प्रबन्धकीय लेखाविधि Management Accounting

We can explain the meaning of management accounting as the science in which

accounting information are collected and analyzed. After this, these information are
provided to management for creation of policies and decision making. From
above meaning, we find that management accounting is combination of two words, one
is management and other is accounting.

Management means decision making.

But Question is more important than meaning of management

How does manager take decision?

Accounting means resource of accounting date.

But, Question is more important that meaning of accounting

Why does Accountant do hard work day and night for recording and analysis of financial
transactions?

Both above two questions are inter-related and invention of management might happen
due to the finding answer of above two question

Ans of 1st question : Manager can take the decision with accounting information.

Ans. of 2nd question : Accountant do hard work for providing help to management of
company.
After this following Cycle will start

Raw data
↓
↓

Financial Accounting  + Cost accounting

↓
↓

Useful Data

↓
↓
 →→ Management Accounting →→ Decision
Making

So, it is concerned with accounting information that is useful to management. Management

accounting's latest research was started since 1950 and after 60 years, its research has
reached at the top level and financial statement analysis, ratio analysis, fund flow
analysis, cash flow analysis, working capital analysis, investment analysis etc. are its main
technique to analyze company and its income and financial position and on these basis,
management takes the decision whether company invest his money in that particular
company or not.

In simple words, any form of accounting enables business to be conducted more efficiently
can regarded as management accounting.

Nature of management accounting guides to know main characteristics of management

accounting. Following are main points which shows the nature of management
accounting

1. No Fixed Norms Followed

In financial accounting, we follow different norms and rules for creating ledgers and
other account books. But there is no need to follow fixed norms in management
accounting. Management accounting tool may be different from one organization to
other organization. Using of different tools of management accounting is fully
dependent on the persons who are using it. So, business policy of each organization
affects rules and regulation of applying management accounting.
2. Increase in Efficiency

It is the nature of management accounting that it is used for increasing in the

efficiency of organization. It scans the points of inefficiency through analysis of
accounting information. By taking action for improving, organization can increase
the efficiency.
3. Supplies Information not Decisions

Management accountant supplies accounting facts and information and also

provides interpretation, but decision making is fully dependent on higher
authorities. Management accounting is just guide.
4. Concerned with Forecasting

It is the temperament of management accounting that it is fully concerned with

forecasting. In management accounting, historical accounting information is
analyzed through common size financial statement, ratio analysis, fund flow analysis
and accounting data tendency for knowing the probability of next fact. So, all these
things are especially useful for forecasting.
These forecasting may be related with following things

a) sales forecasting
b) production forecasting
c) earning forecasting
d) cost forecasting
2. Interpretation Scope

After analysis through ratio analysis, fund flow analysis, cash flow analysis or any
other tool of management accounting, our next management accounting scope is
interpretation scope. Analyzed data is also no tongue if you have no idea how to
explain it? So, this is big scope for every wise man. Same analyzed financial
statement's meaning may be different if interpretation is given by different account
managers. For example, If we open the financial statement of twelve five years plan
and we find that govt of India paid 1,10,000 Crores rupees for ending of poverty and
you can find different detail of it. But if new account manager links it with no. of
poor people, then we can see still 85% persons are poor. So, meaning of spending
of Rs. 1,10,000 crores will become opposite. So, interpretation is important part of
management accounting scope.

3. Decision Making Scope

"Who and how is the accounting information used for decision making?", is the part
of scope of management accounting.
2. Interpretation Scope

After analysis through ratio analysis, fund flow analysis, cash flow analysis or any
other tool of management accounting, our next management accounting scope is
interpretation scope. Analyzed data is also no tongue if you have no idea how to
explain it? So, this is big scope for every wise man. Same analyzed financial
statement's meaning may be different if interpretation is given by different account
managers. For example, If we open the financial statement of twelve five years plan
and we find that govt of India paid 1,10,000 Crores rupees for ending of poverty and
you can find different detail of it. But if new account manager links it with no. of
poor people, then we can see still 85% persons are poor. So, meaning of spending
of Rs. 1,10,000 crores will become opposite. So, interpretation is important part of
management accounting scope.

3. Decision Making Scope

"Who and how is the accounting information used for decision making?", is the part
of scope of management accounting.
accounting for decision making encourages its development. Management
accounting’s main function is to collect accounting information which is useful for
different managerial functions like planning, organization, coordination and control.
Now, we are explaining other important functions of management accounting.

1st Planning and Forecasting Function:

In 2005, Mr. A started his small business. He was well educated of management
accounting tools. By effective use of management accounting, he developed his
small business. Now, after 5 years, he is operating good company. Management
accounting’s basic functions like to study ratio analysis and cash and fund flow
statements can develop any small business like Mr. A. How is it possible?

One – Businessman can easily watch in which project he invested his cash and fund.
He can see whether its ROI and ROE is better than any other investment.

Second – He also makes good plan to reduce his investment in that project whose
return is not sufficient.
1st Planning and Forecasting Function:

In 2005, Mr. A started his small business. He was well educated of management accounting
tools. By effective use of management accounting, he developed his small business. Now,
after 5 years, he is operating good company. Management accounting’s basic functions like
to study ratio analysis and cash and fund flow statements can develop any small business
like Mr. A. How is it possible?

One – Businessman can easily watch in which project he invested his cash and fund. He can
see whether its ROI and ROE is better than any other investment.

Second – He also makes good plan to reduce his investment in that project whose return is
not sufficient.

4th Management Control Function:

Management control can be possible only with management accounting function.

Management accounting uses responsibility accounting tool in which different cost,
revenue and investment centers are made. Proper budget is maintained in each centre.
Analysis of actual recorded performance is compared with standard performance and
deviation is evaluated. This will be helpful to fix up wrong side of company’s decision
promptly. Thus company can do smoothly management control.

5th Communication Function:

Management accounting puts together all useful accounting information with comparable
past data for good communication with govt., bankers and investors.

Today, we will make clear the advantages of management accounting. After reading this,
you will surely study all concepts of management accounting more deeply for becoming
perfect in it.

Management accounting is needed in business because it has capacity to change the

business performance and financial position. Please pay attention to the advantages of
management accounting.

1st : Increase Efficiency :

Management accounting increases the efficiency of operation of company. Everything is

done in management accounting with a scientific system for evaluating and comparing the
performance. With this, we find deviations. We will take promotional decisions on this
basis. Other employees will also be motivated with this because if their performance will be
favourable, they get reward of this. Thus management accounting increases efficiency.

2nd : Maximizing the Profitability :

Using of management accounting's budgetary control and capital budgeting tool, company
can easily succeed to reduce both operating and capital expenditures. After this, company
can reduce its price and then company will receive super profits.

3rd : Simplify the Financial Statements

For taking different managerial decisions, management accountant provides deep technical
reports with simple interpretations  in which he mentions the facts of financial statements,
after this, company's management officers understand what is in financial statement and
how will they use this for company's progress.

4th : Control of Business's Cash Flow :

It is one of important advantage of management accounting that it can be used for

controlling of business's cash flow. We all know that cash in hand is better than in fixed
properties if there is emergency to pay our loan or debt. So, management accountant
deeply studies from where is money coming and where is it going. To check on misuse of
money will surely control of business's cash flow.
5th : Business-critical Decisions

To take business - critical decisions, now management accounting will become more powerful.
Global management accountants are coming for join on one plate-form for taking all business
critical decisions.

In previous educational contents, we've

explained functions and advantages of management accounting. Both contents were
published to tell the importance of this branch of accounting. We want to take this
conversation a step further today, and discuss tools and techniques of management
accounting that can be helpful to management for providing best information. Take a look
at some of best tools and techniques of management accounting outlined below:
In previous educational contents, we've
explained functions and advantages of management accounting. Both contents were
published to tell the importance of this branch of accounting. We want to take this
conversation a step further today, and discuss tools and techniques of management
accounting that can be helpful to management for providing best information. Take a look
at some of best tools and techniques of management accounting outlined below:

3rd Tool : Decision Accounting

There are lots of decision which businessman has to take on the basis of tools of
management accounting. One of management accounting tool is decision accounting. It is
helpful to take main decision which we can explain following ways :

a) To Buy or to construct any fixed asset

b) Do's or Dont's to do any business activity

c) To choose best alternative

d) Calculation the price of product

4th Tool : Throughput accounting

Throughput Accounting (TA) is a dynamic, integrated, principle-based, and

comprehensive management accounting's tool  that provides managers with decision
support information for enterprise optimization. Actually this is the extension of decision
accounting. Throughput accounting  is relatively new in management accounting. It is an
approach that identifies factors that limit an organization from reaching its goal, and then
focuses on simple measures that drive behavior in key areas towards reaching
organizational goals.

5th Tool : MIS

We MIS tool, management accountant provides information needed to manage

organizations effectively
. If we have to understand MIS, we need to understand ERP, SCM, CRM, DSS and other
computer techniques for providing information with effective ways.
6th Tool : Financial Policy

Financial policy is that tool of management accounting which is needed to make good
structure of capital mix We decide the proportion of share capital and loans in capital
structure. Financial and operating leverages are also its sub-tools.

7th Tool : WORKING CAPITAL MANAGEMENT

With this tool of management accounting, we manage short term assets and short term
liabilities. All cash management, debtor management and inventory management will
include in working capital management. We make also working capital cycle for knowing
the firm's ability to convert its resources into cash. If there is low time for conversion of raw
material into sales and then cash from debtor, it is good indication.

Financial Accounting and Management accounting both are the main branches of

Accounting. Both are very necessary for better business decision. All the data which
is used in management accounting are taken from financial accounting. But there
are many difference between financial accounting and management accounting.

Following are the main differences of financial accounting and management

accounting :-

Basis of Difference Financial Accounting Management Accounting

- In this, we analyze the
- In this, we record all the
financial statement through
1. Objectives transactions. We make
ratio analysis, fund flow
financial statements.
statement and other tools.
- Management accounting is
 - Financial accounting is the presentation of data for
2. Nature related to record of historical future planning. We can
transactions. also use estimated data in
it.
- In management
- In financial accounting, we accounting, we tries to best
3. Subject-Matter find the financial statement of for finding each
whole organization. department's financial
results and performance.
4. Compulsion - As per law, to make the - There is not any law
financial statement by follow compulsion for analyze the
the financial accounting rules financial statement by

is necessary for companies.
- Financial accounting's
reports are very useful outside
5. Reporting interested parties like
investors, bankers, govt. org.
and creditors.
- All the transaction which we
can measure in the money,
6. Description
will be recorded in financial
accounting.
- There are common GAAP in
7. Accounting GAAP financial accounting which any
accountant should follow.
- Financial statements in
8. Period financial accounting are made
for one financial period.
- As per law, there is necessity
9. Publication to publish the financial
statements in newspaper.
- As per law, audit of financial - As per law, there is not
statements are necessary
10. Audit
which are made in financial
accounting.
following management
accounting rules. It is just
need for management
planning.
- Management accounting's
reports are useful for inside
management team for
better decision making.
- All the records and events
which are useful for
managerial decision
making, will be used for
analyze.
- There is not any common
GAAP for management
accounting. Recently,
management accountants
are starting to follow rule of
thumb.
- There is not necessary for
making analyze on the basis
of one year data. We can
use more than one year
data in management
accounting. For example
trend analysis, we use 5
years or more data.
- Management Accounting's
reports are personal and
confidentially used for
management's planning.
need of audit of
management accounting
reports.
 Financial Statements
Financial statements are the final product of accounting and these statements
show the balance sheet and profit and loss account of company. Financial
statements are the base of decisions which are taken by management of company
and other interested parties. All other interested parties include investors,
creditors, customers, employees, future investors, government and public. They
take decisions according to the results of these financial statements.

Features of Financial Statements

1. Recorded Facts

It is the feature of financial statements that it is based on recorded facts. We record

daily transactions relating to cash, bank, purchase, sale and many others. All these
transactions are recorded on the historical cost or revenue. So, financial statement
shows only book value of assets, liabilities, incomes and expenditures.

2. Accounting Conventions

For making financial statements, we use some of accounting conventions. These

conventions are useful for making financial statements more comparable, easy and
real.

3. Accounting assumptions
 For making financial statements, we accept going concern and measurement in
money assumption.

4. Personal Judgment

Personal judgment is very important in making of financial statement. For example,

if we use FIFO for valuation of inventory, our financial statements show result
according to this judgment and it will different if we use LIFO for valuation of
inventory. There are many other valuation methods and one of these; we have to
apply in accounting. Except these, there are many other decisions affect financial
statements.

Balance Sheet
Preparation of balance sheet of company is very necessary, because Indian
Company law 1956 gives strict instruction about the format of balance sheet of a
company. A company can make balance sheet according to the form given in Part I
of schedule VI of company law 1956. A company can also make balance sheet
summary form, but it has to attach its schedule in which explanation of different
components are given. We are explaining different components of balance sheet of
company which will be helpful for students to prepare balance sheet of company.

You should remember balance sheet and its all components thoroughly. It can be
made either horizontal or vertical form. But total of assets should be equal to total
of liabilities. Here, I am explaining these components.

Assets Side of Balance Sheet

Assets are written in right side of company’s balance sheet. In these assets, we
include.

    1. Fixed Assets
     
 We will show all fixed assets which are purchased and used in business. This is the
long term expenditure of company. In these assets, we will include following.

I)                    Land

II)                  Building

III)                Plant and Machinery

IV)               Furniture and Fixture

V)                 Leasehold assets

VI)               Development of property

VII)             Vehicles

VIII)           Live stocks

IX)                Railway sidings

X)                  Equipment

We also include intangible assets in fixed assets head. Following are the main
examples of intangible assets.

I)        Goodwill
II)        Patents
III)      Trade marks and design

Depreciation is charged on every fixed asset except land, because value of land will
increase after some time. Here, students are given advice that they should calculate
the value of net fixed assets, if different fixed assets are purchased or sold during
the year. The following table will be the part of working note.
2.  Treatment of Investment in balance sheet

Investment is outflow of fund for getting interest or dividend earning. So, it is the

asset of company and will include in assets side. The following are the main
investments.
a)                  Investment in Government or trust securities.

b)                  Investment in Shares, debentures or bonds

The following points must be kept in mind while you are showing investment in
balance sheet.

i)                    Investment in fully paid up shares must be shown separately from investment

in partly paid up shares.

ii)                   Investment in the form of shares in subsidiary company must be shown

separately from investment in any other company.

c)                   Investment in immovable properties.

d)                  Investment in the capital of partnership firms.

Investment will be shown on cost or market value which is less.

3.  Treatment of current assets , loan and advances in

balance sheet

A)     Current assets

Current assets will be shown in separate head and following components will be
included in it.

i)                    Stock in trade
ii)                   Work in progress

iii)                 Stock of stationary

iv)                 Stock of loose tools

v)                  Stock of stores and spare parts

vi)                 Sundry debtors less provision for doubtful debts

vii)               Cash in hand

viii)              Bank balance

a)      With schedule bank

b)      With other banks

B)      Loan and Advances

The amount which is given by company to others in the form of loan or advances
will be shown in asset side. Followings are its main examples.

a)      Advance and loan to subsidiary company

b)      Advance and loan to partnership firm

c)       Bill of exchange / Bill receivables

d)      Advance expenses paid

e)      Outside incomes.

4. Miscellaneous expenditures
 Expenses which are not written off will be shown in asset side of balance sheet.
There is no market value of these expenses. Examples are given below.

i)                    Preliminary expenses

ii)                   Commission or brokerage of subscription of shares or debentures

iii)                 Discount allowed on issue or shares and debentures

iv)                 Interest paid out of capital during construction

v)                  Development expenditure

5.  Profit and Loss Account

If company suffers net loss after adjusting all reserves, then it will be shown in asset
side. This amount can be also deducted from reserves in liabilities side. That time,
we will not show it in asset side.

Liabilities Side of Balance Sheet

Liabilities are written in left side of company’s balance sheet. In these liabilities, we
include.

1.   Share Capital

In share capital of company, we have to show authorized capital, subscribed capital,

called up capital and paid up capital. For calculating paid up capital, we will deduct
 calls unpaid and add original paid up amount of forfeited shares.

2.   Reserves and Surplus

Following reserves will be shown in liabilities side of balance sheet of company.

i)                    Capital reserves

ii)                   Share premium account

iii)                 Other reserves

iv)                 Surplus balance in profit and loss account after providing dividend, bonus or

reserves.

v)                  Sinking fund

3.   Secured Loan

If any loan is taken by company after keeping any asset as security, then it will be
shown in secured loan head. Its detail is given below.

i)                    Debentures

ii)                   Loan and advances from subsidiaries

iii)                 Other loan and advances

iv)                 Interest payable on secured loan

4.  Unsecured loan
 Following will be the unsecured loan.

i)                    Fixed deposits of public

ii)                   Short term loans and advances

iii)                 Other loans

5. Current Liabilities and Provisions

All liabilities which is payable within one year, will be included in current liabilities
head.

A) Current Liabilities

i)                    Acceptance or bill payables

ii)                   Sundry creditors

iii)                 Interest payable other than on loan

iv)                 Outstanding expenditures

B)      Provisions

i)                    Provisions for taxations

ii)                   Proposed dividend

iii)                 Provision for provident fund

iv)                 Provision for insurance, pension and other staff benefit schemes

v)                  Other provisions
 6.  Contingent liabilities

These types of liabilities will not be shown in balance sheet. But a simple footnote is
made for its detail. Following may be the contingent liabilities of company.

i)                    Claims against the company not acknowledge as debts

ii)                   Uncalled liability on shares paid

iii)                 Areas of fixed cumulative dividends

iv)                 Any other contingent liability of company