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Financial accounting
2. Basic Accounting
Final accounts 3. Process of accounting 5. Rectification of Errors
1. Introduction
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Cost Accounting
6. CONCEPTS
7. ELEMENTS OF COST
8. MATERIAL
9. LABOUR
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Management accounting
information
information
Accounts receivable Labour Bad debts RAW mATERIAL CASH ADR GDR Overheads Accounts payable
Equity shares
Preference Shares
goodwill
Copy right
building
investments
land furniture CASH Short term Equity shares Preference Shares ADR GDR
information
information
Cash credit
INFORMATION
INFORMATION
technical
marketing
MANAGEMENT ACCOUNTS
INFORMATION
INFORMATION
Costing
INFORMATION
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Costs
Anything incurred during the production of the goods or service to get the output into the hands of the customer The customer could be the public (the final consumer) or another business Controlling costs is essential to business success Not always easy to pin down where costs are arising!
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Financial Accounts 1.Recording 2.Outsiders 3.Past 4.Statutory 5.Preparation of profit/lossA/c And balance sheet
Cost Accounts
Management Accounts 1.Estimation 1.Collection and control Analysis and decision 2.Internal making 3. Future 2.Managemen 4. Not allorganisation t 3.Future s 4.Non5.Costing 12 statutory records
Users of information
liquidity banks Dividend/value in the share market shareholders Good name Benefactors tax government
organisation
customers
Preference shareholders dividend Good product creditors Timely payment debtors Timely supply
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Management Accounting
Budgetary control
Mathematics
FFS
1.concepts& conventions
Meaning: Basic assumptions upon which the basic process of accounting based.
a] Business entity conceptb] Dual aspect concept c] Going concern concept d] Accounting period concept e] Cost concept f] Money measurement concept g] Matching Concept
Conventions
Coservativism Materiality Consistency
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a] Business entity concept Business is different from the owner We pass Journal entry when owner contributes towards capital. When amount / goods withdrawn for personal use we make an entry in the business When Income tax paid by the owner out of business money we make an entry In the books of accounts.
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Every debit has equal amount of credit Asset =Liability Liability creates asset If asset>Liability= profit If Liability> Assets= loss
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Business will go for at least for a reasonable period. Depreciation is provided based on this assumption. If this assumption is not made all Fixed assets will be valued at realised value like current assets.
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e] Cost concept
The cost to the organisation (Actual) is recorded in the books Assets are not recorded according to the market price every year. Depreciation is calculated on cost not based on market price Accounting records may not show the real worth of the business Market price may be disclosed with in bracket in the balance sheet
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g] Matching Concept
Matching Cost with revenue It is used to estimate correct profits Accrual/ cash basis of accounting
Even cash paid /received if it belongs to accounting period we consider them as expenditure /income Salary outstanding for the last month? Income from Investments yet to be received? Rent received in advance for next year?
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Conventions
Customs and traditions that are followed by the accountants while preparing the financial statements. Why do we respect elders? Why do we shake hands? Why do Young Indians hate receiving dowry?
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Coservativism
To be on the safer side Expect future losses as current year loss not future income is treated as current year income. Stock is valued cost price / market price which ever is lower Making provision for bad debts is based on this assumptions.
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Materiality
Material impact on profitability are considered Insignificant transactions ignored from recording Pen purchased, pencil purchased? Wine purchased regularly?
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Consistency
Accounting policies and proceedures should be followed consistently Method of depreciation should be followed consistently. Stock valuation- cost/market price whichever is lower is consistently followed If not followed it amount to change in the policy of the company
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1.Cash system: unless cash received /paid in the accounting year can not be considered as income/expenses respectively
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2.Mercantile
Mercantile/Accrual/due concept: Even cash received/paid but due for payment/due for receipt (yet to be received/payable) if they belong to current accounting year are considered. If last year expenditure paid this year? If you receive/paid in advance ? Last year I loved her? Next year I shall love him depends !!!!
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Mercantile love!!!!???
Last year I loved her? Next year I shall love him depends on type of bike model!!!!
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3.Types of Expenditure(19)
A) Capital expenditure(19)
Expenditure incurred which will : a) Increase Production capacity b) Increase earning capacity c) Reduction in the cost of operation. Example: purchase of fixed assets Purchase of Machinery purchase of investment If such expenditure is not to do with the basic functions of the business such expenditure is capital expenditure. How do you consider if you buy goodwill, copy right or patent right?
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Capital expenditure-continue(page-19)
Both tangible and intangible assets included Intangible assets such as patent right, copy right, technical know-how, francises, goodwill etc., Depreciation is provided on fixed assets which will appear in the profit and loss account They appear in the Balance sheet The life is more than one year
Revenue Expenditure(page-19)
Expenditure incurred which will : a) Not Increase Production capacity b) Not Increase earning capacity c) maintain the capacity No Depreciation is provided on fixed assets which will appear in the profit and loss account They appear in the profit and loss account The life is not more than one year They should not appear in the balance sheet
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Terms(page-20)
Account Debit Credit Journal Ledger Narration casting
Assets Liabilities Capital Drawings Debtors depreciatio n Debentures Equity shares Preference shares
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Factory
Prime cost
Factory over heads
Factory
Works cost
Packing material, Sales department samples,salaries to sales personnel,commiss ion to sales manager, warehouse charges,advertise ment,repairs to distribution van, discount to customers
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Life education
Lady in a seashore
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Is Accounting based on business concept or religious concept? Giving first and receiving later. Giving cash receiving machinery We consider both aspects such as debit and credit
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Rules of acccounting(23)
Personal rule/Account-supplier debtors, owner, banker, outstanding wages Real rule/Account- cash, bank, building, furniture, goodwill, patent rights Nominal rule/account: income and expenditure: salary, rent , insurance, commission, internet expenses, cell phone expenses.
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Personal rule
Excercise
Amount collected from debtors? Amount deposited to bank?
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Real rule
These are the accounts of assets and liabilities Rule:
in
Excercise
Goods supplied for cash Cash withdrawn from bank Cash withdrawn from bank for personal use Land purchased by giving a cheque Building sold on credit
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Nominal rule
Related to Expenses and income
Debit all expenses and losses Credit all incomes and gains
Rule:
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Excercise
Rent paid Rs 50,000 Wages paid Rs.1,00,000 Wages outstanding-Rs.60,000 Commission received-25,000 Discount allowed to customer Rs.1,000 Telephone bills paid-Rs.2500 Shares issued at premiumRs.2,00,000
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Depreciation Accounting(24)
Reduction in the value of assets Use factors, time factor,obsolescence are the factors Statutory requirement AS(6) Fixed assets are depreciated Current assets are not depreciated Land and cattle are not depreciated.
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Depreciation methods
Straight line method Written down value method Sinking fund method Machine Hour rate method Unit cost method Depletion asset method Depreciation Fund method Sum of digits method Accelerated depreciation method
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Impact on books
Depreciation Expense Net income Asset Equity Return on assets Return on Equity Turnover Ratios Cash flow NPV IRR Pay back
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Impact of Tax
Block asset method Purchase of Asset Sale of Asset Short term/Long-term Capital asset Asset used less than 180 days during the previous year Asset purchased preceding previous year but put into use less than 180 days during the current previous year
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Methods(25)
1. straight line method: Cost (- )estimated scrap value Estimated life in years 2. written down value or diminishing balance method. cost of the asset=1,00,000; rate of depreciation =10% #Depreciation for the 1st year=1,00,000*10%=10,000 Value at the end of first year= 1,00,00010,000= 90,000 ##Second year depreciation=90,000*10%=9000
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Methods(26)
3. production unit method:
Depreciation= year) (cost-scrap)(units produced during the
no of units the machine can produce during its life Suppose cost=1,00,000; scrap=5000; total life in units=10000 units. No. of units produced during the year=3000 Depreciation=(1,00,000-5000)(3000)/10,000 =Rs 28,500
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Annuity method
C*r Depreciation= n 1- 1/(1+r) - 1 Depreciation is constant It depends on future cash inflows It assumes that the capital invested would have earned interest had been invested otherwise
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n
(1+r) 1
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Renewal method(29)
When asset is renewed full amount is written off.
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By-by to chapter-2
Life education
Chineese tree
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Chapter-3
Journalising Ledger (subsidiary books) Posting Trial balance Trading and profit and loss account Balance sheet
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Terms
Investments Current assets Adjustments Closing stock Depreciation Outstanding expenses Prepaid expenses
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Terms
Accrued income Income received In advance Bad debts Provision for doubtful debts Interest on capital Drawings Deferred revenue expenses
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Terms
Abnormal expenses Goods distributed as free sample Goods sent on approval Commission payable to manager
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Life education
God and Poor man
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Exercise:-23 page124
Q.2 page-115 and questions no6 page-117 and q.25 page-126
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Life education
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Suspense Account
If trial Balance does not tally ie debit is not equal to credit then temporarily to close down we open a suspense Account on the deficit side known as suspense account.
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Rectification: Steps
Rectify only the account in which error is committed. Book means complete set of accounts Accounts means mistake only in the account If suspense account is given and if one side error suspense account has to be either debited or credited accordingly.
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1. Drawings A/c debit to General expenses a/c credit 2. Sales Account debit to Machinery A/c credit 3. Rent a/c debit To land lord a/c 4. Repairs a/c To Building
250 0
2500
130 0 160
1300 160
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particulars
Problem:6 page-139
1100
amount
particulars
Mohan a/c Dr. To sales susp.
c. Suspensea/c ToYogesh a/c d.Furniture a/cdr To P/L a/c e.Machi.a/cdr. To Purchases To trade exp.
700
700 900
900
600 600 18200 17000 1200
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Life education
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Terms in costing
Accounting Costs :
These are costs that impact an organizations general ledger. For example, buying a product results in a chain of events wherein a purchase order is processed, a product/service is received, then an invoice arrives from the vendor
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The bottom line is that the organization is out "hard" or "real" money.[1
Examples: Hardware and software purchases Professional services Maintenance Labor Medical benefits Insurance Internet Service Provider fees
Wide area network fees
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Economic Costs
Economic costs are "opportunity costs." Instead of doing X, you had to do Y. These are not hard-currency costs and it is dangerous to lump them into the costsavings category with accounting costs because their effects will not necessarily show up on the bottom line.
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Example
: Reducing firefighting on incidents related to problematic changes is robbing resources from planned work (projects) and applying them to unplanned, reactive work (incidents). If you say that better change management reduced unplanned work by 20 percent, that is not an accounting cost savings, but it did free up resources to work on projects. It would be wise to identify what project progress was enabled through the action.
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Example-2
By training users, incidents handled by the service desk decreased 5 percent. Again, this is not an accounting cost savings unless a resource is dismissed, thus impacting labor, benefits and so on.
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Overhead
These are indirect costs that are absorbed by IT. For example, a portion of building rent is often allocated to IT based on some cost driver such as percent of floor space allocated.
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illustration
If IT occupies 10 percent of a building, then accounting will likely allocate 10 percent of the rent to IT. This overhead cost must then be factored into the services that IT offers in order for proper charge backs, pricing and so on
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Sunk Costs
These are costs that, once spent, cannot be changed. If something is purchased that cannot be returned or sold off, then that item should be considered a sunk cost. Sunk costs need to be factored into costing, but it also should recognized that altering them may not be possible by definition.
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Cost Drivers
When determining costs, it is worthwhile to understand what drives the costs. In other words, if you do X, then you see a corresponding increase in cost Y. To illustrate, if you must buy a PC and software licenses for each new person hired, then the addition of new users is one of the cost drivers for the associated PC and software expense accounts.
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Differential cost
Increased or decreased cost due to the increased or decreased volume of operations. Additional cost due to operation.
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Manufacturing cost
Product code
Period code
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fixed cost
Activity level
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Activity level
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Red Car, Inc. Cost of Goods Manufactured Schedule For the Year Ended December 31, 20X0
Direct materials used Beginning raw materials inventory Add: Cost of raw materials purchased Total raw materials available Less: Ending raw materials inventory Total raw materials usedDirect laborManufacturing overhead Indirect materials Indirect labor Depreciationfactory building Depreciationfactory equipment Insurance factory Property taxes
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