ASSIGNMENT

Unit I: Introduction of Accounting

1.Explain financial accounting, cost accounting and management accounting with

examples.

Financial accounting:-

Financial accounting is a 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. These transactions are summarized in
the preparation of financial statements, including the balance sheet, income
statement and cash flow statement, that record the company's operating
performance over a specified period.

Work opportunities for a financial accountant can be found in both the public and
private sectors. A financial accountant's duties may differ from those of a general
accountant, who works for himself or herself rather than directly for a company or
organization.

External stakeholders use financial accounting to see the current state of business.

For example, shareholders will want to see financial reports before deciding to
invest in a business. While suppliers need to see a firms’ financial health before
extending credit for services. Next, brokers use a company’s financial reports to
determine the value of its stocks and shares. And auditors, governments, and
regulatory bodies rely on financial reporting to ensure legal and tax compliance.

Financial accounting should not be confused with managerial accounting, which is

used internally by managers (hence the name) to help guide decision-making within
a business. Whereas financial accounting, as we’ve just established, serves
external stakeholders.

Cost accounting:-

Cost accounting is a form of managerial accounting that aims to capture a

company's total cost of production by assessing the variable costs of each step of
production as well as fixed costs, such as a lease expense.
Cost accounting is not GAAP-compliant, and can only be used for internal purposes.

Types of Cost Accounting

Standard Costing
Standard costing assigns "standard" costs, rather than actual costs, to its cost of
goods sold (COGS) and inventory. The standard costs are based on the efficient use
of labor and materials to produce the good or service under standard operating
conditions, and they are essentially the budgeted amount. Even though standard
costs are assigned to the goods, the company still has to pay actual costs. Assessing
the difference between the standard (efficient) cost and the actual cost incurred is
called variance analysis.

If the variance analysis determines that actual costs are higher than expected, the
variance is unfavorable. If it determines the actual costs are lower than expected,
the variance is favorable. Two factors can contribute to a favorable or unfavorable
variance. There is the cost of the input, such as the cost of labor and materials. This
is considered to be a rate variance.

Additionally, there is the efficiency or quantity of the input used. This is considered
to be a volume variance. If, for example, XYZ company expected to produce 400
widgets in a period but ended up producing 500 widgets, the cost of materials
would be higher due to the total quantity produced.

Activity-Based Costing
Activity-based costing (ABC)  identifies overhead costs from each department and
assigns them to specific cost objects, such as goods or services. The ABC system of
cost accounting is based on activities, which refer to any event, unit of work, or
task with a specific goal, such as setting up machines for production, designing
products, distributing finished goods, or operating machines. These activities are
also considered to be cost drivers, and they are the measures used as the basis for
allocating overhead costs.

Traditionally, overhead costs are assigned based on one generic measure, such as
machine hours. Under ABC, an activity analysis is performed where appropriate
measures are identified as the cost drivers. As a result, ABC tends to be much more
accurate and helpful when it comes to managers reviewing the cost and
profitability of their company's specific services or products.

For example, cost accountants using ABC might pass out a survey to production-line
employees who will then account for the amount of time they spend on different
tasks. The costs of these specific activities are only assigned to the goods or
services that used the activity. This gives management a better idea of where
exactly the time and money are being spent.
To illustrate this, assume a company produces both trinkets and widgets. The
trinkets are very labor-intensive and require quite a bit of hands-on effort from the
production staff. The production of widgets is automated, and it mostly consists of
putting the raw material in a machine and waiting many hours for the finished
good. It would not make sense to use machine hours to allocate overhead to both
items because the trinkets hardly used any machine hours. Under ABC, the trinkets
are assigned more overhead related to labor and the widgets are assigned more
overhead related to machine use.

Lean Accounting
The main goal of lean accounting is to improve financial management practices
within an organization. Lean accounting is an extension of the philosophy of lean
manufacturing and production, which has the stated intention of minimizing waste
while optimizing productivity. For example, if an accounting department is able to
cut down on wasted time, employees can focus that saved time more productively
on value-added tasks.

When using lean accounting, traditional costing methods are replaced by value-
based pricing and lean-focused performance measurements. Financial decision-
making is based on the impact on the company's total value stream
profitability. Value streams are the profit centers of a company, which is any
branch or division that directly adds to its bottom-line profitability.

Marginal Costing
Marginal costing (sometimes called cost-volume-profit analysis) is the impact on
the cost of a product by adding one additional unit into production. It is useful for
short-term economic decisions. Marginal costing can help management identify
the impact of varying levels of costs and volume on operating profit. This type of
analysis can be used by management to gain insight into potentially profitable new
products, sales prices to establish for existing products, and the impact of
marketing campaigns.

The break-even point—which is the production level where total revenue for a

product equals total expense—is calculated as the total fixed costs of a company
divided by its contribution margin. The contribution margin, calculated as the sales
revenue minus variable costs, can also be calculated on a per-unit basis in order to
determine the extent to which a specific product contributes to the overall profit of
the company.

Management Accounting:-

Management accounting, also called managerial accounting or cost accounting, is

the process of analyzing business costs and operations to prepare internal financial
report, records, and account to aid managers’ decision making process in achieving
business goals. In other words, it is the act of making sense of financial and costing
data and translating that data into useful information for management and officers
within an organization.

Example
Anderson is the CEO of a small consulting firm. He wants to hire a management
accountant and a financial accountant. He has come up with a list of job tasks and
he needs to break them up into those that should be performed by the managerial
accountant and those that should be performed by the financial accountant. Here is
the list of tasks that Anderson has come up with:

1. Preparing cash flow statements

2. Income statement reporting
3. Budgeting
4. Calculating changes in stockholder equity
5. Preparing taxes for the organization
In this example, the only tasks that would be assigned to the management
accountant are budgeting and taxes. The financial accountant would handle the
other tasks.

2. Explain cash basis and accrual basis of accounting along with advantages and
disadvantages.

Accrual accounting is a financial accounting method that allows a company to

record revenue before receiving payment for goods or services sold and record
expenses as they are incurred.

In other words, the revenue earned and expenses incurred are entered into the
company's journal regardless of when money exchanges hands. Accrual accounting
is usually compared to cash basis of accounting, which records revenue when the
goods and services are actually paid for.

Learn more about accrual accounting and how it differs from the other popular
accounting method, cash accounting.

Benefits of Accrual Accounting

The accrual method does provide a more accurate picture of the company's current
condition, but its relative complexity makes it more expensive to implement.

This method arose from the increasing complexity of business transactions and a
desire for more accurate financial information. Selling on credit, and projects that
provide revenue streams over a long period, affect a company's financial condition
at the time of a transaction. Therefore, it makes sense that such events should also
be reflected in the financial statements during the same reporting period that
these transactions occur.

Under accrual accounting, firms have immediate feedback on their expected cash
inflows and outflows, making it easier for businesses to manage their current
resources and plan for the future.

Disadvantages of the accrual method

 Slightly more complex: You have to track multiple accounts, such as

unearned revenue, accounts payable, receivables, and liabilities. You can
overcome these challenges with the right accounting solution.
 Difficult to track cash flow: The accrual method doesn't provide an accurate
picture of the cash flow of your business. For example, the income
statement might show thousands of dollars in revenue from sales. However,
you might not receive the cash for a few months, until the customer clears
the invoice. You can overcome this inefficiency by using a monthly cash flow
statement to accurately depict the money flowing in and out of your
business.

Cash basis of accounting is referred to as that method of accounting where the

accounting system recognises revenues and expenses only when there is inflow and
outflow of cash.
In other words, the cash basis of accounting recognises the expenses incurred and
revenues earned immediately when money changes hands between two parties
involved in the transaction.
In the cash basis of the accounting system, there is no consideration for income
which is obtained from the credit accounts.
Here are some of the advantages of cash basis of accounting:
1. Cash only transactions are simpler to maintain.
2. The requirement of skills for managing cash transactions is less as compared to
the more complex accrual basis of accounting.
3. Tax liability can be deferred using the cash basis of accounting.
4. It provides a clear view of the amount of cash possessed by the business.

Here are some of the disadvantages of cash basis of accounting :

1. It provides a less accurate picture of the financial position of the business as
compared to the accrual basis of accounting.
2. Business data can be manipulated by deferring payments or late deposit of
cheques.
3. Financial statements cannot be audited under cash basis of accounting method

3. Explain accounting concepts with its types in detail.

Business Entity Concept:

Entity concept states that business enterprise is a separate identity apart from its
owner. Accountants should treat a business as distinct from its owner. Business
transactions are recorded in the business books of accounts and owner’s
transactions in his personal books of accounts.

Only the business transactions are recorded and reported and not

the personal transactions of the owners.
 Income or profit is the property of the business unless distributed
among the owners.
 The personal assets of the owners or shareholders are not considered
while recording and reporting the assets of the business entity.
Money Measurement Concept:

Money measurement concept holds that accounting is a measurement

and communication process of the activities of the firm that are measurable in
monetary terms. Thus, only such transactions and events which can be interpreted
in terms of money are recorded. Events which cannot be expressed in money terms
do not find place in the books of account though they may be very important for the
business. Non-monetary events like, death, dispute, sentiments, efficiency etc. are
not recorded in the books, even though these may have a great effect.

Cost Concept:

According to cost concept, the various assets acquired by a concern or firm should
be recorded on the basis of the actual amounts involved or spent. This amount or
cost will be the basis for all subsequent accounting for the assets. The cost concept
does not mean that the assets will always be shown at cost.

Going Concern Concept:

The financial statements are normally prepared on the assumption that an

enterprise is a going concern and will continue in operation for the foreseeable
future. Hence, it is assumed that the enterprise has neither the intention nor the
need to liquidate or curtail materially the scale of its operations; if such an intention
or need exists, the financial statements may have to be prepared on a different
basis and, if so, the basis used is disclosed.
Dual Aspect Concept:

This concept is based on double entry book-keeping which means that accounting
system is set up in such a way that a record is made of the two aspects of each
transaction that affects the records. The recognition of the two aspects to every
transaction is known as dual aspect concept. Modern financial accounting is based
on dual aspect concept.

Realisation Concept:

According to this concept revenue is recognised only when a sale is made. Unless
money has been realised i.e., cash has been received or a legal obligation to pay has
been assumed by the customer, no sale can be said to have taken place and no
profit can be said to have arisen. It prevents business firms from inflating their
profits by recording incomes that are likely to accrue i.e. expected incomes or gains
are not recorded.

Accrual Concept:

Under accrual concept, the effects of transactions and other events are recognised
on mercantile basis i.e., when they occur (and not as cash or a cash equivalent is
received or paid) and they are recorded in the accounting records and reported in
the financial statements of the periods to which they relate. Financial statements
prepared on the accrual basis inform users not only of past events involving the
payment and receipt of cash but also of obligations to pay cash in the future and of
resources that represent cash to be received in the future.

Accounting Period Concept:

It is customary that the life of the business is divided into appropriate parts or
segments for analyzing the results shown by the business. Each part or segment so
divided is known as an accounting period. It is an interval of time at the end of
which the income or revenue statement and balance sheet are prepared in order to
show the results of operations and changes in the resources which have occurred
since the previous statements have been prepared. Normally, the accounting period
consists of twelve months.

Revenue Match Concept:

In this concept, all expenses matched with the revenue of that period should only be
taken into consideration. In the financial statements of the organization if any
revenue is recognized then expenses related to earn that revenue should also be
recognized. This concept is based on accrual concept as it considers the occurrence
of expenses and income and do not concentrate on actual infow or outfow of cash.
This leads to adjustment of certain items like prepaid and outstanding expenses,
unearned or accrued incomes.