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Dr. Varadraj Bapat 1
Module 1.2
Fundamentals of
Managerial Accounting
Dr. Varadraj Bapat 2
Double Entry System,
Forms of Organisation
 Money Measurement Concept
 Double Entry System
 Single Entry System
 Forms of organisation
 Stakeholders
Dr. Varadraj Bapat 3
Money Measurement Concept
Money is the medium of exchange
and the standard of economic
value. Hence money measurement
concept requires that only those
transactions which are capable of
being measured in terms of money
are to be recorded in books of
accounts.
Dr. Varadraj Bapat 4
Transactions that cannot be
expressed in terms of money are
not recorded in books.
Example1
Successful meeting with a
prospective customer may be very
important but can not be recorded
in the books of accounts.
Dr. Varadraj Bapat 5
Example2
employees are the valuable
resources of the organisation but
their measurement in monetary
terms is not possible therefore, not
recorded in books.
Dr. Varadraj Bapat 6
Double Entry
 Dual aspect concept is the core of
double entry book-keeping system.
 According to it, every transaction has
two aspects and both aspects are to
be recorded in the books of
accounts.
Dr. Varadraj Bapat 7
 Double entry system of book-
keeping means that all transactions
are recorded in two aspect one
involving the receiving benefit and
other giving benefit in the accounts
system.
For instance, buying a machinery for
Rs.25,000 would be entered as a
decrease in the cash account, and as
an increase in the ‘machinery’
account.
Dr. Varadraj Bapat 8
 The advantage of a double entry
system is that it is comprehensive.
 It will give you an accurate picture of
your true financial position, not just
your cash position. As non-cash
transactions can be huge, this is
extremely important for robust
financial management.
 The disadvantage of double entry
bookkeeping is that it needs
Dr. Varadraj Bapat 9
significant details for regular
maintenance of books and not
always easy to use.
 It generally needs a qualified
accountant to run it.
 Every transaction has two aspects:
i) it increases one asset and
decreases other asset
ii) it increases an asset and
increases other liability
Dr. Varadraj Bapat 10
iii) it decreases an asset and
decreases a liability
iv) it decreases one liability and
increases other liability
Dr. Varadraj Bapat 11
 It is difficult to define single entry
system because, in fact, there exists
no system like single entry system.
Broadly speaking, it is a defective
double entry system. Any system
that falls short of complete double
entry method is called single entry
system. Under this method,
sometimes both the aspects of
transactions are recorded,
Single Entry
Dr. Varadraj Bapat 12
sometimes only one aspect is
recorded or sometime no aspects
of transactions is recorded in the
books.
 In short single entry system may be
called a mix of double
entry, single entry and no entry.
 For instance, buying a Machinery for
Rs.25,000 would be entered as a
payment in a cashbook.
Dr. Varadraj Bapat 13
 It has the advantage of being simple,
and spontaneous to use.
 However, it may not account for non-
cash (or non-bank) transactions.
These are transactions that will have
a significant effect on the accounts,
but do not immediately cause a
change on the cash or bank accounts
Dr. Varadraj Bapat 14
 Example
Goods sold on one months credit are
not be recorded in the system at the
time of sale of goods. This will create
a situation where a businessman can
not anticipate exact cash position of
the particular month and therefore
wrong planning.
Dr. Varadraj Bapat 15
 Example of a non-cash transaction is
ordering a Machinery for Rs.25,000.
The machinery might take a month
to arrive. During that month, a single
entry system would not record the
transaction on the formal accounts.
This would mean that the accounting
system has not shown liability of
Rs.25,000 payable to machinery
suppliers: a dangerous situation.
Dr. Varadraj Bapat 16
• Sole Proprietorship
• Hindu Undivided
Family
• Partnership
• Company
• Co-operative Society
Forms of
Business Organization
Dr. Varadraj Bapat 17
• it is a business owned and
usually carried on by a
single person known as
proprietor.
• When the ownership and
management of business
are in control of one
individual, it is known as
sole proprietorship.
Sole Proprietorship
Dr. Varadraj Bapat 18
Advantages:
• Ease of formation
• Better Control
• Prompt Decision Making
• Retention of Business Secrets
• Personal Attention to Consumer Needs
Disadvantages:
• Limited life
• Unlimited liability
• Limited Financial Resources
• Limited Capacity of Individual
Dr. Varadraj Bapat 19
Hindu Undivided Family (HUF)
business is a form of business
organisation found only in India. In
this form of business, all the
members of a Hindu undivided family
own the business jointly. The affairs
of business are managed by the head
of the family, who is known as the
“KARTA” (can be male or female).
Hindu Undivided Family
Dr. Varadraj Bapat 20
HUF business comes into existence as
per the Hindu Inheritance Laws of
India. The membership is limited up to
three successive generations. Thus,
an individual, his child(ren), and his
grandchild(ren) become the members
of a HUF by birth. They are called Co-
parceners. A daughter can also be a
coparcener.
Dr. Varadraj Bapat 21
 A partnership is a relationship
between the persons who have
agreed to share the profits. It is a
business owned and carried on by a
group of people.
 Each member of such a group is
individually known as partner and
collectively the members are known
as a partnership firm.
Partnership
Dr. Varadraj Bapat 22
These firms are
governed by the
Indian Partnership
Act, 1932.
Registration of
partnership is not
compulsory. But since
registration entitles
the firm to several
benefits, it is
considered desirable.
Dr. Varadraj Bapat 23
Advantages:
 Ease of formation
 Less regulations
 Sharing of Risk
 No corporate income tax
Disadvantages:
 Unlimited liability
 Difficult to raise capital
 Lack of Harmony
Dr. Varadraj Bapat 24
Limited Liability Partnership (LLP) can
be formed by any two or more
person, associated for carrying on a
lawful business with a view to profit,
may by subscribing their names to an
incorporation document and filing the
same with Registrar.
Limited Liability Partnership
Dr. Varadraj Bapat 25
• Limited Liability Partnership (LLP) is
a separate legal entity.
• Liability of the partners is limited to
their agreed contribution in the LLP.
• A firm, private company and
unlisted public company is allowed
to be converted into LLP in
accordance with Provisions of the
LLP Act 2008.
• The Indian Partnership Act 1932 is
not applicable to LLPs.
Dr. Varadraj Bapat 26
Company
Unlimited Limited
Private Public
Unlisted Listed
Dr. Varadraj Bapat 27
Company form of business
organisation is a voluntary
association of persons to carry on
business. Normally, it is given a legal
status and is subject to certain legal
regulations. It is an association of
persons who generally contribute
money for some common purpose.
The money so contributed is the
capital of the company.
Company / Corporation
Dr. Varadraj Bapat 28
 The persons who contribute capital are
its members. The proportion of capital
to which each member is entitled is
called his share, therefore members of
a joint stock company are known as
shareholders and the capital of the
company is known as share capital.
 The companies are governed by the
Indian Companies Act, 1956. The Act
defines a company as an artificial
person created by law, having
separate entity, with perpetual
succession and a common seal.
Dr. Varadraj Bapat 29
Advantages:
• Unlimited life
• Professional Management
• Limited liability
• Ease of raising capital
• High possibility of wealth
maximization
Disadvantages:
• Dividend Tax burden
• High cost of set-up and report filing
• More regulation
Dr. Varadraj Bapat 30
Any ten persons can form a co-
operative society. It functions under
the Co-operative Societies Act, 1912
and other State Co-operative
Societies Acts. A co-operative society
is entirely different from all other
forms of organisation discussed
above in terms of its objective. The
co-operatives are formed primarily to
render services to its members.
Co-operative Society
Dr. Varadraj Bapat 31
Every member has a right to take
part in the management of the
society. Each member has one
vote. Generally the members
elect a committee known as the
Executive Committee to look after
the day to day administration and
the said committee is responsible
to the general body of members.
Dr. Varadraj Bapat 32
 The liability of the members is
limited to the extent of capital
contributed by them.
 Registration of a society under
the Co-operative Societies Act is
a must. Once it is registered, it
becomes a body corporate and
enjoys certain privileges just like
a joint stock company.
Dr. Varadraj Bapat 33
Some of the privileges are:
 The society enjoys perpetual
succession.
 It has its own common seal.
 It can own property in its name.
 It can enter into contract with
others.
 It can sue others in court of law.
Dr. Varadraj Bapat 34
Generally it also provides some
service to the society. The main
objectives of co-operative society
are:
(a) rendering service rather than
earning profit,
(b) mutual help instead of
competition, and
(c) self help in place of dependence.
Dr. Varadraj Bapat 35
On the basis of objectives, various
types of co-operatives are formed :
 Consumer co-operatives
 Producers co-operatives
 Producers co-operatives
 Marketing co-operatives
 Housing Co-operatives
 Credit Co-operatives
 Forming Co-operatives
Dr. Varadraj Bapat 36
Advantages :
• Democratic management
• Assistance from the government
• Elimination of middlemen’s profit
• Fairly stable life
Disadvantages :
• Limited capital
• Lack of managerial talent
• Lack of motivation
• Lack of secrecy
• Dependence on the government
Dr. Varadraj Bapat 37
Stakeholder
Stakeholder is a person who has a
legitimate interest in an entity.
Investors
Management of enterprise
Creditors / Lenders
Government
Employees
Dr. Varadraj Bapat 38
Consumers Local Community
Dr. Varadraj Bapat 39
Investor
Investor study the Financial
Statement of the company before
deciding upon whether to buy or
not a business or shares.
If they intend to buy, then the
fair value of business or shares is
also determined on the basis
Dr. Varadraj Bapat 40
of the detailed analysis of the
Financial Statement.
Prospective investors make use of
financial statements to assess the
viability of investing in a business.
Dr. Varadraj Bapat 41
Management
Managers are the main users of
the Financial Statement. They
use the financial statement
 To make the inter firm and inter
period comparison
 To study trends in sales,
expenses etc.
 To understand the relationship
Dr. Varadraj Bapat 42
among various items of financial
statement
 To know movement of funds
through Fund Flow Analysis
Dr. Varadraj Bapat 43
Creditors/ Lenders
Creditor or Lender study the
Financial statement of the
borrower before advancing credit
or loan. Thereafter also the
creditors and lenders analysis the
Financial statement to find out
whether the business is solvent
(in position to repay the loan).
Dr. Varadraj Bapat 44
Government
The amounts payable by concern
by way of taxes levied by
Government such as Income Tax,
Sales Tax, Excise etc. are
examined on the basis of the data
in Financial Statement.
Dr. Varadraj Bapat 45
Employees
Employees also use Financial
Statements in making collective
bargaining agreements with the
management, in the case of
labour union or for individuals in
discussing their compensation,
promotion and rankings.

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MA 1.2-Fundamentals of Managerial Accounting.ppt

  • 1. Dr. Varadraj Bapat 1 Module 1.2 Fundamentals of Managerial Accounting
  • 2. Dr. Varadraj Bapat 2 Double Entry System, Forms of Organisation  Money Measurement Concept  Double Entry System  Single Entry System  Forms of organisation  Stakeholders
  • 3. Dr. Varadraj Bapat 3 Money Measurement Concept Money is the medium of exchange and the standard of economic value. Hence money measurement concept requires that only those transactions which are capable of being measured in terms of money are to be recorded in books of accounts.
  • 4. Dr. Varadraj Bapat 4 Transactions that cannot be expressed in terms of money are not recorded in books. Example1 Successful meeting with a prospective customer may be very important but can not be recorded in the books of accounts.
  • 5. Dr. Varadraj Bapat 5 Example2 employees are the valuable resources of the organisation but their measurement in monetary terms is not possible therefore, not recorded in books.
  • 6. Dr. Varadraj Bapat 6 Double Entry  Dual aspect concept is the core of double entry book-keeping system.  According to it, every transaction has two aspects and both aspects are to be recorded in the books of accounts.
  • 7. Dr. Varadraj Bapat 7  Double entry system of book- keeping means that all transactions are recorded in two aspect one involving the receiving benefit and other giving benefit in the accounts system. For instance, buying a machinery for Rs.25,000 would be entered as a decrease in the cash account, and as an increase in the ‘machinery’ account.
  • 8. Dr. Varadraj Bapat 8  The advantage of a double entry system is that it is comprehensive.  It will give you an accurate picture of your true financial position, not just your cash position. As non-cash transactions can be huge, this is extremely important for robust financial management.  The disadvantage of double entry bookkeeping is that it needs
  • 9. Dr. Varadraj Bapat 9 significant details for regular maintenance of books and not always easy to use.  It generally needs a qualified accountant to run it.  Every transaction has two aspects: i) it increases one asset and decreases other asset ii) it increases an asset and increases other liability
  • 10. Dr. Varadraj Bapat 10 iii) it decreases an asset and decreases a liability iv) it decreases one liability and increases other liability
  • 11. Dr. Varadraj Bapat 11  It is difficult to define single entry system because, in fact, there exists no system like single entry system. Broadly speaking, it is a defective double entry system. Any system that falls short of complete double entry method is called single entry system. Under this method, sometimes both the aspects of transactions are recorded, Single Entry
  • 12. Dr. Varadraj Bapat 12 sometimes only one aspect is recorded or sometime no aspects of transactions is recorded in the books.  In short single entry system may be called a mix of double entry, single entry and no entry.  For instance, buying a Machinery for Rs.25,000 would be entered as a payment in a cashbook.
  • 13. Dr. Varadraj Bapat 13  It has the advantage of being simple, and spontaneous to use.  However, it may not account for non- cash (or non-bank) transactions. These are transactions that will have a significant effect on the accounts, but do not immediately cause a change on the cash or bank accounts
  • 14. Dr. Varadraj Bapat 14  Example Goods sold on one months credit are not be recorded in the system at the time of sale of goods. This will create a situation where a businessman can not anticipate exact cash position of the particular month and therefore wrong planning.
  • 15. Dr. Varadraj Bapat 15  Example of a non-cash transaction is ordering a Machinery for Rs.25,000. The machinery might take a month to arrive. During that month, a single entry system would not record the transaction on the formal accounts. This would mean that the accounting system has not shown liability of Rs.25,000 payable to machinery suppliers: a dangerous situation.
  • 16. Dr. Varadraj Bapat 16 • Sole Proprietorship • Hindu Undivided Family • Partnership • Company • Co-operative Society Forms of Business Organization
  • 17. Dr. Varadraj Bapat 17 • it is a business owned and usually carried on by a single person known as proprietor. • When the ownership and management of business are in control of one individual, it is known as sole proprietorship. Sole Proprietorship
  • 18. Dr. Varadraj Bapat 18 Advantages: • Ease of formation • Better Control • Prompt Decision Making • Retention of Business Secrets • Personal Attention to Consumer Needs Disadvantages: • Limited life • Unlimited liability • Limited Financial Resources • Limited Capacity of Individual
  • 19. Dr. Varadraj Bapat 19 Hindu Undivided Family (HUF) business is a form of business organisation found only in India. In this form of business, all the members of a Hindu undivided family own the business jointly. The affairs of business are managed by the head of the family, who is known as the “KARTA” (can be male or female). Hindu Undivided Family
  • 20. Dr. Varadraj Bapat 20 HUF business comes into existence as per the Hindu Inheritance Laws of India. The membership is limited up to three successive generations. Thus, an individual, his child(ren), and his grandchild(ren) become the members of a HUF by birth. They are called Co- parceners. A daughter can also be a coparcener.
  • 21. Dr. Varadraj Bapat 21  A partnership is a relationship between the persons who have agreed to share the profits. It is a business owned and carried on by a group of people.  Each member of such a group is individually known as partner and collectively the members are known as a partnership firm. Partnership
  • 22. Dr. Varadraj Bapat 22 These firms are governed by the Indian Partnership Act, 1932. Registration of partnership is not compulsory. But since registration entitles the firm to several benefits, it is considered desirable.
  • 23. Dr. Varadraj Bapat 23 Advantages:  Ease of formation  Less regulations  Sharing of Risk  No corporate income tax Disadvantages:  Unlimited liability  Difficult to raise capital  Lack of Harmony
  • 24. Dr. Varadraj Bapat 24 Limited Liability Partnership (LLP) can be formed by any two or more person, associated for carrying on a lawful business with a view to profit, may by subscribing their names to an incorporation document and filing the same with Registrar. Limited Liability Partnership
  • 25. Dr. Varadraj Bapat 25 • Limited Liability Partnership (LLP) is a separate legal entity. • Liability of the partners is limited to their agreed contribution in the LLP. • A firm, private company and unlisted public company is allowed to be converted into LLP in accordance with Provisions of the LLP Act 2008. • The Indian Partnership Act 1932 is not applicable to LLPs.
  • 26. Dr. Varadraj Bapat 26 Company Unlimited Limited Private Public Unlisted Listed
  • 27. Dr. Varadraj Bapat 27 Company form of business organisation is a voluntary association of persons to carry on business. Normally, it is given a legal status and is subject to certain legal regulations. It is an association of persons who generally contribute money for some common purpose. The money so contributed is the capital of the company. Company / Corporation
  • 28. Dr. Varadraj Bapat 28  The persons who contribute capital are its members. The proportion of capital to which each member is entitled is called his share, therefore members of a joint stock company are known as shareholders and the capital of the company is known as share capital.  The companies are governed by the Indian Companies Act, 1956. The Act defines a company as an artificial person created by law, having separate entity, with perpetual succession and a common seal.
  • 29. Dr. Varadraj Bapat 29 Advantages: • Unlimited life • Professional Management • Limited liability • Ease of raising capital • High possibility of wealth maximization Disadvantages: • Dividend Tax burden • High cost of set-up and report filing • More regulation
  • 30. Dr. Varadraj Bapat 30 Any ten persons can form a co- operative society. It functions under the Co-operative Societies Act, 1912 and other State Co-operative Societies Acts. A co-operative society is entirely different from all other forms of organisation discussed above in terms of its objective. The co-operatives are formed primarily to render services to its members. Co-operative Society
  • 31. Dr. Varadraj Bapat 31 Every member has a right to take part in the management of the society. Each member has one vote. Generally the members elect a committee known as the Executive Committee to look after the day to day administration and the said committee is responsible to the general body of members.
  • 32. Dr. Varadraj Bapat 32  The liability of the members is limited to the extent of capital contributed by them.  Registration of a society under the Co-operative Societies Act is a must. Once it is registered, it becomes a body corporate and enjoys certain privileges just like a joint stock company.
  • 33. Dr. Varadraj Bapat 33 Some of the privileges are:  The society enjoys perpetual succession.  It has its own common seal.  It can own property in its name.  It can enter into contract with others.  It can sue others in court of law.
  • 34. Dr. Varadraj Bapat 34 Generally it also provides some service to the society. The main objectives of co-operative society are: (a) rendering service rather than earning profit, (b) mutual help instead of competition, and (c) self help in place of dependence.
  • 35. Dr. Varadraj Bapat 35 On the basis of objectives, various types of co-operatives are formed :  Consumer co-operatives  Producers co-operatives  Producers co-operatives  Marketing co-operatives  Housing Co-operatives  Credit Co-operatives  Forming Co-operatives
  • 36. Dr. Varadraj Bapat 36 Advantages : • Democratic management • Assistance from the government • Elimination of middlemen’s profit • Fairly stable life Disadvantages : • Limited capital • Lack of managerial talent • Lack of motivation • Lack of secrecy • Dependence on the government
  • 37. Dr. Varadraj Bapat 37 Stakeholder Stakeholder is a person who has a legitimate interest in an entity. Investors Management of enterprise Creditors / Lenders Government Employees
  • 38. Dr. Varadraj Bapat 38 Consumers Local Community
  • 39. Dr. Varadraj Bapat 39 Investor Investor study the Financial Statement of the company before deciding upon whether to buy or not a business or shares. If they intend to buy, then the fair value of business or shares is also determined on the basis
  • 40. Dr. Varadraj Bapat 40 of the detailed analysis of the Financial Statement. Prospective investors make use of financial statements to assess the viability of investing in a business.
  • 41. Dr. Varadraj Bapat 41 Management Managers are the main users of the Financial Statement. They use the financial statement  To make the inter firm and inter period comparison  To study trends in sales, expenses etc.  To understand the relationship
  • 42. Dr. Varadraj Bapat 42 among various items of financial statement  To know movement of funds through Fund Flow Analysis
  • 43. Dr. Varadraj Bapat 43 Creditors/ Lenders Creditor or Lender study the Financial statement of the borrower before advancing credit or loan. Thereafter also the creditors and lenders analysis the Financial statement to find out whether the business is solvent (in position to repay the loan).
  • 44. Dr. Varadraj Bapat 44 Government The amounts payable by concern by way of taxes levied by Government such as Income Tax, Sales Tax, Excise etc. are examined on the basis of the data in Financial Statement.
  • 45. Dr. Varadraj Bapat 45 Employees Employees also use Financial Statements in making collective bargaining agreements with the management, in the case of labour union or for individuals in discussing their compensation, promotion and rankings.