MANAGEMENTACCOUNTING - I

- Dr. Sandeep Goel

FOCUS

ACCOUNTINGENVIRONMENT

- Dr. Sandeep Goel

Finding the profit / lossDetermining the financial positionCost ascertainment , andCost control

MANAGEMENT ACCOUNTING Management Accounting is the process of using the accounting information for managerial decision-making.

Internal in nature

PRIME BUSINESS ELEMENTS

Capital

Assets

Liabilities

Revenue

Expenses

CAPITAL

Owners Contribution / Shareholders Funds

Land and Buildings Cash and BankPlant and Machinery Stock / InventoryFurniture and Fixtures - Raw materialInvestments - Work-in-ProgressGoodwill - Finished Goods Accounts Receivable/Debtors

Loans from Banks & Financial Institutions Accounts Payable/ Creditors Loans from Public Bank Overdraft Short-term Loans

Contingent Liabilities- Liabilities that may or may not be incurred by a company and which depend on the outcome of say a forthcoming event e.g. a court case.

Sales and services Financial income - Interest income - Dividend income Gain on sale of fixed assets

Wages Financial Expenses Salaries - Interest on Loan Rent of office Electricity Selling &Distribution

Exercise IIdentify the items as assets, liabilities, capital, revenue and expenses: (i) Machinery - Fixed Asset (ii) Raw material purchased - Purchases (iii) Shares issued by GAIL - Capital (Share capital) (iv) Sales - Revenue / Income (Operating) (v) Borrowings from IDBI - Liability (Long-term loan) (vi) Cash - Current Asset (vii) Debtors - Current Asset (viii) Rent - Operating Expense

(ix) Interest Payable - Liability (Current Liability)

(x) Salaries Payable - Liability (Current Liability)

(xi) Interest Received - Non-operating Income

(xii) Power and Fuel - Operating Expense

(xiii) Salaries - Operating Expense

(xiv) Interest paid on Loans - Non-operating Expense

BASIS OF ACCOUNTING

Cash Basis of Accounting - Here, Cash is the deciding factor. Profit / Loss = Cash Sales Cash Expenses Example : (i) Government Accounting, (ii) Charitable institutions, and (iii) Educational institutions

Accrual or Mercantile Basis of Accounting

- Here, Occurrence of Transaction is the deciding factor

Profit / Loss = Total Income earned Total Expenses incurred

1. Profit/Loss as per Cash Basis Revenue (Cash Inflow or Cash Sales) Rs. 3,90,000 Add: Commission received 5,000 Less: Expenses (Cash Outflow) Rs. 1,90,000 (Rs. 2,70,000 Rs. 80,000) Profit Rs. 2,05,000 2. Profit/Loss as per Accrual Basis Revenue (Total Sales) Rs. 5,50,000 + Interest due on investments 10,000 Less: Total Expenses for the Year Rs. 2,70,000 Profit Rs. 2,90,000 ExampleDuring 2007-08, Ram & Bros. had cash sales of Rs. 3,90,000 and credit sales of Rs.1,60,000.Their expenses for the year were Rs. 2,70,000 out of which Rs. 80,000 is still to be paid. Commission received in the current year, due of last year of Rs. 5,000. Interest due on investments for the current year, Rs. 10,000.

Find out their Profit/Loss for 2007-08 as per: (i) Cash Basis of Accounting, (ii) Accrual Basis of Accounting

DOUBLE ENTRY SYSTEM OF ACCOUNTING

Double Entry System Here, every transaction affects two heads two accounts.

Every transaction has two aspects.

Example1. Issue of Shares Rs. 10,00,000

2. Purchase of Raw material on credit Rs. 10,000

3. Machine purchased for cash, Rs. 1,00,000

Solution1. Share Capital A/c 10,00,000 Cash A/c 10,00,000 2. Purchases A/c 10,000 Creditors A/c 10,000

Machine A/c 1,00,000 Cash A/c 1,00,000

ACCOUNTING PROCESS Identifying the Financial Transactions

Recording In the book of original entry, i.e., in Journal

Classifying Grouping into various Accounts in a Ledger Book

Summarising Into Statements: (i) Trial Balance, (ii) Profit and Loss Account, and (ii) Balance Sheet. Analysis and Interpretation

Communication / Reporting