UNIT – I MANAGEMENT ACCOUNTING …

1 MBA-FinanceManagement AccountingUNIT IMANAGEMENT ACCOUNTINGINTRODUCTION:Abusiness enterprise must keep a systematic record of what happens fromday-tot-day events so that it can knowits position clearly. Most of the business enterprisesare run by the corporate sector. These business houses are required by lawtoprepare periodical statements in proper formshowing the state of financial systematic record of the daily events of a business leading to presentation of acompletefinancial pictureis knownas ACCOUNTING . Thus, Accountingis thelanguage of business. Abusiness enterprise speaks through ACCOUNTING . It revealstheposition, ACCOUNTING : ACCOUNTING is the process of recording, classifying, summarizing, analyzing andinterpreting the financial transactions of the business for the benefit of managementand those parties who are interested in business such as shareholders, creditors,bankers, customers, employees and government.

2 Thus, it is concerned with financialreporting and decision making aspects of the American Institute of Certified Public Accountants Committee on Terminologyproposedin1941that accountingmaybe definedas, The art of recording,classifyingandsummarizingina significant manner andinterms of money,transactions and events which are, in part at least, of a financial character andinterpreting the results thereof .BRANCHES OF ACCOUNTING : ACCOUNTING can be classified into three categories:AcroPDF - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a ACCOUNTING , AccountingFINANCIAL ACCOUNTING :Theterm ACCOUNTING unlessotherwisespecificallystatedalwaysr efersto Financial ACCOUNTING .

3 Financial ACCOUNTING is commonly carries on in the generaloffices of a business. It is concerned with revenues, expenses, assets and liabilitiesof a business house. Financial ACCOUNTING has two-fold objective, viz, ascertain the profitability of the business, know the financial position of the AND SCOPE OF FINANCIAL ACCOUNTING :Financial ACCOUNTING is a useful tool to MANAGEMENT and to external users such asshareholders, potential owners, creditors, customers, employees and government. Itprovides information regarding the results of its operations and the financial statusof the business. The following are the functional areas of financial ACCOUNTING :-1. Dealing with financial transactions: ACCOUNTING as a process deals only with those transactions which are measurable interms of money.

4 Anything which cannot be expressed in monetary terms does notform part of financial ACCOUNTING however significant it Recording of information: ACCOUNTING is an art of recording financial transactions of a business concern. Thereis a limitation for human memory. It is not possible to remember all transactions ofthe business. Therefore, the information is recorded in a set of books called Journaland other subsidiary books and it is useful for MANAGEMENT in its decision - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a Accounting3. Classification of Data:The recorded data is arranged in a manner so as to group the transactions of similarnature at one place so that full information of these items may be collected underdifferent heads.

5 This is done in the book called Ledger . For example, we mayhave accounts called Salaries , Rent , Interest , Advertisement , etc. To verifythe arithmetical accuracy of such accounts, trial balance is Making Summaries:The classified information of the trial balance is used to prepare profit and lossaccount andbalancesheet inamanneruseful totheusersof accountinginformation. The final accounts are prepared to find out operational efficiency andfinancial strength of the Analyzing:It is the process of establishing the relationship between the items of the profit andloss account and the balance sheet. The purpose is to identify the financial strengthand weakness of the business.

6 It also provides a basis for Interpreting the financial information:It is concerned with explaining the meaning and significance of the relationshipestablished by the analysis. It should be useful to the users, so as to enable themtotake correct Communicating the results:The profitability and financial position of the business as interpreted above arecommunicated to the interested parties at regular intervals so as to assist themtomake their own OF FINANCIAL ACCOUNTING :Financial accountingis concernedwiththe preparationof final accounts. Thebusiness has become so complex that mere final accounts are not sufficient inAcroPDF - A Quality PDF Writer and PDF Converter to create PDF files.

7 To remove the line, buy a Accountingmeeting financial needs. Financial ACCOUNTING is like a post-mortemreport. At themost it can reveal what has happened so far, but it can not exercise any control overthe past happenings. The limitations of financial ACCOUNTING are as records only quantitative records only the historical cost. The impact of future uncertainties has noplace in financial does not take into account price level provides information about the whole concern. Product-wise, process-wise, department-wise or information of any other line of activity cannot beobtained separately from the financial figures are not known in advance. Therefore, it is not possible to fix theprice in advance.

8 It does not provide information to increase or reduce theselling there is no technique for comparing the actual performance with that ofthe budgetedtargets, it is not possible toevaluate performance of does not tell about the optimumor otherwise of the quantumof profitmade and does not provide the ways and means to increase the case of loss, whether loss can be reduced or converted into profit bymeans of cost control and cost reduction? Financial ACCOUNTING does notanswer this does not reveal which departments are performing well? Which ones areincurring losses and how much is the loss in each case?10. It does not provide the cost of products manufactured11.

9 There is no means provided by financial ACCOUNTING to reduce the - A Quality PDF Writer and PDF Converter to create PDF files. To remove the line, buy a Accounting12. Can the expenses be reduced which results in the reduction of product costand if so, to what extent and how? No answer to these It is not helpful tothemanagement intakingstrategicdecisions likereplacement of assets, introduction of newproducts, discontinuation of anexisting line, expansion of capacity, Itprovidesamplescopeformanipulationlikeo vervaluationorundervaluation. This possibility of manipulation reduces the It is technical in nature. Aperson not conversant with ACCOUNTING has littleutility of the financial ACCOUNTING :An ACCOUNTING systemis to make available necessary and accurate information forall those who are interested in the welfare of the organization.

10 The requirements ofmajority of themare satisfied by means of financial ACCOUNTING . However, themanagement requires far more detailedinformation than what the conventionalfinancial ACCOUNTING can offer. The focus of the MANAGEMENT lies not in the past buton the a businessman who manufactures goods or renders services, cost ACCOUNTING isa useful tool. It was developed on account of limitations of financial ACCOUNTING andis the extension of financial ACCOUNTING . The advent of factory systemgave animpetus to the development of cost is a method of ACCOUNTING for cost. The process of recording and accountingfor all the elements of cost is called cost Institute of Cost and Works Accountants, London defines costing as, theprocess of ACCOUNTING for cost fromthe point at which expenditure is incurred orcommitted to the establishment of its ultimate relationship with cost centres andcost units.