MA 1.2-Fundamentals of Managerial Accounting.ppt

Accounting igcse

1. Dr. Varadraj BapatDr. Varadraj Bapat 11
Module 1.2
Fundamentals of
Managerial Accounting

2. Dr. Varadraj BapatDr. Varadraj Bapat 22
Double Entry System,
Forms of Organisation

Money Measurement Concept

Double Entry System

Single Entry System

Forms of organisation

Stakeholders

3. Dr. Varadraj BapatDr. Varadraj Bapat 33
Money Measurement Concept
Money is the medium of exchange
and the standard of economic
value. Hence money measurement
concept requires that only those
transactions which are capable of
being measured in terms of money
are to be recorded in books of
accounts.

4. Dr. Varadraj BapatDr. Varadraj Bapat 44
Transactions that cannot be Transactions that cannot be
expressed in terms of money are expressed in terms of money are
not recorded in books.not recorded in books.
Example1Example1
Successful meeting with a Successful meeting with a
prospective customer may be very prospective customer may be very
important but can not be recorded important but can not be recorded
in the books of accounts.in the books of accounts.

5. Dr. Varadraj BapatDr. Varadraj Bapat 55
Example2Example2
employees are the valuable employees are the valuable
resources of the organisation but resources of the organisation but
their measurement in monetary their measurement in monetary
terms is not possible therefore, not terms is not possible therefore, not
recorded in books.recorded in books.

6. Dr. Varadraj BapatDr. Varadraj Bapat 66
Double Entry

Dual aspect concept is the core of Dual aspect concept is the core of
double entry book-keeping system.double entry book-keeping system.

According to it, every transaction has According to it, every transaction has
two aspects and both aspects are to two aspects and both aspects are to
be recorded in the books of be recorded in the books of
accounts.accounts.

7. Dr. Varadraj BapatDr. Varadraj Bapat 77

Double entry system of book-keeping Double entry system of book-keeping
means that all transactions are means that all transactions are
recorded in two aspect one involving recorded in two aspect one involving
the receiving benefit and other giving the receiving benefit and other giving
benefit in the accounts system. benefit in the accounts system.
For instance, buying a machinery for For instance, buying a machinery for
Rs.25,000 would be entered as a Rs.25,000 would be entered as a
decrease in the cash account, and as decrease in the cash account, and as
an increase in the ‘machinery’ an increase in the ‘machinery’
account. account.

8. Dr. Varadraj BapatDr. Varadraj Bapat 88

The advantage of a double entry The advantage of a double entry
system is that it is comprehensive. system is that it is comprehensive.

It will give you an accurate picture of It will give you an accurate picture of
your true financial position, not just your true financial position, not just
your cash position. As non-cash your cash position. As non-cash
transactions can be huge, this is transactions can be huge, this is
extremely important for robust extremely important for robust
financial management.financial management.

The disadvantage of double entry The disadvantage of double entry
bookkeeping is that it needsbookkeeping is that it needs

9. Dr. Varadraj BapatDr. Varadraj Bapat 99
significant details for regular significant details for regular
maintenance of books and not maintenance of books and not
always easy to use.always easy to use.

It generally needs a qualified It generally needs a qualified
accountant to run it. accountant to run it.

Every transaction has two aspects:Every transaction has two aspects:
i) it increases one asset and i) it increases one asset and
decreases other assetdecreases other asset
ii) it increases an asset and ii) it increases an asset and
increases other liabilityincreases other liability

10. Dr. Varadraj BapatDr. Varadraj Bapat 1010
iii) it decreases an asset and iii) it decreases an asset and
decreases a liabilitydecreases a liability
iv) it decreases one liability and iv) it decreases one liability and
increases other liabilityincreases other liability

11. Dr. Varadraj BapatDr. Varadraj Bapat 1111

It is difficult to define
 single entry
system
 because, in fact, there exists
no system like
 single entry system.
Broadly speaking, it is a defective
double entry system. Any system
that falls short of complete double
entry method is called single
 entry
system. Under this method,
sometimes both the aspects of
transactions
 are recorded,
Single Entry

12. Dr. Varadraj BapatDr. Varadraj Bapat 1212
sometimes only one aspect is
recorded or sometime no aspects
of
 transactions is recorded in the
books.

In short
 single entry system may be
called a mix of double
entry,
 single entry and no entry.


For instance, buying a Machinery for
Rs.25,000 would be entered as a
payment in a cashbook.

13. Dr. Varadraj BapatDr. Varadraj Bapat 1313


It has the advantage of being simple,
and spontaneous to use.

However, it may not account for non-
cash (or non-bank) transactions.
These are transactions that will have
a significant effect on the accounts,
but do not immediately cause a
change on the cash or bank accounts

14. Dr. Varadraj BapatDr. Varadraj Bapat 1414

Example
Goods sold on one months credit are Goods sold on one months credit are
not be recorded in the system at the not be recorded in the system at the
time of sale of goods. This will create time of sale of goods. This will create
a situation where a businessman can a situation where a businessman can
not anticipate exact cash position of not anticipate exact cash position of
the particular month and therefore the particular month and therefore
wrong planning.wrong planning.

15. Dr. Varadraj BapatDr. Varadraj Bapat 1515

Example of a non-cash transaction is
ordering a Machinery for Rs.25,000.
The machinery might take a month to
arrive. During that month, a single
entry system would not record the
transaction on the formal accounts.
This would mean that the accounting
system has not shown liability of
Rs.25,000 payable to machinery
suppliers: a dangerous situation.

16. Dr. Varadraj BapatDr. Varadraj Bapat 1616
•Sole Proprietorship
•Hindu Undivided
Family
•Partnership
•Company
•Co-operative Society
Forms of
Business Organization

17. Dr. Varadraj BapatDr. Varadraj Bapat 1717
•it is a business owned and
usually carried on by a
single person known as
proprietor.
•When the ownership and
management of business
are in control of one
individual, it is known as
sole proprietorship.
Sole ProprietorshipSole Proprietorship

18. Dr. Varadraj BapatDr. Varadraj Bapat 1818
Advantages:
•Ease of formation
•Better Control
•Prompt Decision Making
•Retention of Business Secrets
•Personal Attention to Consumer Needs
Disadvantages:
•Limited life
•Unlimited liability
•Limited Financial Resources
•Limited Capacity of Individual

19. Dr. Varadraj BapatDr. Varadraj Bapat 1919
Hindu Undivided Family (HUF)
business is a form of business
organisation found only in India. In
this form of business, all the
members of a Hindu undivided family
own the business jointly. The affairs
of business are managed by the head
of the family, who is known as the
“KARTA” (can be male or female).
Hindu Undivided FamilyHindu Undivided Family

20. Dr. Varadraj BapatDr. Varadraj Bapat 2020
HUF business comes into existence as
per the Hindu Inheritance Laws of
India. The membership is limited up to
three successive generations. Thus, an
individual, his child(ren), and his
grandchild(ren) become the members
of a HUF by birth. They are called Co-
parceners. A daughter can also be a
coparcener.

21. Dr. Varadraj BapatDr. Varadraj Bapat 2121
A partnership is a relationship
between the persons who have
agreed to share the profits. It is a
business owned and carried on by a
group of people.

Each member of such a group is
individually known as partner and
collectively the members are known
as a partnership firm.
Partnership

22. Dr. Varadraj BapatDr. Varadraj Bapat 2222
These firms are
governed by the
Indian Partnership
Act, 1932.
Registration of
partnership is not
compulsory. But since
registration entitles
the firm to several
benefits, it is
considered desirable.

23. Dr. Varadraj BapatDr. Varadraj Bapat 2323
Advantages:Advantages:
Ease of formation
Less regulations
Sharing of Risk
No corporate income tax
Disadvantages:Disadvantages:
Unlimited liability
Difficult to raise capital
Lack of Harmony

24. Dr. Varadraj BapatDr. Varadraj Bapat 2424
Limited Liability Partnership (LLP) can
be formed by any two or more
person, associated for carrying on a
lawful business with a view to profit,
may by subscribing their names to an
incorporation document and filing the
same with Registrar.
Limited Liability Partnership

25. Dr. Varadraj BapatDr. Varadraj Bapat 2525
•Limited Liability Partnership (LLP) is
a separate legal entity.
•Liability of the partners is limited to
their agreed contribution in the LLP.
•A firm, private company and unlisted
public company is allowed to be
converted into LLP in accordance
with Provisions of the LLP Act 2008.
•The Indian Partnership Act 1932 is
not applicable to LLPs.

26. Dr. Varadraj BapatDr. Varadraj Bapat 2626
Company
Unlimited Limited
Private Public
Unlisted Listed

27. Dr. Varadraj BapatDr. Varadraj Bapat 2727
Company form of business
organisation is a voluntary
association of persons to carry on
business. Normally, it is given a legal
status and is subject to certain legal
regulations. It is an association of
persons who generally contribute
money for some common purpose.
The money so contributed is the
capital of the company.
Company / Corporation

28. Dr. Varadraj BapatDr. Varadraj Bapat 2828

The persons who contribute capital are
its members. The proportion of capital
to which each member is entitled is
called his share, therefore members of
a joint stock company are known as
shareholders and the capital of the
company is known as share capital.

The companies are governed by the
Indian Companies Act, 1956. The Act
defines a company as an artificial
person created by law, having
separate entity, with perpetual
succession and a common seal.

29. Dr. Varadraj BapatDr. Varadraj Bapat 2929
Advantages:
•Unlimited life
•Professional Management
•Limited liability
•Ease of raising capital
•High possibility of wealth
maximization
Disadvantages:
•Dividend Tax burden
•High cost of set-up and report filing
•More regulation

30. Dr. Varadraj BapatDr. Varadraj Bapat 3030
Any ten persons can form a co-
operative society. It functions under
the Co-operative Societies Act, 1912
and other State Co-operative
Societies Acts. A co-operative society
is entirely different from all other
forms of organisation discussed above
in terms of its objective. The co-
operatives are formed primarily to
render services to its members.
Co-operative Society

31. Dr. Varadraj BapatDr. Varadraj Bapat 3131
Every member has a right to take
part in the management of the
society. Each member has one
vote. Generally the members
elect a committee known as the
Executive Committee to look after
the day to day administration and
the said committee is responsible
to the general body of members.

32. Dr. Varadraj BapatDr. Varadraj Bapat 3232
The liability of the members is
limited to the extent of capital
contributed by them.
Registration of a society under
the Co-operative Societies Act is
a must. Once it is registered, it
becomes a body corporate and
enjoys certain privileges just like
a joint stock company.

33. Dr. Varadraj BapatDr. Varadraj Bapat 3333
Some of the privileges are:

The society enjoys perpetual
succession.

It has its own common seal.

It can own property in its name.

It can enter into contract with
others.

It can sue others in court of law.

34. Dr. Varadraj BapatDr. Varadraj Bapat 3434
Generally it also provides some
service to the society. The main
objectives of co-operative society are:
(a) rendering service rather than
earning profit,
(b) mutual help instead of competition,
and
(c) self help in place of dependence.

35. Dr. Varadraj BapatDr. Varadraj Bapat 3535
On the basis of objectives, various
types of co-operatives are formed :

Consumer co-operatives

Producers co-operatives

Producers co-operatives

Marketing co-operatives

Housing Co-operatives

Credit Co-operatives

Forming Co-operatives

36. Dr. Varadraj BapatDr. Varadraj Bapat 3636
Advantages :
• Democratic management
• Assistance from the government
• Elimination of middlemen’s profit
• Fairly stable life
Disadvantages :
• Limited capital
• Lack of managerial talent
• Lack of motivation
• Lack of secrecy
• Dependence on the government

37. Dr. Varadraj BapatDr. Varadraj Bapat 3737
Stakeholder
Stakeholder is a person who has a
legitimate interest in an entity.
Investors
Management of enterprise
Creditors / Lenders
Government
Employees

38. Dr. Varadraj BapatDr. Varadraj Bapat 3838
Consumers Local Community

39. Dr. Varadraj BapatDr. Varadraj Bapat 3939
Investor
Investor study the Financial
Statement of the company before
deciding upon whether to buy or
not a business or shares.
If they intend to buy, then the
fair value of business or shares is
also determined on the basis

40. Dr. Varadraj BapatDr. Varadraj Bapat 4040
of the detailed analysis of the
Financial Statement.
Prospective investors make use of
financial statements to assess the
viability of investing in a business.

41. Dr. Varadraj BapatDr. Varadraj Bapat 4141
Management
Managers are the main users of
the Financial Statement. They use
the financial statement
To make the inter firm and inter
period comparison
To study trends in sales,
expenses etc.
To understand the relationship

42. Dr. Varadraj BapatDr. Varadraj Bapat 4242
among various items of financial
statement

To know movement of funds
through Fund Flow Analysis

43. Dr. Varadraj BapatDr. Varadraj Bapat 4343
Creditors/ Lenders
Creditor or Lender study the
Financial statement of the
borrower before advancing credit
or loan. Thereafter also the
creditors and lenders analysis the
Financial statement to find out
whether the business is solvent
(in position to repay the loan).

44. Dr. Varadraj BapatDr. Varadraj Bapat 4444
Government
The amounts payable by concern
by way of taxes levied by
Government such as Income Tax,
Sales Tax, Excise etc. are
examined on the basis of the data
in Financial Statement.

45. Dr. Varadraj BapatDr. Varadraj Bapat 4545
Employees
Employees also use Financial
Statements in making collective
bargaining agreements with the
management, in the case of
labour union or for individuals in
discussing their compensation,
promotion and rankings.