CHAPTER 1

MEANING AND DEFINITION OF

ACCOUNTING
 "the art of recording, classifying and
summarizing in terms of money
transactions and events of financial
character and interpreting the results
thereof”.
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 Language of business, which is effectively employed to
communicate the financial performance of a business to
various interested parties.
BRANCHES OF ACCOUNTING

Accounting

Financial Cost Management

 Financial Accounting - The purpose of this branch of
accounting is to keep systematic records to ascertain the
financial performance and financial position and to
communicate the accounting information to the interested
parties.
USERS INTERESTED IN FINANCIAL
REPORTS AND ACCOUNTS
 Investors
 Shareholders

 Government

 Competitors

 stakeholders
 Cost Accounting – It is the process of accounting and
controlling the cost of a product, operation or function.
The purpose of this branch of accounting is to ascertain
the cost, to control the cost and to communicate the
information for decision making.
 Management Accounting –The purpose of this branch of
accounting is to supply any and/ or all information that the
management may need in taking decision and to evaluate the
impact of its decisions and actions.
MEANING AND DEFINITION OF MA
 MA is a form of accounting enables a business to be
conducted more effectively and efficiently.
 MA focuses on internal planning and control activities.
DEFINITION
 MA is the process of identification, measurement,
accumulation, analysis, preparation and communication
of financial information used by management to plan,
evaluate and control within organization and to ensure
efficient and effective use of its resources.
SILENT FEATURES OF MA
 It is a merger of ‘Management’ and ‘accounting’
 Concerned with accounting info. Which is useful to
mgmt in maximizing profits and minimizing losses.
 Concerned with improvement in the efficiency of the
various phases of mgmt.
SCOPE OF MA
 Financial Accounting
 Cost Accounting

 Tools & techniques of management control

 Statistical & quantitative techniques

 Inflation accounting

 Tax accounting

 Management reporting
FUNCTIONS OF MA
 Furnishing of relevant & vital data
 Compilation of data in suitable form

 Analysis and Interpretation

 Means of communication and reporting

 Controlling

 Planning & Forecasting

 Decision making
OVERVIEW OF PLANNING , CONTROL &
DECISION MAKING
 Planning: involves drawing up detailed plans or budgets
relating to each segment of operations.
 Accounting helps in providing necessary info. on the
basis of which
various plans can be formulated
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 Control: involves a process by which performances of
all divisions, departments and individuals are monitored
and the negative deviations from the desired path are
reported promptly for immediate corrective action.
PROCESS OF CONTROL FUNCTION
a) Evaluating of performances
b) Comparing actual performances with objectives, plans,
policies and standards
c) Analyzing the deviations from such objectives, plans,
policies and standards
d) Taking corrective action as a result of the analysis
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e)Follow up to appraise the effectiveness of the corrective
action
f)Feeding info. back to the planning to improve future
standards of performance
DECISION MAKING
Decision making involves the following process:
a) Recognizing & defining the problem

b) Search for alternative solutions

c) Evaluating alternatives

d) Selecting the best amongst the available alternatives

e) Reporting in actions taken and results achieved in relation to

objectives and goals.
DISTINCTION BETWEEN MA & FA
Financial Accounting
1. Primary users of information
The users of FA statements are mainly
external to the business enterprise
2. Nature
FA is concerned with historical records
relating to the past
3. Purpose of report
FA shows the results of the business as a
whole without showing the results of the
individual departments and products.
Management Accounting
The reports prepared by the management
accounting are used by the members of
management at different levels
MA is concerned with the future plans and
policies
MA highlights result of each product line
and department. The efficiency or
inefficiency & profit or loss of each
segment of business activity is brought out
which helps in better decision making and
control.
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4. Accounting Principles
FA has to follow the “Generally
Accepted Accounting Principles”
(GAAP) for recording, classifying,
summarizing & reporting business
transactions.
5. Audit
FA is subject to statutory audit which
is compulsory as per the provisions of
the company act 1956
6. Time Span
FA data and statements are developed
for a definite period, usually a year or
a half-year.
MA need not have to follow such
principles. It can use any accounting
techniques or practice which generates
useful info.
MA is not subject to any such
statutory audit
MA reports & statements are prepared
whenever needed. Reports may be
prepared on a monthly, weekly or
even daily
basis.
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7. Publishing of reports
In FA, annual accounts are required to MA reports are not required to be
be published in newspaper for info.
and circulation to shareholders.
8. Unit of measurement
All info. under FA is in terms of
money. Whatever the transactions
occurred are measured in terms of
money only.
9. Precision
Data in Financial accounting is more
precise & the degree of accuracy
followed is greater.
published. They are confined to mgmt
only.
Ma uses monetary units but also
consider non-monetary aspects such as
no. of labor hrs, machines hrs. for the
purpose of analysis & decision-
making
MA figures are not precise and
accurate. They are approximate
figures.
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10. Obligatory
It is compulsory to adopt financial Management accounting is optional.
accounting for disclosing the results of
business to the shareholders
11. Importance
FA gives more importance on the Ma gives importance to both objectivity as
objectivity. The entries recorded are well as subjectivity. It contains projections
supported by documentary evidence in based on the past performance.
proof of what has happened.
12. Subject matter and scope
FA also known as external accounting, MA also known as internal accounting
provide info. through income statement, which identifies, collects, measures,
balance sheet, cash flow statements to classifies and reports info. that is useful to
external users. all level of managers in planning, control
and decision making.
ACCOUNTING PRINCIPLES

 It refers to the rules, methods and procedures which are

adopted by accountants while recording the business
transactions.
 They are classified into two categories(i) Accounting Concepts

(ii) Accounting Conventions

ACCOUNTING CONCEPTS
i. Business Entity Concept
ii. Going Concern Concept
iii. Revenue recognized concept
iv. Money Measurement Concept
v. Cost Concept
vi. Dual Aspect Concept
vii. Periodicity Concept
viii. Accrual Concept
ix. Matching Concept
ACCOUNTING CONVENTIONS
 Conventions of Materiality
 Conventions of Conservatism

 Convention of Consistency

 Convention of Disclosure