Introduction to

Financial Accounting;
Cost Accounting;
Management Accounting; &
Financial Management
&
Their relevance to a Post-Graduate Management
Programme

Dr. Rajib Bhattacharya

Associate Professor
What is the main objective of doing Business?
Making / Earning Profit

What is Profit?
Profit is the excess of Revenue over Expenses.

Hence to ascertain the profit earned or loss incurred by a

business, the profit / loss has to be measured.

This measurement of profit must be:

a) Objective; and
b) In Monetary Terms.

Profit / Loss can be measured automatically by

measuring:
a) Income
b) Expenses
Every Business, micro, small, medium or large, needs an
infrastructure for carrying out business.
This infrastructure, of the business is constituted of
certain properties, tangible or intangible, which are
called Assets.
Asssets do not originate by themselves. They have to be
procured by either spending cash or by incurring
liabilities.
A business is an artificial entity having no resources of
its own when it is formed. Hence, if it has to procure
assets, then either cash must be given to it or credit has
to be extended to it by somebody else i.e. the owner or
debt (loan) providers, which, from the viewpoint of the
business, are Liabilities.
If a business has some assets, it must have equal
amount of liabilities as well i.e. Total Assets = Total
Liabilities at any point of time.
The branch of study which enables the accurate and
objective measurement of Revenue, Expenses, Assets &
Liabilities of any business in monetary terms for a
specific time period as well as presentation of the same
in prescribed formats, is called FINANCIAL
ACCOUNTING.
The Revenue and Expenses are presented in a Statement
called Profitability Statement / Income Statement. This
statement shows the Operational Performance / Results
of a business during a particular period in terms of
Profits Earned or Loss Incurred.

The Assets and Liabilities are presented in a Statement

called Balance Sheet. This statement shows the Financial
Position of a business at the end of a particular period in
terms of Break-up of the Total Assets & Total Liabilities
into their constituent parts.
Financial Accounting was there since long.

The scenario changed with the Industrial Revolution.

With the Industrial Revolution, production of goods

became mechanized from manual.

This increased the scale of production manifold.

The scale of business increased substantially and the

requirement of money to set up and run a business
became much higher.

Earlier, the business constitutions were either

proprietary or partnerships and requirement of money
to set up / run the business was small , which was met by
the proprietor / partners.
When the requirement of money became huge, it could
not be met by the proprietor / partners.

This led to the emergence and rapid growth of the Joint

Stock Companies.

With this, the Management & Owners of a business got

separated. The running of the business were in the
hands of Managers who were employees in the business
and were answerable to the Owners i.e. the
Shareholders.

On one hand, there was a requirement to control cost of

products to stay competitive, on the other hand, there
was a need for certain techniques which would aid in
effective decision making by the Managers.
The need to control cost of products led to the evolution
of the subject of COST ACCOUNTING which envisaged
assessing, recording, classifying and controlling costs.

For effective decision making, the decision should always

be based on adequate, reliable and accurate information.

The Financial Statements i.e. Income Statement and

Balance Sheet failed to provide adequate information on
the basis of which effective decisions can be taken.

This led to the rise of MANAGEMENT ACCOUNTING

which is a set of tools and techniques to extract hidden
information from the data contained in the Financial
Statements, which aided in taking effective decisions for
the future by the managers.
With the development of Stock Markets, the scenario
changed significantly.

Shareholders recognized better profit potential in

trading in Shares rather than to hold shares in the
anticipation of dividends.

Thus their attention was focused on the market prices of

shares held by them, which they expected to rise
consistently.

Thus a new branch of study i.e. FINANCIAL

MANAGEMENT evolved which aimed at Maximization
of Shareholders’ Wealth i.e. Market Price of Shares.

Financial Management is all about taking five decisions

i.e. Investment Decision, Financing Decision, Liquidity
Decision, Dividend Decision and Risk-Return Decision.
Post-Graduate Management Students are the future
captains of Industry.

They must take information-based effective decisions. So

they must be experts in Management Accounting.

They must develop and maintain the competitive edge of

their organizations . So they must be abreast with the
Cost Accounting techniques.

However, both Management & Cost Accounting stems

from Financial Accounting. Thus they should be familiar
with Financial Accounting also.

Lastly, they should always keep the interest of the

owners of the company i.e. the Shareholders in mind. So
they should be experts in Financial Management also.
THANK YOU