of accounting period but before the preparation of balance sheet are to be disclosed
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Items to be disclosed…. • Abnormal items • Contingent liabilities or gain • Accounting methods & policies adopted by the
company • Changes in method or policies of accounting & its
effect on profit • Items of non recurring nature • Significant difference between cost & market value
of stock • Items pertaining to previous year – prior period
items