3. Concept of Accounting
• Science and art of generating, managing and using records.
• Means of collecting, summarizing, analyzing and reporting monetary information
about the business
• Science of recording and classifying transactions and events primarily of a
financial character and the art of making significant summarizes, analysis and
interpretations of those transactions and events and communicating the result to
persons who must make decisions or form judgment.
• The process of recording, summarizing, analyzing, and reporting the financial
transactions .
• The main goal of accounting is to record and report a company’s financial
transactions, financial performance, and cash flows.
• A discipline which provides financial and other information essential to efficient
conduct and evaluation of the activities of any organization
4. Concept of Accounting
Identification
of financial
transactions
Recording in
journals and
subidiary books
Posting in the
ledgers
Preparation of
trial balance
Preparation of
final accounts
interpretation,
evaluation and
dessimination
of results
5. Importance of Accounting
• Keeps full and timely record of financial transactions
• Track income & expenditures
• Helps in evaluating the performance of the business
• Ensure legal & statutory compliance
• Helps create budget and future projections
• Improves decision making by providing various quantitative and
qualitative information to various users like management, investors,
creditors, government etc.
7. Financial Accounting
• The process of recording, summarizing and reporting a company's business transactions through financial statements.
• A specialized branch of accounting that keeps track of a company's financial transactions.
• Specific branch of accounting involving a process of recording, summarizing, and reporting the myriad of transactions resulting
from business operations over a period of time.
• A process of gathering information and producing reports on an organization's financial activity.
• Refers to the bookkeeping of the financial transactions by classifying, analyzing, summarizing, and recording financial transaction
• Involves the preparation of accurate financial statements. The focus of financial accounting is to measure the performance of a
business as accurately as possible.
• Accounting principles and standards, such as GAAP (Generally Accepted Accounting Principles), IFRS (International Financial
Reporting Standards), or ASPE (Accounting Standards for Private Enterprises), are standards that are widely adopted in financial
accounting. The accounting standards are important because they allow all stakeholders and shareholders to easily understand and
interpret the reported financial statements from year to year.
8. Cost Accounting
• A process of recording, analyzing and reporting all of a company's costs (both variable and fixed)
related to the production of a product.
• The recording of all the costs incurred in a business in a way that can be used to improve its
management.
• The reporting and analysis of a company's cost structure.
• A systematic set of procedures for recording and reporting measurements of the cost of
manufacturing goods and performing services in the aggregate and in detail. It includes methods
for recognizing, classifying, allocating, aggregating and reporting such costs and comparing them
with standard costs.
• The classifying, recording and appropriate allocation of expenditure for the determination of the
costs of products or services, and for the presentation of suitably arranged data for purposes of
control and guidance of management. It includes the ascertainment of the cost of every order, job,
contract, process, service or unit as may be appropriate. It deals with the cost of production, selling
and distribution.
• Relates to the collection, classification, ascertainment of cost and its accounting and control
relating to the various elements of cost.
9. Objectives of Cost Accounting
• To ascertain the cost per unit of the different products manufactured by a business concern;
• To provide a correct analysis of cost both by process or operations and by different elements of cost;
• To disclose sources of wastage whether of material, time or expense or in the use of machinery, equipment and tools and to
prepare such reports which may be necessary to control such wastage;
• To provide requisite data and serve as a guide for fixing prices of products manufactured or services rendered;
• To ascertain the profitability of each of the products and advise management as to how these profits can be maximized
• To exercise effective control if stocks of raw materials, work-in-progress, consumable stores and finished goods in order to
minimise the capital locked up in these stocks;
• To reveal sources of economy by installing and implementing a system of cost control for materials, labour and overheads;
• To advise management on future expansion policies and proposed capital projects;
• To present and interpret data for management planning, evaluation of performance and control
10. Management Accounting
• A branch of accounting that is concerned with the identification, measurement, analysis, and
interpretation of accounting information so that it can be used to help managers make informed
operational decisions.
• The purpose of management accounting in the organization is to support competitive decision
making by collecting, processing, and communicating information that helps management plan,
control, and evaluate business processes and company strategy.
• Accounting that use accounting information in decision-making and to assist in
the management and performance of their control functions.
• Designed to help managers plan for the future, make decisions for the company, and see if their
plans and decisions were accurate.
• Analyzes the information gathered from financial accounting. It refers to the process of preparing
reports about business operations. The reports serve to assist the management team to make tactical
decisions.
• A process that allows an enterprise to achieve maximum efficiency by reviewing financial
accounting, deciding on the best following steps to take, and then broadcasting the required steps
to all internal business managers.
11. Importance of management Accounting
• Helps in making plan
• Assist in Decision making
• Measure the performance
• Increase the efficiency
• Better service to the customers
• Raises the profitability
• Provides reliability
• Pricing of products and services
12. Accounting Voucher
• An accounting voucher is any written documentation supporting entries recorded in the accounting
books.
• A voucher is considered a document that shows the goods purchased or the services are delivered
are paid. The payments are recorded in the respective ledger accounts
• A document that serves as evidence for a business transaction is called a Voucher.
• They are also called source documents as they help in identifying the source of a transaction. A few
examples of vouchers include bill receipts, cash memos, pay-in-slips, checks, an invoice, a debit or
credit note.
• The voucher is important because it's an internal accounting control mechanism that ensures that
every payment is properly authorized and that the goods or services purchased are actually
received.
13. Trail Balance
• A trial balance is a bookkeeping worksheet in which the balance of all ledgers are
compiled into debit and credit account column totals that are equal
• The general purpose of producing a trial balance is to ensure the entries in a
company's bookkeeping system are mathematically correct.
• A trial balance is a report that lists the balances of all general ledger accounts of a
company at a certain point in time. The accounts reflected on a trial balance are
related to all major accounting items, including assets, liabilities, equity,
revenues, expenses, gains, and losses. It is primarily used to identify the balance
of debits and credits entries from the transactions recorded in the general ledger at
a certain point in time.
• Trial Balance is a statement summarizing the closing balance of all the ledger
accounts, prepared with the view to verify the arithmetical accuracy of ledger
posting.
14. Features of trial balance
• It is a summary of debit and credit balances which are extracted from various ledger accounts
• The motive behind the preparation of Trial balance is to establish arithmetical accuracy of the
transactions recorded in the Books of Accounts
• Trial balance does not prove any arithmetical accuracy of accounts which can only be determined
by the audit
• It is not an account. It is only a statement of account
• It is not a part of the final statements
• A Trial balance at the end of the accounting year but it can also be prepared anytime as and when
required like weekly, monthly, quarterly or half-yearly
• It acts as a bridge between books of accounts and the Profit and Loss Account and Balance sheet
15. Importance of Trail Balance
• Check equality position in debit and credit
• Locate error in recording
• Providing list of all accounts
• Provides balance of all account heads
• Base for preparing final accounts
16. Weaknesses of Trail Balance
• It does not provide that all the transactions have been recorded
• It does not prove that ledger is correct
• Numerous errors may exist even though trial balance agree
• It can not find the missing entry in journal
• It can not find the missing entry in ledger
• It can not protect repetition in posting
• It can not protect offsetting errors
• It can not protect error of principle
17.
18. Profit & Loss Account
• The account that shows the operating result (net profit or net loss) of a business during financial
year
• A financial statement that summarizes the revenues, costs, and expenses incurred during a specified
period in order to know the financial performance of the business
• Shows whether organization has made or lost money during the year
• Traditionally, there are two steps to know the profit/loss. It means, the preparation of :
• Trading Account indicating gross profit or loss of the business.
• Profit & Loss Account indicating net profit or loss of the business.
• The P & L account typically consists of three parts:
• The first is a trading account, showing the total sales income less the costs of production, etc., and any
changes in the value of stock or work in progress from the last accounting period. This gives the gross
profit (or loss).
• The second part gives any other income and lists administrative and other costs to arrive at a net profit
(or loss). From this net profit before taxation the appropriate corporation tax is deducted to give the net
profit after taxation.
• In the third part, the net profit after tax is appropriated to dividends or to reserves (retained profit).
19. Sample of Trading and Profit & Loss Account
Trading and P&L Account
For the year ending………………
Opening Stock Sales
Less: Sales Return
Purchase
Less: Purchase return
Closing Stock
Less: Direct Expenses
Gross Profit (if revenue
exceeds expenses)
Gross Loss (if expenses
exceeds revenue)
Gross Loss b/d Gross Profit b/d
Other administrative or
indirect expenses
Other non operating
incomes
Net Profit Net Loss
22. Importance of Profit & Loss Account
• Ascertainment and evaluation of financial performance of the business
• To determine tax liability
• Basis for forecasting revenues and expenses
• Provides information to be used for evaluating and controlling
expenses
• Provides valuable information on sales, purchases, incomes and
expenses like growth, concentration, ratios, industry positioning etc.
• Helps creating strategies on maximizing incomes and minimizing
costs
23. Insights from Analyzing Profit & Loss
Accounts
• Year-on-year statements should be compared to check how the company is
performing. Also, numbers should be compared with statements of other
players of the industry or industry benchmarks. This helps to find where the
company stands vis-à-vis the competition.
• Analyzing margins such as gross profit margins, operating
margin, EBITDA, and net profit margin.
• Ratio and valuation analysis is done to give an overall view of where the
company stands. Return on equity(ROE), Return on assets(ROA), P/E ratio,
Interest coverage ratio, Inventory turnover ratio, Asset turnover ratio, etc.
are few important ratios. The profit and loss statement and balance sheet of
the Company help in calculation of these ratios.
•
24. Balance Sheet
• Statement prepared for ascertaining financial position of the business on a
particular date
• It is a statement of assets and liabilities
• It is a list of balances in the asset and liabilities accounts. This list depicts the
position of assets and liabilities of a specific business at a specific point of time.
• B/S is a statement; nor account like trading account or profit or loss account.
• It represents data of specific point of time; not of period of time.
• It does not have debit and credit sides like of the account. It has left hand side and
right hand side. Left hand side liabilities and right hand side assets
• B/S does not use “To” and “By” before items
• Total of asset side and total of liability side must be equal
28. Importance of Balance Sheet
• To ascertain true financial position of the business at a given time
• An entity’s balance sheet provides a lot of information which can be used to analyse the financial
stability and business performance.
• Providing knowledge on liquidity, solvency, leverage and performance of the business.
• It is an important tool used by outsiders such as investors, creditors, and other stakeholders to
understand the financial health of an entity. Balance sheets are also important because these documents
let banks know if your business qualifies for additional loans or credit. Balance sheets help current and
potential investors better understand where their funding will go and what they can expect to receive in
the future.
• It is a tool to measure the growth of an entity. This can be done by comparing the balance sheet of
different years.
• It is an essential document that must be submitted to the bank or investors to obtain a business loan.
• It enables decision making regarding expansion projects and meet unforeseen expenses.
• If the entity is funding its operations with profit or debt, it can be known by analysing the balance sheet.
29. Cash Flow Statement
• A cash flow statement is a financial statement that shows how changes in balance sheet accounts and
income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and
financing activities.
• A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows a
company receives from its ongoing operations and external investment sources. It also includes all cash
outflows that pay for business activities and investments during a given period.
• Prepared on the basis of balance sheet and income statement of two years and other financial
information.
• A cash flow statement provides data regarding all cash inflows a company receives from its ongoing
operations and external investment sources.
• The cash flow statement includes cash made by the business through operations, investment, and
financing—the sum of which is called net cash flow. The first section of the cash flow statement is cash
flow from operations, which includes transactions from all operational business activities. Cash flow
from investment is the second section of the cash flow statement, and is the result of investment gains
and losses. Cash flow from financing is the final section, which provides an overview of cash used from
debt and equity.
30.
31.
32.
33.
34. Importance
• Helps in cash planning and maintaining a proper matching between cash inflows
and outflows.
• Shows efficiency of a firm in generating cash inflows from its regular operations.
• Helps to identify the sources from where cash inflows have arisen
• Helps in business projection
• Helps in identifying payment capacity of the business (to lenders, creditors etc.)
• Helps in capital budgeting decisions of the business
• Useful for external parties also i.e. BFIs, government, researchers etc.
• Basis for short term financial analysis. Cash is a life blood of the business.
Knowing exact timing and amount of cash inflow and outflow helps better
planning
• Shows how good is the firm in realizing adequate cash from its main business
• Reveals if firm needs to look outside for external sources of financing
35. • A business's ability to raise cash through financing activities is
dependent upon its ability to generate cash from operations. Likewise,
creditors and shareholders are not keen to invest in a business that
does not generate enough cash from operations to assure prompt
payment of maturing liabilities, interest and dividends. A cash flow
statement provides information and insight on company's
creditworthiness and overall financial health.
• Facilitates to prepare financial policies and strategies
36. Reconciliation
• Reconciliation is an accounting process that compares two sets of records to
check that figures are correct and in agreement. Reconciliation confirms
that accounts in the general ledger are consistent, accurate, and complete.
• Account reconciliation is the process of comparing internal financial
records against monthly statements from external sources—such as a bank,
credit card company, or other financial institution—to make sure they match
up.
• When we reconcile accounts, we compare two or more sources of a
company's accounting to check for errors and bring them into agreement.
• Generally, account reconciliations compare the general ledger balance of an
account to independent systems, third-party data, or other supporting
documentation to substantiate the balance stated in the general ledger.
37. • Account reconciliation is particularly useful for explaining the
difference between two financial records or account balances. Some
differences may be acceptable because of the timing of payments and
deposits.
• Unexplained or mysterious discrepancies, however, may warn
of fraud or cooking the books.
• Some basic types of reconciliations are bank accounts reconciliation
(bank ledger vis-a-vis bank statement), vendor reconciliation (vendor
ledger vis-a-vis vendor’s books), inter-company reconciliations, and
credit card reconciliations, stock reconciliation etc.
• Many organisations have now embraced auto-reconciliation to
streamline the process and create efficiencies. In auto-reconciliation,
an ERP uses a pre-defined set of criteria to automatically match the
statement and the ledger together. This means that we don’t have to
manually match everything, we only step in when there are exceptions
that need to be investigated.
38. Importance of Reconciliation
• Accounts reconciliation is an important step to ensure the completeness and
accuracy of the financial statements.
• It is important for the records to be updated on timely basis
• Account reconciliation can help spot errors, fraud, theft, or other negative
activity in the books of account, which can save money and keep safe from
legal trouble in the long run.
• It acts as an independent check and balance mechanism. So we don’t need
to monitor every single transaction when it happens
• Enhance control over financial transactions
• Discourage frauds and negativities
• Helps increasing efficiencies
39. Challenges in Reconciliation
• Difficult to compare multiple transactions
• Time intensive process
• Requires significant efforts
• Costly as it demands more staffs
• Discrepancies or risks can not be fully controlled
40. Depreciation
• A reduction in the value of an asset over time, due to reasons like use, wear and tear, obsolescence etc.
• An accounting method used for allocating the cost of a fixed asset over its assumed useful life. So, instead
of deducting the total cost as an expense in the year of purchase, the cost is divided into smaller portions
and allocated over its life. By spreading the initial price of the asset over its estimated useful life, companies
can also divide the significant portion of the expenses on a firm’s financial statements.
• Depreciation is any method of allocating net cost of the asset to those periods in which the organization is
expected to benefit from the use of the asset. As such assets contributes in earning for many future years, its
rational to allocate such cost over those years. By depreciating the assets, companies reflect the real value of
the company and its possessions as time passes by.
• Depreciation represents how much of an asset's value has been used up.
• Depreciation is made for two purposes; accounting and tax. The decrease in value of the asset affects
the balance sheet, and the method of depreciation affects the net income.
• There are several standard methods of computing depreciation expense, including fixed percentage, straight
line, and declining balance methods. These may be specified by law or accounting standards, which may
vary by country.
41. Factors required to calculate Depreciation
• Date placed in service
• Acquisition value
• Salvage value
• Estimated useful life
• Depreciation Method
42. Benefits
• The process helps companies accurately state incurred expense from using the asset and compare
that to the revenue that asset brings in. Lack of depreciation can lead to over or under stating total
asset expenses, which can lead to misleading financial information
• It also helps businesses reports the correct net book value of a given asset. Most businesses report
the original purchase cost of the asset. But since assets experience wear and tear from daily use, the
actual value declines over time. Companies can find an asset's net book value by subtracting the
asset's overall depreciation expense from the cost when the asset was purchased
• Calculation of depreciation helps companies to closely monitor the value of assets and record it
accurately. This helps the business to take critical and crucial decisions when it comes to these
fixed assets and adjusting and fixing their values accordingly.
• Depreciation allows for companies to recover the cost of an asset when it was purchased. The
process allows for companies to cover the total cost of an asset over it's lifespan instead of
immediately recovering the purchase cost. This allows companies to replace future assets using the
appropriate amount of revenue
• There are tax rules that make depreciation tax deductible. A greater depreciation expense lowers
taxable income and increases tax savings
• Works as a way of self finance.
43. Necessity of Depreciation
• Allocation of expense: If the asset is not depreciated, then the complete value will be debited in
P&L account in the year of purchase. Invariably, it will result in a huge loss in the purchase year.
Whereas, subsequent years will show good profits, with no offset charges. In order that the right
profits are recorded, companies record depreciation.
• Save Income Tax: If depreciation expense is not taken into Bookkeeping, your profit and loss
account will show more profits. And you would need to pay more income tax to the government
• Asset Evaluation: The asset is shown in the balance sheet, at their true and fair values. The
financial position of your business will come out true and more correct.
• True Profits: This expense is a revenue expense. Unless it is debited to your P&L account, the
correct amount of profit or loss cannot be calculated.
• Asset Replacement: Depreciation Fund is a source of fund for replacing the used and obsolete
asset by a new one.
• Sale of Business: This fund amount in the balance sheet helps as a reminder of the best time to
reinvest in assets. And one of the Factors considered by Venture Capitalists & investors is when
they would need replacement assets that will affect their future income
44. Internal Check & Control
• Internal check and internal control are two frequently used terms in risk management which are often used
interchangeably.
• Internal Check is an integral function of the internal control system. It is an arrangement of duties of the staff
members in such a way that the work performed by one person is automatically and independently checked by
the other
• Internal controls are the mechanisms, rules, and procedures implemented by a company to ensure the integrity
of financial and accounting information, promote accountability, and prevent fraud
• “Internal control comprises the plan of organization and all of the co-ordinate methods and measures adopted
within a business to safeguard its assets, check the accuracy and reliability of its accounting data, promote
operational efficiency, and encourage adherence to prescribed managerial policies.” -American Institute of
CPAs (1948)
• The key difference between internal check and internal control is that internal check refers to the way of
allocating responsibility, segregation of work where work of the subordinates is checked by the immediate
supervisors to verify that the work is carried out according to the company policies and
guidelines whereas internal control is the system implemented by a company to warrant the integrity of
financial and accounting information and ensure that the company is progressing towards fulfilling its
profitability and operational objectives in a successful manner.
45. • An arrangement of staff duties, whereby no one person is allowed to carry through and to record
every aspect of a transaction so that without collusion between two or more persons, fraud is
activated and at the same time the possibilities of errors are reduced to the minimum.
• Internal check means practically a continuous internal audit carried on by the staff itself, using
which other members of the staff independently check the work of each individual.
• “the checks on -a day to day transactions which operate continuously as part of the routine system,
where the work of one person is proved independently or in complementary to the work of another,
the object is the prevention or early detection of errors or frauds.”
• “measures and methods adopted within an organisation to safeguard the cash and other assets of
the company as well as to check the clerical accuracy of the bookkeeping.”
46. Requirements in internal check & Controls
• Division of work to ensure no one perform work from origin to end
• Checking by independent staff
• Use of devices like CC TV, time recording device
• Self balancing system
• Job rotation
• Specialization
• Authority Level
47. Objectives of internal Check & Control
• To minimize the possibility of error, fraud, and irregularity.
• To prevent the misappropriation of cash and goods.
• To allocate duties and responsibilities to every clerk in the organization.
• To ensure an accurate recording of all business transactions.
• To enhance the efficiency of the clerk in the organization.
• To exercise moral influence over the staff member.
• To prepare a final account with ease and efficiency.
48. Principles of Internal checks and controls
• The process should be allocated among the staff of the business according to the duties,
responsibility, and rights in such a. There is no room for interference.
• No single person should have independent control over the all-important aspects of the business.
• The duties among the staff of the business should be changed from time to time so that no staff
should be engaged in a particular job for a long time.
• Every member of the staff should be encouraged to go on leave at least once in a year .this will
help in detecting concealed fraud.
• An efficient system of internal check should provide for automatic checking of the work of an
assistant by others.
• The division of work should not be much expensive.
49. • The self-balancing system should be invariably used.
• The financial and administrative power should be assigned very judiciously to different officers.
• A person having physical custody of assets must not be permitted to have access to the books of
account.
50. Methods of Internal Controls
• Separation of duties
• Accounting system access controls
• Physical audits of assets
• Standardizing documents
• Periodic trial balance
• Periodic reconciliation
• Arrangement of approving authorities
51. Type of Checks & Controls
Organizational Controls
Establishing clear lines of authority, accountability and responsibility based on organizational structure
are very important to ensure effective decision making. Job descriptions for all employees must be
extensive and should describe their duties. Segregation of duties to divide responsibility for recording,
inspecting and auditing transactions should be in place to prevent a single employee committing a
fraudulent act.
Operational Controls
Planning and budgeting activities to decide on production and sales is the main concern of operational
controls. In addition to that, accounting reconciliations to ensure that account balances match up with
balances maintained by other entities including suppliers, customers, and financial institutions is also a
part of ensuring operational control.
Personnel Controls
There should be clear and transparent procedures to select and recruit employees subjected to
verification processes. Once recruited, adequate training should be conducted before allowing them to
perform their designated duties. Independent checks on employee performance such as supervision
should also be conducted.
52. Budgeting System
• Budget is the estimation of sources and uses of fund including revenue and expenses for
the year
• A budget is defined as the formal expression of plans, goals, and objectives of
management that covers all aspects of operations for a designated time period
• A budget is a financial plan to control future operations and results.
• Budgeting is the process of creating a plan to spend money in the business.
• Budgeting is the process of designing, implementing and operating budgets. It is the
managerial process of budget planning and preparation, budgetary control and the related
procedures.
• Budget system determines the allocation of resources among its major functions to
achieve desired outcomes
• Budgeting is the tactical implementation of a business plan.
53. Purpose and objectives of budgeting
1. Aids in the planning of actual operations: The process gets managers to consider how conditions may
change and what steps they need to take, while also allowing managers to understand how to address
problems when they arise.
2. Coordinates the activities of the organization: Budgeting encourages managers to build relationships
with the other parts of the operation and understand how the various departments and teams interact with
each other and how they all support the overall organization.
3. Communicating plans to various managers: Communicating plans to managers is an important social
aspect of the process, which ensures that everyone gets a clear understanding of how they support the
organization. It encourages communication of individual goals, plans, and initiatives, which all roll up
together to support the growth of the business. It also ensures appropriate individuals are made accountable
for implementing the budget.
4. Motivates managers to strive to achieve the budget goals: Budgeting gets managers to focus on
participation in the budget process. It provides a challenge or target for individuals and managers by
linking their compensation and performance relative to the budget.
5. Control activities: Managers can compare actual spending with the budget to control financial
activities.
6. Evaluate the performance of managers: Budgeting provides a means of informing managers of how
well they are performing in meeting targets they have set.
54. Principles of Budgeting
• Management Support: Top management’s support and cooperation is essential for successful
implementation of the budget. It should take interest not only in setting the targets and finalising the
budgets but also constantly monitoring the actual performance to find out the deviations if any and take
curative steps, motivate the personnel and reward the good performers.
• Employees Involvement: The budget should be established on the highest possible level of
motivation. All levels of management should participate in setting targets and preparing budget. This
will result in defining realistic targets. Participation of employees in budgeting process will not only
make them carefully think about the likely development in the forthcoming period and prepare budget
accordingly, but will also motivate them to strive hard to achieve budget levels of efficiency and
activity.
• Statement of Organizational Goal: The organizational goal should be quantified and clearly stated.
These goals should be set within the framework of corporate objectives and strategies. A well defined
corporate policy and strategy is a pre-requisite for budgeting.
55. • Responsibility Accounting: Individual employees should be informed about expectations of the
management. Only those costs over which an individual has predominant control should be used in
evaluating performance of that individual. Responsibility reports often contain budget to actual comparisons.
• Organizational Structure: There should be well-planned organizational structure with clearly defined
authority and responsibility of different levels of management. Role and responsibilities of Budget
Committee and its President must be made known to the people in the organization.
• Flexibility: If the basic assumptions underlying the budget change during the year, the budget should be
restated. This will enable the management to compare the actual level of operations with the expected
performance at that level.
• Communication of Results: Proper communications systems should be established for management
reporting and information service so that information pertaining to actual performance is presented to the
concerned manager timely and accurately so that remedial action is taken wherever necessary.
• Sound Accounting System: Organization should have good accounting system so as to generate precise,
accurate, reliable and prompt information which is essential for successful implementation of budget system.
56. Types of Budgets
• Financial Budget
• Operating Budget
• Capital Budget
• Cash Budget
57. Budgetary Control
• Control gained through budget
• Budgetary Control is a means of control in which the actual results are compared with the
budgeted results so that appropriate action may be taken about any deviations between the two.
• Budgetary control means regularly comparing actual income or expenditure to planned income or
expenditure to identify whether or not corrective action is required.
• Budgetary control is the process in which actual performance is regularly compared with the
budgeted performance and corrective actions are taken if found deviation
• Budgetary control is to make planning in advance of the various functions of a business so that
the business as a whole is controlled.
• “Budgetary control involves the use of budget and budgetary reports, throughout the period to
co-ordinate, evaluate and control day-to-day operations in accordance with the goals specified by
the budget.”
58. Budgetary control serves 4 control purposes:
• They help the manager’s co-ordinate resources;
• They help define the standards needed in all control systems;
• They provide clear and unambiguous guidelines about the organization’s
resources and expectations, and
• They facilitate performance evaluations of managers and units.
59. Essentials for Good Budgetary Control System
• Support from Top Management
• Quantification of organizational goal
• Creation of responsibility center
• Split of organizational goal
• Realistic
• Participation
• Coverage
• Creation of environment conducive to budgetary control
• Coordination
• Flexibility
• Reporting System
60. Advantages Budgetary Control
• Budgeting facilitates the planning of various activities and ensures that the working of the organization
is systematic and smooth.
• Budgeting is a coordinated exercise and hence combines the ideas of different levels of management in
the preparation of the same.
• Any budget cannot be prepared in isolation and therefore coordination among various departments is
facilitated automatically.
• Budgeting helps planning and controlling income and expenditure to achieve higher profitability and
also acts as a guide for various management decisions.
• Budgeting is an effective means for planning and thus ensures sufficient availability of working capital
and other resources.
• It is extremely necessary to evaluate the actual performance with predetermined parameters. Budgeting
ensures that there are well-defined parameters and thus the performance is evaluated against these
parameters.
• As the resources are directed to the most productive use, budgeting helps in reducing the wastages and
losses
61. Limitations of Budgetary Control
• Budgets are prepared for the future period which is always uncertain. In
future, conditions may change which will upset the budgets. Thus, future
uncertainties minimize the utility of budgetary control system.
• Budget involves a heavy expenditure which small business concerns may
not afford.
• Budgetary control is only a management tool. It cannot replace
management in decision-making because it is not a substitute for
management.
• The success of budgetary control depends upon the support of the top
management. If there is lack of support from top management, then this
will fail
62. Capital Budgeting
• Decision to invest available fund most efficiently in long term assets in anticipation of an expected flow of
future benefits over a series of years.
• Capital budgeting consists in planning the deployment of available capital for the purpose of maximizing the
long term profitability (return on investment) of the firm (Richard M Lynch and Robert W Williamson)
• Long term planning for making and financing proposed capital outlays (Charles T Horngren)
• Decisions involving cash inflows and outflows beyond the current year are called capital budgeting decisions
(Ronald W. Hilton)
• Capital budgeting is the process of making long term planning decisions for investments (J.K. shim and J. G
Siegel)
• Capital budgeting generally refers to acquiring inputs with long run returns (Richardson & Green law)
• Capital budgeting refer to the total process of generating, evaluating, selecting and follow up on capital
expenditure alternatives (Gittmen L.J.)
63. Significance
• Involvement of huge fund
• Long term strategic implication
• Irreversible decision
• Uncertain future benefits
• Huge cost involvement for change/replacement
• Capital assets must be in place when needed
• Existence of various kinds of complexities
64. Process of Capital Budgeting
• Exploring viable investment proposals
• Evaluation of the proposals
• Selection of proposals
• Implementation of selected proposal
• Control and Review
65. Process of Evaluation
• Estimation of cash outflows
• Estimation of cash inflows
• Application of analytical tools
• Net present value (NPV)
• Internal rate of return (IRR)
• Profitability index (PI)
• Payback period (PBP)
• Average rate of return (AR)
• Selection of project
66. Profit Planning
• Profit is a condition of survival. Profit does not just happen. It’s the result of
managerial efficiency and effectiveness. It should be planned and effectively
managed
• Profit planning is the set of actions taken to achieve a targeted profit level.
• A profit plan is a set of management decisions about how the company will earn
a desired level of profit
• Profit planning aims to set a profit objective for a budgeting period. Also, to
establish the main policy decisions on how to achieve the objectives. The profit
objective will normally be related to the ‘return’ required on the investment in
the business. Profit planning evaluates alternatives to select the most likely to
give the required profit objective. Managers can plan their budgets on this basis.
• Profit planning is the process of developing a plan of operation that makes it
possible to determine how to arrange the operational budget so that the
maximum amount of profit can be generated
• Profit Planning is a systematic and formalized approach of determining the effect
of management’s plans upon the company’s profitability.
67. • Profit planning is accomplished by preparing numerous budgets,
which, when brought together, form an integrated business plan
known as a master budget.
• Its focus is on all those elements of revenues and expenses which
significantly contributes on profit of the organisation
• A profit plan not only looks at how your business will earn a profit
today but also creates a plan for future profits.
• Key to success of profit planning lies in the competence of the
management to plan activities of the enterprise.
68. Purpose of Profit Planning
• set profit objectives for the budget period
• state the policy decisions, and the course of action to be followed
during the budget period
• give planning directives for preparing detailed operating plans.
69. Basics of Profit Planning
• Evaluating the business operation
• Setting the marketing strategies
• Identifying the resource requirements
• Preparing financial planning
70. Need for Profit Planning
• To improve management performance
• To ensure that the organisation as a whole pulls in a right direction
• To ensure that objectives should be set which will stretch but not
overwhelm managers
71. Process of Profit Planning
• Establishing profit goals
• Determining expected sales volume
• Estimating expenses
• Determining profit
• Comparing estimates with the goal
• Using alternatives to achieve the desired profit
72. Cost of Capital
• Cost of capital is simply the cost which is paid for using the capital
• Cost of company's all kinds of funds that it collects like debt, equity, preference capital etc.
• The cost of capital is simply the return expected by those who provide capital for the business
• Cost of capital is the minimum required rate of earnings or cutoff rate of capital expenditure
• The cost of capital is the minimum rate of return which a company is expected to earn from a
proposed project so as to make no reduction in the earning per share to equity shareholders and
its market price
• the minimum rate of return that a firm must earn on its investment for the market value of the
firm to remain unchanged
• The cost of capital is tied to the opportunity cost of pouring cash into a specific business project
or investment. Once those costs are evaluated, businesses can make better decisions to deploy
their capital to maximize profit potential.
74. Factors affecting cost of capital
• Demand & Supply of Capital
• Expected Rate of Inflation
• Various Risks involved
• Leverage position of the company (Debt to equity ratio)
75. Importance of Cost of Capital
• Maximization of the value of the firm
• Capital Budgeting Decisions
• Management of working capital
• Dividend Decision
• Determination of Capital Structure
• Evaluation of financial performance
76. Base Rate Calculation
• Base rate is defined as the minimum interest rate set by the NRB
below which BFIs are not permitted to lend to their customers except
exception permitted by NRB.
• Standard lending rate offered by BFIs
• It helps ensuring that BFIs pass the benefit of lower interest rates to
borrowers.
• Loans are priced by adding credit risk premium on the base rate.
