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CMA. MN Arora PDF

32 Pages·2001·1.64 MB·English
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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. Phone: 022-23860170/23863863, Fax: 022-23877178 E-mail: [email protected]; Website: www.himpub.com Branch Offices : New Delhi : “Pooja Apartments”, 4-B, Murari Lal Street, Ansari Road, Darya Ganj, New Delhi - 110 002. Phone: 011-23270392, 23278631; Fax: 011-23256286 Nagpur : Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur - 440 018. Phone: 0712-2738731, 3296733; Telefax: 0712-2721216 Bengaluru : Plot No. 91-33, 2nd Main Road Seshadripuram, Behind Nataraja Theatre, Bengaluru-560020. Phone: 08041138821, 9379847017, 9379847005 Hyderabad : No. 3-4-184, Lingampally, Besides Raghavendra Swamy Matham, Kachiguda, Hyderabad - 500 027. Phone: 040-27560041, 27550139; Mobile: 09390905282 Chennai : New-20, Old-59, Thirumalai Pillai Road, T. Nagar, Chennai - 600 017. Mobile: 9380460419 Pune : First Floor, "Laksha" Apartment, No. 527, Mehunpura, Shaniwarpeth (Near Prabhat Theatre), Pune - 411 030. Phone: 020-24496323/24496333; Mobile: 09370579333 Lucknow : House No 731, Shekhupura Colony, Near B.D. Convent School, Aliganj, Lucknow - 226 022. Phone: 0522-4012353; Mobile: 09307501549 Ahmedabad : 114, “SHAIL”, 1st Floor, Opp. Madhu Sudan House, C.G. Road, Navrang Pura, Ahmedabad - 380 009. Phone: 079-26560126; Mobile: 09377088847 Ernakulam : 39/176 (New No: 60/251) 1st Floor, Karikkamuri Road, Ernakulam, Kochi - 682011, Phone: 0484-2378012, 2378016; Mobile: 09344199799 Bhubaneswar : 5 Station Square, Bhubaneswar - 751 001 (Odisha). Phone: 0674-2532129, Mobile: 09338746007 Kolkata : 108/4, Beliaghata Main Road, Near ID Hospital, Opp. SBI Bank, Kolkata - 700 010, Phone: 033-32449649, Mobile: 09883055590, 07439040301 DTP by : Elite-Art, Ansari Road, Daryaganj, New Delhi-110 002 Printed at : M/s. Aditya Offset Process (I) Pvt. Ltd., Hyderabad. On behalf of HPH. PPPPPrrrrreeeeefffffaaaaaccccceeeee tttttooooo ttttthhhhheeeee TTTTThhhhhiiiiirrrrrddddd EEEEEdddddiiiiitttttiiiiiooooonnnnn 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] PPPPPrrrrreeeeefffffaaaaaccccceeeee 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 BBBBBrrrrriiiiieeeeefffff CCCCCooooonnnnnttttteeeeennnnntttttsssss 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 CCCCCooooonnnnnttttteeeeennnnntttttsssss 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

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Hyderabad - 500 027. Phone: 040-27560041, 27550139; Mobile: 09390905282 .. Fixed and Flexible Budgets. 20.17. Revision of . (a) the cost of manufacturing a product, e.g., motor car, furniture, chemical, steel, paper, etc., and.
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