Accounting and Financial Management

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for BCA& Accounling and financial Managemenl lor BCA&MCA THIS PAGE ISBLANKCopyright 2006, New Age International (P) Ltd., PublishersPublished by New Age International (P) Ltd., PublishersAll rights reserved.No part of this ebook may be reproduced in any form, by photostat, microfilm,xerography, or any other means, or incorporated into any information retrievalsystem,electronicormechanical,withoutthewrittenpermissionofthepublisher. All inquiries should be emailed to rights@newagepublishers.comISBN (10) : 81-224-2325-6ISBN (13) : 978-81-224-2325-9PUBLISHING FOR ONE WORLDNEW AGE INTERNATIONAL (P) LIMITED, PUBLISHERS4835/24, Ansari Road, Daryaganj, New Delhi - 110002Visit us at www.newagepublishers.comPREFACE IhavegreatpleasureinplacingthisbookonAccountingandFinancialManagementintothe handsof esteemedreaders.Althoughseveralbooksare availableonthesubject, theneedfor a comprehensivevolumecoveringalltheimportantaspectsofAccountingandFinancial Managementhasbeenfelt for along time .. Mylong experienceinteaching and the knowledgeI have acquired over these years has madeitpossible for me to satisfy this need. The bookiswrittenina simple andlucidstyle.At the end of the each chapter,a fewtheoretical questions and exercises are given to test the understanding ability of students. Thisbookmeets the requirements of S.C.A.andM.e.A.students and other technicalcourses in management. Wewillbe failingin our duty if we do not thank Mr.Saumya Gupta of New Age IntemaiionaJ(P) Lid .intaking activeintetest in the publication. Author THIS PAGE ISBLANKCONTENTS Preface(v) I.AccountingTheory 2.Journal14 3.Ledger34 4.Subsidiary Books47 5.CashBook58 6.Bank Reconciliation85 7.Final Accounts of Sole Traders96 8.Final Accounts of Joint Stock Companies137 9.Depreciation Accounting162 10.Inventory Valuation189 II.Meaning, Importance and Objectives of Financial Management198 12.Analysis and Interpretation ofFinancial Statements205 13.Ratio Analysis244 14.Fund Flow Analysis316 15.Capital Structure338 16.Source of Capital346 17.Working Capital Management355 18.Capital Budgeting372 19.Cost of Capital392 20.Natureand Scope of Cost Accounting403 21.Single or Output or Unit Costing 420 22.Marginal Costing 454 23.Cost-Volume-ProfitAnalysis 493 24.Buslgetary Control 530 25.Standard Costing 575 THIS PAGE ISBLANKNEED FOR ACCOUNTINGBusiness is one of the sources of earning income. Whenever a business is started, it requires investment ofcertain amount which is called as capital. With this amount of capital the businessman may deal either withtrading business or manufacturing business. In a trading business, he will buy goods at a lesser price andsells the same to others at a higher price. In case of manufacturing business, he has to buy raw materials andincur other expenses in the form of wages and salaries, rent, power, insurance, tax, transport, postal andtelephoneexpensesandsoon,inthecourseofproductionanddistributionofgoods.Inasmallsizedbusiness the transactions are simple and less in number. But in a large sized business the transactions arenumerous.These businesstransactionsenable thebusinessman to know the resultofhis businesswhichcan be profit or loss for a given period of time. In order to know the result of his business, a businessman hasto remember all the transactions of his business. However, owing to lack of memory it is not possible foranybody to remember all the transactions over a period of time. This has given rise to maintenance of a set ofaccounting books in which business transactions are chronologically recorded. The systematic recording ofbusiness transactions enable the businessman to account for every transaction without missing any item.Such a system of maintenance of a set of accounting books to record business transactions is known as bookkeeping system.ORIGIN OF BOOK KEEPINGThe practice of record keeping existed ages before the formal recording of history. Barbarians began to keeprecords by scratching them on rocks. From there crude forms of picture writing, the process of rudimentarybookkeeping began. The Italians were the leading bookkeepers and record makers for centuries. As early as813 A.D., Bookkeepers were recognised in Italy and from these men came many of the fundamentals of themodern double entry bookkeeping.In 1911, a Florentine banker devised the first complete bookkeeping system as distinguished from thesimple devices previously used. It had all the rudiments of a set of books including a rough plan of crossentries. The first known system of complete double entry was discovered in Genoa in 1340.The first text book on bookkeeping was written in 1414 by Pacioli, a monk of the order of St. Francis atVenice. Many present day methods were described by this old world mathematician and the ideas he ex-pressed have lived to the present day. Paciolis treatise is based on the premise that where one wishes toconducthisbusinessproperly,hemustfirsthavesufficientcashorcredit.Secondly,hemustbeagoodbookkeeper. Thirdly, he must possess a proper book keeping system.1CHAPTERACCOUNTINGTHEORY2 Accounting and Financial ManagementThe years following Paciolis treatise were marked by the refinement of the double entry bookkeepingsystem and by the use of the position of the accountant in the commercial world. Publications were releasedand some accountants association were formed, but it was not until the 19th century that accounting reallybecame a profession.It was not until the dawn of the 20th Century that the invention and perfection of the business machinesof today took the business of record keeping from the Shadow of the Pen. A new conception of accountingvaluation began to take form and the bookkeeper really became on Accountant. The keeping of books was nolonger restricted to the preparation of financial statement. Because of the ease with which facts could berecorded,accumulatedandanalysed,theaccountantbegantodevotehistimetotheinterpretationofbooked facts and as a result, became a member of managements team.MEANING AND DEFINITION OF BOOK KEEPINGThe art of recording business transactions in a systematic manner is termed as bookkeeping. It is the namegiven to a system which is concerned with recording and summarising business transactions accurately so asto know the true state of affairs of a business.Definition of Book Keeping. R.N. Carter in his book on Advanced Accounting defines book keeping asthe Science and art of correctly recording in books of accounts all those business transactions that result inthe transfer of money or moneys worth. This definition reveals the following features of book keeping.(a) It is a Science. Book Keeping is a science as it represents systematised knowledge. It is based uponasetofwelldefinedprincipleswhicharefollowedthroughoutsothatthereasonforrecordingatransaction in a particular manner can be explained fully.(b) It is an Art. Book keeping is an art as it deals with a system in which human skills and ability is involvedin recording the business transaction according to principles of book keeping.(c) Money Consideration. This implies recording of all transactions which can be expressed in terms ofmoney.Kohler in his Dictionary for Accountants defined book keeping as the process of analysing, classify-ing,andrecordingtransactionsinaccordancewithpreconcievedplan.Thisdefinitionbringsforththefollowing three aspects of accounting.(a) Analysis. It refers to identifying various expenses incurred during a period of time.(b) Classification. It refers to grouping of like items of expenses into a common group.(c) Recording. It refers to entering transactions in the basic books and later on posting them into anotherset of book known as ledger.B.G. Vickery in his book Principles and Practice of Book Keeping defines book keeping as the art ofrecording pecuniary or business transactions in a regular and systematic manner. This definition empha-sisestherecordingofmonetarytransactionsofthebusinessonday-to-daybasisandinasystmeaticmanner, i.e., according to the set rules and regulations of book keeping.Scope of Book KeepingBook Keeping is concerned with two important steps involved in the procedure of accounting. They are : (i)recording of all business transactions in a book known as Journal and (ii) posting all recorded transactionsinto another book known as a ledger. Subsequently, the various accounts in the ledger are balanced to knowtheneteffectofalltransactions.Inbrief,thesubjectmatterofbookkeepingincludespreparationandmaintenance of all records up to the stage of preparation of a statement known as Trial Balance.3Accounting TheoryDEFINITION OF ACCOUNTINGThe American Accounting Association defines accounting as the process of identifying, measuring, andcommunicating economic information to permit informed judgements and decisions by users of the informa-tion. This definition highlights the following aspects :(a) Identifying the Business Transactions. Identification of transactions are useful for proper recordingof them in books of accounting without missing any of the transactions.(b) MeasurementofBusinessPerformance.Measurementorevaluationofbusinessperformanceisnecessary to know the progress of business.(c) Communication of Information. Communication of information relates to reporting the results ofbusinesstoallthoseinterestedinthebusiness.Thisenablesthemtojudgetheefficiencyofthebusiness and to take suitable decisions to improve the business.AccordingtotheAmericanInstituteofCertifiedPublicAccountantsTerminologycommittee;Accounting is the art of recording, classifying and summarising in a significant manner and in terms ofmoney transactions and events which are in part atleast of a financial character and interpreting the resultsthereof.This definition emphasises the following aspects :(a) It is an art(b) It involves recording transactions in a set of books(c) Classifying which refers to grouping of transactions according to their similarities.(d) Summarising the transactions facilitate easy understandi