This document provides an overview of the fundamentals of accounting concepts for an MBA program. It defines key elements of financial statements such as assets, liabilities, equities, income and expenses. It also defines accounting concepts like the cost concept, entity concept, matching concept, and materiality concept. Additionally, it discusses management accounting, cost classification, and the differences between financial and management accounting.

1. MBA 5004 - Fundamentals of Accounting
Master of Business Administration 2022/2024
Preparatory program
Postgraduate & Mid-career Development Unit
Faculty of Management and Finance
University of Colombo
Bandara Rajapakse, Senior Lecturer in Accounting

2. The Elements of F/Ss
• Assets
• Liabilities Statement Financial position
• Equities
• Income
• Expenses Statement of Profit or loss
Comprehensive Income
Statement
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3. Definition of Elements
• Asset:
– Resource controlled
– as a result of past events
– from which future economic benefits are
expected to flow
• Liability:
– Present obligation
– from past events
– the settlement of which is expected to result in
outflow of resources embodying economic
benefits
• Equity: Residual interest of owners

4. Definition of Elements Cont…
• Income :
– Increases in economic benefits
– Inform of inflows / increase of assets or decreases of
liabilities
– Result in increases in equity, other than contributions
from equity.
 Expense
– Decreases in economic benefits
– In form of outflows or depletions of assets
(liabilities) or incurrence of liabilities.
– Result in decreases in equity, other than
distributions to equity.

5. Qualitative Characteristics
Qualitative
characteristics
Fundamental
Relevance
Faithful
representation
Enhancing
Comparability
Timeliness
Verifiability
Understandability

6. Accounting Concepts
• Entity concept
• Money measurement concept
• Cost concept
• Going concern concept
• Accrual concept
• Materiality concept
• Prudence concept
• Matching concept
• Realization concept

7. Accounting Concepts
Entity concept states that the business is separate
from the owner(s) of the business. Therefore the
accounting records for even the simplest business,
the sole trader, must be kept separate from the
personal affairs of the owner or owners.
Cost concept
Cost concept states that the assets and liabilities
of a business should be presented in accounting
records at their historical cost. i.e. Agreed valve of
the assets or liability

8. Accounting Concepts
Money Measurement concept emphasis the
transactions which can be measured in the terms of
monetary value only consider for record in the
financial statements whereas transactions which are
not possible assign monetary valve will not be
recorded in the financial statements.
Accounting period concept
It means the time frame for which a business
prepares its financial statements and reports its
financial performance and position to external
stakeholders. Commonly a twelve months period.

9. Accounting Concepts
Going concern concept assumes that a
business will continue to operate indefinitely and
no intention to close the business in near future.
Accrual concept states that financial statements
should reflect the value of the transactions at the
time when they actually occur, not necessarily
when cash exchanged. Revenue is recorded when it
is earned regardless of when it is received
and expenses are recorded when they are incurred,
regardless of when they are paid.

10. Accounting Concepts
Consistency concept says once the company
decides a accounting policy it should not be
frequently changed unless there is a statutory
requirement or it allows better representation.
This allows users to make inter-firm and inter-
period comparisons. Also, frequent changes in
policies may be to manipulate the accounts and
this must be prevented.

11. Accounting Concepts
Prudence concept (Conservatism) is based on the
conservative approach of estimating the liabilities,
expenses, losses (i.e. cash outflow) without under
estimating and the assets, revenues and profits (i.e.
cash inflow) without over estimating. So, profit should
not be included until it is realized whereas losses are
recognized that have occurred or are even likely to
occur.
Realization Concept
This concept emphasizes that revenue is only
recognized when it is realized. It assumes that revenue
is realized only when its ownership is legally
transferred and legal right arises to be received.

12. Accounting Concepts
Materiality concept states that all material
facts should be disclosed separately whereas
immaterial (insignificant) information no need
to disclosed. The materiality of a transaction
will depend on its significance to the external
users.
Matching Concept
This concept states that all revenue and the
expenses of the period to be considered
when either profit or loss is calculated.

13. Accounting Policies
• Accounting policies are rules and guidelines that are
selected and use by a company to process,
measure, recognize, record, as well as disclose the
specific items in preparing and presenting its
financial statements.
• Accounting policies might be different from one
company to another; however, those policies should
be accepted by the accounting profession.
• Examples are Valuation of fixed assets, Depreciation
and inventory policies, Valuation of investments,
Translation of foreign currency items, Costs incurred
for research and development , Treatment of
goodwill, Recognition of profits on long-term
contracts

14. Other guidelines for preparation of
Financial Statements
• LKAS/ SLFRS
• Best practices
• Voluntary presentations

15. Current Financial Reporting Standard
Framework in Sri Lanka
• The Financial Reporting Standard Framework in
Sri Lanka is much broader and consist many
types of standards and guidelines.
• Its mainly inclusive of LKASs and SLFRSs which
replaced the SLASs from 01st January 2012
onwards.
• Currently there are 28 LKASs and 16 SLFRSs in
Sri Lanka.
• These standards are supposed to be followed by
all Specified Business Enterprises (SBEs).

16. Current Financial Reporting Cont;…….
• Other than above, ICASL issued a separate SLFRS
for Small and Medium sized Entities (SMEs) with
effect from 01st January 2012.
• SLFRS for SMEs is much simplified standard that
derived from the original SLFRSs and LKASs
• Furthermore, for the Public sector accounting,
another separate set of Accounting standards
have being introduced by ICASL namely, Sri
Lanka Public Sector Accounting Standards
(SLPSAS).

17. Dimensions of Corporate Reports
Prior to 2015
Financial Reporting
(Statutory /Mandatory )
Corporate Governance
(Mandatory for banking financing companies)
Intellectual Capital
Information
Human Capital Information
Risk Management.
After 2015
Financial Reporting (Statutory/ mandatory
 Integrated reporting (Value Creation )
(Voluntary Reporting)
Financial/ monetized capital
Manufactured capital
Human capital
Intellectual capital
Social and Relational capital
Natural capital
 Corporate Governance (Mandatory for
banking and financing companies)
 Risk Management
 Sustainability Reporting (Achievement of
Sustainable development goals)

18. Integrated Reporting
“An Integrated report is a concise communication about
how an organization’s strategy, governance,
performance and prospects, in the context of its
external environment, lead to the creation of value over
the short, medium, and long term”.
Integrated reporting emphasizes the importance of
integrated thinking with the organization
IR is a process that results in communication by an
organization, most visible periodic information, about
value creation over time (IIRC, 2013).

19. Source: IIRC, 2013
Fundamental Concepts in IR Framework- Six Capitals

20. 20
Multi-capitals concept in IR framework (2013)
Financial Capital The pool of funds. Includes both debt and equity
finance
Manufactured Capital Manufactured physical objects, not necessarily
owned by the organization. Production oriented
equipment and tools
Intellectual Capital Organizational, knowledge-based intangibles
Human Capital Peoples competencies, capabilities and
experience, and their motivations to innovate
Social and Relationship
Capital
Relationships within and between communities,
groups of stakeholders and other networks, and
the ability to share information to enhance
individual and collective well-being
Natural Capital Renewable and non-renewable environmental
resources

21. Value Creation Model or Business Model

22. Management Accounting
• MA provides financial nature and other
resources based information to the managers in
order to make better and accurate decisions,
controlling the enterprise, business activities,
and development.
• Managerial accounting is the practice of
identifying, measuring, analyzing, interpreting,
and communicating financial and other required
information to managers to make their
decisions.

23. Management Accounting
• So, Management accounting use by Managers
to:
- Planning
- Control
- Communicate and Coordinate
- Evaluate alternatives
- Performance measurement
- Operational decisions (product, product lines,
make or buy, resources allocations, profit
planning &, profitability analysis, sales mix,
select alternatives and pricing, etc;)

24. Financial accounting Vs. Management
Accounting
Financial accounting Management accounting
Purpose Communicate financial
position
Decision making
Requirement Mandatory Optional
Primary audience External parties Internal parties
Regulations Accounting standards None
Frequency Quarterly, annually, per
period
As required
External reviewers Auditors , Regulators None
Focus Past results Information aid to future
decisions making
Scope Company wide Narrow, segments, product,
etc.

25. Cost concepts, Classification of cost
Calculation of cost per unit
• Classification is the process of grouping costs
according to their common characteristics.
• There are several ways
– Direct cost & Indirect cost
– Fixed cost & Variable cost
– Product cost & Period cost
– Controllable cost & Non-controllable cost
– Special Costs…
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26. Direct Cost & Indirect Cost
• Direct Cost – costs which can be conveniently
identified with a particular cost unit, process or
department
e.g. Cost of RM used, Wages of Machine
Operators etc.
• Indirect Cost – costs incurred for the benefit of a
number of cost units, processes or departments
and cannot be conveniently identified with a cost
unit or cost center
e.g. Depreciation, insurance, lighting, rent,
managerial salaries etc.
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27. Fixed Cost & Variable Cost
• Fixed Cost – remains constant over a specific
range of activity for a specified period of time
• It do not change when volume of production is
changed
e.g. building rent, manager’s salary - with
output level
• But… Fixed cost per unit is decreasing when
volume is increasing and vice versa
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28. Fixed Cost & Variable Cost cont…
• Behaviour of Fixed Cost
Total Fixed Cost Line
Volume of Production X
Y Rs. Cost Y
X
Fixed cost per unit
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29. Fixed Cost & Variable Cost cont…
• Variable Cost – tend to vary in direct proportion
to the volume of output
• Total VC change when production volume is
changed
e.g. direct materials, direct wages, power,
royalties, commission of salesmen
But… VC per unit is constant when volume is
changing
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30. Fixed Cost & Variable Cost cont…
• Behaviour of Variable Cost
Volume of Production X
Y Rs. Cost
Variable Cost per unit
Volume of Production X
Y Rs. Cost
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31. Semi-Variable Cost
• Semi-variable or Semi-fixed costs – includes both
fixed & variable component
• A semi-variable cost has a fixed element, below
that it will not fall at any level of output
• The variable element will change at constant
rate
e.g. introduction of additional shifts – supervisors
and other additional costs will increase by steps
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32. Semi-Variable Cost
• Behaviour of Semi-variable cost
Volume of
Production
Y Rs. Cost
0 Volume of
Production
Y Rs. Cost
0
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X

33. Product Cost & Period Cost
• Product Cost
– which is necessary for production & which will
not be incurred, if there is no production
– are ‘absorbed by’ or ‘attached to’ the units
produced
e.g. direct material, direct labour, certain
factory OHs
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34. Product Cost & Period Cost cont…
• Period Cost
–are not necessary for production & are
incurred even if there is no production
–are written off as expenses in the period in
which they are incurred (in the P&L a/c)
e.g. showroom rent, salary of company
executives, travel expenses (admin and
selling expenses)
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35. Controllable Cost & Non-Controllable Cost
• Controllable Cost
–may be directly regulated at a given
level of management authority
–most of the VCs are controllable by
department heads
e.g. cost of RM controlled through
bulk purchases
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36. Controllable Cost & Non-Controllable Cost Cont…
• Non-Controllable Cost
– cannot be influenced by the action of a
specified member of the enterprise
e.g. factory rent, managerial salaries
• In this classification:
– CC and NCC will be determined by specifying
the level & scope of the mgt authority (NCC at
one level may be CC at another level of mgt)
– All costs are controllable in the long run at some
appropriate mgt level
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37. Special Costs for Decision Making
• These costs may not be recorded in the books of
accounts
– Relevant cost & Irrelevant cost
– Sunk cost
– Differential (or Incremental) cost
– Marginal cost
– Imputed cost
– Opportunity cost
– Replacement cost
– Out-of Pocket cost (Explicit & Implicit cost)
– Conversion cost
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38. Elements of Cost of a product unit
Total Cost
Direct Cost (Prime Cost)
Direct Material
Direct Labour
Direct Expenses
Indirect Cost (Overhead)
Indirect Material
Indirect Labour
Indirect Expenses
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39. Examples
Product DM IM DL IL DE IE
Bricks Clay in
bricks
Lubricatin
g oil
Machine
operator
Supervisor Cost of
special
drawings/
designing
Rent & rates
Shoes Leather in
shoes
Sand
paper
Shoe
maker
Inspection Royalty
payment
Depreciation
Garments Cloth in
garments
Thread Tailor Clerk,
Production
manager
Designing Advertising
Furniture Timber in
furniture
Nails, pins Carpenter Peon,
watchman
insurance
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40. Cost sheet
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Direct Cost
Direct Material xxx
Direct Labour xxx
Other Direct Cost xxx
Prime Cost xxx
Over Head Costs
Production overhead cost xxx
Production cost xxx
Administrative overhead xxx
Selling & Distribution overhead xxx
Total Cost xxx

41. Classification of Over head
• Function (production, administration,
distribution)
• Elements (indirect material, indirect labour,
indirect expenses)
• Behaviour / Variability (Fixed, variable, semi
variable)
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42. Steps in Overhead Cost Accounting
• Classification and collections
• Allotment and apportionment over production
and service departments
• Re-apportionment of service departments over
production departments
• Absorption of Overheads
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