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Management  Accounting  SCDL By  Prof. AUGUSTIN AMALADAS M.COM ., AICWA.,PGDFM.,B.Ed.
Structure of the syllubusChapter-1 Financial accounting 1. Introduction 2. Basic Accounting 3. Process of accounting 4. BR...
Cost Accounting 6. CONCEPTS 7. ELEMENTS OF COST 8. MATERIAL 9. LABOUR 9. OVER HEADS 10. MARGINAL COSTING techniques 11. BU...
Management accounting Costs and Budgeting
FLOW OF CASH/SHORT TERM AND LONG TERM information Accounts payable RAW mATERIAL ADR Long term loans Preference Shares Bad ...
FLOW OF CASH - LONG TERM ADR Long term loans Preference Shares Equity  shares CASH Short term GDR land furniture investmen...
FLOW OF CASH-SHORT TERM information Accounts payable RAW mATERIAL Bad debts Accounts receivable Debtors Work in progress i...
Accounting Labour laws marketing Costing technical technology political production statistical Share market MANAGEMENT ACC...
 
<ul><li>Anything incurred during the production of the goods or service to get the output into the hands of the customer <...
 
Differences between cost accounting/Management Accounting/financial accounting 1.Collection Analysis and decision making 2...
Users of information organisation shareholders public Benefactors government banks Debenture holders Loan vendor Preferenc...
Techniques in management accounting Management Accounting Cost accounting Mathematics operation research statistics Ratios...
Chapter-2: Basics of financial accounting <ul><li>1.Concepts </li></ul><ul><li>2.system of accounting </li></ul><ul><li>3....
1.concepts& conventions <ul><li>Meaning:  Basic assumptions upon which the basic process of accounting based. </li></ul><u...
a] Business entity concept- <ul><li>Business is different from the owner </li></ul><ul><li>We pass Journal entry when owne...
b] Dual aspect concept <ul><li>Every debit has equal amount of credit </li></ul><ul><li>Asset =Liability </li></ul><ul><li...
c] Going concern concept <ul><li>Business will go for at least for a reasonable period. </li></ul><ul><li>Depreciation is ...
d] Accounting period concept <ul><li>Fixing time limit for accounts </li></ul><ul><li>Profit for the period </li></ul><ul>...
e] Cost concept <ul><li>The cost to the organisation (Actual) is recorded in the books </li></ul><ul><li>Assets are not re...
f]  Money measurement concept <ul><li>Every thing which can be expressed in terms of Money is recorded in the books </li><...
g] Matching Concept <ul><li>Matching Cost with revenue </li></ul><ul><li>It is used to estimate correct profits </li></ul>...
Conventions <ul><li>Customs and traditions that are followed by the accountants while preparing the financial statements. ...
Coservativism <ul><li>To be on the safer side </li></ul><ul><li>Expect future losses as current year loss </li></ul><ul><l...
Materiality <ul><li>Material impact on profitability are considered </li></ul><ul><li>Insignificant transactions ignored f...
Consistency <ul><li>Accounting policies and proceedures should be followed consistently </li></ul><ul><li>Method of deprec...
2.system of accounting  (18) <ul><li>1.Cash system:  </li></ul><ul><li>unless cash received /paid  in the accounting year ...
2.Mercantile <ul><li>Mercantile/Accrual/due concept: </li></ul><ul><li>Even cash received/paid but due for payment/due for...
Mercantile love!!!!??? <ul><li>Last year I loved her? Next year I shall love him depends on type of bike model!!!! </li></ul>
3.Types of Expenditure(19) <ul><li>A) Capital expenditure </li></ul><ul><li>B) Revenue expenditure </li></ul><ul><li>C) De...
A) Capital expenditure(19) <ul><li>Expenditure incurred which will : </li></ul><ul><li>Increase Production capacity </li><...
Capital expenditure-continue(page-19) <ul><li>Both tangible and intangible assets included </li></ul><ul><li>Intangible as...
Revenue Expenditure(page-19) <ul><li>Expenditure incurred which will : </li></ul><ul><li>Not Increase Production capacity ...
Deferred revenue expenditure(page-19) <ul><li>Deferred means- postponed </li></ul><ul><li>Heavy revenue expenditure </li><...
Terms(page-20) Debentures Equity shares Preference shares Trade discount Cash discount Debit note Credit note Creditors Ba...
Terms used in costing Factory over heads Office and administration overheads Administration section Stationary, salaries t...
Selling and distribution Sales department Packing material, samples,salaries to sales personnel,commission to sales manage...
Life education <ul><li>Lady in a seashore </li></ul>
5.Double entry / Single entry(22) <ul><li>Is Accounting based on business concept or religious concept? </li></ul><ul><li>...
Rules of acccounting(23) <ul><li>Personal rule/Account-supplier debtors, owner, banker, outstanding wages </li></ul><ul><l...
Personal rule <ul><li>Debit the receiver  </li></ul><ul><li>credit the giver </li></ul><ul><li>Example: Computer chips pur...
Excercise <ul><li>Amount collected from debtors? </li></ul><ul><li>Amount deposited to bank? </li></ul>
Real rule <ul><li>These are the accounts of assets and liabilities </li></ul><ul><li>Rule:  debit what comes in  </li></ul...
Excercise <ul><li>Goods supplied for cash </li></ul><ul><li>Cash withdrawn from bank  </li></ul><ul><li>Cash withdrawn fro...
Nominal rule <ul><li>Related to Expenses and income </li></ul><ul><li>Rule:  Debit all expenses and losses </li></ul><ul><...
Excercise <ul><li>Rent paid Rs 50,000 </li></ul><ul><li>Wages paid Rs.1,00,000 </li></ul><ul><li>Wages outstanding-Rs.60,0...
Suitable questions to pass journal entry <ul><li>If cash transaction, person is not important </li></ul><ul><li>Every birt...
Depreciation Accounting(24) <ul><li>Reduction in the value of assets </li></ul><ul><li>Use factors, time factor,obsolescen...
Depreciation methods <ul><li>Straight line method </li></ul><ul><li>Written down value method </li></ul><ul><li>Sinking fu...
Impact on books <ul><li>Depreciation Expense </li></ul><ul><li>Net income </li></ul><ul><li>Asset </li></ul><ul><li>Equity...
Impact of Tax <ul><li>Block asset method </li></ul><ul><li>Purchase of Asset </li></ul><ul><li>Sale of Asset </li></ul><ul...
Divisible profit and depreciation(Page:30-31) <ul><li>Profit after adequate depreciation[Sec.205(2)] </li></ul><ul><li>Pro...
Methods(25) <ul><li>1. straight line method: </li></ul><ul><li>Cost (- )estimated scrap value </li></ul><ul><li>Estimated ...
Methods(26) <ul><li>3. production unit method: </li></ul><ul><li>Depreciation=  (cost-scrap)(units produced during the yea...
Production hour method <ul><li>It depends on number of hours produced instead  of units produced  </li></ul><ul><li>We cal...
Joint factor rate method(27) <ul><li>Both fixed element and variable elements are considered </li></ul><ul><li>Cost is div...
Annuity method <ul><li>C*r </li></ul><ul><li>Depreciation=  </li></ul><ul><li>n </li></ul><ul><li>1-  1/(1+r) -  1 </li></...
Sinking fund method(29) <ul><li>Amount available would be equivalent to the original cost </li></ul><ul><li>C*r </li></ul>...
Endowment policy method <ul><li>Insurance policy is taken to replace the asset. </li></ul><ul><li>The depreciation is equa...
Renewal method(29) <ul><li>When asset is renewed full amount is written off. </li></ul>
By-by to chapter-2 <ul><li>Chineese tree   </li></ul>Life education
Chapter-3 <ul><li>Journalising </li></ul><ul><li>Ledger (subsidiary books) </li></ul><ul><li>Posting </li></ul><ul><li>Tri...
Final Accounts Adjustments <ul><li>Direct expenses </li></ul><ul><li>Indirect expenses </li></ul><ul><li>Opening stock giv...
Final Accounts Adjustments <ul><li>Domestic house hold Expenses </li></ul><ul><li>Income tax refund </li></ul><ul><li>Inco...
Final Accounts Adjustments <ul><li>Reserve Fund </li></ul><ul><li>Goods Distributed as free sample </li></ul><ul><li>Manag...
Terms used in final accounts <ul><li>Trading account </li></ul><ul><li>Profit and loss account </li></ul><ul><li>Profit an...
Terms <ul><li>Investments </li></ul><ul><li>Current assets </li></ul><ul><li>Adjustments </li></ul><ul><li>Closing stock <...
Terms <ul><li>Accrued income </li></ul><ul><li>Income received In advance </li></ul><ul><li>Bad debts </li></ul><ul><li>Pr...
Terms <ul><li>Abnormal expenses </li></ul><ul><li>Goods distributed as free sample </li></ul><ul><li>Goods sent on approva...
Important adjustments In various problems <ul><li>Illus:2 page-59 i) repairs tp plant ii)Income tax of X </li></ul><ul><li...
Important adjustments In various problems <ul><li>Illustration 3: i) adju.e and I and trading account purchases and sales ...
See you in the next chapter BRS <ul><li>Life education </li></ul><ul><li>God and Poor man </li></ul>
Bank reconciliation statement <ul><li>Cash book  </li></ul><ul><li>Pass book </li></ul><ul><li>Cheques issued but  not deb...
Exercise:-23 page124 <ul><li>Q.2 –page-115 and questions no6 page-117 and q.25 –page-126 </li></ul>
Life education <ul><li>Child likes to hug in the evening </li></ul>
Chapter 5: Rectification of Errors(page-129) <ul><li>Reasons for errors in accounting: </li></ul><ul><li>1.error of omissi...
Errors not affecting trial balance <ul><li>1.error of omission </li></ul><ul><li>2.Error of principle </li></ul><ul><li>3....
Suspense Account <ul><li>If trial Balance does not tally ie debit is not equal to credit then temporarily to close down we...
Rectification: Steps <ul><li>Rectify only the account in which error is committed. </li></ul><ul><li>Book means complete s...
Problems in errors Problem:7 page-139 2500 1300 160 245 500 <ul><li>Drawings A/c debit </li></ul><ul><li>to General expens...
Problem:6 page-139 700 400 2700 400 1100 2700 400 a.Machinery Dr. To Purchases a/c To Wages a/c b.Suspese a/c Dr. to Mohan...
700 900 600 17000 1200 700 900 600 18200 Mohan a/c Dr. To sales susp. c. Suspensea/c ToYogesh a/c d.Furniture a/cdr To P/L...
Life education Thomas Cooper –Dictionary
Chapter-6 Cost Accountancy-terms <ul><li>Cost centre </li></ul><ul><li>Impersonal and personal cost centre </li></ul><ul><...
Terms in costing <ul><li>Accounting Costs  : </li></ul>These are costs that impact an organization’s  general ledger.  For...
The bottom line is that the  organization  is out &quot;hard&quot; or &quot;real&quot; money.[1  Examples:  ·  Hardware an...
Economic Costs  <ul><li>Economic costs are &quot;opportunity costs.&quot; Instead of doing X, you had to do Y. These are n...
Example <ul><li>:  </li></ul><ul><li>·  Reducing firefighting on incidents related to problematic changes is robbing resou...
Example-2 <ul><li>·  By training users, incidents handled by the service desk decreased 5 percent. Again, this is not an a...
mixing accounting and economic cost <ul><li>mixing accounting and economic cost savings together and instead wrap both typ...
Overhead  <ul><li>These are indirect costs that are absorbed by IT. For example, a portion of building rent is often alloc...
illustration <ul><li>If IT occupies 10 percent of a building, then accounting will likely allocate 10 percent of the rent ...
Sunk Costs  <ul><li>These are costs that, once spent, cannot be changed. If something is purchased that cannot be returned...
Cost Drivers <ul><li>When determining costs, it is worthwhile to understand what drives the costs. In other words, if you ...
Salvage Value/Salvage Costs <ul><li>If you can sell an asset for more than its book value, then you are actually booking a...
Differential cost <ul><li>Increased or decreased cost due to the increased or decreased volume of operations. </li></ul><u...
Normal cost and abnormal cost(150) <ul><li>Normal costs incurred at a certain level of output </li></ul><ul><li>Abnormalit...
Relevant cost and relevant benefit <ul><li>Required for decision making </li></ul><ul><li>Costs that are affected by by th...
Relevant and irrelevant <ul><li>Five engineers already employed on monthly salary but will not be sent out if not employed...
Direct and indirect costs <ul><li>Direct Costs are costs that can be specifically and exclusively identified with the part...
product costs Period costs <ul><li>Product cost are those costs that are identified with goods purchased or produced for r...
Treatment of period and product costs Product code Period code Manufacturing cost Non manufacturing costs Recorded as an a...
Variable, fixed, semi variable and semi fixed <ul><li>Cost  Variable cost </li></ul><ul><li>cost </li></ul><ul><li>Out put...
Step fixed cost <ul><li>Total </li></ul><ul><li>Fixed cost </li></ul><ul><li>Activity level </li></ul>
Variable, fixed, semi variable and semi fixed. direct material, direct labour and direct expenses.  Both fixed and variabl...
Incremental costs and Marginal cost <ul><li>Differential costs and revenues are the difference between costs and revenues ...
 
Red Car, Inc. Cost of Goods Manufactured Schedule For the Year Ended December 31, 20X0   Direct materials used    Beginnin...
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Income from business-2

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Income from business-2

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  • Transcript of "Income from business-2"

    1. 1. Management Accounting SCDL By Prof. AUGUSTIN AMALADAS M.COM ., AICWA.,PGDFM.,B.Ed.
    2. 2. Structure of the syllubusChapter-1 Financial accounting 1. Introduction 2. Basic Accounting 3. Process of accounting 4. BRS 5. Rectification of Errors Final accounts
    3. 3. Cost Accounting 6. CONCEPTS 7. ELEMENTS OF COST 8. MATERIAL 9. LABOUR 9. OVER HEADS 10. MARGINAL COSTING techniques 11. BUDGETARY CONTROL 12.STANDARD COSTING TECHNIQUES 13. UNIFORM COSTING CONTROL
    4. 4. Management accounting Costs and Budgeting
    5. 5. FLOW OF CASH/SHORT TERM AND LONG TERM information Accounts payable RAW mATERIAL ADR Long term loans Preference Shares Bad debts Accounts receivable Debtors Work in progress information Overheads Labour Equity shares CASH GDR information Information
    6. 6. FLOW OF CASH - LONG TERM ADR Long term loans Preference Shares Equity shares CASH Short term GDR land furniture investments goodwill building Patent rights Know how Copy right
    7. 7. FLOW OF CASH-SHORT TERM information Accounts payable RAW mATERIAL Bad debts Accounts receivable Debtors Work in progress information Overheads Labour information Information Discounting bills creditors Cash credit Bank overdraft Sale of investments Bad debts Bad debts Issue of long term funds Sale of fixed assets Bank overdraft cash cash
    8. 8. Accounting Labour laws marketing Costing technical technology political production statistical Share market MANAGEMENT ACCOUNTS INFORMATION INFORMATION INFORMATION INFORMATION INFORMATION
    9. 10. <ul><li>Anything incurred during the production of the goods or service to get the output into the hands of the customer </li></ul><ul><li>The customer could be the public (the final consumer) or another business </li></ul><ul><li>Controlling costs is essential to business success </li></ul><ul><li>Not always easy to pin down where costs are arising! </li></ul>Costs
    10. 12. Differences between cost accounting/Management Accounting/financial accounting 1.Collection Analysis and decision making 2.Management 3.Future 4.Non-statutory 5.Using various techniques 6.Supply the required information To correct persons on time 1.Estimation and control 2.Internal 3. Future 4. Not allorganisations 5.Costing records 6.Cost audit once in two years 1.Recording 2.Outsiders 3.Past 4.Statutory 5.Preparation of profit/lossA/c And balance sheet 6.Audit& reporting Management Accounts Cost Accounts Financial Accounts
    11. 13. Users of information organisation shareholders public Benefactors government banks Debenture holders Loan vendor Preference shareholders creditors debtors customers dividend liquidity Dividend/value in the share market Interest/return of capital Interest/return of capital Timely payment Timely supply Good product Less pollution Good name tax
    12. 14. Techniques in management accounting Management Accounting Cost accounting Mathematics operation research statistics Ratios Financial accounts Budgetary control Cash flow statement FFS Trend percentages Marginal costing Variance analysis Comparitive statement Common size statements
    13. 15. Chapter-2: Basics of financial accounting <ul><li>1.Concepts </li></ul><ul><li>2.system of accounting </li></ul><ul><li>3.Types of Expenditure </li></ul><ul><li>4.Terms used in financial accounts </li></ul><ul><li>5.Double entry / Single entry </li></ul><ul><li>6. Depreciation methods </li></ul><ul><li>7. Practical consideration relating to depreciation </li></ul>
    14. 16. 1.concepts& conventions <ul><li>Meaning: Basic assumptions upon which the basic process of accounting based. </li></ul><ul><li>a] Business entity concept- </li></ul><ul><li>b] Dual aspect concept </li></ul><ul><li>c] Going concern concept </li></ul><ul><li>d] Accounting period concept </li></ul><ul><li>e] Cost concept </li></ul><ul><li>f] Money measurement concept </li></ul><ul><li>g] Matching Concept </li></ul><ul><ul><ul><ul><ul><li>Conventions </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Coservativism </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Materiality </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Consistency </li></ul></ul></ul></ul></ul>
    15. 17. a] Business entity concept- <ul><li>Business is different from the owner </li></ul><ul><li>We pass Journal entry when owner contributes towards capital. </li></ul><ul><li>When amount / goods withdrawn for personal use we make an entry in the business </li></ul><ul><li>When Income tax paid by the owner out of business money we make an entry In the books of accounts. </li></ul>
    16. 18. b] Dual aspect concept <ul><li>Every debit has equal amount of credit </li></ul><ul><li>Asset =Liability </li></ul><ul><li>Liability creates asset </li></ul><ul><li>If asset>Liability= profit </li></ul><ul><li>If Liability> Assets= loss </li></ul>
    17. 19. c] Going concern concept <ul><li>Business will go for at least for a reasonable period. </li></ul><ul><li>Depreciation is provided based on this assumption. </li></ul><ul><li>If this assumption is not made all Fixed assets will be valued at realised value like current assets. </li></ul>
    18. 20. d] Accounting period concept <ul><li>Fixing time limit for accounts </li></ul><ul><li>Profit for the period </li></ul><ul><li>It can be one week or two weekor 6 months/one year or 5 years </li></ul><ul><li>But to find profit we normally consider 12 months period </li></ul><ul><li>Financial year for income tax point of view 1 st April-31 st March of the following year </li></ul><ul><li>Calendar year –January to December </li></ul><ul><li>Divali to Divali </li></ul>
    19. 21. e] Cost concept <ul><li>The cost to the organisation (Actual) is recorded in the books </li></ul><ul><li>Assets are not recorded according to the market price every year. </li></ul><ul><li>Depreciation is calculated on cost not based on market price </li></ul><ul><li>Accounting records may not show the real worth of the business </li></ul><ul><li>Market price may be disclosed with in bracket in the balance sheet </li></ul>
    20. 22. f] Money measurement concept <ul><li>Every thing which can be expressed in terms of Money is recorded in the books </li></ul><ul><li>Beautiful women are working /Handsome boys working in this company/Efficient engineers worth 5000 crores –How do you record?. </li></ul><ul><li>Good working environment? </li></ul><ul><li>Highly motivated employees? </li></ul>
    21. 23. g] Matching Concept <ul><li>Matching Cost with revenue </li></ul><ul><li>It is used to estimate correct profits </li></ul><ul><li>Accrual/ cash basis of accounting </li></ul><ul><ul><li>Even cash paid /received if it belongs to accounting period we consider them as expenditure /income </li></ul></ul><ul><ul><li>Salary outstanding for the last month? </li></ul></ul><ul><ul><li>Income from Investments yet to be received? </li></ul></ul><ul><ul><li>Rent received in advance for next year? </li></ul></ul>
    22. 24. Conventions <ul><li>Customs and traditions that are followed by the accountants while preparing the financial statements. </li></ul><ul><li>Why do we respect elders? </li></ul><ul><li>Why do we shake hands? </li></ul><ul><li>Why do Young Indians hate receiving dowry? </li></ul>
    23. 25. Coservativism <ul><li>To be on the safer side </li></ul><ul><li>Expect future losses as current year loss </li></ul><ul><li>not future income is treated as current year income. </li></ul><ul><li>Stock is valued cost price / market price which ever is lower </li></ul><ul><li>Making provision for bad debts is based on this assumptions. </li></ul>
    24. 26. Materiality <ul><li>Material impact on profitability are considered </li></ul><ul><li>Insignificant transactions ignored from recording </li></ul><ul><li>Pen purchased, pencil purchased? </li></ul><ul><li>Wine purchased regularly? </li></ul>
    25. 27. Consistency <ul><li>Accounting policies and proceedures should be followed consistently </li></ul><ul><li>Method of depreciation should be followed consistently. </li></ul><ul><li>Stock valuation- cost/market price whichever is lower is consistently followed </li></ul><ul><li>If not followed it amount to change in the policy of the company </li></ul>
    26. 28. 2.system of accounting (18) <ul><li>1.Cash system: </li></ul><ul><li>unless cash received /paid in the accounting year can not be considered as income/expenses respectively </li></ul>
    27. 29. 2.Mercantile <ul><li>Mercantile/Accrual/due concept: </li></ul><ul><li>Even cash received/paid but due for payment/due for receipt (yet to be received/payable) if they belong to current accounting year are considered. </li></ul><ul><li>If last year expenditure paid this year? </li></ul><ul><li>If you receive/paid in advance ? </li></ul><ul><li>Last year I loved her? Next year I shall love him depends !!!! </li></ul>
    28. 30. Mercantile love!!!!??? <ul><li>Last year I loved her? Next year I shall love him depends on type of bike model!!!! </li></ul>
    29. 31. 3.Types of Expenditure(19) <ul><li>A) Capital expenditure </li></ul><ul><li>B) Revenue expenditure </li></ul><ul><li>C) Deferred Revenue expenditure </li></ul>
    30. 32. A) Capital expenditure(19) <ul><li>Expenditure incurred which will : </li></ul><ul><li>Increase Production capacity </li></ul><ul><li>Increase earning capacity </li></ul><ul><li>Reduction in the cost of operation. </li></ul><ul><li>Example: purchase of fixed assets </li></ul><ul><li>Purchase of Machinery </li></ul><ul><li>purchase of investment </li></ul><ul><li>If such expenditure is not to do with the basic functions of the business such expenditure is capital expenditure. </li></ul><ul><li>How do you consider if you buy goodwill, copy right or patent right? </li></ul>
    31. 33. Capital expenditure-continue(page-19) <ul><li>Both tangible and intangible assets included </li></ul><ul><li>Intangible assets such as patent right, copy right, technical know-how, francises, goodwill etc., </li></ul><ul><li>Depreciation is provided on fixed assets which will appear in the profit and loss account </li></ul><ul><li>They appear in the Balance sheet </li></ul><ul><li>The life is more than one year </li></ul><ul><li>They should not appear in the profit and loss account </li></ul>
    32. 34. Revenue Expenditure(page-19) <ul><li>Expenditure incurred which will : </li></ul><ul><li>Not Increase Production capacity </li></ul><ul><li>Not Increase earning capacity </li></ul><ul><li>maintain the capacity </li></ul><ul><li>No Depreciation is provided on fixed assets which will appear in the profit and loss account </li></ul><ul><li>They appear in the profit and loss account </li></ul><ul><li>The life is not more than one year </li></ul><ul><li>They should not appear in the balance sheet </li></ul>
    33. 35. Deferred revenue expenditure(page-19) <ul><li>Deferred means- postponed </li></ul><ul><li>Heavy revenue expenditure </li></ul><ul><li>Vodafone incurred 200 crores for advertisement after merger with Hutch </li></ul><ul><li>It can not be written off within a year </li></ul><ul><li>It appears in the balance sheet as last item </li></ul><ul><li>Every year some portion is written off in the profit and loss account. </li></ul><ul><li>Research and deveopment expenditure, initial advertisement expenditure, preliminary expenditure are example </li></ul>
    34. 36. Terms(page-20) Debentures Equity shares Preference shares Trade discount Cash discount Debit note Credit note Creditors Balance sheet Accounts receivable Accounts payable Assets Liabilities Capital Drawings Debtors depreciation Polio Brought forward(B/f) Trail balance Account Debit Credit Journal Ledger Narration casting
    35. 37. Terms used in costing Factory over heads Office and administration overheads Administration section Stationary, salaries to accounts staff, postage, internet, bank charges, audit, administration expenses, depreciation Indirect material Indirect labour Indirect expenses + Total cost Factory Consumable stores, cotton waste ,oil Wages to storekeeper, foremen, works manager’s salary, repairs to factory building, insurance to machinery factory lighting Indirect material Indirect labour Indirect expenses + Works cost Factory Raw material; cost per unit can be identified, in the individual cost centre; Engaged in manufacturing process Hire charges of machinery-direct expenses Direct material Direct labour Direct expenses Prime cost
    36. 38. Selling and distribution Sales department Packing material, samples,salaries to sales personnel,commission to sales manager, warehouse charges,advertisement,repairs to distribution van, discount to customers Indirect material Indirect labour Indirect overheads Cost of sales+ Profit Sales
    37. 39. Life education <ul><li>Lady in a seashore </li></ul>
    38. 40. 5.Double entry / Single entry(22) <ul><li>Is Accounting based on business concept or religious concept? </li></ul><ul><li>Giving first and receiving later. </li></ul><ul><li>Giving cash receiving machinery </li></ul><ul><li>We consider both aspects such as debit and credit </li></ul>
    39. 41. Rules of acccounting(23) <ul><li>Personal rule/Account-supplier debtors, owner, banker, outstanding wages </li></ul><ul><li>Real rule/Account- cash, bank, building, furniture, goodwill, patent rights </li></ul><ul><li>Nominal rule/account: income and expenditure: salary, rent , insurance, commission, internet expenses, cell phone expenses. </li></ul>
    40. 42. Personal rule <ul><li>Debit the receiver </li></ul><ul><li>credit the giver </li></ul><ul><li>Example: Computer chips purchased on credit from wipro </li></ul><ul><li>Here credit Wipro as Wipro is the giver of computer. </li></ul><ul><li>Sold goods to Meena </li></ul><ul><li>Meena is the receiver-debit </li></ul>
    41. 43. Excercise <ul><li>Amount collected from debtors? </li></ul><ul><li>Amount deposited to bank? </li></ul>
    42. 44. Real rule <ul><li>These are the accounts of assets and liabilities </li></ul><ul><li>Rule: debit what comes in </li></ul><ul><ul><ul><li>Credit what goes out </li></ul></ul></ul>
    43. 45. Excercise <ul><li>Goods supplied for cash </li></ul><ul><li>Cash withdrawn from bank </li></ul><ul><li>Cash withdrawn from bank for personal use </li></ul><ul><li>Land purchased by giving a cheque </li></ul><ul><li>Building sold on credit </li></ul>
    44. 46. Nominal rule <ul><li>Related to Expenses and income </li></ul><ul><li>Rule: Debit all expenses and losses </li></ul><ul><li>Credit all incomes and gains </li></ul>
    45. 47. Excercise <ul><li>Rent paid Rs 50,000 </li></ul><ul><li>Wages paid Rs.1,00,000 </li></ul><ul><li>Wages outstanding-Rs.60,000 </li></ul><ul><li>Commission received-25,000 </li></ul><ul><li>Discount allowed to customer – Rs.1,000 </li></ul><ul><li>Telephone bills paid-Rs.2500 </li></ul><ul><li>Shares issued at premium-Rs.2,00,000 </li></ul>
    46. 48. Suitable questions to pass journal entry <ul><li>If cash transaction, person is not important </li></ul><ul><li>Every birth of an account there is a death of the account </li></ul><ul><li>Ask what comes in? </li></ul><ul><li>Or what goes out? </li></ul>
    47. 49. Depreciation Accounting(24) <ul><li>Reduction in the value of assets </li></ul><ul><li>Use factors, time factor,obsolescence are the factors </li></ul><ul><li>Statutory requirement </li></ul><ul><li>AS(6) </li></ul><ul><li>Fixed assets are depreciated </li></ul><ul><li>Current assets are not depreciated </li></ul><ul><li>Land and cattle are not depreciated. </li></ul>
    48. 50. Depreciation methods <ul><li>Straight line method </li></ul><ul><li>Written down value method </li></ul><ul><li>Sinking fund method </li></ul><ul><li>Machine Hour rate method </li></ul><ul><li>Unit cost method </li></ul><ul><li>Depletion asset method </li></ul><ul><li>Depreciation Fund method </li></ul><ul><li>Sum of digits method </li></ul><ul><li>Accelerated depreciation method </li></ul>
    49. 51. Impact on books <ul><li>Depreciation Expense </li></ul><ul><li>Net income </li></ul><ul><li>Asset </li></ul><ul><li>Equity </li></ul><ul><li>Return on assets </li></ul><ul><li>Return on Equity </li></ul><ul><li>Turnover Ratios </li></ul><ul><li>Cash flow </li></ul><ul><li>NPV </li></ul><ul><li>IRR </li></ul><ul><li>Pay back </li></ul>
    50. 52. Impact of Tax <ul><li>Block asset method </li></ul><ul><li>Purchase of Asset </li></ul><ul><li>Sale of Asset </li></ul><ul><li>Short term/Long-term Capital asset </li></ul><ul><li>Asset used less than 180 days during the previous year </li></ul><ul><li>Asset purchased preceding previous year but put into use less than 180 days during the current previous year </li></ul>
    51. 53. Divisible profit and depreciation(Page:30-31) <ul><li>Profit after adequate depreciation[Sec.205(2)] </li></ul><ul><li>Profit after interest-depreciation of the current year- Depreciation of the previous year- loss of the previous year </li></ul><ul><li>Depreciation as per Schedule XIV of the Companies Act </li></ul><ul><li>Section 350 –calculated on WDV </li></ul>
    52. 54. Methods(25) <ul><li>1. straight line method: </li></ul><ul><li>Cost (- )estimated scrap value </li></ul><ul><li>Estimated life in years </li></ul><ul><li>2. written down value or diminishing balance method. </li></ul><ul><li>cost of the asset=1,00,000; rate of depreciation =10% </li></ul><ul><li>#Depreciation for the 1 st year=1,00,000*10%=10,000 </li></ul><ul><li>Value at the end of first year= 1,00,000-10,000= 90,000 </li></ul><ul><li>##Second year depreciation=90,000*10%=9000 </li></ul>
    53. 55. Methods(26) <ul><li>3. production unit method: </li></ul><ul><li>Depreciation= (cost-scrap)(units produced during the year) </li></ul><ul><ul><ul><ul><ul><li> no of units the machine </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>can produce during its life </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Suppose cost=1,00,000; scrap=5000; total life in units=10000 units. No. of units produced during the year=3000 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Depreciation=(1,00,000-5000)(3000)/10,000 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li> =Rs 28,500 </li></ul></ul></ul></ul></ul>
    54. 56. Production hour method <ul><li>It depends on number of hours produced instead of units produced </li></ul><ul><li>We calculate production hour rate </li></ul><ul><li>Multiply the no.of hours used during the year with the rate gives depreciation </li></ul>
    55. 57. Joint factor rate method(27) <ul><li>Both fixed element and variable elements are considered </li></ul><ul><li>Cost is divided into fixed and variable </li></ul><ul><li>Fixed part is divided based on time </li></ul><ul><li>Variable elements are divided by total units which gives rate per unit </li></ul>
    56. 58. Annuity method <ul><li>C*r </li></ul><ul><li>Depreciation= </li></ul><ul><li>n </li></ul><ul><li>1- 1/(1+r) - 1 </li></ul><ul><li>Depreciation is constant </li></ul><ul><li>It depends on future cash inflows </li></ul><ul><li>It assumes that the capital invested would have earned interest had been invested otherwise </li></ul>
    57. 59. Sinking fund method(29) <ul><li>Amount available would be equivalent to the original cost </li></ul><ul><li>C*r </li></ul><ul><li>Depreciation= n </li></ul><ul><li>(1+r) – 1 </li></ul><ul><li>Calculation of 26380 is wrong. I should be 16380. </li></ul>
    58. 60. Endowment policy method <ul><li>Insurance policy is taken to replace the asset. </li></ul><ul><li>The depreciation is equal to the insurance premium paid </li></ul>
    59. 61. Renewal method(29) <ul><li>When asset is renewed full amount is written off. </li></ul>
    60. 62. By-by to chapter-2 <ul><li>Chineese tree </li></ul>Life education
    61. 63. Chapter-3 <ul><li>Journalising </li></ul><ul><li>Ledger (subsidiary books) </li></ul><ul><li>Posting </li></ul><ul><li>Trial balance </li></ul><ul><li>Trading and profit and loss account </li></ul><ul><li>Balance sheet </li></ul>
    62. 64. Final Accounts Adjustments <ul><li>Direct expenses </li></ul><ul><li>Indirect expenses </li></ul><ul><li>Opening stock given in adjustment </li></ul><ul><li>Closing stock given in the adjustment </li></ul><ul><li>Wages outstanding in trail balance </li></ul><ul><li>Income from investment due given in trail balance </li></ul><ul><li>Meaning of adjustment </li></ul><ul><li>Income tax </li></ul><ul><li>Life insurance premium </li></ul><ul><li>Goods drawn by the owner </li></ul>
    63. 65. Final Accounts Adjustments <ul><li>Domestic house hold Expenses </li></ul><ul><li>Income tax refund </li></ul><ul><li>Income from house property </li></ul><ul><li>Accrual basis of Accounting </li></ul><ul><li>Un expired insurance </li></ul><ul><li>Income received in Advance </li></ul><ul><li>Interest on Capital </li></ul><ul><li>Provision on Doubtful debts </li></ul><ul><li>provision for Discount on debtor </li></ul><ul><li>Deffered revenue expenditure </li></ul>
    64. 66. Final Accounts Adjustments <ul><li>Reserve Fund </li></ul><ul><li>Goods Distributed as free sample </li></ul><ul><li>Manager’s Commission </li></ul><ul><li>Goods on sale or approval basis </li></ul><ul><li>Hidden adjustments </li></ul>
    65. 67. Terms used in final accounts <ul><li>Trading account </li></ul><ul><li>Profit and loss account </li></ul><ul><li>Profit and loss appropriation account </li></ul><ul><li>Balance sheet </li></ul><ul><li>Capital </li></ul><ul><li>Long term liabilities </li></ul><ul><li>Current liabilities </li></ul><ul><li>Fixed assets </li></ul>
    66. 68. Terms <ul><li>Investments </li></ul><ul><li>Current assets </li></ul><ul><li>Adjustments </li></ul><ul><li>Closing stock </li></ul><ul><li>Depreciation </li></ul><ul><li>Outstanding expenses </li></ul><ul><li>Prepaid expenses </li></ul>
    67. 69. Terms <ul><li>Accrued income </li></ul><ul><li>Income received In advance </li></ul><ul><li>Bad debts </li></ul><ul><li>Provision for doubtful debts </li></ul><ul><li>Interest on capital </li></ul><ul><li>Drawings </li></ul><ul><li>Deferred revenue expenses </li></ul>
    68. 70. Terms <ul><li>Abnormal expenses </li></ul><ul><li>Goods distributed as free sample </li></ul><ul><li>Goods sent on approval </li></ul><ul><li>Commission payable to manager </li></ul>
    69. 71. Important adjustments In various problems <ul><li>Illus:2 page-59 i) repairs tp plant ii)Income tax of X </li></ul><ul><li>Iii) Provision for bad debts </li></ul><ul><li>Iv) adjustment no.b,e and f </li></ul><ul><li>V) calculation of works manager’s commission and general manager’s commission </li></ul>
    70. 72. Important adjustments In various problems <ul><li>Illustration 3: i) adju.e and I and trading account purchases and sales </li></ul><ul><li>Illustration 4: bank loan, adj. a,d and g. </li></ul><ul><li>Illustration 5: loan, adj.b and c. </li></ul><ul><li>Illustration 6: adj: b,f and h </li></ul><ul><li>Illustration 7: adj:b and d </li></ul><ul><li>Illustration 8: adj.f </li></ul><ul><li>Illustration 9: adj. d and e </li></ul><ul><li>Illustration 10: loan, adj.a </li></ul>
    71. 73. See you in the next chapter BRS <ul><li>Life education </li></ul><ul><li>God and Poor man </li></ul>
    72. 74. Bank reconciliation statement <ul><li>Cash book </li></ul><ul><li>Pass book </li></ul><ul><li>Cheques issued but not debited </li></ul><ul><li>Cheques deposited but not cleared </li></ul><ul><li>Bank charges entered in the pass book </li></ul><ul><li>Income from investments entered in the pass book </li></ul><ul><li>Electricity, water, telephone , internet bills paid directly by bank entered in the pass book </li></ul><ul><li>Clerical errors in the pass book or cash book </li></ul>
    73. 75. Exercise:-23 page124 <ul><li>Q.2 –page-115 and questions no6 page-117 and q.25 –page-126 </li></ul>
    74. 76. Life education <ul><li>Child likes to hug in the evening </li></ul>
    75. 77. Chapter 5: Rectification of Errors(page-129) <ul><li>Reasons for errors in accounting: </li></ul><ul><li>1.error of omission </li></ul><ul><li>2 .error of commission </li></ul><ul><li>3.Error of principle </li></ul><ul><li>4. Compensating error </li></ul>
    76. 78. Errors not affecting trial balance <ul><li>1.error of omission </li></ul><ul><li>2.Error of principle </li></ul><ul><li>3.compensating error </li></ul><ul><li>4. complete omission </li></ul><ul><li>5.error of commission </li></ul>
    77. 79. Suspense Account <ul><li>If trial Balance does not tally ie debit is not equal to credit then temporarily to close down we open a suspense Account on the deficit side known as suspense account. </li></ul>
    78. 80. Rectification: Steps <ul><li>Rectify only the account in which error is committed. </li></ul><ul><li>Book means complete set of accounts </li></ul><ul><li>Accounts means mistake only in the account </li></ul><ul><li>If suspense account is given and if one side error suspense account has to be either debited or credited accordingly. </li></ul>
    79. 81. Problems in errors Problem:7 page-139 2500 1300 160 245 500 <ul><li>Drawings A/c debit </li></ul><ul><li>to General expenses a/c credit </li></ul><ul><li>2. Sales Account debit </li></ul><ul><li>to Machinery A/c credit </li></ul><ul><li>3. Rent a/c debit </li></ul><ul><li>To land lord a/c </li></ul><ul><li>4. Repairs a/c </li></ul><ul><li>To Building </li></ul><ul><li>5. Suspense a/c debit </li></ul><ul><li>To Harish a/c </li></ul><ul><li>To Cash A/c </li></ul>2500 1300 160 245 250 250
    80. 82. Problem:6 page-139 700 400 2700 400 1100 2700 400 a.Machinery Dr. To Purchases a/c To Wages a/c b.Suspese a/c Dr. to Mohan a/c Cash a/cDr. To Mohan amount amount particulars
    81. 83. 700 900 600 17000 1200 700 900 600 18200 Mohan a/c Dr. To sales susp. c. Suspensea/c ToYogesh a/c d.Furniture a/cdr To P/L a/c e.Machi.a/cdr. To Purchases To trade exp. particulars
    82. 84. Life education Thomas Cooper –Dictionary
    83. 85. Chapter-6 Cost Accountancy-terms <ul><li>Cost centre </li></ul><ul><li>Impersonal and personal cost centre </li></ul><ul><li>production and service cost centre </li></ul><ul><li>Concept of cost </li></ul>
    84. 86. Terms in costing <ul><li>Accounting Costs : </li></ul>These are costs that impact an organization’s general ledger. For example, buying a product results in a chain of events wherein a purchase order is processed, a product/service is received, then an invoice arrives from the vendor
    85. 87. The bottom line is that the organization is out &quot;hard&quot; or &quot;real&quot; money.[1 Examples: · Hardware and software purchases · Professional services · Maintenance · Labor · Medical benefits · Insurance · Internet Service Provider fees · Wide area network fees
    86. 88. Economic Costs <ul><li>Economic costs are &quot;opportunity costs.&quot; Instead of doing X, you had to do Y. These are not hard-currency costs and it is dangerous to lump them into the cost-savings category with accounting costs because their effects will not necessarily show up on the bottom line. </li></ul>
    87. 89. Example <ul><li>: </li></ul><ul><li>· Reducing firefighting on incidents related to problematic changes is robbing resources from planned work (projects) and applying them to unplanned, reactive work (incidents). If you say that better change management reduced unplanned work by 20 percent, that is not an accounting cost savings, but it did free up resources to work on projects. It would be wise to identify what project progress was enabled through the action. </li></ul>
    88. 90. Example-2 <ul><li>· By training users, incidents handled by the service desk decreased 5 percent. Again, this is not an accounting cost savings unless a resource is dismissed, thus impacting labor, benefits and so on. </li></ul>
    89. 91. mixing accounting and economic cost <ul><li>mixing accounting and economic cost savings together and instead wrap both types of costs with a business case explaining the benefits of the proposal. </li></ul>
    90. 92. Overhead <ul><li>These are indirect costs that are absorbed by IT. For example, a portion of building rent is often allocated to IT based on some cost driver such as percent of floor space allocated. </li></ul>
    91. 93. illustration <ul><li>If IT occupies 10 percent of a building, then accounting will likely allocate 10 percent of the rent to IT. This overhead cost must then be factored into the services that IT offers in order for proper charge backs, pricing and so on </li></ul>
    92. 94. Sunk Costs <ul><li>These are costs that, once spent, cannot be changed. If something is purchased that cannot be returned or sold off, then that item should be considered a sunk cost. Sunk costs need to be factored into costing, but it also should recognized that altering them may not be possible by definition. </li></ul>
    93. 95. Cost Drivers <ul><li>When determining costs, it is worthwhile to understand what drives the costs. In other words, if you do X, then you see a corresponding increase in cost Y. To illustrate, if you must buy a PC and software licenses for each new person hired, then the addition of new users is one of the cost drivers for the associated PC and software expense accounts. </li></ul>
    94. 96. Salvage Value/Salvage Costs <ul><li>If you can sell an asset for more than its book value, then you are actually booking another form of income. On the other hand, if the salvage value is lower than the book value, then accounting will need to write the asset off. </li></ul><ul><li>If you have to pay someone to take things away due to hazardous materials laws, then you may even incur expenses relating to the disposal of the asset. </li></ul>
    95. 97. Differential cost <ul><li>Increased or decreased cost due to the increased or decreased volume of operations. </li></ul><ul><li>Additional cost due to operation. </li></ul>
    96. 98. Normal cost and abnormal cost(150) <ul><li>Normal costs incurred at a certain level of output </li></ul><ul><li>Abnormality in cost due to unforeseen situations </li></ul>
    97. 99. Relevant cost and relevant benefit <ul><li>Required for decision making </li></ul><ul><li>Costs that are affected by by the decision </li></ul><ul><li>Costs and benefits that are independent of a decision are not relevant and need not be considered. </li></ul><ul><li>Future cash inflows and future outflows are relevant. </li></ul><ul><li>Sunk costs are irrelevant </li></ul><ul><li>Allocated common costs are irrelevant </li></ul><ul><li>Opportunity costs are relevant (shadow price) </li></ul><ul><li>Incremental costs are relevant incremental benefits are relevant. </li></ul><ul><li>Avoidable costs are relevant and unavoidable costs are irrelevant for decision making. </li></ul>
    98. 100. Relevant and irrelevant <ul><li>Five engineers already employed on monthly salary but will not be sent out if not employed in an another project. The salary paid to those engineers are relevant or irrelevant to estimate the price for the project? </li></ul><ul><li>Two more engineers are selected exclusive to the new project-are the costs relevant to take decision for new project? </li></ul>
    99. 101. Direct and indirect costs <ul><li>Direct Costs are costs that can be specifically and exclusively identified with the particular object (product) </li></ul><ul><li>Salary of processing associate </li></ul><ul><li>Indirect Costs are costs that can not be specifically and exclusively identified with the particular object (product) </li></ul><ul><li>Salary of team leader </li></ul><ul><li>Direct costs are allocated. Indirect costs are apportioned. </li></ul>
    100. 102. product costs Period costs <ul><li>Product cost are those costs that are identified with goods purchased or produced for resale. </li></ul><ul><li>Period costs are those costs that are not included in the inventory valuation and as a result are treated as expense in the period in which they are incurred. </li></ul><ul><li>Product costs will generate income.but period costs do not generate income. </li></ul>
    101. 103. Treatment of period and product costs Product code Period code Manufacturing cost Non manufacturing costs Recorded as an asset In the balance sheet And becomes an Expense in the P/L A/C When the product Is sold Recorded as an Expense in the P/L A/c In the current Accounting year sold unsold
    102. 104. Variable, fixed, semi variable and semi fixed <ul><li>Cost Variable cost </li></ul><ul><li>cost </li></ul><ul><li>Out put </li></ul><ul><li>fixed cost </li></ul>Activity level
    103. 105. Step fixed cost <ul><li>Total </li></ul><ul><li>Fixed cost </li></ul><ul><li>Activity level </li></ul>
    104. 106. Variable, fixed, semi variable and semi fixed. direct material, direct labour and direct expenses. Both fixed and variable elements in the costs. Variable costs Semi variable cost Supervisors’ salary, leasing charges for cars, depreciation on building In the long run all costs are variable. Fixed cost
    105. 107. Incremental costs and Marginal cost <ul><li>Differential costs and revenues are the difference between costs and revenues for the corresponding item under each alternative being considered. </li></ul><ul><li>Marginal cost/revenue - one extra unit of output cost/revenue. </li></ul>
    106. 109. Red Car, Inc. Cost of Goods Manufactured Schedule For the Year Ended December 31, 20X0 Direct materials used    Beginning raw materials inventory    Add: Cost of raw materials purchased    Total raw materials available   Less: Ending raw materials inventory      Total raw materials usedDirect laborManufacturing overhead    Indirect materials  Indirect labor  Depreciation—factory building  Depreciation—factory equipment  Insurance—factory  Property taxes—factory    Total manufacturing overheadTotal manufacturing costsAdd: Beginning work-in-process inventoryLess: Ending work-in-process inventoryCost of goods manufactured
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