FINANCIAL AND MANAGEMENT ACCOUNTING STUDT NOTES
Unit - 1
Accounting – Defination – According for historical function and managerial function –
Scope of accounting – Financial accounting and Management accounting – Managerial uses –
Differences.
Financial Accounting: Accounting concepts – Convections – Principles – Accounting
standards – International Accounting standards.
Unit-2
Double entry system of accounting - Accounting books – Preapartion of journal and
ledger, subsidiary books - Errors and rectification – Preparation of trial balance and final
accounts.
Accounting from incomplete records - Statements of affairs methods -Conversion method
- Preparation of Trading, Profit & Loss Account and Balance Sheet from incomplete records.
Unit - 3
Financial Statement Analysis - Financial statements - Nature of financial statements -
Limitations of financial statements - Analysis of interpretation -Types of analysis -- External vs
Internal analysis - Horizontal vs Vertical analysis - Tools of analysis - Trend analysis - Common
size statements -Comparative statements.
Ratio Analysis - Types - Profitability ratios - Turnover ratios - Liquidity ratios -
Proprietary ratios - Market earnings ratios - Factors affecting efficiency of ratios - How to make
effective use of ratio analysis - Uses and limitation of ratios - Construction of Profit and Loss
Account and Balance Sheet with ratios and relevant figures - Inter-firm, Intra-firm comparisons.
Unit -4
Fund Flow Statements - Need and meaning - Preparation of schedule of changes in
working capital and the fund flow statement - Managerial uses and limitation of fund flow
statement.
Cash Flow Statement - Need - Meaning - Preparation of cash flow statement - Managerial
uses of cash flow statement - Limitations – Differences between fund How and cash tlow analysis.
Unit-5
Budgeting and Budgetary Control: Preparation of various types of budgets - Classification
of budgets - Budgetary control system - Mechanism -Master budget.
Unit-6
Capital Budgeting System - Importance - Methods of capital expenditure appraisal -
Payback period method - ARR method - DCF methods - NPV and
IRR methods - Their rationale - Capital rationing.
PREPARED BY MR. ANTONY AMBIA Page 1
,FINANCIAL AND MANAGEMENT ACCOUNTING
LESSON TITLE
1. Accounting an Introduction
2. Management Accounting
3. Theory Base of Accounting - Accounting Standards
4. Practical Base of Accounting - Origin and Analysis of Business Transactions
5. Financial Statements of Profit-making Entities Manufacturing-cum-Trading
Organisations
6. Financial Statements of Non-Profit-making Entities
7. Errors Management
8. Accounts from Incomplete Records - Single Entry System
9. Financial Statement Analysis
10. Ratio Analysis
11. Fund Flow Analysis
12. Cash Flow Analysis
13. Budgeting and Budgetary Control
14. Capital Budgeting
15. Case Study
PREPARED BY MR. ANTONY AMBIA Page 2
, LESSON - 1
ACCOUNTING: AN INTRODUCTION
Learning outcomes; on completion of this chapter, you should be able to:
Explain the nature of accounting.
Identify the various branches of accounting.
Explain the process of creation of financial statements and their interpolation.
Explain the various objectives of financial statements.
Identify the various uses of accounting information.
INTRODUCTION
Accounting discipline deals with measurement of economic activities affecting inflow and
outflow of economic resources to develop useful information for decision making. At household
level information about outflow and inflow of cash resources helps -.0 assess financial position
and plan household activities. At Government level, information about inflow from taxes (direct
as well as indirect) and expenditure on various activities (developmental and non developmental)
is needed for planning and budgeting. Although accounting can be discipline has universal
applicability, but its growth is closely associated with the developments in the business world.
Thus to understand accounting as a field of study for universal application, it is best identified
with recording of business transaction and thereby creating economic information about business
enterprises to facilitate decision making.
NATURE OF ACCOUNTING:
1.2 Accounting
i. is man-made;
ii. has evolved over a period of time;
iii. is practiced in a social system;
iv. is a systematic exercise;
v. is judgmentat at times;
vi. follows flexible, not a rigid approach;
vii. is essentially a language;
viii. as a language, has a very well defined syntax of its own; and
ix. Communicates financial information for decision making.
Accounting being a man-made system has evolved over a period of time to provide
financial information of business enterprises to users of accounting information. A large number
of groups with varied interests in affairs of a business enterprise have emerged over a period of
time, especially after emergence of corporate forms of organization involving separation of
ownership management. These user groups include those who;
manage the activities of the enterprise( management)
own the enterprise( owners/ shareholders)
extend credit for supply of goods to the enterprises
(creditors)
buy goods from the enterprises( customers)
lend money to the enterprises( banks and financial information)
are employed in the enterprises (employees)
PREPARED BY MR. ANTONY AMBIA Page 3
, intend to make investment in the enterprises(ivestors)
are doing research(researchers)
are engaged in collection of taxes ( sales tax and income tax
authorities)
formulate fiscal and monetary policies (other Government
department)
are members of the public at large(general public)
Internal users of accounting information are inside the enterprise and need information to
control and plan the activities of the business to manage it effectively. These include Owners in
case of non corporate enterprises and managers and directors in case of corporate business. Their
information needs are satined through various reports which are generally prepared internal use
and remain unpublished. External users of accounting information are outside the enterprise. The
information need of these user groups are met by measuring the desired information by following
a systematic process. It results in creation of financial statements which are generally published to
make the information available to external user group for decision making. The need for
communicating relevant and useful information to that potential internal and external users is
always there and accounting is intended to perform that role.
Thus, accounting may be defined as:
"the process of identifying, measuring and communicating information to permit
judgement and decision by the users" ( American Accounting Association)
BRANCHES OF ACCOUNTING
Financial Accounting:
It primarily concentrates on creation of financial information for external user
groups such as creditors, investors, lenders and so on. It deals with business events which have
already occurred and is, therefore, historical in nature. Traditionally, the aim was to develop
information about income and financial position on the basis of events which had taken place
during a period of time. Recent trend in corporate form of organization is to provide information
about cash flows and earnings per sh^e also as part of published financial statements.
Management Accounting - The information provided by the financial accounting
system is significant but not sufficient for smooth orderly and efficient conduct of business.
Management needs more information to discharge its function of stewardship, planning, control
and decision-making. As information needs of management vary from enterprise to enterprise,
the grouping and reporting of information takes different forms. Trie different ways of grouping
information and preparing reports as desired by managers for discharging their functions are
referred to a management accounting. Management accounting provides information to the
management not only about cost but also revenue, profit, investment etc., for managing business
more efficiently and effectively. A very important component of management accounting is cost
accounting which deals with cost ascertainment and cost control.
Few other branches of accounting which are of recent origin are social
responsibility accounting and human resources accounting. The first one involves accounting for
social costs incurred by the enterprise and social benefits created by it while the second deals with
accounting for human resources.
PREPARED BY MR. ANTONY AMBIA Page 4
Unit - 1
Accounting – Defination – According for historical function and managerial function –
Scope of accounting – Financial accounting and Management accounting – Managerial uses –
Differences.
Financial Accounting: Accounting concepts – Convections – Principles – Accounting
standards – International Accounting standards.
Unit-2
Double entry system of accounting - Accounting books – Preapartion of journal and
ledger, subsidiary books - Errors and rectification – Preparation of trial balance and final
accounts.
Accounting from incomplete records - Statements of affairs methods -Conversion method
- Preparation of Trading, Profit & Loss Account and Balance Sheet from incomplete records.
Unit - 3
Financial Statement Analysis - Financial statements - Nature of financial statements -
Limitations of financial statements - Analysis of interpretation -Types of analysis -- External vs
Internal analysis - Horizontal vs Vertical analysis - Tools of analysis - Trend analysis - Common
size statements -Comparative statements.
Ratio Analysis - Types - Profitability ratios - Turnover ratios - Liquidity ratios -
Proprietary ratios - Market earnings ratios - Factors affecting efficiency of ratios - How to make
effective use of ratio analysis - Uses and limitation of ratios - Construction of Profit and Loss
Account and Balance Sheet with ratios and relevant figures - Inter-firm, Intra-firm comparisons.
Unit -4
Fund Flow Statements - Need and meaning - Preparation of schedule of changes in
working capital and the fund flow statement - Managerial uses and limitation of fund flow
statement.
Cash Flow Statement - Need - Meaning - Preparation of cash flow statement - Managerial
uses of cash flow statement - Limitations – Differences between fund How and cash tlow analysis.
Unit-5
Budgeting and Budgetary Control: Preparation of various types of budgets - Classification
of budgets - Budgetary control system - Mechanism -Master budget.
Unit-6
Capital Budgeting System - Importance - Methods of capital expenditure appraisal -
Payback period method - ARR method - DCF methods - NPV and
IRR methods - Their rationale - Capital rationing.
PREPARED BY MR. ANTONY AMBIA Page 1
,FINANCIAL AND MANAGEMENT ACCOUNTING
LESSON TITLE
1. Accounting an Introduction
2. Management Accounting
3. Theory Base of Accounting - Accounting Standards
4. Practical Base of Accounting - Origin and Analysis of Business Transactions
5. Financial Statements of Profit-making Entities Manufacturing-cum-Trading
Organisations
6. Financial Statements of Non-Profit-making Entities
7. Errors Management
8. Accounts from Incomplete Records - Single Entry System
9. Financial Statement Analysis
10. Ratio Analysis
11. Fund Flow Analysis
12. Cash Flow Analysis
13. Budgeting and Budgetary Control
14. Capital Budgeting
15. Case Study
PREPARED BY MR. ANTONY AMBIA Page 2
, LESSON - 1
ACCOUNTING: AN INTRODUCTION
Learning outcomes; on completion of this chapter, you should be able to:
Explain the nature of accounting.
Identify the various branches of accounting.
Explain the process of creation of financial statements and their interpolation.
Explain the various objectives of financial statements.
Identify the various uses of accounting information.
INTRODUCTION
Accounting discipline deals with measurement of economic activities affecting inflow and
outflow of economic resources to develop useful information for decision making. At household
level information about outflow and inflow of cash resources helps -.0 assess financial position
and plan household activities. At Government level, information about inflow from taxes (direct
as well as indirect) and expenditure on various activities (developmental and non developmental)
is needed for planning and budgeting. Although accounting can be discipline has universal
applicability, but its growth is closely associated with the developments in the business world.
Thus to understand accounting as a field of study for universal application, it is best identified
with recording of business transaction and thereby creating economic information about business
enterprises to facilitate decision making.
NATURE OF ACCOUNTING:
1.2 Accounting
i. is man-made;
ii. has evolved over a period of time;
iii. is practiced in a social system;
iv. is a systematic exercise;
v. is judgmentat at times;
vi. follows flexible, not a rigid approach;
vii. is essentially a language;
viii. as a language, has a very well defined syntax of its own; and
ix. Communicates financial information for decision making.
Accounting being a man-made system has evolved over a period of time to provide
financial information of business enterprises to users of accounting information. A large number
of groups with varied interests in affairs of a business enterprise have emerged over a period of
time, especially after emergence of corporate forms of organization involving separation of
ownership management. These user groups include those who;
manage the activities of the enterprise( management)
own the enterprise( owners/ shareholders)
extend credit for supply of goods to the enterprises
(creditors)
buy goods from the enterprises( customers)
lend money to the enterprises( banks and financial information)
are employed in the enterprises (employees)
PREPARED BY MR. ANTONY AMBIA Page 3
, intend to make investment in the enterprises(ivestors)
are doing research(researchers)
are engaged in collection of taxes ( sales tax and income tax
authorities)
formulate fiscal and monetary policies (other Government
department)
are members of the public at large(general public)
Internal users of accounting information are inside the enterprise and need information to
control and plan the activities of the business to manage it effectively. These include Owners in
case of non corporate enterprises and managers and directors in case of corporate business. Their
information needs are satined through various reports which are generally prepared internal use
and remain unpublished. External users of accounting information are outside the enterprise. The
information need of these user groups are met by measuring the desired information by following
a systematic process. It results in creation of financial statements which are generally published to
make the information available to external user group for decision making. The need for
communicating relevant and useful information to that potential internal and external users is
always there and accounting is intended to perform that role.
Thus, accounting may be defined as:
"the process of identifying, measuring and communicating information to permit
judgement and decision by the users" ( American Accounting Association)
BRANCHES OF ACCOUNTING
Financial Accounting:
It primarily concentrates on creation of financial information for external user
groups such as creditors, investors, lenders and so on. It deals with business events which have
already occurred and is, therefore, historical in nature. Traditionally, the aim was to develop
information about income and financial position on the basis of events which had taken place
during a period of time. Recent trend in corporate form of organization is to provide information
about cash flows and earnings per sh^e also as part of published financial statements.
Management Accounting - The information provided by the financial accounting
system is significant but not sufficient for smooth orderly and efficient conduct of business.
Management needs more information to discharge its function of stewardship, planning, control
and decision-making. As information needs of management vary from enterprise to enterprise,
the grouping and reporting of information takes different forms. Trie different ways of grouping
information and preparing reports as desired by managers for discharging their functions are
referred to a management accounting. Management accounting provides information to the
management not only about cost but also revenue, profit, investment etc., for managing business
more efficiently and effectively. A very important component of management accounting is cost
accounting which deals with cost ascertainment and cost control.
Few other branches of accounting which are of recent origin are social
responsibility accounting and human resources accounting. The first one involves accounting for
social costs incurred by the enterprise and social benefits created by it while the second deals with
accounting for human resources.
PREPARED BY MR. ANTONY AMBIA Page 4
