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MANAGEMENT

ACCOUNTING - I

- Dr. Sandeep Goel

FOCUS
ACCOUNTING
ENVIRONMENT

- Dr. Sandeep Goel

BRANCHES
OF
ACCOUNTING

Financial
Accounting
Finding the profit / loss
Determining the financial position

Cost
Accounting
Cost ascertainment , and
Cost 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

ASSETS

Non-Current Assets/
Fixed Assets

Current Assets

Land and Buildings

Cash and Bank

Plant and Machinery

Stock / Inventory

Furniture and Fixtures

- Raw material

Investments

- Work-in-Progress

Goodwill

- Finished Goods

LIABILITIES

Non-Current Liabilities/
Long-Term
Liabilities

Current
Liabilities

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.

REVENUE /
INCOME
Operating Income
Sales and services

Non- operating
Income
Financial income
- Interest income
- Dividend income
Gain on sale of fixed assets

EXPENSES

Operating Expenses

Wages
Salaries
Rent of office
Electricity
Selling &Distribution

Non- operating
Expenses
Financial Expenses
- Interest on Loan

Exercise I
Identify 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

Example
During 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
1. Profit/Loss as per Cash Basis
Revenue (Cash Inflow or Cash Sales)
Add: Commission received

Less: Expenses (Cash Outflow)


(Rs. 2,70,000 Rs. 80,000)
2. Profit/Loss as per Accrual Basis
Profit
Revenue (Total Sales)
+ Interest due on investments
Less: Total Expenses for the Year
Profit

Rs. 3,90,000
5,000

Rs. 1,90,000
Rs.
Rs.2,05,000
5,50,000
10,000
Rs. 2,70,000
Rs. 2,90,000

DOUBLE ENTRY SYSTEM OF


ACCOUNTING
Double Entry System

Here, every transaction affects two heads two accounts.

Every transaction has two aspects.

Example
1. 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

Solution
1. Share Capital A/c

10,00,000
Cash A/c

2. Purchases A/c

10,000
Creditors A/c

3. Machine A/c

10,00,000
10,000

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