ModuleII ACCOUNTING is the recording classifying summarizing and

Module-II

ACCOUNTING is the recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties with the information they need to make good decisions. FINANCIAL TRANSACTIONS include buying and selling goods and services acquiring insurance paying employees using supplies. An ACCOUNTING SYSTEM is the method used to record and summarize accounting data into reports. 17 -2

PURPOSES OF ACCOUNTING: To give managers basic financial information so they make better decisions. To report financial information to PEOPLE OUTSIDE THE FIRM such as owners, creditors, suppliers, employees, investors, and the government. Accounting is the MEASUREMENT AND REPORTING of financial information to various users regarding the economic activities of the firm. 17 -3

Five key areas of the accounting profession are: Managerial accounting financial accounting Auditing tax accounting

The Role of Accounting & Finance in Business management l l l l 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 l l l l 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 l 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.

Differences between Cost Accounting and Management Accounting Basis of Difference Cost Accounting Management Accounting 1. History The history of dates back to 14 th century Management Accounting evolved in the middle of the 20 th 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 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 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 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 l 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 l 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 l 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.

l l 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.

l 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 underprivileged, providing financial and manpower support for public program's, environmental contribution, product safety, product durability, customer satisfaction, etc.

l l 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. "

l 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.

l 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 l It is the art and science of managing money l The most essential requirement of any organized business. l The field of FINANCE refers to the concepts of time, money and risk and how they are interrelated.

l 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”. l “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 l l Profit Maximization Wealth Maximization

ROLE OF FINANCIAL MANAGER Raising of funds Allocation of funds Profit planning Understanding capital markets