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‡ The knowledge and techniques of Management


Accounting is normally possessed by finance
professionals but its practical application by them is
very limited.
‡ There are financial implications in virtually all day
to day business activities .
‡ Therefore non-finance executive must know enough
managerial accounting concepts to work these
implications into their own specialized fields for
efficient decision making.
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‡ Generally in our country businessmen (seth) do not


hire professional accountants as they presume that it
is an unnecessary cost and they limit their
accounting function up to transactions recording
and reporting the results only.
‡ In my opinion, all non-finance executives viz
marketing, inventory planning and plant managers
must acquire some basic knowledge of these
concepts to run business more efficiently.
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‡ Decision making requires:


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‡ Management accounting provides such data


and analyses which lead to effective
decision making.
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With a view to assess the


basic accounting knowledge
of all students so that I can
decide the pace of the class
it is essential to know your
basic accounting knowledge.
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‡ The Accounting Profession has been


considered as DRY & BORING
‡ Two decade back students used to feel
shy in opting for ³Commerce´, but
now the situation has changed.

‡ It is considered as most charming and


rewarding profession of in our country
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‡ A new publication , is released by the International Federation of


Accountant (IFAC), which provides insights into the varied
responsibilities of professional accountants in business.

‡ It includes interviews with 16 senior-level accountants working in a


variety of organizations in 11 different countries.

‡ The interviews were conducted by Robert Bruce, a leading


accountancy journalist.

‡ One of the interviews include Mr. David LI,CHAIRMAN OF A BIG


CHINESS BANK IN HONGKONG who says that:
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‡ This study highlights the following 3 key roles of


professional accountants in business :
‡ Providing assurance,
‡ Facilitating management decision-making and
strategic development, and
‡ Serving as the gatekeeper of corporate integrity.
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‡ Accounting could be defined as the process of :


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‡ The recording of financial transactions and


preparation of financial statements in accordance
with acknowledged methods and conventions.
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Finance is a word used to describe:


‡ Money resources and
‡ The Management of those resources

Dictionary meanings of Finance is:


‡ the system of money, credit
‡ to provide or obtain funds, capital or credit
‡ to manage or secure financial resources
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‡ Accounting is not limited to business world. Everyone in day to day
life file income tax returns, settle credit cards bills or obtain bank
loans etc.

‡ Accounting may be considered as a subject close to nature as our


religion ISLAM has the concept of recording each and every act for
JAZZA & SAZZA on the day of Judgment.

‡ Quran has specifically described various accounting matters like


distribution of ³WIRASAT´

‡ Every professional whether he is Consultant ,Engineer or Doctor is


Accountable for professional duties.
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‡ In today¶s business world, an understanding


of accounting is not just useful it¶s a survival
skill.

‡ It is the language of business and its difficult


to communicate if you can¶t speak the
language.
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‡ Accounting is the basis for business decisions.

‡ The basic purpose of accounting is to provide


accurate and timely information to the decision
makers.

‡ Example: For accepting an special order at reduced


prices marketing/sales manager should know the
bifurcation of each cost elements for competing
with other bidders.
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‡ Recently there is reduced emphasis on preparing


information due to introduction of IT.

‡ Emphasis has now increased on interpretation of


financial information

‡ Traditional work of transaction processing is being


outsource by some multinational companies. For
example Unilever Australia, LASMO OIL have
outsource this function.
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‡ You may be aware about following symbols


‡ +
‡ -
‡ In mathematics, + is used for addition and ±
for deduction

‡ In Accounting, symbols of 2  and   are


used to convey specific meanings either increase or
decrease. 2     
      
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‡ There are 5 pillars of Accounting.

‡ Rules for Debit and Credit under Double Entry System for all these
heads are different as follows:

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Assets = Liabilities + Equity


Equity = Capital + Retained Earning

‡ Retained earning may be described as reserves and un-appropriated profits

‡ This Basic Accounting Equation is applied for Balance Sheet.

‡ Formula to Compute Profitability


È Net Profit = Gross Profit ± Marketing. Exp. ± Admin Exp. ± Financial charges +
Other Income
È Gross Profit = Sales ± Cost of goods sold
È Cost of goods sold = Opening inventory + purchases ± closing inventory
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   0  
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O0 0 O   
=ood ill xxx apital xxx
Trade ark xxx eserves xxx
0 O   ( ro it ± oss) xxx
  
and xxx ong Term oans xxx
uilding xxx
achinery xxx
Vehicles xxx
omputers xxx
       
ash xxx ayable t upplier xxx
ank xxx hort term inancing xxx
ebtors xxx ividend payable xxx
tocks xxx Taxes payable xxx
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ount
+   xxxx
Less: Discount, rebates, Commission ]
Net Sales
&+
Opening Inventory
Purchases 
Closing Inventory ]
Cost of Goods Sold
& ( 2 -3 ) xxxx
Less : Marketing Expenses ] xxxx
Administration Expenses ]

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Less: Financial Charges ] xxxx
Add: Other Income
  
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‡ In Basic Accounting equation:


‡ the Assets represent Resources of a company
‡ the Liability & Capital side represents Sources of those resources

Example
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Invested Rs. 100 in a business
Cash««««««««««. 100
Capital«««««««««««««.. 100

Took loan of Rs. 500


Cash ««««««««««. 50
Loan«««««««««««««. 50

Received Rs. 25 as rental income


Cash ««««««««««. 25
Rent Income««««««««««««. 25
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‡ It is a structured financial representation of


the    * )  and
Changes in financial position of an
enterprise.

‡ The word Accounts is generally used for


Financial Statements.
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‡ Balance Sheet
‡ Income Statement
‡ Cash Flow Statement
‡ Accounting Policies and notes to the
Accounts.
‡ Statement of changes in Equity.
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‡ Annual report contains


‡ Financial Statements
‡ Directors¶ Report
‡ Auditors¶ Report
‡ Notice of AGM
‡ Company¶s Information
‡ Corporate Governance
‡ Compliance Statement
‡ Statement of value added
‡ Business policies
‡ Pattern of holding of shares
‡ Financial information of six years etc
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Transaction Journal Entry General Ledger
 

Trial Balance Adjustments Adjusted TB

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Notes to A/cs
Balance Sheet & Accounting
Policy

Income Cash Flow Statement of


Statement Statement Changes in Equity
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‡ The Board of Directors is responsible for


preparation and presentation of financial
statements , NOT THE AUDITORS
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The financial statements disclose basis of
preparation in notes to the accounts.

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³These accounts have been prepared in
accordance with the requirements of the
Companies Ordinance 1984 and IAS««´
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‡ In order to understand it is necessary to understand


some basic assumptions and concept/terms used in
preparation of financial statements:
‡ Going concern
‡ Accrual
‡ Consistency
‡ Historical cost convention
‡ Materiality
‡ Substance over form
‡ IAS
‡ GAAP
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³The enterprise is normally viewed as a going
concern, that is, as continuing in operation
for the foreseeable future. It is assumed that
the enterprise has neither the intention nor
the necessity of liquidation or of curtailing
materially the scale of its operations.´
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Revenue and cost are recognized as they are earned or
incurred respectively, not on the basis of money received or
paid.

§  
A basic principle of accounting is that transactions are
normally stated in accounts at their historical amount. Usually
a note is provided that these accounts are prepared under
historical cost convention.

In general, accountants prefer to deal with objective costs,


rather than with estimated values. This is because valuations
tend to be subjective and to vary according to what the
valuation is for .
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There are many areas in which judgment must be exercised in attributing
money values. Like for charging depreciation we assume useful life of assets
& for valuing inventories either LIFO or FIFO method is used.

It is normally assumed that accounting policies are consistent from one period
to another

` 
Each material item should be presented separately in Financial Statements.

Immaterial amounts should be aggregated with amounts of a similar nature or


function and need not be presented separately.

In deciding whether an item is material, the nature and size of the items are
evaluated together.
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It signifies all rules, from whatever sources, which


govern accounting

In other words, GAAP is a set of rules for


conducting behavior in a way acceptable to the
majority of people. This includes:

1. Requirement of the securities and Exchange Commission


of Pakistan (SECP)
2. International Accounting Standards
3. Stock Exchange requirements.
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1. International Accounting Standards are to be applied for the preparation of


financial statements.

2. Introduction of International Accounting Standards .

3. IAS are set instruction of Generally Accepted Accounting Principles for


preparation of financial statements.

4. IAS help to improve the quality, reliability and comparability of worldwide


financial reporting.

5. IAS help comparability of A/Cs of same industry in the country.

6. IAS its objective is to achieve uniformity in the accounting principles around


the world.
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°  ° 
`anagers To anage the business efficiently
To take planning decission
To know proitability
To know financial position

E ployees To evaluate their future and benefit

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or preparing their de ands

Shareholders To deter ine break up value of invest ents


To esti ate dividends and capital gain

Investors To assess the risk and potentials of the Co pany

Creditors / Suppliers To ascertain the ability of the Co pany to pay

Bankers To assess the financial health


To assess the co pany's ability to pay off bank's dues
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=overn ent
uthorities
Ta
uthorities To calculate the correct ta liabilities
Custo s or post i portation audit
Health `inistry or central resarch fund
Director Labor or WPP/WW

inancial
nalysts To ascertain the shares prices
To work out the credit rating of the Co pany


uditors To give opion on the financial state ents

SECP or supervision and controlling corporate culture

Stock E chnage To see the co plaince of its require ents.

State Bank of Pakistan To see the co pliance on re ittance of dividend


To see the co pliance on reporting of foreign balance sheet

Holding Co pany or the purpose of consolidation of accounts


or publishing it with their annual report

`onopoly Control
uthority To onitor the undertakings whose assets are over Rs. 300

IC
P To review accounts in order to review the quality control
require ents and co pliance of I
S and statutory
require ents.

Other users are Students, Journalists, Donors, etc.


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Every company to keep at its registered office proper books
of account.

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The directors of the company are required to prepare and
publish Annual Accounts and take approval of shareholders
of the company in AGM.

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Every listed company is required to prepare and publish the
quarterly accounts, & half yearly accounts as well as annual
accounts.
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The terms Cost Accounting and Management Accounting are
interchangeably used.

   is a technique or method for


determining the cost of a project, process or
product.

 )    is used in its broadest


sense and it is a process of identification,
measurement, accumulation, analysis, preparation,
interpretation and communication.
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 )    present
accounting information in the form most
helpful to management and it is used for:

1. Formulation of strategy;
2. Planning and controlling the activities;
3. Decision making;
4. Optimizing the use of resources; and
5. Performance appraisal
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‡ In its scope Management Accounting is not
restricted in application to the manufacturing
functions of industrial organizations.

‡ It also covers non-manufacturing activities viz.


Selling and administration.

‡ Its principles, methods and techniques can be


applied with quite an ease to trading businesses,
service industries, financial institutions, insurance
companies, educational institutes and hospital etc.
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The financial manager is responsible for raising finance and
controlling financial resources. The kind of decisions he or
she will be required to make include the following:

‡ Should the company borrow from a bank or raise funds by


issuing shares?
‡ Should the inventory be bought on credit or financed
through bank overdraft?
‡ How much should be paid as a dividend?
‡ Should the company spend money on new machinery?
‡ How much credit and discount should be given to
customers?
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To decide about the most desirable level & combination of assets
holding like
1. Cash Sales vs. Credit Sales (Trade Discounts)
2. Inventory Management (Inventory levels, size of order)
3. Credit policy
4. Evaluation of Capital Expenditure Proposals - Justification

 -----   +
1. Decide combination of Capital Structure i.e. debt & equity
2. Credit terms with supplier vs. short term running finance
3. Loan, Equity or leasing options for Capital Expenditures
4. Dividend policy
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Financial Management decisions may be
classified into three main categories:
i. Operating decisions
ii. Investment decisions
iii.Financing decisions
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