Fundamentals of Managerial Accounting

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Module 1.2
Fundamentals of
Managerial Accounting

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Double Entry System,
Forms of Organisation
 Money Measurement Concept
 Double Entry System
 Single Entry System
 Forms of organisation
 Stakeholders

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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.

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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.

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Example2
employees are the valuable
resources of the organisation but
their measurement in monetary
terms is not possible therefore, not
recorded in books.

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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.

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 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.

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 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

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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

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iii) it decreases an asset and
decreases a liability
iv) it decreases one liability and
increases other liability

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 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

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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.

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 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

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 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.

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 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.

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• Sole Proprietorship
• Hindu Undivided
Family
• Partnership
• Company
• Co-operative Society
Forms of
Business Organization

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• 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

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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

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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

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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.

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 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

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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.

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Advantages:
 Ease of formation
 Less regulations
 Sharing of Risk
 No corporate income tax
Disadvantages:
 Unlimited liability
 Difficult to raise capital
 Lack of Harmony

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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

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• 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.

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Company
Unlimited Limited
Private Public
Unlisted Listed

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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

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 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.

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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

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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

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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.

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 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.

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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.

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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.

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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

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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

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Stakeholder
Stakeholder is a person who has a
legitimate interest in an entity.
Investors
Management of enterprise
Creditors / Lenders
Government
Employees

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Consumers Local Community

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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

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of the detailed analysis of the
Financial Statement.
Prospective investors make use of
financial statements to assess the
viability of investing in a business.

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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

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among various items of financial
statement
 To know movement of funds
through Fund Flow Analysis

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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).

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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.

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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.