ACCOUNTS FOR MANAGERS

(THEORY SUGGESTIONS)

1. What is accounting?

Ans. Accounting is the processor keeping the accounting books of the

financial transactions of the company. The accountants summarize the
transactions in the form of journal entries. These entries are used in
bookkeeping. The books of accounts are prepared by the accountants as per
the regulation of the auditors and various regulating bodies. The accountants
might follow the Generally Accepted Accounting Principles (GAAP) or the
IFRS (International Financial Reporting Standards) principles.

2. Who are the users of accounting information’s?*

Ans. Users may be categorised into internal users and external users.

(A) Internal Users

 Owners: Owners contribute capital in the business and thus they are
exposed to maximum risk. So, they are always interested in the safety of
their capital.

 Management: Accounting information is used by management for taking

various decisions.

 Employees: Employees are interested in the financial statements to assess

the ability of the business to pay higher wages and bonuses.

(B) External Users

 Banks and financial institutions: Banks and Financial Institutions

provide loans to business. So, they are interested in financial information
to ensure the safety and recovery of the loan.

 Investors: Investors are interested to know the earning capacity of

business and safety of the investment.

 Creditors: Creditors provide the goods on credit. So they need

accounting information to ascertain the financial soundness of the firm.

 Government: The government needs accounting information to assess

the tax liability of the business entity.
  Researchers: Researchers use accounting information in their research
work.

 Consumers: They require accounting information for establishing good

accounting control, which will reduce the cost of production.

3. Write short note on IFRS.

Ans. IFRS is short for International Financial Reporting Standards. IFRS is

the international accounting framework within which to properly organize and
report financial information. It is derived from the pronouncements of the
London-based International Accounting Standards Board (IASB). It is currently
the required accounting framework in more than 120 countries. IFRS requires
businesses to report their financial results and financial position using the same
rules; this means that, barring any fraudulent manipulation, there is considerable
uniformity in the financial reporting of all businesses using IFRS, which makes
it easier to compare and contrast their financial results.

IFRS is used primarily by businesses reporting their financial results anywhere

in the world except the United States. Generally Accepted Accounting
Principles, or GAAP, is the accounting framework used in the United States.
GAAP is much more rules-based than IFRS. IFRS focuses more on general
principles than GAAP, which makes the IFRS body of work much smaller,
cleaner, and easier to understand than GAAP.

4. Golden Rules of accounting.

Ans. Following are the golden rules of accounting-

1) Rule One

"Debit what comes in - credit what goes out."

This legislation applies to existing accounts. Accurate replicas include furniture,

land, buildings, machines, and so on. By default, they have a negative balance.
They are debiting what is arriving in order to enhance the balance of the current
account.

2) Rule Two

"Credit the giver and Debit the Receiver."

It is a rule for personal accounts. When someone, genuine or fictitious,
contributes to the business, it counts as an inflow, and the giver must be noted
in the records. However, the receiver must be acknowledged. Consider
purchasing a gift from a gift shop. Your account will be updated to reflect the
transaction.

3) Rule Three

"Credit all income and debit all expenses."

This regulation applies to nominal accounts. A company's capital is its

obligation. It has a credit balance. If all earnings and profits are credited, the
capital will increase. When losses and costs are deducted, the capital declines. 

5. Distinguish between Financial Accounting and Management

Accounting?*

Ans.

6. Explain various types of accounting concepts and conventions.*

Ans. Accounting Concepts

Accounting Concepts can be understood as the basic accounting assumption,

which acts as a foundation for the preparation of financial statement of an
enterprise. Indeed, these form a basis for formulating the accounting principles,
methods and procedures, to record and present the financial transactions of
business.
  Business Entity Concept: The concept assumes that the business
enterprise is independent of its owners.

 Money Measurement Concept: As per this concept, only those

transaction which can be expressed in monetary terms are recorded in the
books of accounts.

 Cost concept: This concept holds that all the assets of the enterprise are
recorded in the accounts at their purchase price

 Going Concern Concept: The concept assumes that the business will
have a perpetual succession, i.e. it will continue its operations for an
indefinite period.

 Dual Aspect Concept: It is the primary rule of accounting, which states

that every transaction effects two accounts.

 Realisation Concept: As per this concept, revenue should be recorded by

the firm only when it is realized.

 Accrual Concept: The concept states that revenue is to be recognized

when they become receivable, while expenses should be recognized when
they become due for payment.

 Periodicity Concept: The concept says that financial statement should be

prepared for every period, i.e. at the end of the financial year.

 Matching Concept: The concept holds that, the revenue for the period,
should match the expenses.

Accounting Convention

Accounting Conventions, as the name suggest are the practice adopted by an

enterprise over a period of time, that rely on the general agreement between the
accounting bodies and helps in assisting the accountant at the time of
preparation of financial statement of the company.

For the purpose of improving quality of financial information, the accountancy

bodies of the world may modify or change any accounting convention. Given
below are the basic accounting conventions:
  Consistency: Financial statements can be compared only when the
accounting policies are followed consistently by the firm over the period.
However, changes can be made only in special circumstances.

 Disclosure: This principle state that the financial statement should be

prepared in such a way that it fairly discloses all the material information
to the users, so as to help them in taking a rational decision.

 Conservatism: This convention states that the firm should not anticipate
incomes and gains, but provide for all expenses and losses.

 Materiality: This concept is an exception to the full disclosure

convention which states that only those items to be disclosed in the
financial statement which has a significant economic effect.

7. Distinguish between journal and ledger?

Ans.

8. Mention the types of errors that can’t be find out when trail balance
is balanced.

Ans. The correspondence of trial balance is not stated as definite evidence

for the absolute accuracy of the books. It only indicates the mathematical
precision of the books of accounts. The Trial balance may agree, and yet there
may be some errors of the following types remaining undisclosed.

 An error of omission – If the entry has not been recorded in a subsidiary
book, the debit and credit would be omitted. And the trial balance
agreement will not be affected in any way.

 Compensating errors – These are the errors that compensate themselves

in the net result.I.e., Over debit or under the credit of various accounts
being neutralized by over credits or under the credit to the same extent as
other accounts. For example, the posting of Rs. 500 on the debit side of a
certain account would be compensated by under posting of Rs. 100 on the
credit side of another account and omission of credit posting of Rs. 400 to
a third account. This error may also be neutralized by over-posting Rs.
500 on the debit side in some other account or accounts.

 Errors of principle – These errors will not affect the trial balance
agreement as they arise from the debiting or crediting of wrong heads of
accounts, as would be inconsistent with the fundamental principles of
double-entry accounting. For example, Rs. 1,500 spent on the extension
of the building wrongly debited to the repairs account instead of the
building account will not affect the agreement of the Trial Balance. Thus,
such errors arise whenever an asset is treated as an expense, liability as
income, or vice versa.

 A wrong entry in a subsidiary book – If a credit purchase of Rs. 450

from James is wrongly written as Rs. 540 in the purchase book, such an
error will not be disclosed. The posting on both the debit side of the
purchase account and the credit side of the account of James will be with
the wrong amount of Rs. 540, so the trial balance will agree.

 Posting an item to the right side but in the wrong account – If a
purchase of Rs. 100 from Carl James has been credited to Mathew Woods
instead of Carl James, it will not detect such an error.

9. What is depreciation? Explain its causes.

 Ans. Definition: The monetary value of an asset decreases over time due to
use, wear and tear or obsolescence. This decrease is measured as depreciation.

Causes

1. By Constant Use: The constant use of any asset by a business causes wear

and tear, which causes a decrease in the value of those assets. As a result, the
capacity of the asset to serve in the business is reduced. 

2. By Passing of Time: The value of assets also decreases when an asset is

exposed to forces of nature like wind, rain, etc., even if it is not put to any use.

3. By Obsolescence: Obsolescence is also one main reason for depreciation. An

existing asset can become outdated in some time due to technological changes,
improvements in production methods, changes in market demand, etc., as a
result, the demand for the asset decreases, as the old asset is not able to fulfil the
requirements of the business.

4. By Expiration of Legal Rights: There are some assets that are used in the
business for a certain time period. The time period is determined by an
agreement in which the tenure to use that particular asset is mentioned.
Example: Patents, Copyrights, Lease, etc.

5. By Accident: Assets can be destroyed due to some abnormal factors, such as

earthquakes, floods, etc. This leads to a decrease in the value of the asset. Thus,
it needs to be taken into account.

10.Distinguish between Straight line and Diminishing Balance method.

Ans.
 11.Distinguish between Store Ledger and Bin Card?

Ans.

12.Explain ABC in brief.

Ans. ABC analysis refers to the inventory management technique used to

identify items that constitute a significant part of the overall inventory value and
categorize them into critical, important, and moderately important. The basic
premise of ABC analysis is that every single item in an inventory doesn’t have
equal value and demand – some items cost much more than others. In contrast,
some items are used more frequently, and the remaining are a mix of both.

Typically, companies use the following steps to perform ABC analysis –

Step 1: Firstly, determine the items’ inventory value by multiplying their price
and consumption volume during the given period. Mathematically,

Inventory Value = Item Cost * Consumption Volume

Step 2: Next, sort all the items according to inventory value from highest to
lowest.

Step 3: Next, calculate the value contribution of each item as a percentage of

the total inventory value. Mathematically,

Item % of Total Inventory Value = Item’s Inventory Value / Total

Inventory Values
Step 4: Finally, group all the items according to their contribution to the overall
inventory value. For instance, items that account for 80% of
total inventory may be allocated to the category ‘A’ items. In comparison,
items that account for the following 15% may be allocated to category ‘B,’ and
the remaining 5% may be allocated to category ‘C.’

13.Distinguish between Halsey Plan and Rowan Plan.

Ans.

14.What do you mean by Labour Budget?

Ans. The direct labour budget is used to calculate the number of labour hours
that will be needed to produce the units itemized in the production budget. A
more complex direct labour budget will calculate not only the total number of
hours needed, but will also break down this information by labour category. The
direct labour budget is useful for anticipating the number of employees who will
be needed to staff the manufacturing area throughout the budget period. This
allows management to anticipate hiring needs, as well as when to schedule
overtime, and when layoffs are likely. The budget provides information at an
aggregate level, and so is not typically used for specific hiring and layoff
requirements.
 15.Distinguish between Allocation and Apportionment?

Ans.

16.What is Break Even Point and Margin of Safety and Angle of

incidence?

Ans. Break Even Point (B.E.P): Break-even point (BEP) is a term in accounting
that refers to the situation where a company’s revenues and expenses were equal
within a specific accounting period. It means that there were no net profits or no
net losses for the company – it “broke even”. BEP may also refer to the
revenues that are needed to be reached in order to compensate for the expenses
incurred during a specific period.

There are two ways to compute for the break-even point – one is based on units
and the other is based in rupees.

To compute for the break-even point in units, the following formula is followed:

Break-even Point (Units) = Fixed Costs / (Revenue Per Unit – Variable Cost
Per Unit)

That’s the accounting break-even.

To compute for break-even point in dollars, the following formula is followed:

Break-even Point (Sales in rupees) = Fixed Costs / (Sales Price per Unit x
BEP in Units

That’s the financial break-even.

Where:

 Fixed Costs are the costs that are independent of the volume of sales,
such as rent
  Variable Costs are the costs that are dependent on the volume of sales,
such as the materials needed for production or manufacturing

Margin of Safety: Margin of safety is a principle of investing in which an

investor only purchases securities when their market price is significantly below
their intrinsic value. In other words, when the market price of a security is
significantly below your estimation of its intrinsic value, the difference is the
margin of safety. Because investors may set a margin of safety in accordance
with their own risk preferences, buying securities when this difference is present
allows an investment to be made with minimal downside risk.

Alternatively, in accounting, the margin of safety, or safety margin, refers to the

difference between actual sales and break-even sales. Managers can utilize the
margin of safety to know how much sales can decrease before the company or a
project becomes unprofitable. 

 A margin of safety is a built-in cushion allowing for some losses to be

incurred without major negative effect.

 In investing, the margin of safety incorporates quantitative and qualitative

considerations to determine a price target and a safety margin that
discounts that target.

 By purchasing stocks at prices well below their target, this discounted

price builds in a margin of safety in case estimates were incorrect or
biased.

 In accounting the safety margin is built into break-even forecasts to allow

for some leeway in those estimates.

Angle of Incidence: It is the angle of intersection between total sales line and
total cost line drawn in the case of break even chart. It indicates the rate at
which profits are earned. The larger the angle, the higher the rate of profit or
vice versa.

17.Cost centre and Cost Unit.

Ans. Cost Centre: In simple terms, you can define the cost centre as the one or
more units of the firm that don’t contribute directly to the process of revenue
generation in an organisation but incur expenses. This is a type of responsibility
centre that is accountable for incurring expenses that are under their control. It
indicates any section of the organisation’s product or service for which specific
cost collection is looked for. 

A cost centre, according to the Institute of Cost and Management Accountants

(ICMA), is a location, person, or item of equipment (or a combination of these)
for which costs can be determined and utilised for cost control.

A cost centre, in other words, is any location, person, machine, section, part,
activity, or function inside an organisation or enterprise where expenses are
gathered or aggregated and assigned.

Cost Unit: The cost unit is defined as the unit of product, service, time, activity,
or combination in relation to which cost is estimated. At the time of preparing
the cost statements and accounts, a particular unit is required to be selected. It
helps to identify the cost accurately and allocate the various expenses. It assists
the cost measurement process of the company and promotes comparison. 

Cost Unit Example- 

The cost unit of the hotel industry is a room and the cost unit of the steel
industry would be a ton. This is preceded by the cost centre. 

There are both simple units and complex units in cost units. A simple unit
represents a single standard measurement like per kilogram, per piece, per
metre, etc. a complex unit uses a combination of two simple units like per
kilowatt-hour, per tonne-kilometre, etc.

18.Concept of GAAP.

Ans. GAAP (generally accepted accounting principles) is a collection of

commonly followed accounting rules and standards for financial reporting. The
acronym is pronounced gap.

GAAP specifications include definitions of concepts and principles, as well as

industry-specific rules. The purpose of GAAP is to ensure that financial
reporting is transparent and consistent from one public organization to another,
and from one accounting period to another.

GAAP emerged in the 1970s and involved the following four major rules and
standards:
  Accrual accounting methods. GAAP uses accrual accounting, which
records revenue when a service or good is sold but not when payment is
received; direct expenses for goods sold are recorded when a sale is
transacted, and indirect expenses are recorded when expenses are paid.

 Depreciation and capital expenditures. Costs of major asset

acquisitions are accounted for over the entire life of the asset. For
example, an item with a 10-year life is accounted for at 10% for 10 years.

 Reporting of historical costs. Some assets -- such as property,

equipment and facilities -- are accounted for using original purchase costs
rather than current market values.

 Reporting of bad debts. Companies with significant money owed by

customers, or accounts receivable, must report the possibility that some or
all of that money may not be received and becomes lost revenue.

Principles of GAAP

GAAP is outlined by the following 10 general concepts or principles.

1. Regularity. The business and accounting staff apply GAAP rules as

standard practice.

2. Consistency. Accounting staff apply the same standards through each

step of the reporting process and from one reporting cycle to the next,
paying careful attention to disclose any differences.

3. Sincerity. Accounting staff provide objective and accurate information

about business finances.

4. Permanence. Accounting staff use consistent procedures in financial

reporting, enabling business finances to be compared from report to
report.

5. Noncompensation. Accountants provide complete transparency of

positive and negative factors without any compensation. In other words,
they do not get paid based on how good or bad the reporting turns out.

6. Prudence. Financial data is based on documented facts and is not

influenced by guesswork.
 7. Continuity. Financial data collection and asset valuations should not
disrupt normal business operations.

8. Periodicity. Financial data should be organized and reported according to

relevant accounting periods. For example, revenue or expenses should be
reported within the corresponding quarter or other reporting period.

9. Materiality. Accountants must rely on material facts and disclose all

material financial and accounting facts in financial reports.

10.Good Faith. There is an expectation of honesty and completeness in

financial data collection and reporting.

19.Accounting concepts (Entity, Going Concern, Money measurement,

Accrual).

Ans. (a) Business Entity Concept This concept explains that the business is
distinct from the proprietor. Thus, the transactions of business only are to be
recorded in the books of business.

(b) Going Concern Concept This concept assumes that the business has a
perpetual succession or continued existence.

(c) Money Measurement Concept According to this concept only those

transactions which are expressed in money terms are to be recorded in
accounting books.

(d) The Accounting Period Concept Businesses are living, continuous

organisms. The splitting of the continuous stream of business events into time
periods is thus somewhat arbitrary. There is no significant change just because
one accounting period ends and a new one begins. This results into the most
difficult problem of accounting of how to measure the net income for an
accounting period. One has to be careful in recognizing revenue and expenses
for a particular accounting period. Subsequent section on accounting procedures
will explain how one goes about it in practice.

(e) The Accrual Concept The accrual concept is based on recognition of both
cash and credit transactions. In case of a cash transaction, owner’s equity is
instantly affected as cash either is received or paid. In a credit transaction,
however, a mere obligation towards or by the business is created. When credit
transactions exist (which is generally the case), revenues are not the same as
cash receipts and expenses are not same as cash paid during the period. Today’s
accounting systems based on accrual concept are called as Accrual system or
mercantile system of accounting

20.Concept of labour turnover.

Ans. Labour turnover is the percentage of a company's workers leaving the

company over a given period of time (usually a year).

Relatively high labour turnover could be directly related to pay or

organizational culture, among others, which could influence the employee to
look for opportunities elsewhere.
Number of employees leaving
Labour Turnover = Average Number of Employed *100

There are two main factors that influence labour turnover including avoidable
causes and unavoidable causes.

Avoidable causes

Avoidable causes are related to the company's facilities and working

conditions. These include factors that the management could adjust to retain the
workforce. Examples of avoidable causes include:

 Below-average working condition,

 Dissatisfactory wages and allowance,

 no retirement benefits,

 Lack of job security,

 Improper health and safety measures,

 Conflict with supervisor or co-workers,

 Poor transportation facilities.

Unavoidable causes

On the other hand, employees sometimes have to depart from the company for
unavoidable reasons. Neither the organization nor the employee can take any
step to avoid such events. Examples of unavoidable causes include:

 illness,
  accident

 retired,

 death

 domestic issues,

 community issues,

 Misconduct of workers.

21.Concept of EOQ.

Ans. Economic order quantity (EOQ) is a term for the ideal quantity a company
should purchase to minimize its inventory costs, like shortage or carrying costs.
The overall goal of economic order quantity is to decrease spending; its formula
is used to identify the greatest number of units needed (per order) to reduce
buying.
2 AO
EOQ = √ C

A = Annual Consumption in unit

O = Ordering Cost per / order

C = Carrying Cost depends on per unit cost at…..%

Benefits of Utilizing Economic Order Quantity

The main benefit of using EOQ is improved profitability. Here’s a list of

benefits that all add up to savings and improvements for your business:

 Improved Order Fulfilment: When you need a certain item or something

for a customer order, optimal EOQ ensures the product is on hand,
allowing you to get the order out on time and keep the customer happy.
This should improve the customer experience and may lead to increased
sales.
  Less Waste: More optimized order schedules should cut down on
obsolete inventory, particularly for businesses that hold perishable
inventories that can result in dead stock.

 Lower Storage Costs: When your ordering matches your demand, you

should have less products to store. This can lower real estate, utility,
security, insurance and other related costs.

 Quantity Discounts: Planning and timing your orders well allows you to

take advantage of the best bulk order or quantity discounts offered by
your vendors.

22.Concept of Idle time and overtime.

Ans. Idle Time:

When workers are paid on the basis of time, there may be some difference
between the time paid for and the time actually spent on production. This
difference is known as idle time. In other words, idle time is a period or
duration for which workers have been paid but they have not worked towards
production in the factory. This is a wastage which needs some effective control
so that payment of wages without actual work maybe minimized. Idle time may
be categorized as:

 Normal idle time due to unavoidable factors in the factory.

 Abnormal idle time caused by avoidable factors.

Causes of Idle Time: The reasons for idle time may be multiple. Some of the
examples of situations which causes idle time are represented as follows:
Treatment of Idle Time Cost: Cost of idle time should be treated in the
following manner:

 Item: Cost of Normal and Controllable Idle Time,  Charged

to: FACTORY OVERHEAD.

 Item: Cost of Normal but Uncontrollable Idle Time, Charged to: JOBS

(by inflating the rates of wages).
  Item: Cost of Abnormal and Uncontrollable or  Unavoidable Idle
Time, Charged to: COSTING PROFIT AND LOSS ACCOUNT.

Overtime:

When workers have to work beyond their normal duty hours, the additional
period is treated as Overtime. Overtime is an extra time over and above the
scheduled hours of work or beyond the usual working hours. When workers are
detained for overtime, they are normally paid at double the usual rate for extra
hours.

Overtime may be considered useful under the following circumstances:

 When the urgency of work demands an immediate completion of the job

for the customer.

 When the organization desires to make up any shortfall in production.

 When the company needs extra production to meet additional market

demand or seasonal rush.

 When the number of workers is less than the requirement.

Since overtime involves an extra cost, it needs proper authorization and control.
One has to ensure that the system is not put to misuse. This will expect a careful
scrutiny of (i) the justification for overtime, and (ii) the workers who are
required to be retained for this purpose.