chapter 1 management accounting
DESCRIPTION
Compiled by Prof At MEt Nashik CollegeTRANSCRIPT
Management Accounting
Financial Accounting
Concepts & Conventions
Chapter 1:
Power of Accounting
“Accounting provides a very selective but powerful representation of the corporate identity..”
“The detailed language of assets, liabilities, costs, profits provide a range of corporate imagery and vocabulary …….”
“Accounting provides the categories through which organisational participants perceive both themselves and the organisation.”
Mike Powers
Definition of Financial Accounting
• Financial accounting is the process of identifying, measuring and communicating economic information about a business organisation in order to permit informed judgements by users of that information.
[American accounting association]
The Process of Financial Accounting
SUMMARISING
IDENTIFYING
COMMUNICATING
& classifying the assets, liabilities, capital, income & expenses
recording each transaction of the business
in the form of periodic financial statements
to users/stakeholders in the business
Who are the Stakeholders ?
Accounting information
Suppliers
Shareholders/
investors
Employees
Competitors
Customers Government
Lenders/
creditors
General public
Investment analysts
Managers
Necessary qualities of financial information.
Accounting Information
consistency
clarity accuracy
reliability
timeliness relevance
Main forms of business enterprise [entity].
Business organisation
Public limited liability company [plc]
Non - profit co-op charity public body
Sole trader
partnership
Private limited liability company
What is Management Accounting?
• It is that field of accounting which deals with providing information to managers for their use in
planning, Decision making, performance evaluation, control, Management of cost, Financial Reporting.
Planning Acting
Feedback
Controlling
The Functions of Management
Origin • This concept was not known to the
business world until 1950. • The term was first formally
described in a report entitled ‘Management Accounting’ in 1950.
• The report was published by the Anglo American Council of Productivity Management Accounting Team after its visit to US in first quarter of 1950
Definition of Management Accounting
“ The process of identification, measurement,
accumulation, analysis, preparation & communication
Of financial information used by management to Plan, Evaluate & Control Within the organisation
& to assure appropriate use & accountability for its resources.”
-National Association of Accountants [USA]
Management Accounting and Financial Accounting
Internal managers of the business
Investors, Creditors, Government authorities
Primary Users
Management Accounting and Financial Accounting
Help managers plan and control business operations
Help investors, creditors, and others make investment, credit, and other decisions
Purpose of Information
COMPARING MANAGERIAL AND FINANCIAL ACCOUNTING
Phases in the evolution of Accounting
?
HRA Inflation
Acct. Social
Respon. Acct. Management Accounting
Cost Accounting
Financial Accounting
Stewardship Accounting
Scope of Management Accounting 1. Financial Accounting 2. Cost Accounting 3. Financial Statement Analysis 4. Forecasting & Budgeting 5. Cost Control Techniques 6. Inflation Accounting 7. Management Reporting 8. Quantitative Techniques 9. Taxation 10. Internal Audit.
Functions of Management Accounting
• Planning & Forecasting • Furnishing Information • Not confined merely to financial data • Analysis & Interpretation • Coordinating • Communication • Establishing standard of performance • Undertaking special studies • Controlling
Accounting Concepts
• The term concept denotes the basic assumptions or pro or conditions upon which accounting is based.
• Accounting concepts are such ideas that are commonly associated with the theory and practice of accountancy.
Accounting Period
Accrual
Realization
Matching Cost
Attach
Cost
Going concern
Money Measurement
Dual Aspect
Business Entity
Accounting Concepts
Accounting Conventions
• Conservatism
• Consistency
• Materiality
• Disclosure
1. Conservatism
• This convention put forth the concept that, “Anticipate no profit & provide for all possible losses.”
• This indicate that think & provide for all probable losses and expense but do not credit any probable future profit.
Conservatism
On this basis, • Closing stock is valued at cost or market
price whichever is less. • Creating a provision for doubtful debts, • Fixed assets are shown at cost less dep. • Amortizing intangible assets • Providing for discount on debtors.
2. Consistency
• Accounting policies, methods, rules and practices should remain unchanged from one year to another year.
• Then only the results of business concern can be compared from one year to another
• Consistency has to be followed in following various accounting policies.
Examples of Accounting policies
• Method of charging depreciation. • Valuation of inventories • Valuation of Investments & Fixed assets • Treatment of contingent liabilities • Treatment of goodwill • Treatment of revenue & capital
expenditure.
3. Materiality
• Materiality means relative importance and is related to the convention of disclosure.
• Disclosure is necessary in financial accounts only for material facts.
• Materiality depends not only on the size of the amount spent but also on its nature.
• Ultimately, what is material in one accounting period may not be material in next accounting period & what is material for one business may not be material to another business.
4. Disclosure
• All the material facts should be disclosed in the final accounts.
• The object of disclosure is to make the financial statements more useful & to five less scope for misinterpretation.
• Even significant events occurring after the end of accounting period but before the preparation of balance sheet are to be disclosed
Items to be disclosed…. • Abnormal items • Contingent liabilities or gain • Accounting methods & policies adopted by the
company • Changes in method or policies of accounting & its
effect on profit • Items of non recurring nature • Significant difference between cost & market value
of stock • Items pertaining to previous year – prior period
items