Accounting for financial management, Thesis of Financial Accounting

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ISBN (13) : 978-81-224-2548-

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Preface

Management in India increasingly realises the use of accounting information for efficient management of business enterprises. Accounting is the science of measurement, analysis and communication. The designing of accounting systems, generating information and transmitting it to the management has expanded the scope of accounting and financial management. This book has been written with a specific aim i.e., to cater to the needs of I.T. professionals (especially MCA students) of U.P. Technical University as well as other universities also. I.T. comprises of Hardware part, Software part, and Information part. When we talk of business application software, we need to recognize and understand business information because problem recognition is the first step of software development. Accounting and Financial management are said to be the language of business because it enables the user to recognize and understand complexities associated with business information. This generates the need for study of Accounting and Financial management for I.T. professionals. This book has been written from system’s point of view to facilitate I.T. professionals. A system comprises of three components as shown below:

INPUT DATA

OUTPUT PROCESSING DATA

Framework

Accounting as system takes business transactions/events as input data and process it within the framework of accounting principles and theories leading to generation of a number of reports (output data) which in turn acts as input data for financial management. Financial management as system process it within the framework of external environment and takes financial decisions (output data) viz. financing decisions, investment decisions and dividend decisions. This book is also intended to assist beginners of management courses like B.B.A., B.Com. etc. and non-finance executives at work enabling them to understand business information (published in form of annual reports) and complexities associated with business organization. Furthermore, I am extremely grateful

Contents

Part-I: Financial Accounting

CHAPTER–I: ACCOUNTING AND FINANCIAL MANAGEMENT

Exercises

Part-II: Management & Cost Accounting

• 1.1 Introduction — A CONCEPTUAL FRAMEWORK
• 1.2 Need for Accounting and Role of Accountant
• 1.3 Defining Accounting
• 1.4 Accounting Information
• 1.5 Branches of Accounting
• 1.6 Difference between FA, MA and CA System
• 1.7 Accounting Information System (AIS)
• 1.8 Users of Accounting Information
• 1.9 Steps in Accounting Process
• 1.10 Limitations of Accounting
• 1.11 Accounting and Financial Management — Inter-relationship
• 1.12 Organization Structure for Accounting and Finance Activity
• 1.13 Utility of Accounting and Financial Management for IT Professionals - Exercises
  • 2.1 Introduction CHAPTER–II: BOOK-KEEPING
  • 2.2 Types of Books of Account
  • 2.3 Book-keeping Process
  • 2.4 Types of Errors during Book-keeping Process
  • 2.5 Data Flow Diagram (DFD) for Book-keeping Process
    • Exercises
  • 3.1 Introduction to Final Accounts CHAPTER–III: FINAL ACCOUNTS (Financial Statements)
  • 3.2 Preparation of Final Accounts — An Introduction
  • 3.3 Preparation of Final Accounts for Sole Proprietorship Concern
  • 3.4 Difference between Trial Balance and Balance Sheet
  • 3.5 Difference between Trading Account and Manufacturing Account
  • 3.6 Difference between Trading Account and Profit and Loss Account
  • 3.7 Difference between Income Statement and Balance Sheet
  • 3.8 Accounting Theory Framework
  • 3.9 Final Accounts for Partnership Firm
• 3.10 Final Accounts for Companies
  • 4.1 Introduction CHAPTER–IV: RATIO ANALYSIS
  • 4.2 Concept of Ratios
  • 4.3 Types of Ratios
  • 4.4 Measurement and Interpretation of Ratios
  • 4.5 Application of Ratios
  • 4.6 Methodology for Ratio Analysis
  • 4.7 Du-Pont Chart for Ratio Analysis
  • 4.8 Advantages of Ratio Analysis
  • 4.9 Limitations of Ratio Analysis
    • Exercises
  • 5.1 Introduction CHAPTER–V: FUND FLOW STATEMENT (FFS)
  • 5.2 Preparation of Fund Flow Statement (FFS)
  • 5.3 Difference between FFS and CFS (Cash Flow Statement)
  • 5.4 Difference between FFS and Income Statement
  • 5.5 Difference between FFS and Balance Sheet
    • Exercises
  • 6.1 Fundamentals of Cost CHAPTER–VI: COST ACCOUNTING
  • 6.2 Cost Accounting
  • 6.3 Absorption Costing and Marginal Costing
  • 6.4 Inventory Management
    • Exercises

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Accounting and Financial Management 1

Part – I

Financial Accounting

Accounting and Financial Management 3

Chapter–

Accounting and Financial Management

A Conceptual Framework

LEARNING OBJECTIVES

In this chapter we will study: Introduction Need for Accounting and Role of Accountant q Important terms Defining Accounting—Traditional and Modern View Accounting Information Branches of Accounting Difference between Financial Accounting, Management Accounting and Cost Accounting Accounting Information System—Information flow chart Users of Accounting Information Steps in Accounting Process Limitations of Accounting Accounting and Financial Management—Inter-relationship Organisation Structure for Accounting and Finance Activity Utility of Accounting and Financial Management for Information Technology Professionals.

4 Accounting and Financial Management for I.T. Professionals

1.1 INTRODUCTION

l Organizations play an important role towards economic development. l There are different types of organizations engaged in trading and manufacturing of goods/services. l On the basis of motive, there may be two categories of organizations. Organizations

Profit motive Non-profit motive

All business organizations Social organizations like club, trust, have profit motive church, government hospital, and (The intention is to earn profit government schools have non-profit (profit =revenue –cost)) motive (The intention is to earn revenue just to meet the cost of meeting the objectives i.e., no profit no loss.)

l Both category of organizations (stated above) need money to fulfil their objectives i.e., to sustain and to grow.

l There are two aspects of money (Fund).

Measurement of money Management of money l In a very limited sense measurement of money means how much money has been invested and where i.e., record-keeping whereas, management of money means from where the money will come in and where it will go i.e., procurement of fund (Financing decision) and utilization of fund (Investment decision). Thus,

l Accounting is concerned Financial Management is with measurement of money. concerned with management of money.

6 Accounting and Financial Management for I.T. Professionals

1.2 NEED FOR ACCOUNTING AND ROLE OF ACCOUNTANT

1.2.1 Need for Accounting

Accounting helps in knowing: l What is the result of business operation after a certain interval i.e., profit/loss? l Financial health: Will the organization be able to meet commitments/obligations in the near future? l What is fund/cash position? l What the organization owns i.e., assets to the organization. l What the organization owes i.e., liabilities of the organization. and many more things, which help in decision-making process. This creates need for accounting. Now, before going into details of accounting, first have a look on important terms frequently used in accounting. This will help in clear understanding of accounting concept and process.

1.2.2 Role of Accountant

With the help of proper accounting system, accountant helps the management in three ways: l Record-keeping/book-keeping l Attention-directing l Problem-solving q Accountant in his record-keeping role maintains books of account. q Accountant in his attention-directing role generates different statutory and non-statutory routine accounting information to bring the attention of management towards strength and weakness of the organization concerned. q Accountant in his problem-solving role helps the management by providing crucial information i.e., non-routine information and number of alternate options to solve particular problem related to financial decisions (Financing, Investment and Dividend decision).

SOME IMPORTANT TERMS AND DEFINITIONS

Assets Assets mean what an organization owns. In other words, anything which enables a business enterprise to get cash or a benefit in future, is an asset.

Classification of assets

Assets

Intangible assets Tangible assets (Are intangible in naturee.g., (Are tangible in naturee.g., Plant, Trademark, Goodwill, Machinery, Land, Building etc.) Patents etc.)

Fixed assets Current assets

Accounting and Financial Management 7

l Fixed Assets: Assets that are acquired for relatively long periods for carrying on the business of the enterprise and not meant for resale, e.g., land, building, plant, and machinery etc. l Current Assets (CA): Assets which are either in the form of cash or can be converted into cash within one year/short period i.e., get converted into cash within one operating cycle of business e.g., Cash, Inventories, Debtors, Bills Receivable, etc. l Liquid/Quick Assets: Assets, which are immediately convertible into cash without much loss, e.g., debtors, marketable securities, stamps etc. i.e., except stock, all CA are liquid assets. Liabilities Liabilities mean what the organization owes. In other words, it is an amount, which a business owes and has to return or account for. For example, loan from banks, trade creditors, etc. Classification of liabilities Liabilities

Long-term liability Short-term liability/Current liability (Having long-term maturity period) (Having short-term maturity period usually less than one yeare.g., Trade creditors, Bank overdraft etc.

Inside liability Outside liability (Permanently remains (Payment is made over a period with organization of timee.g., Loan from banks, e.g., Owner’s capital A/c) Debenture capital etc.) Capital: It refers to the amount invested by the proprietor in business enterprises. Revenue: It means income of a recurring nature from any source related to business. Capital Expenditure: An expenditure, which has been incurred for the purpose of obtaining a long- term advantage for the business, e.g. expenditure incurred for purchase of fixed assets. Revenue Expenditure: It denotes the cost of services and things used for generating revenue. In other words, all items of expenditure, whose benefit expires within a year or which have been incurred merely to maintain the business or to keep the assets in good working condition, is taken as revenue expenditure. For example, salaries and wages paid to employees, depreciation of business assets, maintenance expenses of motor vehicle, etc. Revenue expense is different from loss. An expense is supposed to bring some benefit to the firm, whereas a loss brings no benefit to the firm. For example, loss by theft, loss by fire, etc. While calculating the income or the profit of a business for a particular period, the revenue earned during that period is to be matched with the expense incurred in earning that revenue (matching concept). Deferred Revenue Expenses: A revenue expenditure whose benefit is to continue for period of two or more years. Such expenditure is written off not in one year but over a period of two or three years. For example, expenditure incurred on heavy advertisement, preliminary expenditure, etc. Creditor: Any person who gives credit is a creditor. The supplier supplying goods on credit is creditor. Creditor is one to whom the business owes. Owner is a creditor under ‘Separate Entity Concept’. Debtor: A person who owes money to the business is called a debtor. He is a customer to whom goods are sold on credit.