FMS Sem- II Accounting & Costing for Managers

A. Rajyalakshmi Evolution of Financial Accounting: Systematic record keeping, formulated by Fra Luca Pacioli in 1494 Industrial revolution and emergence of company form of organization Impact of information technology Emergence of Accounting standards

Definition of Accounting: Accounting is defined differently by different authors and organizations each pointing out the various functions of accounting The American Institute of Certified Public Accountants. According to them, accounting is the the art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events which are, in part at least, of a financial character, and interpreting the results thereof Users of Financial Statements: The financial statements are used by the internal users and the external users. The importance of accounting is to provide meaningful information about a business enterprise to those persons who are directly or indirectly interested in the performance and financial position of a business enterprise. Such persons may include owners, creditors, investors, employees, government, public research scholars and the managers.
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Management: In a company form of organization the owners or the share holders elect a group of people to manage the day-to-day affairs of the company. Since these managers are ultimately responsible for the financial performance, they must periodically compile and interpret the financial statements. Shareholders: The owners of the business furnish capital to be used for the purpose of carrying out business. They are interested to know whether the business incurred any profit or loss during a particular period and also its financial position on a particular date. They need accounting report in order to have an appraisal of past performance and also for an assessment of future prospects. Investors: Investors look not only at the earning capacity of the business but also at its financial strength and solvency before deciding whether to subscribe or not for the shares in a company. They are interested in steady and good returns on

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their capital, the safety of their capital and appreciation in the value of the organization.
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Creditors: The creditors include supplier of goods and other supplies, bankers and other lenders of money. They are interested in the financial stability of the concern before making loans or granting credit. They look at the ability of the business to pay interest and the principal amount as and when it becomes due for payment. They also look at the trends of earnings as it ultimately affects the solvency of a concern. Customers: They are a composite group, consisting of (a) producers at every stage of processing, (b) Wholesalers and retailers and (c) the final consumers. Producers at the next stage of processing should be assured of the input which they obtain from the concern in question. The wholesalers and retailers must also be sure about the uninterrupted supply of the materials. Otherwise, they will be hesitant to stock it. The ultimate consumer is interested in the continuous availability of the product. Should he come to think that the availability may be disrupted or stopped, he will shift his preference for another variety or brand. In all these kinds of decisions, accounting information has a significant role to play. Employees: Employees are interested in the earning capacity of a concern as their salaries, bonus and pension schemes are dependent on this factor They have a permanent stake in the business and in order to have an assurance of steady employment they are very much interested in the stability of the organization. Government: Any economy of the day is, in a way, controlled and regulated by the political authorities, i.e., the government. Consequently, government agencies rely on the financial information for permitting expansion or contraction of business, for import and export of products and/or materials, for allocation of essential resources for regulating labour or imposing taxes like income tax or excise duty. Researchers: Researchers are interested in accounting statements and reports in order to get data for providing their thesis on which they are working in order to complete their research projects. Public: For the members of the public, the financial information is of the nature of a health examination report it tells them about employment opportunities and general growth in the individual concern and the economy as a whole.

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Nature of Financial Accounting:

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Financial Accounting is an art. It requires skill and experience Financial Accounting is a science & is governed by rules, concepts and policies Deals with financial information expressed in terms of money, useful to different stakeholders Financial performance is measured for a definite period of time

o Non-financial events can not be recorded. For Example: Honesty of employees o Involves effective information system. There is horizontal and vertical flow of information. o A tool for planning and decision making. Functions and objectives of FA o Systematic recording of transactions o Journal, ledger and all subsidiary books are maintained as per the principles of accounting o Preparation of final accounts.
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Reporting to stakeholders.

o Satisfying the statutory requirements of SEBI, ROC, Government etc., o Protecting the properties of business o Tool for internal control of business performance. o Tool for effective forecasting

Accounting into three broad categories Financial Accounting, Cost Accounting and Management Accounting Financial Accounting: Financial Accounting is that part of accounting which is mainly concerned with the historical, custodial and stewardship aspects of external reporting to share holders, government and other users of accounting information outside the business entity. Financial accounting emphasizes the stewardship aspect of accounting rather than the control or decision making aspects of accounting. It is the recording and processing of financial data affecting the business unit, which relates to the past and is generally for one year. The end product of financial accounting is the Profit and loss for the period ended (which shows the
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profit earned or loss incurred) and the Balance Sheet as on the last day of the accounting period (which shows the financial position). The preparation of the financial accounting is based on generally accepted accounting principles, enunciated by the accounting profession and is heavily constrained by legal regulations and accounting standards. Cost Accounting: Is that part of accounting which is concerned with the accumulation and assignment of historical costs to units of product and departments, primarily for the purpose of valuation of stocks and measurement of profits. Cost accounting seeks to ascertain the cost of a unit produced and sold or the services rendered by the business unit with a view to exercising control over these costs to assess the profitability and efficiency of the enterprise. It generally relates to the future and involves an estimation of future costs to be incurred. The process of cost accounting is based on the data provided by the financial accounting. Management Accounting: is that part of accounting which is concerned mainly with internal reporting to the managers of a business unit. It relates to planning, control and decision making which are useful to the management in the discharge of its functions. Thus, it emphasizes the control of decision-making aspects of accounting which is tailormade to suit the management needs of a specific enterprise, rather than stewardship aspects of accounting. Management accounting is forward looking and generally includes cost accounting and budgeting. The preparation of management accounting is not based on generally accepted accounting principles and is relatively free of constraints imposed by legal regulations and accounting standards. Financial Accounting Management Accounting

Owners, bankers, suppliers, brokers,The users are top, middle and lower level employees, Government use themanagers information Information is expressed in terms ofUnits of measurement may be different from money one department to another Based on historical data It is an independent discipline Uses the financial data of the present for the future Knowledge of economics, management, information system, operations research etc., is needed.

Accounting Concepts: May be considered as postulates i.e., basic assumptions or conditions upon which the science of accounting is based there is no authoritative list of these concepts but most of the following concepts have fairly general support.

The concepts and conventions can be put in the form of a chart as given below Accounting Principles

Concepts
Business Entity Money measurement Going Concern Cost Dual Aspect Accounting Period Matching period Realization concept

Conventions
Consistency Full Disclosure Conservatism Materiality

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Business Entity: This concept implies that a business unit is separate and distinct from the persons who supplies capital to it. Irrespective of the form of organization, a business unit has got its own individuality as distinguished from the persons who own or control it. The accounting equation (i.e Assets= Liabilities + Capital ) is an expression of the entity concept because it shows that the business itself owns the assets and in turn owes the various claimants. Money measurement: Money is the only practical unit of measurement that can be employed to achieve homogeneity of financial data, so accounting records have only those transactions which can be expressed in terms of money though quantitative records are also kept. The advantage of expressing business transactions in terms of money is that money serves a common denominator by means of which heterogeneous facts about a business can be expressed in terms of numbers( i.e money) which is enables of additions and subtractions. Going Concern: It is assumed that a business unit has a reasonable expectation of continuing business at a profit for an indefinite period of time. Due to this concept the suppliers supply goods on credit and the fixed assets are recorded at original cost and not at liquidation value; depreciation is also charged on original cost without concern to realization value. Cost: A concept of accounting, the assets are recorded at the cost incurred in acquiring them. This will reduce the scope for subjectivity and personal bias. Dual Aspect: This is the basic concept of accounting. According to this concept, every financial transaction involves a two-fold aspect: yielding of that benefit and giving of that benefits hence capital + liabilities = assets this si also known as the accounting equation. Accounting Period: The measurement of business income or a loss on a whole life basis is very simple. But for that purpose the company has to be liquidated to find

the performance. To get out of this, the final accounts are prepared on periodical basis normal for a year vii. Matching: This concept is based on the accounting period concept. The most important objective of running a business is to ascertain profit periodically. The determination of profit of a particular accounting period is essentially a process of matching the revenue recognized during the period and the costs to be allocated to the period to obtain the revenue. viii. Realization concept: Accounting conventions: The term convention denotes circumstances or traditions which guide the accountants while preparing the accounting statements
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Consistency: Accounting rules, practices and conventions should be continuously observed and applied i.e., they should not change from one year to another. The results of different years will be comparable only when accounting rules are continuously adhered to from year to year. Full Disclosure: According to this convention, all accounting statements should be honestly prepared and to that end full disclosure of all significant information should be made. All information which is of material interest to proprietors, creditors and investors should be disclosed in accounting statements. Conservatism: Conservatism means taking the gloomy view of a situation. It is a policy of caution or playing safe. With this, the businessmen take into account all the possible losses which may occur and ignore the possible gains in future while recording the accounts. The closing stock is valued at market price or cost price which ever is less and this is the application of the principle of conservatism Materiality: Whether something should be disclosed in the accounts or not in the financial statements will depend on whether it is material or not. Materiality depends on the amount involved in the transaction. For example, the expense incurred in purchasing a waste basket worth Rs.50 is termed as expense for the year rather than a asset. . Customs also drives the materiality only round figures have to be recorded to make the figures manageable without affecting the accuracy.

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