Accounting and dection marking

1. 22BAB05-ACCONTING
FOR DECISION MAKING
UNIT-I
INTRODUCTION TO FINANCIAL
ACCOUNTING

2. MEANING AND DEFINITION
OF ACCOUNTING
• Accounting involves the procedure of
recording the financial transaction in the
books of accounts which are helpful to its
users for analysis and interpreting the
financial soundness of business.

3. Branches of accounting
Financial accounting-The main purpose of
financial accounting is to ascertain profit or
loss during a specific period, to show
financial condition of the business. It is the
original form of accounting. It is mainly
concerned with the preparation of financial
statements for the outsiders like
shareholders, debenture holders, Creditors,
banks and financial institutions.

4. • Management accounting-The main
objective of managerial accounting is to
maximize profit and minimize losses.
• The main objective of management
accounting is to help the internal
management.
• Management accounting is the
presentation of accounting information in
such a way as to assist management in
the creation of policy and day-to-day
operation of an undertaking.

5. • Cost accounting- Cost accounting is
prepared for managerial decision making.
Cost accounting is the classifying,
recording and appropriate allocation of
expenditure for the determination of the
costs of products or services, and for the
presentation of suitably arranged data for
the purpose of control and guidance of
management.

6. Financial Accounting
• Financial Accounting provides the requisite
information necessary for taking
investment decisions.
• According to American accounting
association is “The process of identifying,
measuring and communicating economic
information to permit informed judgments
and decisions by users of the information”.

7. FEATURES OF FINANCIAL
ACCOUNTING
• Monetary Transaction-Expressed in terms
of money
• Historical nature-transaction already taken
place in past.
• Legal requirement-Mandatory
• Disclosure of financial status-Performance
during a particular period.

8. • Financial accounting process-Various
process adopted by various
companies.EX-Valuation of inventory,
calculation of depreciation,etc.

9. Book Keeping Vs Accounting
• Book keeping in simple terms the
recording of all the financial transactions
such as purchase,sales,receipts,payments
pertaining to an individual or organisation.
• Accounting is the next stage which starts
after book keeping process.

10. OBJECTIVES OF FINANCIAL ACCOUNTING
• To keep systematic records-maintenance of
proper and systematic record of all business
transactions.
• To determine profit or loss-profit or loss durning
an academic year
• To ascertain financial position-balance sheet
depicts the statement of assets and liabilities of
a business entity as on a particular date.
• To communicate the information-decision
making process by providing financial data and
other vital information to stakeholders.

11. FUNCTIONS OF FINANCIAL
ACCOUNTING
• Identification of the transactions.-types of
accounts(Personal ac,Real Account,Nominal
Account)
• Recording of business transactions.-Journal
• Classifying various business transactions-
ledger-to know the total expenditure incurred or
income earned(sale of goods, Interest on bank
Deposit,commission) under the head(purchase
of raw
material,wages,salaries,rent,tax,advertisement
etc.)

12. • summarising information analysis of
financial statement-business transaction of
an organisation is useful to the
stakeholders(both internal and external)
• Analysing of FS-An in depth analysis of
financial statements.profit or loss
account,balancesheet-strength and
weakness of the business.

13. • Interpretation of the financial statements-
decision making process and formulating
business strategy with regard to
growth,expansion and diversification.
• Communicating financial data to other
stakeholders

14. Advantages of Financial
Accounting
• Helps in management-a company to
perform their job in an efficient manner by
appropriate planning,monitoring and taking
decisions.
• substitute to memory-recording of all the
business transactions in a scientific and
classified manner.

15. • Ssettlement of taxation liability-assessment of
tax liability
• Evidence in court-business transaction may be
produced in the court of law-good evidence
• Assistance to an insolvent person-Individual
becoming insolvent, he is required to explain a
number of business activities undertaken during
the conduct of business.
• Comparative study-profit and loss
a/c,balancesheet which allows the management
of a company to compare the annual result of a
year and initiate requisite actions neccessary for
the growth of the business.

16. DISADVANTAGES OF FINANCIAL
ACCOUNTING
• Non monetary items overlooked-completely out of
purview of the existing Accounting System.
• Original cost-true value is not reflected in the balance
sheet of the business entity
• Possibility of manipulation-profit to be the only parameter
to assess the performance of the company
management.(R&D,Advertisement are excluded).
• Bases on estimates-estimation instead of the actual)
• Rule of consistency-fail to observe the basic tenents of
accounting.Principles are compromised in certain
cases.(depreciation on fixed assets)

17. Users of accounting information
• INTERNAL USERS
• Owners-shareholders,partners,and
Proprietors
• Management
• Employees

18. EXTERNAL USERS
• Creditors-supplier of raw material
• Investors
• Government agencies
• Customers
• Researchers
• Foreigners
• Others

19. 3 Different types of accounts
• Personal Account
• Real Account
• Nominal Account.

20. • A personal account is an account for use
by an individual for that person's own
needs.
• (1) Natural personal accounts
• (2) Artificial personal accounts
• (3) Representative personal account.

21. • A Real Account is a general ledger
account relating to Assets and Liabilities
other than people accounts. These are
accounts that don't close at year-end and
are carried forward. An example of a Real
Account is a Bank Account.

22. • Nominal Accounts are accounts related to
and associated with losses, expenses,
income, or gains. Examples include a
purchase account, sales account, salary
A/C, commission A/C, etc. The outcome of
a nominal account is either profit or loss,
which is then ultimately transferred to the
capital account.

23. GOLDEN RULES OF
ACCOUNTING

24. MANAGEMENT ACCOUNTING
• Management accounting is the
presentation of accounting information in
such a way as to assist management in
the creation of a policy and in day-to-day
operation of an undertaking.

25. Objectives of Management
Accounting
• Measuring performance
• Assessing Risks
• Allocating Resources

26. Scope of Accounting
• Financial Accounting
• Cost accounting
• Statistical methods
• Operations research

27. Tools and Techniques of
Management Accounting
• Financial policy and Accounting
• Analysis of financial statements
• Historical cost accounting
• Budgetary control
• Standard costing
• Marginal costing
• Decision accounting

28. • Management information system
• Working capital management
• Replacement accounting
• Control accounting

29. Financial accounting Vs
Cost accounting
S.No Point of Distinction Financial accounting Cost accounting
1. Purpose It tells about P&L account and Financial
position of the business to the Owner and
Outsiders.
It provides information to the
management for proper planning,
Operation, control and decision
making.
2. Requirement These accounts are kept mandatory in
such a way to meet the requirements of
the Companies Act and Income Tax Act.
These accounts are generally kept
voluntarily to meet the requirements
of the management.
3. Recording It classifies, records and analyses the
transactions in a subjective manner i.e.
according to the nature of expenses
It records the expenditure in an
objective manner i.e. according to the
purposes for which the costs are
incurred.
4. Periodicity of report Operating results and financial position
are usually reported at the end of the
year.
Reports to the management as and
when desired.
5. Information Monetary information is only used. Non-monetary information like units
is also used.
6. Figures Financial accounts deal mainly with
actual facts and figures.
Cost accounts deal partly with facts
and figures and partly with estimates.
7. Stock valuation Stocks are valued at cost or market price
whichever is less.
Stocks are valued at cost.

30. Financial accounting Vs
Management accounting
S.No Point of Distinction Financial accounting Management accounting
1. Objects The main objects of financial accounting
is to measure the business income and
communication of information to the
various parties i.e. Owners, Creditors,
investors, Suppliers, Government etc
The main object of Management
accounting is to help the internal
management.
2. Compulsion Financial accounting is obligatory for
joint stock companies in order to satisfy
statutory provisions or for tax purpose.
Management accounting is optional
though it is highly useful for
managerial decision making.
3. Methodology It records the transaction relating to
income, expense, revenue, personal
accounts and property accounts.
It records cost and revenue by profit
centre or responsibility centre.
4. Parties It is prepared to meet the requirements of
external parties
It provides information for the
internal use of management only.
5. Transactions It records only monetary transactions Non-monetary events like
Competition, changes in time value of
money etc. are also dealt.