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The management accounting is the provision of accounting

information to management activities such as planning,
controlling and decision making so that the business could be
conducted more efficiently.
Characteristics of management accounting :
Management decision making and control
Basic information for financial & cost accounting which is
Management accounting not for external parties like
shareholders, creditors or banks.
It is more futuristic and the past historical records are not
seen much
There are no set of rules or structure for presenting the
financial information


The starting point of accounting is from Financial Accounting
followed by Cost accounting and ending at Management
Financial Accounting involves preparation of P&L account,
balance sheet & various financial statements
Cost accounting does more detailed study of accounts with
the cost and profit in operational activities
The management accounting is more vast with the
application of cost & financing information to managerial
functions along with various cost controls & internal audit.


Employing various techniques to analyse and interpret the
financial & costing data
Planning short & long term future plans as corporate strategy
involving budgeting, standard costing , probability correlation etc.
Different departments have to be synchronised while providing
the financial information like production budget, sales budget or
purchase budget.
Financial analysis & interpretation in managerial accounting is
done in a more lucid way with the use of ratios cash flow
statements, funds flow.
Management accounting also uses the qualitative information
like legal framework, opinion polls, nature of clients and
employees to analyse the financial health of the organisation
Taxation reports are prepared just not with the financial reports
but the management policies also


Standard Costing & Variance analysis
Marginal costing and Cost-volume-profit analysis
Ratio analysis
Comparative financial statements
Funds flow statements
Cash flow statements
Responsibility Accounting
Statistical & graphical techniques
Discounted Cash flow
Risk analysis


Users or the audience for financial are external (investors,
creditors,Govt.) & for managerial is the internal
Method of accounting is double entry for financial but no
structure for managerial
Financial is mandatory but managerial is voluntary
The total cost & profit is shown but in managerial, product
wise, department wise & overall is shown
More of historical data is used. In Managerial more of
future planning is done with the aid of past data.
Financial reports are usually prepared year to year.
Managerial data is prepared more frequently as per the
managerial requirements

Accounting standards have to be adhered for financial

statements as per ICAI. Managerial has nothing of this
Financial statements are to be published for external users
and to be audited by Chartered Accountants. Managerial is
for internal use only
Only monetary information to be provided by financial
reports. Managerial accounting can be expressed in non
monetary term also like labour hours, units of production.


Only cost information of production is done in Costing.
Managerial gives costing & financing information
Costing has evolved due to the shortcomings of financial
accounting. Managerial has evolved due to the limitations of
As per Govt. certain industries have it mandatory to maintain
cost records. No such compulsions for managerial accounting
The cost accountant is at a lower level in hierarchy than the
managerial accountant.
The cost accounting techniques are like standard costing,
variance analysis, marginal costing, CVP analysis and
budgetary control. Managerial accounting has additional
techniques like funds flow statement, statistical techniques
operational research, mathematics, economics etc.


Entity concept Business firm is a separate entity .Accounts
maintained separate from the people involved in it.
Money measurement concept money is the common denominator
of measurement of land, plant, equipment etc.
Going Concern Concept the firm will be running for a long period
irrespective of people coming and going
Cost Concept Assets in the financial statements are recorded on
the actual cost and not the market value like the case of
depreciation charged on the cost.
Conservatism concept This means anticipate no profit but
provide for all losses. Therefore the statement that to be valued at
cost or market value whichever is lower.
Accrual Concept- here revenues are recognised when sales are
made whether cash is received or not. The expenses are recognised
when goods are use or services received even if the cash has not

Dual aspect concept This is the most vital concept on the

basis of which accounting mechanics work.
Before this Assets, liabilities and equity need to be
Assets this means what the firm owns like land, building,
plant, inventories, debtors, advances & loans given, bank &
cash balance.
Liabilities are what is owed by the firm to various parties
like lenders, employees, suppliers, government
Equity- is the residual interest of the owners in the assets of
the firm. As it is that money invested on the assets. It is the
difference between the assets & liabilities.
So, the dual aspect states that:
Asset = Liability + Equity

Accounting period concept The accounting period is

generally April to march of every year.
Realisation concept Here revenue is earned only when it is
realised. That is when goods are delivered and not when the
sales order is received or contract signed.
Matching Concept This is to ensure that the sales and cost
of goods sold as mentioned in the financial statements are for
the same products and matching. The realisation of revenues
and payment of expenses have to be checked


Financial Accounting takes the business as a whole unit
whereas managerial accounting takes the segmented
form of accounting.
So, managerial accounting deals with different
responsibility centres- cost , profit & investment.
The responsibility centre means sections, departments,
products or various individual jobs carried on.
The management accounting centre is structured hence
the costs are measured by assigning managers
responsible for every unit and its operations
This type of accounting uses budgeting to compare the
actuals with the standard costs

Three important financial statements for financial
accounting P&L Accounting, Balance Sheet & Cash
flow statement
The balance sheet show the financial position of the
firm at a given point of time. A snapshot or a static
The P&L Account (income statement) shows the
performance of a firm over a period of time.
The cash flow statement shows the flow of cash
through the business during an accounting period.
The financial position of a firm is shown by assets &
Assets are fixed assets, investments, current assets
loans & advances, miscellaneous expenditures and

Liabilities are share capital, reserves & surplus, secured

loans, unsecured loans and current liabilities &
P&L items are net sales, cost of goods sold, gross profit,
operating expenses, operating profit, non operating
surplus/deficit, profit before interest & tax, interest, profit
before tax, tax profit after tax.
The cash flow statement shows the net change in cash
position of the firm due to cash flow from operations,
investing & financing activities.
Discussion in detail
The fixed assets are stated at cost less depreciation(cost
The current assets are stated at cost or market vale
whichever is lower (conservative concept)
Assets are equal to liabilities + equity (duality concept)

Liabilities It arises when some benefit has been received by the

firm and so it promises to pay by cash or by goods & services in
predefined time.
Share capital Equity shareholders are the owners of the firm. It is
risk capital and no fixed rate of dividend.
Preference Capital has a fixed rate of dividend
The final share capital in the Balance sheet is paid up capital
Authorised capital is the maximum that a company can issue as
per its memorandum, followed by issued , subscribed and paid up
Reserves & surplus contains retained earnings as well as nonearnings like share premium and capital subsidy.
Two types of Reserves- Capital reserves & revenue reserves.
Capital reserves- share premium, revaluation reserve and capital
redemption reserve. It cannot be distributed to the shareholders.
Revenue Reserve Accumulated retained earnings from the profit.
Transferring from the P&L a/c the profits to various reserve accounts
is called Appropriation of profit.

The reserves & surplus + paid up capital = shareholders

equity or the Net worth of a company
Secured loans secured by a charge on the assets.
Charge on the inventory, debtors, land building etc.
E.g. debentures ( maturity from one to ten years), term
loans and working capital loans
Unsecured loan not secured by a charge on the assets
of the firm.
Eg. Public deposits, commercial paper, unsecured loans
from promoters, inter corporate loans, unsecured loans
from commercial banks
Current liabilities and provisions are obligations
that will mature within a year.
Current liabilities are Bills payable, sundry creditors ,
advance payments, interest accrued but not due on loans
Provisions are provision for taxes, dividend, provident
fund, gratuity superannuation & leave encashment

Assets resources which shall provide a firm with future

economic benefits, cash flows
Fixed Assets- also called as non current assets and provide
benefits for more than one year. They may be tangible or
Tangible assets are land, building, plant, machinery. They are
recorded at the net book value i.e. cost of acquiring less the
Intangible assets are patents, copyrights, trademarks,
goodwill. They are recorded at the net book value i.e. Gross value
less accumulated amortisation (allocation of the cost of asset to
various accounting periods that benefit from their use)
Investments They are the financial securities owned by the
firm. Like equity shares, debentures of other companies most of
them associate and subsidiary companies
Current assets, loans and advances Cash and bank
balance, inventories, sundry debtors and loans and advances
Inventories also called stocks are raw materials, work-inprogress, finished goods, packing material, stores and spares

Sundry debtors also called Accounts Receivable are

the amounts to the firm owed by its customers. Firms
keep Provision for Doubtful Debts. So, the net Sundry
debtors are after deducting provision for doubtful debts
Cash & bank balances
Other current assets interest accrued on
investments, dividends receivable
Loans and advances advances and loans to
subsidiaries, deposits with governmental authorities
Miscellaneous expenditure & losses- comprises
preliminary expenses, discount allowed on the issue of
securities, interest paid out of capital during
If there is any debit balance i.e. Loss of P&L A/c then
that is shown in the Assets side or deducted from Capital
of balance sheet


It tells about the operating and financial transactions
contributed to the exchange in owners' equity during the
accounting period.
It has revenues and expenses. A the net change in owners'
equity during the period is Profit after tax (PAT).
Due to Accrual accounting (outcome of realisation and
matching principle) the PAT is generally different from
cash flow figures.
Net Sales = Sales-Sales Returns-Excise duty
Cost of Goods Sold is the cost of goods for procuring the
goods . However the Cost of Production is different as it is
all the costs incurred in production.
Gross Profit is the difference between net sales and the
cost of goods sold.
PAT is the net profit.


If a firm is profitable but does not hold enough cash then
it might dissolve over a period of time.
Cash flow activities are Operating, investing and
Cash from operating involves all the production and
selling activities. Cash inflows are payment from clients.
Cash outflows are payment to suppliers, employees,
government taxes.
Investment activities are acquiring and disposing fixed
assets, buying and selling financial securities, disbursing
and collecting loans.
Financial activities are raising money from loans,
shareholders, paying interest & dividends, redeeming
loans and share capital.



Represents laws/ rules to be used as a guideline in the

preparation of financial statements
Money measurement concept
Separate entity concept
Duality concept
Going concern concept
Cost concept
Accounting period concept
Conservative Principle
Realisation concept
Accrual concept
Matching concept

Under matching concept the expenses are incurred to get

the revenues. Expenses are Capital expenses and Revenue
Capital Expenses are where benefits accrue beyond one
year. They are not recurring & not for resale value. They
are very difficult to match with the corresponding incomes
as the machinery may become obsolete before one year and
could not be determined as to which year will get how
much benefit.
Revenues Expenditure Here the revenues can be
correlated to the expenses. However one problem arises
when there is deferred revenue expenditure like
advertisement expenses, research & development. So,
subjectivity is involved in matching these expenses .
Consistency principle- is the accounting treatment of
items such as depreciation & inventory valuation to ensure
comparability over the years. Like uniform depreciation
method to be applied throughout.

Materiality Concept- full disclosure of all material

information but exceptions to stationery , electricity
where things cannot be counted.
Depreciation Accounting wear & tear of assets.
Salvage value. Life of Assets
The depreciable amount of an asset is its historical cost
less the residual value.
1) Straight-line method
2) Written down value or reducing balance method


Opening entry > Transaction analysis > Recording in

Journal books > Posting to various ledger books >
Preparation of Trial balance > Closing entries in

respect of nominal Accounts > Preparation of

Financial Statements.
Book keeping is the recording & classifying
transactions & events in the books of accounts
under various heads. As a book keeper entering
the transactions, manipulating the accounting
cycle, closing the books at the end of the
accounting period & then starting the entire cycle
again for next accounting period.

Double entry system of book keeping is recording

transactions from two sides debit & credit. Based on the
principle that every debit has equal amount of credit.
Fixed Assets are measured at historical costs.
Current assets measured at the lower of cost or realised
Equity = Owner's capital + accumulated profit or loss =
Net worth = shareholders fund
Dual effects of double entry system can be explained in
the following way :
1) Increase in liability = increase in assets
2) increase in one asset = decrease in another asset
3) increase in one liability = decrease in another liability
4) decrease in liability = decrease in assets
In all the cases liability includes equity.
For every Debit there is Credit

If it is Debit balance then Debit is higher than the Credit.

If it is Credit balance then Credit is higher than Debit.
If Asset increases then Debit balance
If Asset decreases then Credit balance
Liability when increases then Credit balance
Liability when decreases then Debit balance
Equity increases then Credit balance
Equity when decreases then Debit balance
Expenses goes to Debit Side
Income goes to Credit Side
With this every transaction has a dual entry :
Increase in Liability = Credit
Increase in Assets = Debit
Decrease in Liability = Debit
Decrease in Assets = Credit
Increase in one Asset= Debit
Decrease in another Assets = Credit
Increase in one Liability = Credit
Decrease in another Liability = Debit

If Income more than Expense then it is Credit balance

When there is Profit then it is Credit balance & for Loss
there is Debit balance.
So. Increase in Asset is Debit balance & increase in
Liabilities is Credit balance
Every transaction will have one of these combinations :
Asset & Asset
Asset & Liability
Liability & Liability
Liability & Asset
In any of these combinations if one is Debit then the other
has to be Credit.
Analyse the following transactions & apply Debit & Credit
rules :
Qs to be dictated from the notebook.