CMA. MN Arora

32 Pages·2001·1.64 MB·English

Accounting
for
Management
“The most exciting and innovative work in management today is found in accounting”.
Peter F. Drucker
CMA. M N Arora
M.Com, FCMA
Ex-Associate Professor
Hans Raj College, Delhi University
DELHI - 110007
Visiting Faculty in Business Schools
Assisted by :
Dr.Rupali A. Khanna
Kamla Nehru College, Delhi University
DELHI - 110049
MUMBAI  NEW DELHI  NAGPUR  BENGALURU  HYDERABAD  CHENNAI  PUNE
LUCKNOW  AHMEDABAD  ERNAKULAM  BHUBANESWAR  KOLKATA
© MN ARORA
No part of this book shall be reproduced, reprinted or translated for any purpose, whatsoever,without
prior permission of the Author and Publisher in writing.
First Edition : 2010
Second Revised Edition : 2012
Third Revised Edition : 2016
Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd.,
“Ramdoot”, Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004.
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The first two editions of this Accounting for Management were extremely successful and well received
by professors and students. Since the last edition of this book was published, I have received numerous
email messages and letters from readers commenting on the book and suggesting how it could be
improved. I have also my own ideas based on own experiences. With the help of all this information, I
have thoroughly revised the book. The entire portion of basic financial accounting has been completely
revised and the number of chapters in this portion has increased from seven to nine. This has resulted in
total number of chapters in the book from twenty three to twenty five. Other obvious changes in this
edition are revision of certain portions of other chapters, adding new latest concepts and questions and
also deleting certain portions, making typing corrections, etc. Every effort has been made to make the
book more useful to all readers. Professors who are using this book for preparing their lectures should find
the revised edition more useful and acceptable.
I have greatly profited from the comments and thoughtful suggestions of many professors, students
and friends. I feel extraordinarily grateful to all those who have provided me with ideas for improving the
subject matter of this book.
I feel grateful to Himalaya Publishing House for cooperation and bringing out this new edition in a
beautiful get up.
M N Arora
E mail: [email protected]
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Accounting has been important throughout history and in all forms of economic structures. It continues to
evolve and respond to changes in informational needs of its users. Basically, there are two types of users of
accounting information – external users and internal users. Though financial accounting information is
primarily focused for external users, whereas cost accounting and management accounting are meant only for
internal users i.e. management, yet financial accounting information is also used by internal users. This is
because the management needs all types of accounting information for efficiently performing its functions of
planning, controlling and decision making. The present volume is designed to meet the need of management
for knowledge of accounting.
Managers and potential managers should have thorough understanding of all types of accounting i.e.
financial accounting, cost accounting and management accounting. Keeping this in view, this volume is
divided into four sections in logical sequence. Section I deals with basics of financial accounting, Section
II explains analysis and interpretation of financial statements prepared under financial accounting,
Section III deals with fundamentals of cost accounting and Section IV explains basic techniques used in
management accounting.
The text of the subject matter has been organized on ‘first things first’ basis for its logical
presentation. It is student-friendly, simple and intelligible. The discussion that involves conceptual
difficulties is immediately followed by a numerical example. In addition, the book contains a liberal
sprinkling of charts and diagrams so as to make the subject easily understandable, highlight its finer points
and sustain readers’ interest. Review Problems and Solutions have also been included in chapters. Apart
from theoretical and numerical questions included in review questions, objective type questions have also
been included to serve as self test by students.
I am confident that with all these distinctive features, the students and teachers will find the book
extremely useful and rewarding. However, I am always open to suggestions on how to improve
continuously and add value for students.
I am grateful to all friends, colleagues, students, family members and other well-wishers who have been
the source of inspiration for my published works. My special thanks are due to Himalaya Publishing House
Pvt. Ltd. for taking interest in this publication and superb production values.
Hans Raj College M N Arora
Delhi University
E-mail: [email protected]
June 8, 2010
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SECTION I : BASIC FINANCIAL ACCOUNTING
1. Introduction to Accounting 1.1–1.21
2. Accounting Principles 2.1–2.13
3. Accounting Process 3.1–3.30
4. Subsidiary Books 4.1-4.36
5. Rectification of Errors 5.1–5.21
6. Bank Reconciliation Statement 6.1–6.17
7. Final Accounts (Financial Statements) 7.1–7.54
8. Depreciation, Provisions and Reserves 8.1–8.30
9. Inventory Valuation 9.1–9.20
SECTION II : ANALYSING ACCOUNTING INFORMATION
10. Methods of Financial Analysis 10.1–10.12
11. Financial Ratio Analysis 11.1–11.47
12. Funds Flow Statement 12.1–12.42
13. Cash Flow Statement 13.1–13.32
SECTION III : COST ACCOUNTING
14. Cost Accounting—Nature and Scope 14.1–14.9
15. Basic Cost Concepts 15.1–15.18
16. Cost Sheet and Price Quotations 16.1–16.26
17. Process Costing 17.1–17.50
18. Reconciliation of Cost and Financial Accounts 18.1–18.19
SECTION IV : MANAGEMENT ACCOUNTING
19. Management Accounting — Introduction 19.1–19.8
20. Budgeting and Budgetary Control 20.1–20.50
21. Standard Costing and Variance Analysis 21.1–21.70
22. Marginal Costing and Break-even Analysis 22.1–22.68
23. Strategic Decision Making 23.1–23.55
24. Responsibility Accounting and Transfer Pricing 24.1–24.14
25. Recent Development in Cost Management 25.1–25.25

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Section I
BASIC
FINANCIAL ACCOUNTING
1 Introduction to Accounting 1.1–1.21 Trial Balance 3.15
Review Problems and Solutions 3.20
Accounting as an Information System 1.1 Review Questions 3.28
Meaning of Financial Accounting 1.4
Book-keeping vs. Accounting 1.4 4 Subsidiary Books 4.1-4.36
Objectives and Functions of Financial Accounting 1.5
Introduction 4.1
Systems of Accounting 1.5
Types of Subsidiary Books 4.1
Double Entry System 1.6
Cash Book 4.3
Accounting Equation 1.6
Types of Cash Book 4.3
Meaning of Account 1.10
Petty Cash Book 4.10
Meaning of Debit and Credit 1.10
Purchases Book 4.13
Cash System and Accrual System of Accounting 1.11
Sales Book 4.15
Capital and Revenue Expenditure 1.11
Sales Return Book (Returns Inwards Book) 4.16
Capital and Revenue Receipts 1.12
Purchases Return Book (Returns Outwards Book) 4.17
Advantages of Accounting 1.14
Bills Receivable and Bill Payable Books 4.18
Limitations of Accounting 1.14
General Journal (Journal Proper) 4.18
Basic Terms Used in Accounting 1.15
Review Problems and Solutions 4.26
Relation of Accounting with Other Disciplines 1.18
Review Questions 4.32
Ethics in Accounting 1.19
5 Rectification of Errors 5.1–5.21
Key Terms 1.19
Review Questions 1.20 Introduction 5.1
Types of Errors 5.1
2 Accounting Principles 2.1–2.13 What to do if a Trial Balance Doesn’t Balance? 5.3
Rectification of Errors 5.4
Introduction 2.1
Rectification of Errors after Preparation of Final
Accounting Concepts 2.2
Accounts 5.6
Accounting Conventions 2.5 Review Problems and Solutions 5.10
Accounting Standards (AS) 2.6 Review Questions 5.18
International Financial Reporting Standards (IFRS) 2.8
Management Accountants and IFRS 2.11 6 Bank Reconciliation Statement 6.1–6.17
Review Questions 2.11
Introduction 6.1
Meaning of Bank Reconciliation Statement 6.2
3 Accounting Process (Journal,
Reasons for Difference 6.2
Ledger and Trial Balance) 3.1–3.31 Utility of Bank Reconciliation Statement 6.3
Preparation of Bank Reconciliation Statement 6.3
Introduction 3.1
Forms of Bank Reconciliation Statement 6.4
Journal 3.2
Review Problems and Solutions 6.8
Simple and Compound Journal Entries 3.6
Review Questions 6.13
Opening Entries 3.7
Ledger 3.10
7 Final Accounts Common Size Statements 10.6
Trend Percentages 10.10
(Financial Statements) 7.1–7.54
Key Terms 10.11
Introduction 7.1 Review Questions 10.11
Trading Account 7.2
Profit and Loss Account 7.5 11 Financial Ratio Analysis 11.1–11.47
Closing Entries 7.7
Introduction 11.1
Manufacturing Account 7.9
Classification of Ratios 11.2
Balance Sheet 7.12
Liquidity Ratios 11.3
Balance Sheet and Trial Balance—Distinction 7.13
Profit & Loss Account and Balance Sheet—Distinction 7.13 Capital Structure Ratios 11.6
Adjustment Entries 7.16 Turnover Ratios 11.9
Difference in Final Accounts of Sole Proprietors Profitability Ratios 11.13
and Partnership Firms 7.29 Advantages and Limitations of Ratio Analysis 11.20
Final Accounts of Joint Stock Companies 7.32 Summary of Formulae 11.22
Review Problems and Solutions 7.34 Review Problems and Solutions 11.24
Review Questions 7.44 Key Terms 11.39
8 Depreciation, Provisions and Review Questions 11.40
Reserves 8.1–8.30
12 Funds Flow Statement 12.1–12.42
Fixed Assets 8.1
Introduction 12.1
Accounting Concept of Depreciation 8.1
What is ‘Flow of Fund’ ? 12.3
Depreciation, Amortisation and Depletion 8.2
Statement of Changes in Working Capital 12.10
Objectives of Providing Depreciation 8.2
Distinction between Funds Flow Statement and
Causes of Depreciation 8.2
Profit and Loss Account 12.21
Determining the Amount of Depreciation 8.3
Distinction between Funds Flow Statement
Accounting Entries for Recording Depreciation 8.3
and Balance Sheet 12.21
Methods of Calculating Depreciation 8.4
Advantages and Uses of Funds Flow Statement 12.22
Selection of a Depreciation Method 8.17
Review Problems and Solutions 12.23
Salient Features of Accounting Standard 6 (AS-6) 8.18
Key Terms 12.35
Depreciation Accounting 8.18
Review Questions 12.35
Provisions and Reserves 8.18
Types of Reserves 8.20
13 Cash Flow Statement 13.1–13.32
Review Problems and Solutions 8.21
Review Questions 8.28 Introduction and Meaning 13.1
9 Inventory Valuation 9.1–9.20 Accounting Standard-3 (AS-3): Cash Flow Statement 13.2
Preparation of Cash Flow Statement 13.6
Meaning and Definition 9.1 Objectives and Uses of Cash Flow Statement 13.10
Importance of Inventory Valuation 9.2 Review Problems and Solutions 13.11
Inventory Systems 9.3 Key Terms 13.27
Inventory Valuation 9.4 Review Questions 13.27
Inventory Costing Methods 9.4
Salient Features of Accounting Standard - 2 9.11 Section III
Review Problems and Solutions 9.11
COST ACCOUNTING
Key Terms 9.18
Review Questions 9.18
14 Cost Accounting —
Section II
Nature and Scope 14.1–14.9
ANALYSING ACCOUNTING Financial Accounting the forerunner of Cost
Accounting 14.1
INFORMATION
Meaning of Costing, Cost Accounting and Cost
Accountancy 14.2
10 Methods of Financial Analysis 10.1–10.12 Cost Accounting and Financial Accounting
—Comparison 14.4
Introduction 10.1
Installation of a Costing System 14.6
Principal Tools of Analysis 10.4
Advantages of Cost Accounting 14.6
Comparative Financial Statements 10.4
Limitations or Objections against Cost Accounting 14.8
Section IV
Essentials of a Good Cost Accounting System 14.8
Key Terms 14.9 MANAGEMENT ACCOUNTING
Review Questions 14.9
15 Basic Cost Concepts 15.1–15.18 19 Management Accounting
— Introduction 19.1–19.8
Concept of Cost 15.1
Cost Centre, Cost Unit and Cost Object 15.2 Meaning and Definition 19.1
Methods of Costing 15.4 Characteristics or Nature of Management Accounting 19.3
Techniques of Costing 15.5
Scope of Management Accounting 19.3
Classification of Costs 15.6
Functions (or Objectives) of Management Accounting 19.4
Classification of Costs for Decision Making 15.10
Financial Accounting and Management
Elements of Cost 15.12
Accounting — Comparison 19.5
Cost Sheet 15.16
Cost Accounting and Management Accounting
Key Terms 15.16
— Comparison 19.6
Review Questions 15.17
Limitations of Management Accounting 19.7
Key Terms 19.8
16 Cost Sheet and Price
Review Questions 19.8
Quotations 16.1–16.26
Meaning of Cost Sheet 16.1 20 Budgeting and Budgetary
Method of Preparing Cost Sheet 16.2 Control 20.1–20.50
Treatment of Stocks 16.2
Items Not Included in Cost Sheet 16.3 Meaning and Definition of Budget 20.1
Treatment of Scrap 16.6 Meaning and Definition of Budgetary Control 20.2
Price Quotations or Tenders and Estimated Cost Sheet 16.7 Objectives of Budgetary Control 20.3
Review Problems and Solutions 16.8 Advantages of Budgetary Control 20.4
Key Terms 16.22 Limitations of Budgetary Control 20.4
Review Questions 16.22 Essentials of Effective Budgeting 20.5
Budget Administration 20.6
17 Process Costing 17.1–17.50 Functional Budgets 20.8
Master Budget 20.16
Introduction 17.1 Fixed and Flexible Budgets 20.17
Characteristics of Process Costing 17.1 Revision of Budgets 20.20
Process Costing Procedure 17.2 Budget Reports 20.21
Problems Peculiar to Process Costing 17.3 Zero Base Budgeting (ZBB) 20.22
Process Losses and Wastages 17.3 Performance Budgeting 20.24
Work-in-progress 17.10 Review Problems and Solutions 20.25
Joint Products and By-products 17.19 Key Terms 20.43
Internal Process Profits 17.26 Review Questions 20.43
Review Problems and Solutions 17.26 21 Standard Costing and Variance
Key Terms 17.45 Analysis 21.1–21.70
Review Questions 17.45
18 Reconciliation of Cost and Historical Costing 21.1
Standard Costing 21.2
Financial Accounts 18.1–18.19
Standard Costs and Estimated Costs — Comparison 21.3
Introduction 18.1 Standard Costing and Budgetary Control
Reasons for Disagreement in Profit or Loss 18.2 — Comparison 21.3
Method of Reconciliation 18.3 Preliminaries in Establishing a System of
Review Problems and Solutions 18.4 Standard Costing 21.5
Key Terms 18.13 Standard Hour 21.7
Review Questions 18.13 Standard Cost Card 21.8
Variance Analysis 21.9
Material Variances 21.11
Labour Variances 21.17
Overhead Variances 21.24
Variable Overhead Variances 21.25
Fixed Overhead Variances 21.27