Chapte

19

Managerial Accounting
Lecture 01: Introduction to Accounting

Masud Jahan
Department of Science and Humanities
Military Institute of Science and Technology
Knowing The Numbers

“To be good at your business,

you have to know the numbers—cold.”

- Harold S. Geneen
(Former chairman of IT&T)

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Information Age

We live in the information age- a time of

communication, data, news and facts.
Access to and understanding of
information affect how we live and the
opportunities we have. To take advantage
of the information, we need knowledge of
the information system.

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Information System

An information system is the collecting,

processing, and communicating of
information to decision makers.

Understanding and processing information

is the core of information system.

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Accounting, an Information System

Accounting is an information system that

collects, processes and communicates
financial information to interested users
about an organization useful in making
decisions.

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Financial Information

Financial information may include sales,

expenses, taxes and any other figure of an
economic event.

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Economic Event

Economic event is an event which causes

changes to the financial position of an
organization.

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Users Of Accounting Information

Interested parties are also called

accounting information users. There are
two broad categories of accounting
information users:

➢ External Users
➢ Internal Users.

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External Users & Their Need

External users are parties outside the

reporting entity (i.e. company) who are
interested in the accounting information.

They include investors, creditors, taxing

authorities, customers etc.

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External Users -Investors

Investors use accounting information to

make buy, sell or keep decisions related to
shares, bonds, etc.

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External Users- Creditors

Creditors (suppliers, banks) utilize

accounting information to make lending
decisions.

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External Users- Taxing Authorities

Taxing authorities (Internal Revenue

Service) need accounting information to
determine a company's tax liabilities.

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External Users- Customers

Customers may need accounting

information to decide which products and
from which company to buy.

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Internal Users & Their Need

Internal users are parties inside the

reporting entity (i.e. company) who are
interested in the accounting information.
Internal users are managers, owners and
employees who actually work for the
business.

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Internal Users- Managers

A company's management uses

accounting information to run the business.

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Internal Users- Employees

Employees utilize accounting information

to determine a company's profitability and
profit sharing.

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Types of Accounting
There are mainly two types of accounting:

✓ Financial Accounting

✓ Managerial Accounting

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Financial Accounting

Financial accounting provides information

that is designed to satisfy the needs of
external users. Such reporting is usually
done in the form of financial statements.

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Managerial Accounting

Managerial accounting provides

information that is useful in running a
company by internal users. Such reporting
is usually accomplished through custom
designed reports.

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Illustration

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GAAP
The accounting profession has
developed standers that are generally
accepted and universally practiced.
This common set of standers is called
“Generally Accepted Accounting
Principles" (GAAP).
These standers indicate how to report
economic events.

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GAAP- Money Measurement Principle

Money Measurement Principle

For an accounting record to be made it must be able to be
expressed in monetary terms.
Only those economic events and transactions
that can be monetized (stated in a monetary unit such as
the BD Taka or U.S. Dollars) are recorded.

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Organizations
Organizations: A person or body of
persons organized for some specific
purpose.
Organizations can be classified as either
business or nonbusiness.
■ Business Organizations is one or more
individuals selling products or services for
profit.
■ Nonbusiness Organizations serve us in
ways not always measured by profit.
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GAAP- Business Entity Concept

Business Entity Concept

A business entity is separate from the personal affairs of its owner.

Accounts are kept for entities and not the people who own or run the
company.  Even in proprietorships and partnerships, the accounts for the
business must be kept separate from those of the owner(s).

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Forms of Business Organizations
.

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 Single Proprietorship
A
proprietorshi Advantages
p is owned by • Ease in organizing
one individual. • Low cost of
organizing

X’s Disadvantage
• Limited source
of financial
resources
• Unlimited
liability 26/34
Partnership
A partnership Advantages
is owned by • More financial
two or more resources than a
individuals. proprietorship.
• Additional
management skills.
X & Y’s Disadvantage
• Unlimited
liability.

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Corporation
A corporation is
organized under Advantage
state or federal • The ability to
statutes as a obtain large
separate legal amounts of
entity. resources by
X & Y, Inc.
issuing shares.
• Limited liability.
Disadvantage
• Double taxation.

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Activities in Business Organizations

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 Financing activities
Financing activities
• Owner financing
Nonowner financing

Financing

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 Investing activities
Investing activities
• Buying resources
• Selling resources

Investing
= Financing

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 Operating activities
Operating activities
• Aim at selling the
organization’s
products and
services.
• Result in sales
and expenses.

Investing Financing

Operating
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Types of Business
● Service companies
– Provide services for a fee.
● Merchandising companies
– Purchase goods that are ready for sale and then
resell them to customers.
● Manufacturing companies
– Buy materials, convert them into products, and
then sell the products to other companies or to
final customers.

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End of Lecture 01
thank you all…