Compiled by Prof At MEt Nashik College

1. Management Accounting
Chapter 1:
Financial Accounting
Concepts & Conventions

2. 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

3. 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]

4. The Process of
Financial Accounting
& classifying the assets,
liabilities, capital, income &
IDENTIFYING expenses
recording each transaction of
the business
SUMMARISING in the form of periodic
financial statements
to users/stakeholders in the
COMMUNICATING
business

5. Who are the Stakeholders ?
Suppliers
Managers
Shareholders/
investors
Investment
analysts
Accounting Employees
information
General
public
Competitors
Lenders/ Customers
creditors Government

6. Necessary qualities of
financial information.
accuracy
clarity
consistency Accounting reliability
Information
timeliness
relevance

7. Main forms of business
enterprise [entity].
Non - Sole
profit trader
co-op
charity
public Business
body partnership
organisation
Private
Public limited limited
liability liability
company company
[plc]

8. 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.

9. The Functions of Management
Planning Acting Controlling
Feedback

10. 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

11. 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]

12. Management Accounting and
Financial Accounting
Primary Users
Internal managers of the business
Investors, Creditors,
Government authorities

13. Management Accounting and
Financial Accounting
Purpose of Information
Help managers plan and
control business operations
Help investors, creditors, and others make
investment, credit, and other decisions

14. COMPARING MANAGERIAL AND
FINANCIAL ACCOUNTING

15. Phases in the evolution of Accounting
?
HRA
Inflation
Acct.
Social
Respon. Acct.
Management
Accounting
Cost Accounting
Financial Accounting
Stewardship Accounting

16. 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.

17. 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

18. 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.

19. Business
Accounting Entity
Period Dual
Aspect
Accrual Money
Measurement
Accounting
Concepts
Realization Going
concern
Matching Cost
Cost
Attach

20. Accounting Conventions
• Conservatism
• Consistency
• Materiality
• Disclosure

21. 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.

22. 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.

23. 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.

24. 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.

25. 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.

26. 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

27. 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