MB0025 - Financial and Management Accounting

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ReferenceBooks: 1. 2. 3. 4. 5. 6. AccountingformanagersbyJawaharaLal. FinancialAccountingbyS.N.Maheswari. FinancialAccountingforManagersbyR.NarayanaSwamy. IntroductiontoManagementbyAnthonyReece. ManagementAccountingbyManmohanandGoel. CostandManagementAccountingtoHorugrenetal.

FinancialandManagementAccounting MB0025 ContentsUnit1 FinancialAccountingAnIntroduction Unit2 AccountingConcepts,Principles,BasesandPolicies Unit3 DoubleEntryAccounting Unit4 PrimaryBooks Unit5 SecondaryBooks Unit6 TrialBalance Unit7 FinalAccounts Unit8 IntroductiontoManagementAccounting Unit9 FinancialStatementAnalysisEdition:Fall2008

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ContentsUnit10 FundsFlowAnalysis Unit11 CashFlowAnalysis Unit12 UnderstandingCost Unit13 MarginalCostingandBreakEvenAnalysis Unit14 BudgetaryControl Unit15 StandardCosting 300 281 264 243 229 184

Edition:Fall2008

BKIDB0668

Dr.K.Jayakumar ViceChancellor SikkimManipalUniversityofHealth,Medical,andTechnologicalstudies Prof.NandagopalV.B. DirectorandDean SikkimManipalUniversityofHealth,Medical,andTechnologicalstudies.

BoardofStudiesDr.T.V.NarasimhaRao Professor,ManipalUniversalLearning Ms.VimalaParthasarathy Asst.Professor,SikkimManipalUniversityof Health,MedicalandTechnologicalstudies. Ms.SadhanaDash SenorManagerHR MicrosoftIndiacorporation(Pvt)limited Mr.PankajKhanna Director,HR,FidelityMutualFund Prof.K.V.Varambally Director,ManipalInstituteofManagement,Manipal Mr.ShankarJagannathan FormerGroupTreasurer WiproTechnologiesLimited,Bangalore Mr.AbrahamMathews ChiefFinancialOfficer InfosysBPO,Bangalore

ContentPreparationTeam1. Dr.Y.Rajaram AdjunctFaculty,ManipalUniversalLearning

PeerReviewByDr.NageshMalavalli Principal&ProfessorofFinance&Accounting M.P.BirlaInstituteofManagement,Bangalore

2. Mr.S.N.DoraiRaj RetdPrincipal&Professorofcommerce, SeshadripuramCollege,Bangalore. Edition:Fall2008 Thisbookisadistanceeducationmodulecomprisingofcollectionoflearningmaterialforourstudents. All rights reserved. No partof this work may bereproduced in anyform by anymeans without permission in writingfromSikkimManipalUniversityofHealth,MedicalandTechnologicalSciences,Gangtok,Sikkim. PrintedandPublishedonbehalfofSikkimManipalUniversityofHealth,MedicalandTechnologicalSciences, Gangtok,SikkimbyMr.RajkumarMascreen,GM,ManipalUniversalLearningPvt.Ltd.,Manipal 576104. PrintedatManipalPressLimited,Manipal.

INTRODUCTION

Accounting is a systematic effect of collecting. Classifying and analyzing financial information for effective use in decision making activities. There are two facts of accounting namely Financial AccountingandManagementAccounting.Whilefinancialaccountingisconcernedwithrecordingand preparation of financial statements, management accounting focuses on using the information for planning,decisionmakingandcontrollingthefinancialactivitiesofbusinessenterprise.Inviewofthe fastchangingscenarioworldover,MBAstudentsshouldacquaintthemselveswithrudimentsofthe subject.Thisbookcontains15Units.

Unit1:

FinancialAccountingAnIntroductionPresents an overview of meaning, purpose and evolution of accounting and introduces basicterminology.

Unit2:

AccountingConcepts,Principles,BasesandPoliciesBrieflydescribestheaccountingconceptsandassumptioninfinancialaccounting.

Unit3:

DoubleEntryAccountingDealswithbasicaccountingprinciplesofDoubleentrysystem.

Unit4:

PrimaryBooksContainsdetailsofprimarybooksGeneraljournalandsubsidiarybooks.

Unit5:

SecondaryBooksCoverstheprocessofpostingfromprimarybookstoledger,whichiscalledsecondary book.

Unit6:

TrialBalanceDealswiththeprocessofpreparingtrialbalance,errorsandrectification.

Unit7: FinalAccountsDescribesthePreparationoffinalaccountsTradingA/c,P&LA/candBalancesheet.

Unit8:

IntroductiontoManagementAccountingPresentsthemeaningandscopeofManagementAccounting.

Unit9:

FinancialStatementAnalysisDealswithratioanalysisasapartofanalysisoffinancialstatements.

Unit10: FundsFlowAnalysisFocusesonfundflowanalysis.

Unit11: CashFlowAnalysisGivesabriefsketchofcashanalysis.

Unit12: UnderstandingCostThrowslightonmeaningandroleofcostaccounting.

Unit13: MarginalCostingandBreakEvenAnalysisIntroducesthetoolofmarginalcostinganditsusage.

Unit14: BudgetaryControlProvidesaninsightofbudgetsasameansofcontrol.

Unit15: StandardCostingIntroducesthetechniqueofstandardcostingasaneffectivecontrollingsystem.

Financial and Management Accounting

Unit 1

Unit 1Structure: 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 Introductions Objectives Evolution Self Assessment Questions 1 Need Self Assessment Questions 2

Financial Accounting An Introduction

Meaning of Accountancy, book keeping and Accounting Self Assessment Questions 3 Characteristics Self Assessment Questions 4 Functions and objectives of accounting Self Assessment Questions 5 Difference between book keeping and accounting, accountancy Self Assessment Questions 6 Financial accounting and management accounting Self Assessment Questions 7 Basic terms Self Assessment Question 8

1.10 Summary Terminal Questions Answer to SAQs and TQs

1.1 IntroductionAccounting is a branch of knowledge, concerned with recording classifying, analyzing and reporting financial information to owners, bankers, creditors, government and host of stakeholders regarding the financial performance of organizations - business or bon-business entities. Over a period of time, accounting has assumed a status of a science and an art. In order to achieve uniformity globally, international standards have also emerged in accounting. In this Unit, the historical perspective of Accounting, its meaning, functions and basic terms used in the subject are discussed.Sikkim Manipal University

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Financial and Management Accounting

Unit 1

Learning Objectives: After studying this unit, you should be able to understand the following

1. To expose the students with meaning, need and purpose of accounting. 2. To know the functions Accounting. 3. To understand the difference between Financial Accounting and Management Accounting. 4. To acquaint with the basic terminology used in the subject.1.2 Evolution of Financial AccountingAny branch of knowledge does not emerge all of a sudden. Knowledge is a product of continuous intellectual exercise and the changes in the environmental and social demands. Accounting is an ancient art. Michael Russel in his article Evolution of Accounting points out that as early as 8500 B.C, accounting was existing. Archeologists have found clay tokens as old as 8500 BC in Mesopotamia which were usually cones, disks, spheres and pellets. These tokens correspond to such commodities like sheep, clothing or bread. They were used in the Middle West in keeping records. Similarly in ancient civilizations like China, Babylonia, Greece and Egypt, record keeping was in practice in the same manner as stated above. During 3600 BC in Babylonia payment of salaries was recorded in clay tablets. The rulers of these civilizations kept track of labour and material costs by using accounting methods. In an article published by John R. Alexander on History of Accounting, he stated that an improved system of book keeping known as double entry book keeping was introduced in 14th century and the following seven key ingredients were responsible for the creation of double entry book keeping. Private property: The power to change ownership, because book keeping is concerned with recording the facts about property and property rights Capital: Wealth productively employed, because otherwise commerce would be trivial and credit would not exist Commerce: The interchange of goods on a widespread level, because purely local trading in small volume would not create the sort of press of business needed to spur the creation of an organized system to replace the existing hodgepodge of record keeping Credit: The present use of future goods, because there would have been little impetus to record transactions completed on the spot.

Sikkim Manipal University

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Financial and Management Accounting

Unit 1

Writing: A mechanism for making a permanent record in a common language given the limits of human memory.

Money: The common denominator for exchange, since there is no need for book keeping except as it reduces transactions to a set of monetary values.

Arithmetic: A means of computing the monetary details of the deal.

Double entry records first came out during 1340 A.D. in Genoa. In 1494, the first systematic record keeping was formulated by Fra Luca Pacioli a Franciscan monk and one of the most celebrated mathematicians to this day. Pacioli is considered as the father of accounting. Michael Russel, in his article states that industrial revolution, which brought paradigm changes in the working and business transactions paved way to the specialized field of accounting called cost accounting in order to meet the need for the analysis of various costs. Mean while, corporate form of organisation came into being which made it necessary to report financial information to the owners (shareholders) by the management. Virtually management and ownership got separated and to instill confidence of the shareholders, managers had to submit reports, as prepared on the basis of accounting information. Welsch and Anthony, in their book Fundamentals of Financial Accounting, comment that the growth of business organizations in size, particularly publicly held corporations, has brought pressure from stock holders, potential investors, creditors, government agencies, and the public at large, for increased financial disclosure. The publics right t