Introduction

Accounting
 Accounting
Accounting = Language of the business

Language = means of communication

Accounting = communicates the results of business operations to

various parties who have some stake in the business.
 Why?
1. Records
2. Ascertain profits or loss
3. Ascertain position
4. Facilitates for Legal provision
5. Maintaining accounts in right manner
6. Minimize dispute
7. Assistant in management
 Need for Accounting
1. What he owns?
2. What he owes?
3. Whether he has earned a profit or suffered a loss on account of
running a business?
4. What is his financial position?
 Definition
Accounting is defined as “the process of recording, classifying,
summarizing, analysing and interpreting the financial transactions and
communicating the results thereof to the persons interested in such
information.”
 Accounting
1. Recording
2. Classifying
3. Summarizing
4. Dealing with financial transactions
5. Analysing and interpreting
6. Communicating
 Accounting
1. Recording: Basic function of accounting. Recording + in an orderly
manner. Recording is done in “Journal”.

2. Classifying: Systematic analysis of the recorded data, with a view to

group transactions of one nature at one place. “Ledger” – individual
account heads with all financial transactions of similar nature.

3. Summarizing: presenting the classified data in a manner which is

understandable to internal and external end-user of accounting
statements. Trial balance, income statement, balance sheet.
 Accounting
4. Dealing with financial transactions: Only monetary transactions.

5. Analysing and interpreting: in a manner that the end-users can

make a meaningful judgement about the financial condition an
profitability of the business operations.

6. Communicating: after being meaningfully analysed and interpreted

has to be communicated in a proper manner.
 Book-Keeping
• Book-keeping is an activity concerned with the recording of financial
data related to business operations in a significant and orderly
manner. Book-keeping is the record-making phase of accounting.

• The essential idea behind maintaining book-keeping records is to

show correct position regarding each head of income and
expenditure.
Objectives of Book-Keeping
• To have a permanent record of each
transaction of the business and to show its
1 financial effect on the business

• To ascertain the combined effect of all the

transactions made during an accounting
period upon the financial position of the
2 business as a whole.
 Book-Keeping Vs Accounting
Book-Keeping Accounting
Recording phase of accounting system Summarizing phase of an accounting system.
Persons responsible for book-keeping are called Persons responsible for accounting are called
book-keepers. accountants.

Financial statements are not prepared from book- Financial statements are prepared from accounting.
keeping records.

It does not give the complete picture of the financial It gives the complete picture of the financial
condition of the business unit. condition of the business unit.

It does not provide any information for taking It provides information for taking managerial
managerial decisions. decisions.

It has no branch. It has several branches, e.g., financial accounting,

cost accounting, management accounting, etc.

It does not require any special skill or knowledge It requires special skill and knowledge.
Users of Accounting Information
 Users of Accounting Information
1. Proprietors
2. Managers
3. Creditors
4. Prospective investors
5. Government
6. Employees
7. Citizen
 Objectives of Accounting
1. To keep systematic records
2. To protect business properties
3. To ascertain the profit or loss
4. To ascertain the financial position of business
5. To facilitate rational decision making
Qualitative Characteristics of Financial Statements

1. Understandability

2. Relevance

3. Reliability

4. Comparability
 Branches of Accounting
1. Financial Accounting
2. Management Accounting
 Financial Accounting
It is the original form of Accounting. It is mainly confined to the
preparation of financial statements for the use of outsider like
shareholders, debenture holders, creditors, banks and financial
institutions.

The financial statements i.e. Profit and Loss Account and the Balance
sheet, show the manner in which operations of the business have been
conducted during a specified period.
 Limitations of Financial Accounting
1. Provides only limited information.

2. Treats figures as simple and silent items: fails to realize the purpose

3. Provides only a post-mortem record of business transactions

4. Considers only quantifiable information

5. Fails to provide informational needs of different levels of

management
 Management Accounting
• It is concerned with collection and presentation of accounting information
required by management for decision making.

• The process of preparing management reports and accounts that provide accurate
and timely financial and statistical information required by managers to make day-
to-day and short-term decisions.

• Management Accounting is the branch of accounting which provides accounting

information to the management in a systematic way so that managerial functions of
planning, controlling and decision making can be performed in an efficient manner.
 Management Accounting
‘Management accounting is the process of identification, measurement, analysis,
preparation and communication of financial information used by management to
plan, evaluate and control within the organization and to assure appropriate use and
accountability for its resources.’

National Association of Accounts (USA)

 Management Accounting
‘Management accounting is the integral part of management concerned with
identifying, presenting and interpreting information used for –
(I) Formulating strategy;
(II) Planning and controlling activities;
(III)Decision making;
(IV)Optimizing the use of resources;
(V) Disclosure to shareholders and others external to the entity;
(VI)Disclosure to employees;
(VII) Safeguarding assets.
Chartered Institute of Management Accountants
Nature/features of management accounting

Useful in decision making

Financial and cost information

Internal use

Purely optional

Concerned with future

Flexibility in presentation of information

Limitations
1) Based on historical data

2) Lack of wide knowledge

3) Complicated approach

4) Not a substitute of management

5) Costly

6) Developing stage

7) Lack of objectivity

8) Resistance from staff

 Tools for decision making in
management accounting

• Financial statement analysis

• Ratio analysis

• Fund flow analysis

• Cash flow analysis

• Marginal costing system

• Budgetary control

• Variance analysis
Basis Financial Accounting Management Accounting
External and internal use Information is mainly meant for external Information is mainly meant for
users like investors, shareholders, internal users i.e; Management
creditors, Govt. authorities etc.

Accounting method It is based on double entry system for It is not based on double entry
recording business transactions. system.

Statutory requirement Under Company law and taxation laws, It is optional although its utility
financial accounting is obligatory to satisfy makes it highly desirable to adopt it.
various statutory provisions.

Analysis of cost and profit Financial Accounting shows profit/loss of Management Accounting provides
business as a whole. It does not show the detailed information about individual
cost and profit for individual products, products, plants, departments or any
processes or departments etc. other responsibility centres.
Basis Financial Accounting Management Accounting
Past and future data It is concerned with recording It is future oriented and focuses on
transactions which have already taken what is likely to happen in future
place, i.e; represents historical data. though it uses past or historical data.
For future projections.

Periodic and continuous Financial reports (P/L and B/S) are Management reports are prepared
reporting prepared usually on a year to year frequently i.e; monthly, weekly or
basis. even daily as per management
requirements.

Accounting standards Companies are required to prepare No such need.

financial accounts in accordance with
accounting standards.

Types of statement prepared In financial accounting, Profit and Loss In management accounting special
account and Balance Sheet are purpose statements are prepared eg;
prepared which is used by external performance report of sales manager
users.
Basis Financial Accounting Management Accounting

Publication and audit Financial statements are published for Management accounting statements are
general public use and are also sent to not published as these are for internal use
shareholders. These are required to be and also are not required to be audited by
audited by Chartered Accountants. Chartered Accountants

Monetary and non- Financial accounting provides Management accounting may apply both
monetary management information in terms of money only. monetary or non-monetary
measurements.
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