Financial and Management Accounting - MB0041

Answer 1
Accounting and Book-keeping can be explained as follows:
Accounting:
The systematic and comprehensive recording of financial transactions pertaining to a
business. Accounting also refers to the process of summarizing analyzing and reporting these
transactions. The financial statements that summarize a large company!s operations financial
position and cash flows over a particular period are a concise summary of hundreds of
thousands of financial transactions it may have entered into over this period. Accounting is one
of the key functions for almost any business" it may be handled by a bookkeeper and
accountant at small firms or by sizable finance departments with dozens of employees at
larger companies.
Book-keeping:
Book #eeping is the task of recording classifying and summarizing $upto trail balance% of
financial transactions and events. &t is a part of accounting or can be called as the fundamental
pillars of accounting. 'ince in earlier days these financial transactions and events were written
in the long Bahi Books registers copies hence these were known as book keeping. (ow the
form of keeping is getting changed by the advent of technology and these transactions and
events are recorded and processed through computers but still the substance remain the same
and so about the key word )Book #eeping.)
The *b+ectives of Accounting can be explained as follows
To keep systematic records:
Accounting is done to keep a systematic record of financial transactions. &n the absence
of accounting there would have been terrific burden on human memory which in most cases
would have been impossible to bear.
To protect business properties:
Accounting provides protection to business properties from un+ustified and unwarranted
us. This is possible on account of accounting supplying the information to the manager or the
proprietor.
To ascertain the operational proit or loss:
Accounting helps is ascertaining the net profit earned or loss suffered on account of
carrying the business. This is done by keeping a proper record of revenues and expenses of a
particular period. The profit and loss account is prepared at the end of a period and if the
amount of revenue for the period is more than the expenditure incurred in earning that
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revenue there is said to be a profit. &n case the expenditure exceeds the revenue there is said
to be a loss.
To ascertain the inancial position o business:
The profit and loss account gives the amount of profit or loss made by the business
during a particular period. ,owever it is not enough. The businessman must know about his
financial position i.e. where he stands" what he owes and what he owns- This ob+ective is
served by the balance sheet or position statement.
To acilitate rational decision making:
Accounting these days has taken upon itself the task of collection analysis and
reporting of information at the re.uired points of time to the re.uired levels of authority in order
to facilitate rational decision making.
Answer !
/efinition of 0AA1 $"enerally Accepted Accounting #rinciples% is as follows:
The common set of accounting principles standards and procedures that companies use to
compile their financial statements. 0AA1 are a combination of authoritative standards $set by
policy boards% and simply the commonly accepted ways of recording and reporting accounting
information.
There are the necessary assumptions or conditions upon which accounting is based.
Accounting concepts are postulates assumptions or conditions upon which accounting records
and statement are based. The various accounting concepts are as follows
$ntity %oncept:
2or accounting purpose the 3business4 is treated as a separate entity from the
proprietor$s%. *ne can sell goods to himself but all the transactions are recorded in the book of
the business. This concept helps in keeping private affairs of the proprietor away from the
business affairs. 5.g. &f a proprietor invests 6s. 7888889- in the business it is deemed that the
proprietor has given 6s. 7888889- to the 3business4 and it is shown as a 3liability4 in the books
of the business. 'imilarly if the proprietor withdraws 6s. 788889- from the business it is
charged to them.
%ost %oncept:
This concept does not recognize the realizable value the replacement value or the real
worth of an asset. Thus as per the cost concept
a% As asset is ordinarily recorded at the price paid to ac.uire it i.e. at its cost and
b% This cost is the basis for all subse.uent accounting for the asset.
2or example if a machine is purchased for 6s. 788889- it is recorded in the books at 6s.
788889- and even if its market value at the time of the preparation of the final account is 6s.
:88889- or 6s. ;88889- the same will not considered
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&ual Aspect %oncept:
As per this concept every business transaction has a dual affect. 2or example if 6am
starts business with cash 6s. 7 888889- there are two aspects of the transaction: 3Asset
Account4 and 3<apital Account4. The business gets asset $cash% of 6s. 7 888889- and on
the other hand the business owes 6s. 7 888889- to 6am.
Accrual %oncept:
The accrual system is a method whereby revenue and expenses are identified with
specific periods of time like a month half year or a year. &t implies recording of revenues
and expenses of a particular accounting period whether they are receive
%ost-Attach %oncept:
This concept is also known as 3cost-merge4 concept. =hen a finished good is produced
from the raw material there are certain process and costs which are involved like labor cost
power and other overhead expenses.
These costs have a capacity to 3merge4 or 3attach4 when they are brought together.
'eriiable (b)ecti*e $*idence %oncept:
According to this concept all accounting transactions should be evidenced and supported
by ob+ective documents. These documents include invoices contract correspondence
vouchers bills passbooks cherub etc
Answer +
Accounts are mainly classified into two accounts that is
7. 1ersonal account
:. &mpersonal account
#ersonal Account: Accounts recording transactions relating to individuals or firms or company
are known as personal accounts. These are the accounts that have the names of debtors
$customers% or creditors $suppliers%. They are therefore personal to this extent. 6ule for this
type of account is as follows 3&ebit the ,ecei*er %redit the "i*er-.
/mpersonal Accounts: This account is further classified into two types:
,eal Accounts: These accounts are tangible in nature and represent accounts that records
possession such as machinery furniture premises and stock. 6ule for this type of account is
as follows:
3&ebit 0hat %omes /n %redit 0hat "oes (ut4
1ominal Accounts: These accounts are intangible in nature and represent accounts that in
which expenses revenues and capital are recorded. 6ule for this type of account is as follows:
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3&ebit All $2penses or 3osses %redit All /ncomes or gains4
The five different types of account can be explained as follows:
They are all in the main nominal ledger and despite their different features" entries may
be posted freely between them. To repeat key points made in the last chapter this must be
done with debit receiving the benefit and credit giving the benefit and with the total of the
debits e.ualing the total of the credits. The five different accounts are treated differently when
the accounts are prepared. They are:
/ncome accounts
These relate to sales or other income and they increase the profit. They almost always
have a credit balance and are eventually credited to the profit and loss account. *f course if
goods are returned for a refund there will be a debit to an income account.
&n the last chapter the sale of >?888 to @. #. 1atel Atd was credited to an income account. The
other side of the posting went to an asset account.
$2penditure accounts
These accounts are made up of expenditure that reduces the profit. They almost always
have a debit balance and are eventually debited to the profit and loss account.
&n the last chapter the >:888 invoice from #ing Brothers went into an expenditure account.
The other side of the posting went to a liability account.
Asset accounts
These accounts normally have a debit balance and are made up of assets that retain
their value. This is distinct from say the electricity account which is an expenditure account.
5xamples of asset accounts are stock motor vehicles and bank accounts $if there is not an
overdraft%. Boney owing to the business is in debtor accounts and these are asset accounts.
Asset accounts eventually go into the balance sheet not the profit and loss account.
&n the last chapter the >:C88 for widgets went into stock which is an asset account. The other
side of the posting went to a liability account.
3iability accounts
These accounts are the debts of the business and they normally have a credit balance.
5xamples are the accounts for money owing to suppliers and these accounts are called
creditors. A further example is the bank account $if there is an overdraft%. Aiability accounts
eventually go into the balance sheet not the profit and loss account.
&n the last chapter the >:888 invoice from #ing Brothers was credited to a liability account.
The other side of the posting went to an expenditure account.
%apital accounts
These accounts represent the investment in the business by the owners. &f the
business is a company it is the net worth owned by the shareholders. &t might be hard to grasp
but it is true for all businesses even a sole trader. &f the capital accounts in /eborah
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2ountain!s hat making business total >C888 then this is her investment in the business. 'he
could take the >C888 out close the business down and go on holiday. The business is
separate from the person who owns it. An example of a capital account is 6evenue 6eserves.
&f the business makes profits after tax and disregarding dividends and other distributions the
value of the capital accounts will increase over time. 'o long as a business is solvent the
capital accounts will have credit balances. A net debit balance is a desperate sign of trouble
and often means that the closing of the business is imminent
Answer 4
<ash book is a book in which all transactions relating to cash receipts and cash payments are
recorded. &t starts with the cash or bank balances at the beginning of the period. 0enerally it is
made on monthly basis. A financial +ournal that contains all cash receipts and payments
including bank deposits and withdrawals. This is a very popular book and is maintained by all
organizations big or small profit or not-for profit. &t serves the purpose of both +ournal as well
as the ledger $cash% account. 5ntries in the cash book are then posted into the general ledger.
The cash book is periodically reconciled with the bank statements as an internal method of
auditing. . &t is also called the book of original entry. =hen a cashbook is
maintained transactions of cash are not recorded in the +ournal and no separate account for
cash or bank is re.uired in the ledger.
The /ifference between <ash book and other subsidiary can be explained as follows.
%ash book 4ubsidiary book
The cashbook is a ledger as well as +ournal *ther subsidiary books consist only +ournals
The cash book itself acts as cash account.
(o separate ledger account is maintained
&n other subsidiary books ledger accounts
have to be maintained in the ledger like the
B91 ac 1urchase book account sales book
account etc.
The cash book has the debit side as well as
the credit side
There are no credits or debits in other
subsidiary books
The cash book itself gives the balance
amount.
As itDs a ledger account is has to balanced
&n other subsidiary books the amount in not
balanced but totaled and the totaled amount
is transferred to other respective account.
Answer 5
The amount to be debited in 19A a9c towards 6B/ is calculated as follows:
*ld 6B/ E 6s 7;F88
$-% Bad debts E 6s G888
Balance E6s CF88
(ew 6B/' HFI on 7;888 E6s J888
6B/ to be provided E 6s F88 $J888-CF88%
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The amount to be debited to 19A a9c towards 6eserve for /iscount on /ebtors is calculated as
follows:
0ood /ebtors E(ew 6B/ E6s 7F:888$7;8888-J888%
*ld 6eserve for /iscount on debtors E 6sK:88
$-% /iscount on /ebtors E6s7J88
Balance 6eserve E 6s 7?88
(ew 6eserve for /iscount at :I on
0ood debtors 6s 7F:888 E6s K8?8
6eserve for discount to be provided E 6s 7;?8$K8?8-7?88%
&n the final balance sheet the 'undry debtors are reduced by bad debts shown outside the trail
balance" in profit and loss account debit side we will show only provision for discount account.
&n balance asset side we show the net debtors amount.
Answer ;
Banagement accounting can be explained as:
Banagement accounting involves preparing and providing timely financial and statistical
information to business managers so that they can make day-to-day and short-term
managerial decisions. Banagement accounting% is different from financial accounting in that it
produces reports for a companyDs internal stakeholders as opposed to external stakeholders.
The result of management accounting is periodic reports for e.g. the companyDs department
managers chief executive officer etc.
6oles of management can be explained as follows
Banagerial vs. 2inancial Accounting:
Banagerial accounting differs greatly from financial accounting. The financial
information recorded by managerial accountants is primarily for internal use while financial
accountants record information used by external parties. &n contrast to financial accounting
managerial accounting does not follow generally accepted accounting principles. The reports
created by managerial accountants include performance budget and cost reports. The reports
often focus on a particular segment within the organization such as product lines or
departments. 2inancial accountants record information for the creation of financial statements.
The primary purpose of financial statements is to show the financial health of the company as
a whole.
&ecision-Making
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A ma+or factor in determining the price of a product is the cost related to manufacturing the
product.
Banagers must often make decisions that re.uire choosing between alternate products. 2or
example a manager of a manufacturing company may need to determine the best product to
manufacture to remain profitable and the price to charge customers for the product. The
production decisions made by managers are a direct result of information received from
managerial accountants. Banagerial accountants often perform cost analysis for certain
products and divisions which include variable and fixed costs.
Forecasting and #lanning
1lanning re.uires that managers align the companyDs ob+ectives with its available resources. A
managerDs ability to forecast and plan depends on the budgets developed by accountants. The
information presented by managerial accountants is often used by managers to forecast and
plan. Banagers want to know what products are best to manufacture now but also desire to
know where they should focus their efforts in the future. Banagers use the information to
develop specific goals and strategies for the future
Budgets
1reparing budgets is a basic activity for managerial accountants. Budgets express the
companyDs plan of action using .uantitative figures. The budgeting process allows managers to
allocate resources to the most financially needy departments and eliminate programs and
departments that are not effectively using the resources. The disadvantage of the budgeting
process is that it can cause animosity between departments vying for resources. The particular
budgets produced by managerial accountants depend on the needs of the organization.
<ommon budgets prepared include the master sales production material labor and cash
bud.
2unctions of management can be explained as follows.
#lanning and Forecasting Function:
Businessman can easily watch in which pro+ect he invested his cash and fund. ,e can see
whether itDs 6*& and 6*5 is better than any other investment. The person makes good plan to
reduce his investment in that pro+ect whose return is not sufficient. This can be explained with
an example.
&n :88F Br. A started his small business. ,e was well educated of management accounting
tools. By effective use of management accounting he developed his small business. (ow
after F years he is operating good company.
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Modiication o &ata Function:
'econd good function of management accounting is to modify of raw accounting data. After
this businessman bids fair to effective use these modify data in businessDs management.
Banagement accounting can be used to classify every accounting item in different views.
There are so many accounting software which can be helpful to show sale or purchase or any
other accounting items according to production level area season country age or .uality of
debtors or creditors.
*ne 'ide it will build up analytic approach of company and other side it will be helpful to
check up each and every accounting item from different angels.

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