Rules of recording financial transactions

in journal
• Personal Account:-According to the rule of “debit the receiver”
the personal account of person to whom we give some money
or goods is debited.
In the same way, according to the rule of “credit the giver”
the personal account of the person from whom we receive
some money or goods is credited.
• Real Account:-According to the rule of “debit what comes in
and credit what goes out" the account of the cash, goods or
other property which is received by the business firm is debited
and in the same way, the account of cash, goods or other
property which goes out of the business is credited.
• Nominal Account:-According to the rule of “debit all expenses”
the accounts of all expenses and losses are debited.
Similarly, according to the rule of" credit all income and
gains” the accounts of all income and profits are credited.
1
 Concept of Depreciation
• According to R.N. Carter, depreciation is the gradual and permanent decrease in
the value of an asset from nay cause.
• According to William Pickles, depreciation may be defined as the permanent and
continuing decrease in the quality, quantity or the value of an asset.
•
• Causes of depreciation

• By constant use
• By accident
• By Obsolescence
• By expiry of legal rights
•
Methods of providing depreciation

• ! 1)Straight line method 2) Written down value method

•
•
•
2
 Factor affecting amount of
Depreciation
 Total cost of asset:-
The cost of a fixed asset is determined after adding all expenses
incurred for bringing the asset to usable condition such as freight,
installation cost,etc.
 Estimated useful life of an asset:-
Useful life of an asset is estimated in terms of number of years,
it can be effective for business operations.
 Estimated scrap value:-
It is the estimated sale value of an asset at the end of its useful
life. Also called as residual value or break-up value. For example, a
plant is purchased for Rs 1,00,000 and estimated its serviceable life
will be 10 years. Scrap value is 8,000.
Depreciation charged on plant will be =

100000 − 8000
= Rs.9200
10 3
 Meaning of Cost Sheet
• Cost Sheet is a statement which is used to determine the
total cost of goods produced or units in a specific period and
in which total cost, per unit of cost and the cost incurred at
various stages from manufacturing a products to the stage of
making it saleable are shown. This statement as per
convenience, can be prepared on weekly, monthly or
quarterly intervals.

• According to ICMA London, Cost Sheet is a document which

provides for the assembly of the detailed cost of a cost centre
or cost unit. Advantages of Cost Sheet
• Determination of selling price
• Control on expenses
• Helpful in minimizing the expenses
• Benefit to common man
4
Functions of Management Accounting
• “Any form of accounting which enables a
business to be conducted more efficiently, can
be regarded as management accounting.”
-Institute of Charted Accounts of England and Wales. :
Functions
 Helpful in planning and forecasting
 Supply information to various levels
 To help in Co-ordination and communication
 Collection of Qualitative information also
 Concept of Flexible Budget
• Flexible Budget is that budget which presents costs, revenues and profits at various
levels of business activity i.e., various volumes of output and sales.

• According to ICMA London, Flexible Budget may be defined as a budget which is

designed to change in accordance with the level of activity attained.
Importance of Flexible Budget
• Advantages or marginal analysis
• Comparison with actual performance
• More practical Need of Flexible Budget

• Where there are chances of change in level of activity due to change in government
policies
• Where production is carried out only after receiving the customer’s order
• Where the supply of labour and material required for production are uncertain.
• Where the demand goes changing due to change in taste and fashion of customers
•

•
•

•
•
• 6
Describe Money Measurement Concept
• According to this concept, only those
transactions are recorded in accounting books
which can be measured in terms of money. An
event, even though it may be very important for
the business, will not be recorded in the books if
the effect of that event cannot be measured in
terms of money. For example, accounting does
not record a quarrel between manager and
employees.
• As such to make accounting records relevant,
simple and understandable, they are expressed
in a common unit of measurement,i.e.,money.

7
Basis of Standard costing Budgetary control
difference
Meaning It is a pre-determined cost,Budgetary control is a tool of
which determines what eachmanagement control and
product or service should costaccounting which directs and
under given condition co-ordinates the working
operations on the basis of
budget.

Basis These are fixed on the basis ofThese are fixed on the basis of
technical information past records and future
expectations

Relation- These are related to costThese are related to final

account account
ship

Scope Limited as it is related withWide scope as it covers

various elements of cost inalmost all the departments
production deptt.
8
What are Accounting Standards (AS)
• Accounting Standards may be defined as written statements
or guidelines issued from time to time by institutions of
Accounting professionals, specifying uniform rules or
practices for preparing the financial statements.
• According to Kohler,Accounting Standards are a mode of
conduct imposed on Accountants by custom, law or
professional body.
Advantages of Accounting Standards
• AS significantly reduce the chances of manipulation and
frauds
• AS ensure the consistency and comparability of financial
statements
• AS improve the reliability and credibility of financial
statements
• AS help in resolving conflicts of financial interests among
various groups. 9
 Explain Margin of Safety(MOS)
• Margin of Safety is the difference between actual total sales and B.E.P.MOS can be
calculated in rupees or in units .

• MOS in Rupees:- 1) MOS(Rs)=Sales(Rs)-BEP(Rs)

• 2) MOS(Rs)=
•
• MOS(in units):- profit
1) MOS(in units)= Sales(units)-BEP(units)
P / Vratio
• 2) MOS(in units)=

• Importance of Margin of Safety:-

profit
MOS is an important indicator of strength of the business. If MOS is large, the
position contributi
business will be sound. It will on. perunitto earn profit. If
have more opportunities
Mos is small, a small reduction in sales can be a serious matter and may result
even in loss.

• 10
 Explain Material mix variance(MMV)
• MMV is that part of material variance which arises due to
change in standard and actual composition of mix. If
material mix used in production is of higher price and
larger in quantity than the standard mix and material mix
will be more and vice versa. The variance can be
calculated under two situations-

 When TSQ=TAQ,then MMV=

SP(SQ-AQ)

 When TSQ ≠ TAQ,then MMV=

SP(RSQ-AQ)
SQ
 here,RSQ= × TAQ
T SQ
11
 Assumptions of Break even point
• The Break even point is that point of sales volume where
total revenue add total expenses are equal, it is also said as
the point of zero profit or zero loss.
•
• Assumptions:-

• Fixed and variable cost

• Certain and constant fixed cost
• Unchanged sales-mix-There is only one product. If several
products being produced and sold, sales-mix will remain
constant
• Technological stability

12
 Define costing and nature of cost
accounting.
 Costing:-
The technique and process of ascertaining cost is called
costing. Here technique refers to principles and rules which are applied
for ascertaining cost like marginal costing standard costing,etc.

 Cost Accounting:-
It may be defined as the body of
concepts,methods,techniques and procedures used to compute and
estimate the costs, profitability and performance of individual products,
services and segments of an enterprise.

 Nature of cost accounting:-

 Specialized branch of accounting

 Art and science both
 Helpful to management
13
Explain break even chart and Zero base
budgeting
• Break even chart:-
It is a graphical presentation showing
relationship between cost, volume and profit. It
shows the Break even point and also indicates the
estimated cost and profit or loss at various
volumes of activity.
• Zero base budgeting:-
It is the latest technique of budgeting and
first used in America in 1962.In this, every year is
taken as a new year and previous year is not taken
as base. The budget for this year will have to be
justified according to present situations. Its
approach is towards achievement of objectives and
focus on cost benefit analysis.
14
Explain usefulness of cost accounting in
modern day business organizations

 Cost Accounting:- It may be defined

as the body of concepts,methods,techniques and
procedures used to compute and estimate the costs,
profitability and performance of individual products, services
and segments of an enterprise.

Advantages of cost accounting:-

 Control on wastage of material and labour
 Proper utilization of plant
 Economy in cost
 Periodical profit and loss account

15
Define Budget, Budgeting and Budgetary
control
o Budget:-
Budget is an estimate of future needs arranged according to an
orderly basis being covering some or all the activities of an enterprise
for a definite period of time
o Budgeting:-
Budgeting is a wider process which includes preparation related
to budget, decisions related to various problems arising in Budget,
implementation of budget and control on the basis of budget.
o Budgetary control:-
Budgetary control is a tool of management control and accounting
which directs and co-ordinates the working operations on the basis of
budget. If there are variances in actual results, then either they are
corrected or budget is modified so that the objective of maximum
efficiency as per the policy of management may be achieved.
16
 Significance of preparing Fund flow
statement
 Fund flow statement:- It is a method by which we study
changes in the financial position of a business enterprise between
beginning and ending financial statement dates. It shows the sources
and uses of funds for a period of time.

 It is also called sources and application of funds, statement of change in

financial position, Movement of Fund statement or Where gone
statement.
 Significance of Fund flow statement:-
 It helps in appraising the use of working capital
 It helps in proper allocation of resources
 It acts as a future guide
 It helps in knowing the overall creditworthiness of a firm

17
Basis of Trade discount Cash discount
difference
Meaning Allowed at the time of saleIt is allowed if the
to the customer at a fixedcustomer makes the
percentage on printed listpayment immediately or
price within a fixed period
Object It is allowed to theIt is allowed to
retailers to enable them toencourage quick
sell the goods to theirpayment
customers at list price
Recording Not recorded in books Recorded in books
in books

Deduction It is deducted from invoice It is not deducted from

from invoice invoice
18
 Profit- Volume Ratio(P/V ratio)
• P/V ratio is an important ratio for studying the profitability of
operations of a business. It is also called Contribution ratio, Marginal
income percentage or contribution/sales ratio. It is a ratio of
contribution to sales and is expressed generally in terms of
percentage.
P/V ratio can be calculated as-
contributi on
• P/V Ratio = ×100
sales

= Sales − var iable cos t

× 100
sales

Fixed . cos t + profit

= ×100
sales

19
 Accounting Process with Diagram
• Also called Accounting Cycle
•

•
•

• Recording of financial transactions only

• Recording
• Classifying
• Summarizing
• Recording in terms of money
• Interpretation of the results

20
•
Main features of Budgetary control and
what are the requisties for a successful
Budgetary control.
Features
• Continuous comparison
• Revision
• Co-ordination
• Establishment
Requisties
• Clarifying Objectives
• Proper delegation pf authority and responsibility
• Participation of all employees
• Flexibility 21
 Types of Budget
On the basis of period:-
 Long term budget
 Short term budget
 Current budget
 On the basis of Flexibility:-
 Fixed budget
 Flexible budget
 On the basis of Functions:-
 Sales budget
 Production budget
 Cash budget
 Master/Comprehensive budget


22
Basis of Journal Ledger
difference
Meaning It is a book of original entry inThe book which contains a
which transactions areclassified and permanent
recorded first of all as andrecord of all the transactions is
when they take place called ledger

Accuracy Accuracy of these booksAccuracy of these books is

cannot be tested tested by preparing trial
balance
Page number Page no. of ledger i.e. LedgerPage no. of journal i.e. Journal
Folio(L.F.)is written in theseFolio(J.F.)is written in these
books books

Recording of Full details of transactions areFull details of transactions are

transactions recorded in these books not recorded in these books.

23
 What are Financial Statements
 Financial Statements refer to such statement which report
the profitability and financial position of the business at the
end of accounting period.
 The term Financial Statements include at least two basic
statement which are as under
 Income statement(or trading and profit and loss account)
which shows results of business operations during an
accounting period
 Statement of financial position(or balance sheet) which
shows financial position of business at a specified point of
time.
Users of Financial Statements
 Investors
 Creditors
 Employees
 Government 24
 Tools of Management accounting
• Management accounting is essential to help mgt.in
formulating policies and plans.
• According to Anglo-American Council on Productivity,
Management accounting is the presentation of
accounting information in such a way as to assist
management in the creation of policy and the day-to-day
operation of an undertakings.

• Tools and Techniques

 Financial policy and accounting

 Budgetary control
 Standard costing
 Decision accounting
 Control accounting
25
Basis of Standard cost Actual/Historical
difference cost
Record and It is determined beforeIt is determined and
determination actual performance recorded after the
actual performance

Importance It is considered as anActual cost carries its

important tool of costhistorical significance
control only
Relationship It is a part ofIt is a part of traditional
with management accounting accounting
accounting

Compulsion It is optional It is compulsory

26
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