Introduction

Financial Accounting

“Accounting is 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 thereto.”

Functions of Financial Accounting

1. Recording the financial transactions2. Classification3. Summarizing4. Concerned only with financial transactions5. InterpretationPrinciples of financial accounting

A. Accounting Concepts B. Accounting Conventions

1. Business Entity Concept 1. Convention of Disclosure2. Going concern concept 2. Convention of consistency3. Cost Concept 3. Convention of Conservation4. Concept of Dual Aspect 4. Convention of Materiality5. Money Measurement Concept6. Accounting Period Concept 7. Realisation Concept8. Matching of Cost and Revenue Concept

Limitations of Financial Accounting

1. Provides only historical data

2. Provides only limited information

3. Provides only quantitative information

4. It will not help for price fixation

5. It will not provide tools for cost control

6. It will not possible to measure the comparative performance

7. It will not provide information to management for planning and decision making.

8. It is possible to manipulate accounts

COST ACCOUNTING

Cost Accounting emerged as an accounting system to face high competition in the business. In order to withstand competition the concerns have to supply goods at low prices. Companies could be able to supply goods at low prices only be reducing the cost of production. Cost Accounting as a subject is designed to provide many methods and techniques to reduce the cost of production through various stages of production.

1. Costing2. Cost Accounting3. Cost Accountancy

Classification of Costs

1. Element – wise classification2. Functional – wise classification3. On the basis of identifiability4. Behaviour – wise classification5. On the basis of Controllability6. On the basis of time7. On the basis of relevancy

Element Wise Classification

a. Material Cost b. Labour Costc. Expenses

Functional – wise Classification

a. Production Costb. Administration Costc. Selling and Distribution Cost

On the basis of Identifiability

a. Direct Costb. Indirect Cost

Behaviour –wise Classification of Costs

a. Fixed Costb. Variable Costc. Semi-Variable Cost

On the basis of Controllability

a. Controllable Costsb. Uncontrollable Costs

On the basis of Time

a. Historical Costsb. Pre-determined Costs

On the basis of Relevancy

a. Relevant Costsb. Irrelevant Costs

III MANAGEMENT ACCOUNTING

Management Accounting is concerned with the accounting to management. Financial Accounting and Cost Accounting are not able to provide the relevant information to management for managerial planning and decision making. Financial Accounting is providing the historical data in account form of Profit and Loss Account and Balance Sheet. Cost Accounting analyses the different elements related to the cost of production. But these information are not sufficient for managerial planning and control. Hence, a new accounting system called Management Accounting.

According to Anglo-American Council on Productivity:“Management Accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and the day-to-day operation of an undertaking”.

Functions of Management Accounting

1. Provision of Data2. Modification of Data3. Analysis and interpretation of Data4. Communication Function5. Fix standards at all level6. Function of Control7. Provides Qualitative information

Scope of Management Accounting

1. Financial Accounting2. Cost Accounting3. Statistical Methods4. Revaluation Accounting5. Budgetary Control6. Inventory Control7. Interim Reporting8. Internal Audit9. Taxation10. Financial Management

Utility of Management Accounting

1. Planning2. Organising3. Co-ordinating4. Motivating5. Communicating6. Controlling

Tools and techniques of Management Accounting

1. Financial Statement Analysis2. Fund Flow Analysis3. Cash Flow Analysis 4. Marginal Costing5. Standard Costing6. Budgetary Control7. Revaluation Accounting8. Management information System9. Management Reporting

Installation of Management Accounting System

1. Preparation of Organisational Manual2. Appointment and Training of Employees3. Preparation of forms and Returns4. Classification and codification of accounts5. Formulating a suitable system for integration of cost and financial data6. Setting up of suitable budgetary control system7. Formulating suitable techniques for standard costing8. Formulating suitable operational research techniques

Limitations of Management Accounting

1. Management Accounting is based on Financial Accounting2. It is considered only as tool3. It can be adopted only big concerns4. Personal judgement5. Personal Bias6. Evolutionary Stage7. Opposition of Change

Management Accounting and Financial Accounting

1. Management Accounting is concerned with the preparation of various statement meant fir managerial planning, control and decision making. Hence, it is future oriented. But financial Accounting is concerned with the recording the past events only.

2. Management Accounting aims at providing information for the management. Financial Accounting aims at providing information external to the management, like shareholders, debenture holders, creditors, Government etc.

3. There is no limit in the preparation of accounts and statements in Management Accounting. It may be prepared for 15 days or 1 month, 2 months,3 months, etc., as per the requirements of the management. But, Financial Accounting is prepare only for one year. The profit and los account and the balance sheet are prepare at the end of the financial year.

4. Management accounting is concerned with quantitative and qualitative information. But Financial Accounting is concerned only with quantitative information.

5. There is no compulsion for the preparation of Management Accounting. Financial Accounting is compulsory according to the companies act 1956.

6. Reports of the Management Accounting are not circulated to external parties. It only provided for the management to take managerial decisions. But the reports of the Financial Accounting including the Profit and Loss Account and Balance Sheet are circulated to the external parties also.

Management Accounting and Cost Accounting

1. The purpose of Management Accounting is to provide information to the management for decision making. The purpose of cost accounting is ascertainment of cost of each stages for production.

2. Management Accounting purely aims at the future on the basis of past information. Cost Accounting is prepared mainly on the basis of past and less emphasis is given for the future.

3. Management Accounting is prepared without adopting any specific and rigid rules. It may be prepared according to the will of the managerial personnel. But cost Accounting is prepared on the basis of some rules and regulations prescribed by the ICWAI

4. The reports of the Management Accounting are not subject to statutory audit. But the report of the cost accounting is subject to statutory audit.

5. The reports of the Management Accounting are useful only for the internal parties. But the reports of the Cost Accounting are useful both to the internal and external parties.