Module-II

17-2

ACCOUNTINGACCOUNTING

is the recording, classifying, summarizing, and interpreting of financial is the recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested events and transactions to provide management and other interested

parties with the information they need to make good decisions.parties with the information they need to make good decisions.

FINANCIAL TRANSACTIONS include FINANCIAL TRANSACTIONS include

buying and selling goods and servicesbuying and selling goods and services

acquiring insuranceacquiring insurance

paying employeespaying employees

using supplies.using supplies.

An ACCOUNTING SYSTEM is the method used to record and An ACCOUNTING SYSTEM is the method used to record and

summarize accounting data into reports.summarize accounting data into reports.

17-3

PURPOSES OF ACCOUNTING: PURPOSES OF ACCOUNTING:

To give managers basic financial information so they may make better To give managers basic financial information so they may make better decisions.decisions.

To report financial information to PEOPLE OUTSIDE THE FIRM such as To report financial information to PEOPLE OUTSIDE THE FIRM such as owners, creditors, suppliers, employees, investors, and the owners, creditors, suppliers, employees, investors, and the

government.government.

Accounting is the MEASUREMENT AND REPORTING of financial Accounting is the MEASUREMENT AND REPORTING of financial information to various users regarding the economic activities of the information to various users regarding the economic activities of the

firm.firm.

  

Five key areas of the accounting profession are:Five key areas of the accounting profession are:

Managerial accountingManagerial accounting

financial accountingfinancial accounting

AuditingAuditing

tax accounting tax accounting

The Role of Accounting & Finance in Business management

Accounting and finance practices can help you understand what’s happening at your company and give you ideas for how and where to move forward by:

Helps in Setting Budgets Analyzes cost Meet TRENDS Manages Debt Services Set Credit terms Meet Compliance Needs.

Accounting Fundamentals

Financial Accounting Cost Accounting Management Accounting Tax Accounting Auditing Green Accounting Social Accounting Financial Management

Financial Accounting

The accounting system concerned only with the financial state of affairs and financial results of operations is known as Financial Accounting. It is the original from of accounting. It is mainly concerned with the preparation of financial statements for the use of outsiders like creditors, debenture holders, investors and financial institutions. The financial statements i.e., the profit and loss account and the balance sheet, show them the manner in which operations of the business have been conducted during a specified period

Cost Accounting

It is that branch of accounting which is concerned with the accumulation and assignment of historical costs to units of product and department, primarily for the purpose of valuation of stock and measurement of profits. Cost accounting seeks to ascertain the cost of unit produced and sold or the services rendered by the business unit with a view to exercising control over these costs to assess profitability and efficiency of the enterprise. It generally relates to the future and involves an estimation of future costs to be incurred.

Management Accounting

According to the Anglo-American Council on productivity, “Management accounting is the presentation of accounting information is such a way as to assist management in the creation of policy and the day-to-day operation of an undertaking.” It covers all arrangements and combinations or adjustments of the orthodox information to provide the Chief Executive with the information from which he can control the business e.g. Information about funds, costs, profits etc. Management accounting is not only confined to the area of cost accounting but also covers other areas (such as capital expenditure decisions, capital structure decisions, and dividend decisions) as well.

Basis of Difference Cost Accounting Management Accounting

1.History The history of dates back to 14th century

Management Accounting

evolved in the middle of the 20th century

2.Objectives The main objective is to ascertain and control cost

The main objective is to provide useful information to to management for decision making

3. Scope Narrow scope

It covers matters relating to ascertainment and control of cost

Wider scope It includes all information required for managerial decision making

Differences between Cost Accounting and Management Accounting

Differences between Cost Accounting and Management Accounting

Basis of Difference Cost Accounting Management Accounting

4. User’s Cost accounting reports are very useful to external user’s and internal users

Management accounting's reports are useful for internal user’s for better decision making

5.Transactions It deals with quantitative aspects of business transactions

It deals with quantitative and qualitative aspects of business transactions

6. Books of Record Cost accounting follows established principles and a format for recording

The data to be presented depends on the need of management

Differences between Financial Accounting and Cost Accounting

Basis Financial Accounting Cost Accounting

1.Purpose Financial accounting's reports are very useful to external user’s like investors, bankers, govt. organisations,tax authorities. and creditors

Cost accounting reports are useful for internal user’s i.e. to the management of every business

2.Nature Financial accounting records all transactions that take place in business at historical cost

Cost accounting records only those cost which affect production and sales both at historical and estimated cost

Differences between Financial Accounting and Cost Accounting

Basis Financial Accounting Cost Accounting

3.Control It does not make use of any control technique

It makes use of various control techniques such as Budgetary Control, Standard costing etc. to control cost

4.Analysis of Profit Financial Accounting discloses profit /loss of the entire business unit

Cost Accounting shows the cost of each product ,process or division.

5.Books of record It is mandatory to maintain records in accordance with the statutory provisions

Records are maintained on a voluntary basis

Differences between Financial Accounting and Cost Accounting

Basis Financial Accounting Cost Accounting

6.Duration of reporting Generally, provides financial information at the end of the year

provides cost data at frequent intervals i.e. daily, monthly, quarterly, annually.

7. Pricing Policy It fails to guide the formulation of a pricing policy

It provides adequate data for the formulation of a pricing policy

8.Valuation of stock Stock is valued at cost or market price whichever is less

Stock is always valued at cost

9.Evaluation The information provided by is not sufficient to evaluate the efficiency of the business

The cost data helps in evaluating the efficiency of the business

Differences between Financial Accounting and Management Accounting

Basis of Difference Financial Accounting Management Accounting

1.Objectives In this, we record all the transactions. We make financial statements.

In this, we analyze the financial statements through ratio analysis, fund flow statement and other tools.

2.Nature Financial accounting records transactions at historical cost

Management accounting is the presentation of data for future planning. We can also use estimated data in it

3.Scope In financial accounting, we find the financial statement of whole organization

In management accounting, we tries to best for finding each department's financial results and performance

Differences between Financial Accounting and Management Accounting

Basis of Difference Financial Accounting Management Accounting

4.Nature of record All the transactions which we can measure in the money, will be recorded in financial accounting

All the records and events which are useful for managerial decision making, will be used for recording and analyzes.

5. User’s Financial accounting's reports are very useful to external user’s like investors, bankers, govt. org. and creditors

Management accounting's reports are useful for internal user’s for better decision making

6.Accounting GAAP There are common GAAP in financial accounting which every financial accountant should follow

There is no common GAAP for management accounting.

Differences between Financial Accounting and Management Accounting

Basis of Difference Financial Accounting Management Accounting

7. Publication As per law, there is necessity to publish the financial statements in newspaper.

Management Accounting's reports are personal and confidentially used for management's planning

8. Audit As per law, audit of financial statements are necessary which are made in financial accounting

As per law, there is not need of audit of management accounting reports

9..Accuracy Accuracy is an important

factor in financial

accounting.

But approximations

are widely used in

management accounting.

This is because most of the

information is related to the

future and intended for

internal use.

Tax Accounting

It encompasses the preparation of tax returns and the consideration of the tax consequences of proposed business transactions or administrative courses of action. Accountants specializing in this field particularly in the area of tax planning, must be familiar with tax statutes affecting their employer or clients and also must keep themselves up dated on administrative regulations and court decision on tax cases. Thus the branch of accounting which is used for tax purposes is called Tax Accounting. Income Tax and Sale tax are computed on the basis of this accounting.

Auditing Spicer and Pegler: "Auditing is such an examination of

books of accounts and vouchers of business, as will enable the auditors to satisfy himself that the balance sheet is properly drawn up, so as to give a true and fair view of the state of affairs of the business and that the profit and loss account gives true and fair view of the profit/loss for the financial period, according to the best of information and explanation given to him and as shown by the books; and if not, in what respect he is not satisfied."

Auditing

It is a field of activity involving an independent review of the accounting records. In conducting an audit public accountants examine the records supporting financial reports of an enterprise and express an opinion regarding their fairness and reliability.

Social accounting (also known as social and environmental accounting, corporate social reporting, corporate social responsibility reporting, non-financial reporting or accounting) is the process of communicating the social and environmental effects of organizations' economic actions to particular interest groups within society and to society at large.

Social accounting is commonly used in the context of business any organization, including NGOs, charities, and government agencies may engage in social accounting.

Social accounting is the process of identifying, measuring and communicating the contribution of a business to the society. The contribution of a business to the society consist of providing employment to under-privileged, providing financial and manpower support for public program's, environmental contribution, product safety, product durability, customer satisfaction, etc.

Social accounting process to collect, measure and report transactions and interactive effects of these transactions between business and society surrounding him Social Accounting and Reporting by measuring the effects of cross-business unit and its surrounding community, to assess the fulfillment of social obligations makes possible.

Social responsibilities, duties and obligations of the organization should help in the maintenance of a society in which the activity will do. "

Green accounting is a type of accounting that attempts to factor environmental costs into the financial results of operations. It has been argued that gross domestic product ignores the environment and therefore decision makers need a revised model that incorporates green accounting.

Green accounting is the kind of environmental accounting describes an effort to incorporate environmental benefits and costs into economic decision-making or a business’s financial results.

Finance

It is the art and science of managing money

The most essential requirement of any

organized business. The field of FINANCE refers to the concepts of time,

money and risk and how they are interrelated.

Financial Management means the efficient and effective management of money (funds) in such a manner so as to accomplish the objectives of the organization. It includes how to raise the capital, how to allocate it i.e. capital budgeting. Not only about long term budgeting but also how to allocate the short term resources like current assets. It also deals with the dividend policies of the share holders.

“Financial management is about planning

income and expenditure, and making decisions

that will enable you to survive financially”.

“Financial Management is concerned with that

managerial decision that result in the

acquisition & financing of long term & short term

credits for firm

OBJECTIVES OF FINANCIAL MANAGEMENT

Profit Maximization Wealth Maximization

ROLE OF FINANCIAL MANAGER

Raising of funds

Allocation of funds

Profit planning

Understanding capital markets