Chapter 1 management accounting


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Compiled by Prof At MEt Nashik College

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Chapter 1 management accounting

  1. 1. Management Accounting Chapter 1: Financial AccountingConcepts & Conventions
  2. 2. 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 whichorganisational participants perceive both themselvesand the organisation.” Mike Powers
  3. 3. 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]
  4. 4. The Process of Financial Accounting & classifying the assets, liabilities, capital, income & IDENTIFYING expenses recording each transaction of the business SUMMARISING in the form of periodic financial statements to users/stakeholders in theCOMMUNICATING business
  5. 5. Who are the Stakeholders ? Suppliers Managers Shareholders/ investorsInvestmentanalysts Accounting Employees informationGeneralpublic Competitors Lenders/ Customers creditors Government
  6. 6. Necessary qualities of financial information. accuracy clarityconsistency Accounting reliability Information timeliness relevance
  7. 7. Main forms of business enterprise [entity]. Non - Sole profit trader co-op charity public Business body partnership organisation PrivatePublic limited limitedliability liabilitycompany company[plc]
  8. 8. 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.
  9. 9. The Functions of ManagementPlanning Acting Controlling Feedback
  10. 10. 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
  11. 11. Definition of ManagementAccounting “ 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]
  12. 12. Management Accounting and Financial Accounting Primary Users Internal managers of the business Investors, Creditors, Government authorities
  13. 13. Management Accounting and Financial Accounting Purpose of Information Help managers plan and control business operationsHelp investors, creditors, and others make investment, credit, and other decisions
  15. 15. Phases in the evolution of Accounting ? HRA Inflation Acct. Social Respon. Acct. Management Accounting Cost Accounting Financial Accounting Stewardship Accounting
  16. 16. Scope of Management Accounting1.  Financial Accounting2.  Cost Accounting3.  Financial Statement Analysis4.  Forecasting & Budgeting5.  Cost Control Techniques6.  Inflation Accounting7.  Management Reporting8.  Quantitative Techniques9.  Taxation10. Internal Audit.
  17. 17. 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
  18. 18. 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.
  19. 19. Business Accounting Entity Period Dual Aspect Accrual Money Measurement Accounting ConceptsRealization Going concern Matching Cost Cost Attach
  20. 20. Accounting Conventions•  Conservatism•  Consistency•  Materiality•  Disclosure
  21. 21. 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.
  22. 22. 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.
  23. 23. 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.
  24. 24. 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.
  25. 25. 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.
  26. 26. 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
  27. 27. 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