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