Dr. Varadraj Bapat*Module 1.2Fundamentals of Managerial Accounting

Dr. Varadraj Bapat*Double Entry System, Forms of OrganisationMoney Measurement ConceptDouble Entry SystemSingle Entry SystemForms of organisationStakeholders

Dr. Varadraj Bapat*Money Measurement ConceptMoney 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.

Dr. Varadraj Bapat* Transactions that cannot be expressed in terms of money are not recorded in books. Example1 Successful meeting with a prospective customer may be very important but can not be recorded in the books of accounts.

Dr. Varadraj Bapat*Example2employees are the valuable resources of the organisation but their measurement in monetary terms is not possible therefore, not recorded in books.

Dr. Varadraj Bapat*Double EntryDual aspect concept is the core of double entry book-keeping system.According to it, every transaction has two aspects and both aspects are to be recorded in the books of accounts.

Dr. Varadraj Bapat*Double entry system of book-keeping means that all transactions are recorded in two aspect one involving the receiving benefit and other giving benefit in the accounts system. For instance, buying a machinery for Rs.25,000 would be entered as a decrease in the cash account, and as an increase in the machinery account.

Dr. Varadraj Bapat*The advantage of a double entry system is that it is comprehensive. It will give you an accurate picture of your true financial position, not just your cash position. As non-cash transactions can be huge, this is extremely important for robust financial management.The disadvantage of double entry bookkeeping is that it needs

Dr. Varadraj Bapat*significant details for regular maintenance of books and not always easy to use.It generally needs a qualified accountant to run it. Every transaction has two aspects: i) it increases one asset and decreases other asset ii) it increases an asset and increases other liability

Dr. Varadraj Bapat*iii) it decreases an asset and decreases a liabilityiv) it decreases one liability and increases other liability

Dr. Varadraj Bapat*It is difficult to definesingleentry systembecause, in fact, there exists no system likesingleentry system. Broadly speaking, it is a defective double entry system. Any system that falls short of complete double entry method is called singleentry system. Under this method, sometimes both the aspects of transactionsare recorded, Single Entry

Dr. Varadraj Bapat*sometimes only one aspect is recorded or sometime no aspects oftransactionsis recorded in the books.In shortsingleentry system may be called a mix of double entry,singleentry and no entry. For instance, buying a Machinery for Rs.25,000 would be entered as a payment in a cashbook.

Dr. Varadraj Bapat* 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

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

Dr. Varadraj Bapat*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.

Dr. Varadraj Bapat*Sole ProprietorshipHindu Undivided Family PartnershipCompanyCo-operative SocietyForms ofBusiness Organization

Dr. Varadraj Bapat*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 Proprietorship

Dr. Varadraj Bapat*Advantages:Ease of formationBetter ControlPrompt Decision Making Retention of Business SecretsPersonal Attention to Consumer NeedsDisadvantages:Limited lifeUnlimited liabilityLimited Financial ResourcesLimited Capacity of Individual

Dr. Varadraj Bapat*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 Family

Dr. Varadraj Bapat*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.

Dr. Varadraj Bapat*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

Dr. Varadraj Bapat* 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.

Dr. Varadraj Bapat*Advantages:Ease of formationLess regulationsSharing of RiskNo corporate income tax

Disadvantages:Unlimited liabilityDifficult to raise capitalLack of Harmony

Dr. Varadraj Bapat*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

Dr. Varadraj Bapat*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.

Dr. Varadraj Bapat*

Dr. Varadraj Bapat*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

Dr. Varadraj Bapat*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.

Dr. Varadraj Bapat* Advantages:Unlimited lifeProfessional ManagementLimited liabilityEase of raising capitalHigh possibility of wealth maximization Disadvantages:Dividend Tax burdenHigh cost of set-up and report filingMore regulation

Dr. Varadraj Bapat*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

Dr. Varadraj Bapat*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.

Dr. Varadraj Bapat*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.

Dr. Varadraj Bapat*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.

Dr. Varadraj Bapat*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.

Dr. Varadraj Bapat*On the basis of objectives, various types of co-operatives are formed :Consumer co-operativesProducers co-operativesProducers co-operativesMarketing co-operativesHousing Co-operativesCredit Co-operativesForming Co-operatives

Dr. Varadraj Bapat*Advantages : Democratic management Assistance from the government Elimination of middlemens profit Fairly stable life Disadvantages : Limited capital Lack of managerial talent Lack of motivation Lack of secrecy Dependence on the government

Dr. Varadraj Bapat*Stakeholder Stakeholder is a person who has a legitimate interest in an entity.Investors Management of enterpriseCreditors / LendersGovernmentEmployees

Dr. Varadraj Bapat*Consumers Local Community

Dr. Varadraj Bapat*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

Dr. Varadraj Bapat*of the detailed analysis of the Financial Statement.Prospective investors make use of financial statements to assess the viability of investing in a business.

Dr. Varadraj Bapat*ManagementManagers are the main users of the Financial Statement. They use the financial statement

To make the inter firm and inter period comparisonTo study trends in sales, expenses etc.To understand the relationship

Dr. Varadraj Bapat*among various items of financial statementTo know movement of funds through Fund Flow Analysis

Dr. Varadraj Bapat*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).

Dr. Varadraj Bapat*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.

Dr. Varadraj Bapat*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.