This document provides an overview of key concepts in finance and accounting, including:
1. It defines financial accounting as the process of recording business transactions and preparing financial statements like the income statement and balance sheet.
2. Accounting principles and concepts are discussed, such as the business entity concept and matching principle. Conventions like conservatism are also covered.
3. Basic bookkeeping elements are introduced, including journals, ledgers, trial balances, and how final accounts like trading, profit and loss, and balance sheets are prepared.
4. The document distinguishes between financial and management accounting.
5. Cost accounting concepts are outlined, including different types of costs, cost statements, work-
3. MEANING OF FINANCIAL
ACCOUNTING
• Financial Accounting is the process of identifying, measuring,
recording, classifying, summarizing, analyzing, interpreting and
communicating the financial transactions and events.
• Financial accounting is primarily concerned with providing of
financial information of the business enterprises to all
stakeholders.
• Presenting financial statement such as Profit & Loss A/c and
Balance sheet.
• The purpose of financial accounting is to present financial
performance of enterprises.
4. IMPORTANCE OF FINANCIAL
ACCOUNTING
• Systematic recording of business transactions
• Ascertainment of Results
• Ascertain the financial position of business
• To provide information's to various parties
• To know the solvency Positions
5. ACCOUNTING PRINCIPLES
•Accounting principles are nothing but those rules of conduct or
procedure which are adopted by the accounts universally, while
recording the accounting transactions.
•For ensuring uniformity, clarity and understanding, accounting
principle are required to follow to record transactions.
•Accounting principle are classified into two category
a) Accounting concepts
b) Accounting conventions
•Accounting principles are described by various terms such as
assumptions, conventions, concepts, doctrines, postulates etc.
6. ACCOUNTING CONCEPTS
• Business entity concepts
• Going Concern concepts
• Dual Aspects concepts
• Accounting period concepts
• Cost Concepts
• Matching of cost and revenue concepts
• Realization concepts
7. ACCOUNTING CONVENTIONS
• Convention of conservatism
• Convention of full disclosure
• Conventions of Consistency
• Conventions of materiality
8. JOURNAL
• A Journal is called a book of prime entry. The process of
recording a transaction in a journal is called Journalizing.
An entry made in the journal is called Journal entry.
• Journal is the book of original entry in which, after
following the rules of debit and credit, all business
transactions are recorded in a chronological order.
• Format of Journal
Date Particulars LF Dr. Amount Cr. Amount
9. STEPS OF PREPARING JOURNAL
ENTRIES
Step 1: Identify the statement given in an event or transaction.
Step 2: Identify the accounts involved in the transaction.
Step 3: Determine the type of accounts involved.
Step 4: apply appropriate rules of accounting.
Step 5: Inside the journal book, record the transaction along with
narration or a short description.
10. UTILITY OR FEATURES OF
JOURNAL
• A Primary book of original entry.
• A Fundamental book in line with the double entry book-keeping.
• Transaction in chronological order.
• Complete transaction about business transaction.
• Classification of all transaction become easier.
• Ensure arithmetical accuracy.
11. LIMITATIONS OF JOURNAL
• Bulky and Voluminous.
• Information in Scattered form.
• Time consuming
• Lack of Internal Control
12. LEDGER
• The book which contains a classified and permanent records of all
the transactions of business is called the ledger.
- L. C. Cropper
• The ledger is the chief book of accounts and it is in this book that all
the transactions would ultimately find their place under their
accounts in duly classified form.
- J.R. Batliboi
• Format of Ledger
Name of Ledger Accounts
Dr. Cr.
Date Particular JF Amount Date Particular JF Amount
13. UTILITY OF LEDGER
• Quick information about particular item.
• Proper control over transaction.
• Help in preparing trail balance.
• Helps in preparing financial statement.
14. TRIAL BALANCE
• Trial balance is statement of debit and credit balance taken out from
ledger accounts including cash book.
• Trial Balance is the list of debit and credit balance, taken out from ledger.
It also includes the balances of cash and bank taken from cash.
- Carter
• The statement prepare with the help of ledger balance, at the end of the
financial year to find out whether debit total agree with credit total is
called trail balance.
- William Pickles
• Format of Trail Balance
Trail Balance of……
as at ……..
s. No. Name of Accounts LF Debit Balance Rs. Credit Balance Rs.
Total XXX XXX
15. CHARACTERISTICS OF
TRIAL BALANCE
• It contains the balance list of ledger account and cash book.
• It is not a account, but a statement.
• It is just a working paper, but not the part of double entry
system and does not appear in the actual books of account.
• It is not prepare for the particular period. On a particular
date it is prepared.
• Prepared to check out the arithmetical accuracy of the
ledger accounts.
16. OBJECTIVES OF TRIAL BALANCE
• To ascertain the arithmetical accuracy of ledger accounts.
• To help in locating or we can say to help in detecting of
errors.
• To help in the preparation of financial statement.
• To obtain a summary of the ledger accounts.
17. LIMITATION OF TRIAL BALANCE
• Transaction has not been entreated at all i.e. completely
omission of transaction in the journal.
• A wrong amount has been both debit and credit in the
journal.
• A wrong account has been mentioned in the journal.
• A transaction entered in journal, but not posted at all in
ledger.
• In ledger, entry posted in twice time.
18. METHODS OF PREPARING
TRIAL BALANCE
• There are two methods for preparing trial balance.
1. Balance Method.
Under this method, the balance of all the accounts are
incorporated in the trial balance. In order to prepare trial balance
under this method, all the accounts showing debit balance in the
ledger are put on the debit side of trial balance and the accounts
showing credit balance are put on its credit side.
2. Total amount Method.
Under this method, trial balance is prepared with the total of
each and every ledger accounts including cash book. The total amount
of debit items and credit items in each ledger accounts are incorporated
in the trial balance. It may be noted that trial balance under this method
can be prepared immediately after the completion of posting to the
ledger.
19. FINALACCOUNTS
• Financial Accounts/ Statements are collectively given to income
statement and positional statement of an enterprises, which show
the financial position of business concerned on an organized
manner.
• Financial statements refer to such statements, which report the
profitability and financial position of the company at the end of
accounting period.
• Financial accounts contain the following.
1. Trading account
2. Profit and loss Account
3. Balance sheet
20. PREPARATION OF
TRADING ACCOUNTS
• Trading account is one of the financial statements, which shows
the results of buying and selling of goods and services during an
accounting period.
• Trading account is prepared for calculating the gross profit or
gross loss arising or incurred as a result of the trading activities
of a business.
• The trading account shows the results of buying and selling of the
goods. In preparing this account, the general establishment
charges are ignored and only the transactions in goods are
included.
- J. R. Batliboi.
22. PREPARATION OF
PROFIT & LOSS ACCOUNT
• P & L A/c are prepared after preparation trading account.
• The profit and loss account is prepared to ascertain the net
profit earned or net loss include by the business entity
during an accounting period.
• A Profit and loss account is an account into which all gains
and losses are collected, in order to ascertain the excess of
the gains over the losses or vice-versa.
- Professor Carter
24. PREPARATION OF
BALANCE SHEET
• Balance sheet is one of the financial statements.
• A Balance sheet is a statement of assets and liabilities of an
enterprise at a given date.
• The balance sheet is a statement at a particular date showing
on one side the trader’s property and positions and on the
other hand the liabilities.
- A. Palmer
• A Balance sheet is a statement prepared with a view to
measure the exact financial position of a business on certain
fixed date.
- J. R. Batliboi
26. FINANCIALACCOUNT V/S
MANAGEMENT ACCOUNT
Points Financial accounting Management Accounting
Object To record various transactions to find out
profit or loss at the end of the financial
year to know the financial position.
To provide information to
management for formulating policies
and plans.
Accounting
principles
It is governed by generally accepted
principles & conventions
No set principles are followed.
Nature Deals with historical data Deals with projection of data for the
future
Legal
compulsion
It is Compulsory It is Optional/not compulsory
Precision Only actual figure are recoded with
perfect accuracy and precision.
Approximate figure are used
Reporting Not only for benefit of the concern but
also for outsiders.
These reports meant for internal use
only
Audit Financial accounts can be audited. Management account can not be
audited.
28. INTRODUCTION COST
• Cost is the monetary value that a company has spent in order to produce
goods and services.
• The term cost refers to the monetary value of expenditures for raw
materials, equipment, supplies, services, labor, products, etc. It is an
amount that is recorded as an expense in bookkeeping records.
• Cost accounting is a process via which we determine the costs of goods
and services. It involves the recording, classification, allocation of
various expenditures, and creating financial statements. This data is
generally used in financial accounting.
• Cost accounting involves suitable presentation of cost data for the
purpose of cost control and guidance to the management to make
decision.
• Cost accounting deals with the cost of every unit, job, process, order,
service, etc, whichever is applicable and includes the cost of production,
cost of selling and cost of distribution.
29. SCOPE OF COST ACCOUNTING
• Cost Ascertainment
– This is one of the main criteria for cost accounting. Cost ascertainment is
the process of collection of expenses and by analysis of these expenses.
• Cost Accounting
– This is the process of accounting for the costs of a firm. Classifying and
recording of costs is the first step in the process. The end result is the
preparation and presentation of this statistical data in an acceptable
format. Cost accounting is almost as crucial to management as financial
accounting. It allows them to make decisions.
• Cost Control
– Cost control is the process by which action is taken to reduce the costs &
expenses to boost profitability and efficiency.
30. TYPES OF COST
• Fixed costs
– Fixed costs are costs that do not vary with the level of output in the short
term.
– Examples: Rent, Office salaries, Advertising, Insurance, Depreciation
etc.
• Variable costs
– A variable cost varies in direct proportion with the level of output.
Varying directly means that the total variable cost will be totally
dependent on the level of output. If output doubles, then the variable cost
would double. If halved, the variable costs would halve. If output were
zero, then no variable costs would be incurred.
– Examples: labour wages, Raw materials and components, Packaging
costs, Royalties etc.
Continue
31. • Semi-variable costs
– A cost composed of a mixture of both fixed and variable
components. These costs are sometimes called mixed costs.
These costs change with output, but not in direct proportion.
Costs are fixed for a set level of production or consumption, and
become variable after this production level is exceeded. If no
production occurs, a fixed cost is often still incurred.
– Example: Electricity , Telephone charges, Maintenance of
assets, indirect materials, indirect labor, repairs etc.
• Total costs
– Total costs are the sum of fixed costs, semi-variable costs and
variable costs for any particular level of output. If the output
level is zero, then total costs would consist only of fixed costs.
– Total costs = fixed costs + variable costs + Semi-variable cost
Continue
32. • Direct costs
– a direct cost is any cost, which is directly related to the output level of
a particular product or department. The costs which are easily
identified with a specific cost unit or cost centers. Some of the most
basic examples are the materials used in the manufacturing of a
product or the labor involved with the production process. Direct cost
is more appropriate for a firm that makes more than one type of
product.
– Example : If a firm is producing both chairs and tables. The chairs
produced use a certain type of wood, but the tables use another type of
wood. Then both types of wood would be direct costs, because they are
directly related to the level of output of a particular product, not to the
level of output in general.
• Indirect costs
– An indirect cost is any cost, which cannot be linked with the output of
any particular product or department. These costs are also known
as indirect overheads or administrative costs. They are related to the
level of output of the firm, but not in a direct manner and not for any
one product.
– Example:- production supervision salaries, quality controlcosts,
insurance, and depreciation etc.
33. CONCEPTS OF NORMAL LOSS &
ABNORMAL LOSS
Basis of
difference
Normal loss Abnormal loss
Meaning Normal loss means that loss which is
inherent in the processing operations. It
can be expected or anticipated in
advance.
Abnormal loss means that loss which is
caused by unexpected or abnormal
conditions such as accident, machine
breakdown, riot, flood, theft, road
accidents etc.
Nature It is recurring nature It is accidental nature
Avoidable Normal loss cannot be avoided. Abnormal Loss is avoidable o account
of precautions.
Causes This loss is due to nature of the goods
such as evaporation, loss of weight,
drying etc.
This loss arises due to external reasons
like loss by theft, fire, carelessness etc.
Calculation This loss is not calculated separately. Value of abnormal loss is calculated in
the same manner as the value of stock
on consignment.
Continue
34. Basis of difference Normal loss Abnormal loss
Insurance Normal loss cannot be insured. Abnormal loss can be insured.
Journal entries No separate journal entries are posted
to show the normal loss.
Proper journal entries are
required to be made to treat the
abnormal loss in consignor’s
books.
Part of cost It is treated as a part of cost. It is charged to profit and loss
account not being treated as a
part of cost.
35. COST STATEMENT
• A cost sheet is a statement which represents the various costs
incurred at different stages of business operations, in a tabular
format. It determines the total cost or expenditure made by the
organization, along with the cost incurred on each unit of a product
or service in a particular period.
• Main objective of cost statement
– For determining the selling price
– Helps in managerial decision making
– Preparation of budgets
37. VALUATION OF WORK IN
PROGRESS
• Work-in-process can be valued on actual basis, i.e., an attempt may
be made to find out how much materials have been used on the
unfinished units and how much actual amount of labour and
expenses has been spent on them.
• Method of valuation of Work in progress
– FIFO Method
– LIFO Method
– Average Method (Simple and Weighted)
38. LABOUR COST CONTROL
• Labour cost refers to the amount of money paid to the people who are
engaged in the production of goods or work done for company.
• In manufacturing businesses, often management will break down labour cost
into direct cost and indirect cost.
• The nature of labour whether it is direct or indirect depends upon the
contribution of labour towards production. If they are directly engaged in
production activities, the labour is termed as direct labour and if indirectly
engaged then indirect labour.
• Labour cost includes various types of expenses incurred on workers. These
may be monetary payments made to workers directly such as basic wages,
dearness allowance, bonus etc., deferred monetary benefits such as
employer’s contribution to provident fund, gratuity, pension, etc., and fringe
benefits such as employer’s contribution to Employees’ State Insurance
scheme, subsidised food, subsidised housing, leave travel concession,
medical and holiday home facilities, libraries and Other Welfare measures.
In relation to the job or the product, labour cost may be direct or indirect.
Continue….
39. • Labor cost is another important element of the total cost of any
organization and it works at 40 to 60% of the total cost in most
corporate undertakings.
• Minimization of labour cost through control does not necessarily
mean paying less to the employees. It means obtaining maximum
work from the employees by providing them all the facilities – both
monetary and non-monetary.
• Classification of Labour Cost
– Direct Labour Cost.
– Indirect Labour Cost.
– Controllable Labour Cost.
– Uncontrollable Labour Cost.
Continue
40. • Information required for labour cost control effectively:
Cost of recruitment of labour, Training cost of workers,
Labour Turnover, Idle Time, Over Time, Shift Work, Labour
Efficiency, Number of workers, Wastage, Spoilage, Wages Paid.
• Why does the organization Labour cost control:
Proper production planning, Fixing of standard time, Fixing of
clear-cut wage structure, An agreement with workers, Preparation
of labour budgets i.e. Labour Cost Budget and Labour Hours
Budget, Performance reports of labour, Fixing of specific incentive
payment.
41. METHODS OF REMUNERATION
• Time or Day Rate Method
• Piece Work Rate Method
• Incentives and Profit Sharing Method
• Bonus Method
42. OVERHEADS
• Overhead expenses is known as Indirect expenses of business.
• Overheads are business costs that are related to the day-to-day
running of the business.
• Overhead expenses vary depending on the nature of the business
and the industry it operates in.
• Overhead costs are important in determining how much a company
must charge for its products or services in order to generate a
profit.
44. OVERHEADS- ALLOCATION,
• Overhead allocation means, when items of overheads are
identifiable directly with some products or departments such
overheads are charged to cost centers or department.
• It is complete distribution of an item of overhead to the
departments or products on logical or equitable basis is called
allocation.
• Where a cost can be clearly identified with a cost centre or cost
unit, then it can be allocated to that particular cost centre or unit.
• Examples:
– Salary of stores clerk can be allocated to stores department.
– Depreciation of machinery can be allocated to various
departments as the machines can be identified.
– Electricity charges can be allocated to various departments if
separate meters are installed.
45. OVERHEADS-APPORTIONMENT
• There are certain overhead expenses which cannot be charged totally to a specific
department, Such expenses are apportioned in a suitable ratio over related departments.
• One best step to apportion overhead expenses is to know the basis of apportionment of
overhead expenses and then to use them.
• By using the appropriate basis all overhead will be apportioned to relevant production
departments and service departments.
• Example:
Suppose total rent is Rs. 5000
Area of department X is 100 square feet.
Area of department Y is 200 square feet.
Area of department Z is 700 square feet,
Answer:-
Now the total ratio of X : Y : Z is 1 : 2 : 7
Total rent expenses of department X= (5,000) x 1/10 = Rs.500
Total rent expenses of department Y = (5,000) x 2/10 = Rs.1,000
Total rent expenses of department Z = (5,000) x 7/10 = Rs.3,500
Total Rent = Rs.5,000
46. OVERHEADS- ABSORPTION
• Absorption of overheads refers to charging of overheads to
individual products or jobs.
• It is a process of distribution of overheads allotted to a particular
department or cost centre over the units produced.
• The absorption of overhead is done by applying overhead
absorption rates.
• The overhead absorption rate is calculated as follows:
=
Continue
47. Methods of Overhead Absorption
• Direct Material Cost Method
Actual Overhead Cost / Direct Material Cost X 100
• Direct Labour Cost Method
Actual Overhead Cost / Direct Labour Cost X 100
• Prime Cost Method
Budgeted Overhead Expenses / Anticipated Prime Cost
• Direct Labour Hour Method
Overhead Cost / Direct labour Hours
• Rate Per Unit of Production Method
Budgeted Overhead Cost / Budgeted Units of Production
• Sales Price Method
Budgeted Overhead Expenses / Sales of Units of Production
• Machine Hour Rate Method
Total Overhead Cost / Total Machine Hours
48. • Over absorption and under absorption
= Estimated Overheads- Actual Overheads
• Example
– Under-absorption
If the overheads absorbed on a predetermined basis are Rs: 1, 00,000
– But the actual overheads incurred are Rs. 1, 50,000, – There is under-
absorption to the extent of Rs.50, 000.
– Over-absorption
If the overhead rate is predetermined to be Rs. 50 per direct labor
hour consumed – But the actual amount should have been Rs. 40 per hour –
Then the Rs. 10 difference is considered to be over absorbed overhead.
(Note:- Allocation and apportionment of overheads and then absorption of
overheads helps for finding total cost of production for better decision
making for cost control and cost reduction)
49. ACTIVITY BASED COSTING (ABC)
• ABC is new techniques of absorption of overheads. It was developed by
Proessor Robin Cooper and Robert S. Kaplan.
• The ABC costing system is a method of accounting you can use to find
the total cost of activities necessary to make a product.
• The ABC system of cost accounting is based on activities, which are
considered any event, unit of work, or task with a specific goal.
• It helps to know the direct or indirect/Overheads cost for producing a
each unit of product.
• CIMA, the Chartered Institute of Management Accountants, defines ABC
as an approach to the costing and monitoring of activities which involves
tracing resource consumption and costing final outputs.
50. • The main objectives of the ABC
– To Focus on high cost activities.
– To assign the cost to every available resources.
– To distribute overheads on the basis of activities.
– To ensure correct cost for product for decision making.
– To find opportunity for reducing cost.
• ABC come for reduce defect of traditional costing.
• ABC use as a alternative to traditional costing.
• ABC assigning cost to activities using multiple cost driver.
• In this techniques cost are apportioned among the various product
on the basis of activity performed.
51. ELEMENTS OF ABC
• Activity:
Comprise of one or more task which associated with another accomplish goal.
• Cost Drivers:
The activity that cause to costs to be incurred are called cost driver. It is a factor of
which cost is dependent. A changes in cost driver will result in change in cost.
Ex. Labour hours, machine hours, quantity handled, invoiced process, number of set etc.
• Process:
Represent aggregate of related function specific activities like inspection of of material
etc.
• Cost objects:
Final point to which cost are traced and these are linked to objective of organization
like if objectives is to select profitable customer then individual customer is cost object
• Activity cost pool:
ABC focus on major activity needed to produce product and services. Such major
activity considered as “Cost Pool/cost centre”.
52. Cost Pool Cost Deriver (i.e. measure
of activities)
1. Purchases No. of purchase order placed
2. Machine Set up No. of set ups and production
runs.
3. Machine repaired & maintenance Machine hour worked
4. Material handling No. material movement
5. Inspection No. of inspection
6. Packing No. of packing orders
7. Power Kilowatt hours
8. Heat/ Light/ Water No. of units