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Managerial Accounting and Control

ABM (504)

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Accounting Activities

 Identifying  Recording
Business Business
Activities Activities

Communicating
Business
Activities
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Accounting Principles
• Principles means guidelines for action or conduct for
any activity

Accounting Principles are


Accounting Concepts and Accounting Conventions

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Accounting Concepts:

All those basic assumptions or conditions upon


which the science of accounting is based are
grouped under accounting concepts

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Accounting Concepts
1. Separate business entity concepts
2. Money measurement concepts
3. Going concern concepts
4. Accounting period concepts
5. Dual aspect concepts
6. Realisation concepts
7. Accrual Concepts
8. Periodic matching of cost and revenue

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1. Separate business entity concepts
• The business enterprise and its owner are
two separate independent entities

• The accounting records are made in the


books of accounts from the point of view of the
business unit and not the person owning the
business.

• Example: sole trade ,partnership


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2. Money measurement concepts
• All business transactions must be in terms of money,
that is in the currency of a country.
• Rs. With Unit (Kg, Litter ,Tone etc)

• Sincerity, Honesty of employees are not recorded


in books of accounts because these cannot be
measured in terms of money although they affect the
profits and losses of the business concern.

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3. Going Concern Concept

Now Future
This concept states that a business firm will continue to
carry on its activities for an indefinite period of time
instead of being closed or sold.

In the absence of this concept, the cost of a fixed asset


will be treated as an expense in the year of its purchase.

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4. Accounting Period Concept

• Year that begins from 1st of January and ends on 31st of


December, is known as Calendar Year.

• The year that begins from 1st of April and ends on 31st of
March of the following year, is known as financial year.

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5. Accounting cost concept (Historical Cost Concept.)
• All assets are recorded in the books of accounts at
their purchase price, which includes cost of
acquisition, transportation and installation and not at
its market price.
• e.g. A machine was purchased by Sai Limited for
Rs.500000, for manufacturing shoes. An amount of
Rs.1,000 were spent on transporting the machine to
the factory site. In addition, Rs.2000 were spent on
its installation.
Cost price = 5,00,000 + 2,000 +3,000
= 5,05,000/- or 1,00,000 (M.P)

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6. Dual Aspect Concept

• This concept assumes that every transaction


has a dual effect, i.e. it affects two accounts
in their respective opposite sides.
Accounting Equation :

Assets = Liabilities + Equity

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Examples of dual aspects of transaction

1. Purchase of machinery by cheque


2. Goods sold for cash
3. Rent paid in cash to the landlord
4. Salary paid to manager
5. Interest paid to Bank by cash

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7. Realisation concept

• This concept states that revenue from any


business transaction should be included in the
accounting records only when it is realised.

• Realisation means creation of legal


right to receive money.

1. Selling goods is realisation,


2. Receiving order is not.
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Examples
1. N.P. Jeweller received an order to supply gold ornaments
worth Rs.500000. They supplied ornaments worth
Rs.200000 up to the year ending 31st December 2005
and rest of the ornaments were supplied in January 2006.
2. Bansal sold goods for Rs.1,00,000 for cash in 2006 and
the goods have been delivered during the same year.
3. Akshay sold goods on credit for Rs.50,000 during the
year ending 31st December 2005. The goods have been
delivered in 2005 but the payment was received in March
2006.

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8. Accrual Concept
• It is indicate that expense or income is record
in this period when it is actual occur.
Like……..
• Credit purchase and sales
• Unpaid dividend
• Prepaid interest
• Outstanding income
• Outstanding salary

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9. Periodic cost and revenue matching concept

Expenses Rs. Revenue Rs.


Salary 10000 Sales

Interest paid 5000 Cash 200000


Purchased Credit 5000
Cash 150000
Credit 30000
Profit 55000

250000 250000

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Accounting Conventions :
All those customs or traditions which guide the
accountant while preparing the accounting statement
are included under the head accounting conventions

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Accounting Conventions are
1. Convention of consistency.
2. Convention of full disclosure.
3. Convention of materiality.
4. Convention of conservatism

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1.Convention of consistency
• Consistency means that same accounting
principles should be used for preparing
financial statements year after year
(same policy)
1. Depreciation
2. Stock

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2.Convention of full disclosure

• Full disclosure means that there should be


full and fair disclosure of accounting
information.

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3.Convention of materiality
• The materiality of a fact depends on its
nature and the amount involved. Material
fact means the information of which will
influence the decision of its user.

Pencil and Building

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4. Convention of conservatism
• This convention is based on the principle that
“Anticipate no profit, but provide for all possible
losses”.

Building (Cost price and Market Price)


Stock
(Cost Price and Market Price whichever is lower)
Debtors (Bad debts reserve)

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Users of Financial Statements
• Investors
– Need information about the profitability, dividend yield and price
earnings ratio in order to assess the quality and the price of shares
of a company
• Lenders
– Need information about the profitability and solvency of the
business in order to determine the risk and interest rate of loans
• Management
– Need information for planning, policy making and evaluation
• Suppliers and trade creditors
– Need information about the liquidity of business in order to access
the ability to repay the amounts owed to them

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• Government
– Need information about various businesses for statistics and
formulation of economic plan
• Customers
– Interested in long-tem stability of the business and continuance of
the supply of particular products
• Employees
– Interested in the stability of the business to provide employment,
other benefits and promotion opportunities

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Importance of Accounting

Accounting Identifies
is a
system that
Records

Relevant Communicates
information
that is
Reliable
to help users make
Comparable better decisions.
Accounting
Accounting is the process of identifying, recording ,classifying
and communicating information that is relevant, reliable, and
comparable.

The goal of the accounting process is to provide helpful


information to users of financial information.

Quality information may help users reach more informed


decisions.