1)Explain the various 'Accounting Concepts’: accounting profession as guides for recording

and reporting the affairs and activities of a business. For convenience, these concepts are
classified into two groups: i) Concepts to be observed at the recording stage. ii) Concepts to
be observed at the reporting stage i.e., at the time of preparing the final accounts. The first
group of concepts were fully discussed in Unit 3. The second group of concepts are: 1 Going
Concern Concept 2 Accounting Period Concept 3 The Matching Concept 4 Conservatism
Concept 5 Consistency Concept 6 Full Disclosure Concept 7 Materiality Concept These
concepts are concerned with the preparation of final accounts and their reporting to the
interested parties.
The Going Concern Concept Normally, the business is started with the intention of continuing
it indefinitely or at least for the foreseeable future. The investors lend money and the
creditors supply goods and services with the expectation that the enterprise would continue
for long. Unless there is a strong evidence to the contrary, the enterprise is normally viewed
as a going (continuing) concern. Hence financial statements are prepared on a going concern
basis and not on liquidation (closure). Let us now discuss them one by one.
The Accounting Period Concept You know the going concern concept assumes that the
business will continue for a long period, almost indefinitely. But the businessmen cannot
postpone the preparation of financial statements indefinitely. Conventionally, duration of the
accounting period is twelve months. It is called an 'accounting year'. The Matching Concept
This is also called 'Matching of Costs against Revenues Concept'. To work out profit or loss of
an accounting year, it is necessary to bring together all revenues and costs pertaining to that
accounting year. In other words, expenses incurred in an accounting year should be matched
with the revenues earned during that year.
The Conservatism Concept This is also known as Prudence Concept. This concept tries to
ensure that all uncertainties. and risks inherent in business are adequately provided for.
Accountants generally prefer understatement of assets or revenues, and overstatement of
liabilities or costs. The Consistency Concept The principle of consistency means 'conformity
from period to period with unchanging policies and procedures'. It means that accounting
method adopted should not be changed from year to year. The Full Disclosure Concept You
know the financial statements are the basic means of communicating financial information to
all interested parties. These statements are the only source for assessing the performance of
the enterprise for investors, lenders, suppliers, and others.
The Materiality Concept This concept is closely related to the Full Disclosure Concept. Full
disclosure does not mean that everything should be disclosed. It only means that all relevant
and material information must be disclosed. Materiality primarily relates to the relevance and
reliability of information. An item is considered material if there is a reasonable expectation
that the knowledge of it would influence the decision of the users of the financial statements.
However, there are no specific rules for ascertaining material or nonmaterial items. It is just
a matter of personal judgement.
2) The scope of accounting can be presented in a diagrammatic form as shown in Figure 1.1.
Data creation and collection is the area which provides raw material for accounting. The data
collected is `historic' in the sense that it refers to events which have already taken place.
Earlier, accounting was largely concerned with what had happened, rather than making any
attempt to predict and prepare for future. After the historic data has been collected, it is
recorded in accordance with generally accepted accounting theory. A large number of
transactions or events have to be entered in the books of original entry (journals) and ledgers
in accordance with the classification scheme already decided upon.
activity of accounting may be called reformative. The processing method employed for
recording may be manual, mechanical or electronic. Computers are also used widely in
modern business for doing this job. Data evaluation is regarded as the most important activity
in accounting these days. Evaluation of data includes controlling the activities of business with
the help of budgets and standard costs (budgetary control), evaluating the performance of
business, analysing the flow of funds, and analysing the accounting information for decision-
making purposes by choosing among alternative courses of action.
The analytical and interpretative work of counting may be for internal or external uses and
may range from snap answers to elaborate reports produced by extensive research. Data
evaluation has another dimension and this can be known as the auditive work which focuses
on verification of transactions as entered in the books of account and authentication of
financial statements.
Data reporting consists of two parts-external and internal. External reporting refers to the
communication of financial information (viz., earnings, financial and funds position) about the
business to outside parties, e.g., shareholders, government agencies and regulatory bodies of
the government. The central purpose of accounting is to make possible the periodic matching
of costs (efforts) and revenues (accomplishments).
3) ACCOUNTING AS AN INFORMATION SYSTEM While discussing the scope of accounting you
must have observed that accounting involves a series of activities linked with each other,
beginning with the collecting, recording, analysing and evaluating the data, and finally
communicating information to its users. Information has no meaning unless it is linked with a
certain purpose. Accounting as a social science can be viewed as an information system since
it has all the features of a system. It has its inputs (raw data), processes (men and equipment),
and outputs (reports and information)
Shareholders and Investors: Since shareholders and other investors have invested their
wealth in a business enterprise, they are interested in knowing periodically about the
profitability of the enterprise, the soundness of their investment and the growth prospects of
the enterprise. Creditors: Creditors may be short-term or long-term lenders. Short-term
creditors include suppliers of materials, goods or services. They are normally known as trade
creditors. Long-term creditors are those who' have lent money for a long period, usually in
the form of secured loans. Employees: The view that business organisations exist to maximise
the return to shareholders has been undergoing change as a result of social changes. A
broader view is taken today of economic and social role of management.
Government: In a mixed economy it is considered to be the responsibility of the Government
to direct the operation of the economic system in such a manner that it sub serves the
common good. Controls and regulations on the operations of private sector enterprises are
the hallmark of mixed economy. S. Management: Organisations may or may not exist for the
sole purpose of profit. However, information needs of the managers of both kinds of
organisations are almost the same, because the managerial process i.e., planning, organising
and controlling is the same. Consumers and others: Consumers' organisations, media,
welfare organisations and public at large are also interested in condensed accounting
information in order to appraise the efficiency and social role of the enterprises in different
sectors of the economy, that is, what levels of profits and outputs are being achieved, in what
way the social responsibility is being discharged and in what manner the growth is being
planned by the enterprises in-accordance with the national priorities etc .In any case, the
objective of accounting information is to enable information users to make optimum
decisions.
4)DIFFERENT TYPES OF BUDGETING Budget and budgetary process in government is probably
a 19th century phenomenon. For example, the “budget classification in India, for a long time
even after Independence, continued to be carried out in the format of the lineitem method
though it is outdated in several respects, especially making its evaluation difficult
(Chakrabarty & Chand, 2016). Line-Item Budgeting Line-item budgeting is seen as a
traditional form of budgeting. It was developed during the early 20th century. The line-item
budget covers inputs only, meaning that each line on a paper-sheet has an item or object (for
example a wooden chair) on the left side followed by the cost (for example, Rs. 1000) on the
right side.
Performance Budgeting Performance budgeting, also called programme budgeting is a
special tool of development administration. Performance budgeting is essentially a technique
of presenting government operations in terms of “functions, programmes, activities and
projects” (ARC, 1967). o links the programming and budgeting together so that it serves as a
management tool; ii) to enable the legislature to exercise control over the executive in a
better way; iii) to help in the formulation and review of policy and plans for integration with
budget; to supply yardsticks of efficiency; and v) to facilitate effective accounting and audit.
Planning-Programming-Budgeting, also known as Planning-Programming Budgeting System,
or PPBS, is a system of resource allocation designed to improve government efficiency and
effectiveness by establishing long-range planning goals, analysing the costs and benefits of
alternative programmes that would meet these goals, and articulating programmes as
budgetary and legislative proposals.
Zero-Based Budgeting Zero-based Budgeting (ZBB) is the latest technique which has been
developed in the budget process during the 1970s. It is a system of budgeting that requires
all spending for each programme and agency to be justified and approved for each new
period, that is, each year. Results in efficient allocation of resources, as it is based on needs
and benefits. 2) Drives managers to find out cost-effective ways to improve operations. 3)
Detects inflated budgets. 4) Useful for service department where the output is difficult to
identify. 5) Increases staff motivation by providing greater initiative and responsibility in
decision making. 6) Increases communication and coordination within the organisation. 7)
Identifies and eliminates wastage and obsolete operations.
Gender Budgeting Gender budgeting means preparation of budgets or their analysis from a
gender perspective. Its aim is to deal with issues of gender inequality through budget. Gender
Budgeting (GB) is a powerful tool for achieving gender mainstreaming so as to ensure that
benefits of development reach women as much as much as men. Target-Based Budgeting
(TBB) was embraced by newly-elected US President Ronald Reagan in 1981.Since then it
continues to work in tandem with its budgetary successors at all governmental levels in the
United States. TBB, also known as Target Budgeting, Fixed-Ceiling Budgeting, and Top-Down
Budgeting, is a method of allocating resources to agencies in which agency spending limits or
targets are set by the elected chief executive.

5)Profitability ratios assess a company's ability to earn profits from its sales or operations,
balance sheet assets, or shareholders' equity. They indicate how efficiently a company
generates profit and value for shareholders. Profitability ratios include margin ratios and
return ratios. Higher ratios are often more favourable than lower ratios, indicating success at
converting revenue to profit. These ratios are used to assess a company's current
performance compared to its past performance, the performance of other companies in its
industry, or the industry average. Some common examples of the two types of profitability
ratios are: Gross margin, Operating margin, Pretax margin, Net profit margin, Cash flow
margin, Return on assets (ROA), Return on equity (ROE), Return on invested capital (ROIC)

Cost-volume-profit (CVP) analysis is a method of cost accounting that looks at the impact that
varying levels of costs and volume have on operating profit. KEY TAKEAWAYS; Cost-volume-
profit (CVP) analysis is a way to find out how changes in variable and fixed costs affect a firm's
profit. Companies can use CVP to see how many units they need to sell to break even (cover
all costs) or reach a certain minimum profit margin. CVP analysis makes several assumptions,
including that the sales price, fixed, and variable costs per unit are constant

Amortization and depreciation are two methods of calculating the value for business assets
over time. Amortization is the practice of spreading an intangible asset's cost over that asset's
useful life Depreciation is the expensing a fixed asset as it is used to reflect its anticipated
deterioration. Amortization and depreciation differ in that there are many different
depreciation methods, while the straight-line method is often the only amortization method
used. The two accounting approaches also differ in how salvage value is used, whether
accelerated expensing is done, or how each are shown on the financial statements.

BUDGETARY CONTROL No system of planning can be successful without having an effective

and efficient system of control. Budgeting is closely connected with control. The exercise of
control in the organisation with the help of budgets is known as budgetary control. The
process of budgetary control includes 1. preparation of various budgets 2. continuous
comparison of actual performance with budgetary performance and 3. revision of budgets in
the light of changed circumstances. A system of budgetary control should not become rigid.
There should be enough scope for flexibility to provide for individual initiative and drive.
Budgetary control is an important device for making the organisation more efficient on all
fronts. It is an essential tool for controlling costs and achieving the overall objectives.

Financial planning is concerned with the raising of funds and their effective utilisation to
maximise the company’s wealth. It includes the determination of: the amount of funds
needed for implementing various business plans  the pattern of financing, i.e. the form and
proportion of various corporate securities, such as shares, debentures, bonds, bank loans to
be issued or raised  the timing of floatation of various corporate securities.

The debt-to-equity ratio (D/E ratio) shows how much debt a company has compared to its
assets. It is found by dividing a company's total debt by total shareholder equity. A higher D/E
ratio means the company may have a harder time covering its liabilities. A D/E ratio of 2
indicates that the company derives two-thirds of its capital financing from debt and one-third
from shareholder equity, so it borrows twice as much funding as it owns (2 debt units for
every 1 equity unit)

BREAK EVEN ANALYSIS The analysis of cost behaviour is necessary for planning, control and
decision making. Analysis of cost behaviour means analysis of variability of each cost element
in relation to the level of output. Every cost follows some definite behaviour pattern. For
example, total variable costs vary in direct proportion to the volume of output but per unit
variable cost remains same. Examples of such costs are direct material, direct labour,
packaging expenses, selling commission etc.

Liquidity is a very critical part of a business. Liquidity is required for a business to meet its
short term obligations. Liquidity ratios are a measure of the ability of a company to pay off its
short-term liabilities. Liquidity ratios determine how quickly a company can convert the assets
and use them for meeting the dues that arise. The higher the ratio, the easier is the ability to
clear the debts and avoid defaulting on payments. it helps understand the availability of cash
in a company which determines the short term financial position of the company. Current
Ratio = Current Assets / Current Liabilities.
Preference shares, more commonly referred to as preferred stock, are shares of a company's
stock with dividends that are paid out to shareholders before common stock dividends are
issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from
company assets before common stockholders.
Capital structure refers to the specific mix of debt and equity used to finance a company’s
assets and operations. From a corporate perspective, equity represents a more expensive,
permanent source of capital with greater financial flexibility. Financial flexibility allows a
company to raise capital on reasonable terms when capital is needed. Conversely, debt
represents a cheaper, finite-to-maturity capital source that legally obligates a company to
make promised cash outflows on a fixed schedule with the need to refinance at some future
date at an unknown cost.
Financial leverage results from using borrowed capital as a funding source when investing to
expand the firm's asset base and generate returns on risk capital. Leverage is an investment
strategy of using borrowed money—specifically, the use of various financial instruments
or borrowed capital—to increase the potential return of an investment. Leverage can also
refer to the amount of debt a firm uses to finance assets.
Overhead cost variance can be defined as the difference between the standard cost of
overhead allowed for the actual output achieved and the actual overhead cost incurred. In
other words, overhead cost variance is under or over absorption of overheads. Actual Output
X Standard Overhead Rate per unit – Actual Overhead Cost or Standard Hours for Actual
Output X Standard Overhead Rate per hour – Actual Overhead Cost.