Module 1.2              Fundamentals of            Managerial AccountingDr. Varadraj Bapat                  1
Management Accounting Money Measurement Concept Double Entry System Single Entry System Forms of organisation Stakeho...
Money Measurement Concept  Money is the medium of exchange  and the standard of economic  value. Hence money measurement  ...
Transactions that cannot be  expressed in terms of money are  not recorded in books.  Example1       Successful meeting wi...
Example2   employees     are    the   valuable   resources of the organisation but   their measurement in monetary   terms...
Double Entry    Dual aspect concept is the core of     double entry book-keeping system.    According to it, every trans...
    Double entry system of book-     keeping means that all transactions     are recorded in two aspect one     involving...
    The advantage of a double entry     system is that it is comprehensive.    It will give you an accurate picture of  ...
significant    details    for regular   maintenance of books and not   always easy to use.  It    generally needs a quali...
iii) it decreases an asset and      decreases a liability iv) it decreases one liability and      increases other liabilit...
Single Entry    It is difficult to define single entry     system because, in fact, there exists     no system like singl...
sometimes only one aspect is     recorded or sometime no aspects     of transactions is recorded in the     books.    In ...
   It has the advantage of being simple,    and spontaneous to use.   However, it may not account for non-    cash (or n...
   Example    Goods sold on one months credit are    not be recorded in the system at the    time of sale of goods. This ...
   Example of a non-cash transaction is    ordering a Machinery for Rs.25,000.    The machinery might take a month    to ...
Forms of        Business Organization•    Sole Proprietorship•    Hindu Undivided     Family•    Partnership•    Company• ...
Sole Proprietorship•   it is a business owned and    usually carried on by a    single person known as    proprietor.•   W...
Advantages:• Ease of formation• Better Control• Prompt Decision Making• Retention of Business Secrets• Personal Attention ...
Hindu Undivided FamilyHindu    Undivided   Family   (HUF)business is a form of businessorganisation found only in India. I...
HUF business comes into existence asper the Hindu Inheritance Laws ofIndia. The membership is limited up tothree successiv...
Partnership   A partnership is a relationship    between the persons who have    agreed to share the profits. It is a    ...
These firms aregoverned by theIndian PartnershipAct, 1932.Registration ofpartnership is notcompulsory. But sinceregistrati...
Advantages: Ease of formation Less regulations Sharing of Risk No corporate income taxDisadvantages: Unlimited liabil...
Limited Liability Partnership Limited Liability Partnership (LLP) can be formed by any two or more person, associated for ...
•    Limited Liability Partnership (LLP) is     a separate legal entity.•    Liability of the partners is limited to     t...
Company Unlimited             Limited                 Private         Public                       Unlisted           List...
Company / CorporationCompany        form     of     businessorganisation      is   a      voluntaryassociation of persons ...
   The persons who contribute capital are    its members. The proportion of capital    to which each member is entitled i...
Advantages: • Unlimited life • Professional Management • Limited liability • Ease of raising capital • High possibility of...
Co-operative SocietyAny ten persons can form a co-operative society. It functions underthe Co-operative Societies Act, 191...
Every member has a right to take  part in the management of the  society. Each member has one  vote. Generally the members...
 The liability of the members is  limited to the extent of capital  contributed by them. Registration of a society under...
Some of the privileges are: The    society enjoys perpetual  succession. It has its own common seal. It can own propert...
Generally it also provides some service to the society. The main objectives of co-operative society are: (a) rendering ser...
On the basis of objectives, various  types of co-operatives are formed : Consumer co-operatives Producers co-operatives...
Advantages :• Democratic management• Assistance from the government• Elimination of middlemen’s profit• Fairly stable life...
Stakeholder  Stakeholder is a person who has a  legitimate interest in an entity.  Investors  Management of enterprise  Cr...
Consumers Local Community Dr. Varadraj Bapat   38
Investor        Investor study the Financial     Statement of the company before     deciding upon whether to buy or     n...
of the detailed analysis of the   Financial Statement.   Prospective investors make use of   financial statements to asses...
Management     Managers are the main users of     the Financial Statement. They use     the financial statement    To mak...
among various items of financial    statement   To know movement of funds    through Fund Flow AnalysisDr. Varadraj Bapat...
Creditors/ Lenders       Creditor or Lender study the     Financial    statement     of    the     borrower before advanci...
Government      The amounts payable by concern     by way of taxes levied by     Government such as Income Tax,     Sales ...
Employees       Employees also use Financial     Statements in making collective     bargaining agreements with the     ma...
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Ma 1.2 fundamentals of managerial accounting

  1. 1. Module 1.2 Fundamentals of Managerial AccountingDr. Varadraj Bapat 1
  2. 2. Management Accounting Money Measurement Concept Double Entry System Single Entry System Forms of organisation StakeholdersDr. Varadraj Bapat 2
  3. 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 3
  4. 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 4
  5. 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 5
  6. 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 6
  7. 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 7
  8. 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 8
  9. 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 liabilityDr. Varadraj Bapat 9
  10. 10. iii) it decreases an asset and decreases a liability iv) it decreases one liability and increases other liabilityDr. Varadraj Bapat 10
  11. 11. Single Entry 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, Dr. Varadraj Bapat 11
  12. 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 12
  13. 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 13
  14. 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 14
  15. 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 15
  16. 16. Forms of Business Organization• Sole Proprietorship• Hindu Undivided Family• Partnership• Company• Co-operative Society Dr. Varadraj Bapat 16
  17. 17. Sole Proprietorship• 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. Dr. Varadraj Bapat 17
  18. 18. Advantages:• Ease of formation• Better Control• Prompt Decision Making• Retention of Business Secrets• Personal Attention to Consumer NeedsDisadvantages:• Limited life• Unlimited liability• Limited Financial Resources• Limited Capacity of IndividualDr. Varadraj Bapat 18
  19. 19. Hindu Undivided FamilyHindu Undivided Family (HUF)business is a form of businessorganisation found only in India. Inthis form of business, all themembers of a Hindu undivided familyown the business jointly. The affairsof business are managed by the headof the family, who is known as the“KARTA” (can be male or female).Dr. Varadraj Bapat 19
  20. 20. HUF business comes into existence asper the Hindu Inheritance Laws ofIndia. The membership is limited up tothree successive generations. Thus, anindividual, his child(ren), and hisgrandchild(ren) become the membersof a HUF by birth. They are called Co-parceners. A daughter can also be acoparcener.Dr. Varadraj Bapat 20
  21. 21. Partnership 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.Dr. Varadraj Bapat 21
  22. 22. These firms aregoverned by theIndian PartnershipAct, 1932.Registration ofpartnership is notcompulsory. But sinceregistration entitlesthe firm to severalbenefits, it isconsidered desirable.Dr. Varadraj Bapat 22
  23. 23. Advantages: Ease of formation Less regulations Sharing of Risk No corporate income taxDisadvantages: Unlimited liability Difficult to raise capital Lack of HarmonyDr. Varadraj Bapat 23
  24. 24. Limited Liability Partnership 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. Dr. Varadraj Bapat 24
  25. 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 25
  26. 26. Company Unlimited Limited Private Public Unlisted ListedDr. Varadraj Bapat 26
  27. 27. Company / CorporationCompany form of businessorganisation is a voluntaryassociation of persons to carry onbusiness. Normally, it is given a legalstatus and is subject to certain legalregulations. It is an association ofpersons who generally contributemoney for some common purpose.The money so contributed is thecapital of the company.Dr. Varadraj Bapat 27
  28. 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 28
  29. 29. Advantages: • Unlimited life • Professional Management • Limited liability • Ease of raising capital • High possibility of wealth maximizationDisadvantages: • Dividend Tax burden • High cost of set-up and report filing • More regulation Dr. Varadraj Bapat 29
  30. 30. Co-operative SocietyAny ten persons can form a co-operative society. It functions underthe Co-operative Societies Act, 1912and other State Co-operativeSocieties Acts. A co-operative societyis entirely different from all otherforms of organisation discussedabove in terms of its objective. Theco-operatives are formed primarily torender services to its members.Dr. Varadraj Bapat 30
  31. 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 31
  32. 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 32
  33. 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 33
  34. 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 34
  35. 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-operativesDr. Varadraj Bapat 35
  36. 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 governmentDr. Varadraj Bapat 36
  37. 37. Stakeholder Stakeholder is a person who has a legitimate interest in an entity. Investors Management of enterprise Creditors / Lenders Government EmployeesDr. Varadraj Bapat 37
  38. 38. Consumers Local Community Dr. Varadraj Bapat 38
  39. 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 basisDr. Varadraj Bapat 39
  40. 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 40
  41. 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 relationshipDr. Varadraj Bapat 41
  42. 42. among various items of financial statement To know movement of funds through Fund Flow AnalysisDr. Varadraj Bapat 42
  43. 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 43
  44. 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 44
  45. 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.Dr. Varadraj Bapat 45

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