ACCOUNTING FOR

MANAGEMENT

Dr. K. Selvi MBA, M.Com, MFM, M.Phil, PhD, NET

 Introduction

• - Accounting is an ancient art as old as money itself; however the role of

accounting has changing with economic and social developments. The
traditional view of accounting as a historical description of financial
activities is no longer acceptable. Accounting now is regarded as service
activity the function of which is to provide quantitative information about
economic activities.
 Development of accounting

• -In India chanakya in his artha shastra had emphasized the existence and
need of proper accounting and auditing.
• However modern system of accounting owes its origin to pacoili who lived
in Italy in the 15th century.
• The advent of industrial revolution has resulted in large scale production,
cut throat competition and widening of the market. This has resulted in
decentralization of authority and control.
• Accounting today, therefore cannot be the same as it used to be about half
a century ago. Changes in technology have also brought a remarkable
change in the filed of accounting.
 Accountancy

• Accountancy is the art of communicating financial

information about a business entity to users such as
shareholders and managers.[1] The communication is
generally in the financial form statements that show in
money terms the economic resources under the control
of management; the art lies in selecting the information
that is relevant to the user and is reliable.[2]
 Financial accounting

• According to the American institute of certified Public accountants “the

art of recording , Classifying and summarizing in a significant
manner and in terms of money transactions and events which are in
part at least of a financial character and interpreting the results
thereof”

• Functions of Financial accounting –

1. Recording
2. Classification of data
3. Summarizing
4. Deals with Financial Transactions
5. Interpreting Financial information
 Limitations of Financial Accounting:

1. Historical in nature
2. Provides information about the concern as a whole
3. Not helpful in price Fixation
4. Only Actual costs are Recorded.
5. Not Helpful in Taking Strategic Decisions.
6. Chances of manipulation.
 Cost accounting-

• Cost accounting-
Costing is a specialized branch of accounting.In management Cost refers
to expenditure and not the price.Costing is the technique and process of
ascertaining costs. It consists of the principles and rules which are used
for ascertaining the costs of products and services.

• Objectives of cost Accounting.

1. Analysis and Ascertainment of costs.
2. Presentation of costs for Cost reduction and cost control
3. Planning and Decision making
 Importance of cost accounting.

1. Cost accounting as an aid to management

2. Advantages to employees
3. Advantages to creditors, investors and Bankers
4. Advantages to the government and the society.
 Management Accounting
• Management Accounting- The Term management Accounting Refers to
accounting for the management I,e accounting which provides necessary
information to the management for discharging its functions. The functions
are planning , organizing ,directing and controlling of business operations.

• ICWAI published Glossary of management accounting terms Defining

Management accounting as a “system of collection and presentations of
relevant economic information relating to an enterprise for planning,
controlling and decision making”.
 Charactersitics of Manangement
accounting
1. Providing Accounting Information – The collection and classification of
data is the primary function of accounting department.(I,e from cost and
financial accounting).The information so collected is used by the management
for taking policy decisions. Management Accounting is a service function and
it provides necessary information to different levels of Mgt.
2. Cause and effect analysis –Financial accounting is limited to the preparation
of profits and loss A/c and finding out the ultimate result I,e Profit and
loss .Management Accounting goes a step further. If there is a loss, the
reasons for the loss are probed: if there is a profit the factors directly
influencing the profitability are also studied.
3. Helps to take important decisions: - Which are operational based and
strategic in nature.
4. Helps in achieving of objectives:- Management accounting helps in
achieving organizational objectives. Historical data is used for formulating
plans & setting up objective Actual performance is compared with the targeted
figures and corrective action if necessary.
 Charactersitics of Manangement
accounting
5 No fixed norms Followed –In financial Accounting Certain rules are
followed for preparing Different accounting books. On the other hand no
specific rules are followed in management accounting as there is scope
for flexibility in their preparations and moreover outsiders have no access
to them.

6 Increase in efficiency – Since Management accounting helps the

management to take a decision about the future ,the efficiency can be
achieved by setting up goals for each Department or section.
The performance Appraisal will pin point efficient and inefficient spots.

7 Helps in co-ordination- Management accounting techniques of planning

also helps in coordinating various business activities. Ex While
Preparing budgets for various Departments like production ,sales ,
purchases etc there should be coordination among all the three depts.
than contradiction.
 Scope of Management accounting-
1. Financial accounting –Management accounting is mainly
concerned with the rearrangement of the information provided
by financial accounting. Thus for an effective and successful
management accounting there should be a proper and well
designed financial accounting system.
2. Cost accounting – Many of the techniques of cost control like
standard costing, budgetary control etc are used by management
accounting
3. Budgeting and forecasting – This includes framing of
budgets.in order to plan business activities for the future
forecasting and budgeting play a very significant role.
Comparison of actual performance with the budgeted
performance ,computation of variances, finding their causes.
 Scope of Management accounting-
4. Inventory control- Inventory Control denotes raw materials, goods in the
process of manufacture and finished products. Inventory control is
significant as it involves large sums. The management should determine
different levels of stock I,e minimum, maximum and reorder level. The
control of inventory will help in controlling costs of products.
Management accountant will guide management as to when and from
where to purchase and how much to purchase.
5. Financial Management – Financial management is concerned with the
planning and controlling of the financial resources of the firm. It deals
with raising funds and their effective utilization.
6. Reporting to management- One of the functions of management
accountant is to report to the management. The reports are presented in
the form of graphs, diagrams , statistical techniques. The reports may
cover profit and loss statement, Cash and fund flow statement, Stock
reports etc. The reports may be monthly, quarterly and half yearly.
7. Cost control procedures – Any system of management accounting is
incomplete with out effective cost control procedures like inventory
control , labour control,budgetrary control etc.
 Scope of Management accounting-
8. Internal Audit – Management accountant heavily depends on internal
financial controls like internal audit and internal check to plug the loop
holes in the financial systems of the concern. Internal audit system is
necessary to judge the performance of different individuals.
9. Tax accounting- Tax planning is an important part of management
accounting .
Income statements are prepared and liabilities are calculated. The
management is informed about the tax burden from central, state and
local governments. Tax returns are to filed with different departments.
10. Office services – Management accountant is expected to deal with data
processing. filing. copying ,duplicating, communicating
etc.
Differences Between Managment accounting
and financial accounting
• Object -
 Financial accounting is designed to supply information in the form of
profit and loss a/c and balance sheet ( to find out the financial position))
to external parties like shareholders, creditors , banks , investors and
government.
 Management accounting is essential to help management in formulating
policies and plans which is internal.
• Analyzing performance –
 Financial accounting portrays the position of business as a whole. The
financial statements like income statement and balance sheet report on
overall performance of the business.
 On the other hand management accounting directs its attention to
various divisions ,departments of the business and reports about
the profitability, performance etc. of each of them.
• Nature –
 Financial accounting is mainly concerned with the historical data. It
records only those transactions which have already taken place.
 Management accounting deals with projection of data for the future and
therefore it supplies data for the present and future duly analysed and in
detail in the management language.
• Monetary Management –
 In Financial accounting only such economic events find place which
can be described in money.
 However the management is equally interested in non monetary
economic events viz technical innovations, personnel in the organization
etc
• Precision –
 There is less emphasis on precision in case of management accounting.
 Where as in financial accounting only exact figures are taken to arrive at
precision..
• Reporting –
 Financial accounting reports are meant for outsiders like bankers ,
Investors , shareholders, govt agencies etc.
 Where as management accounting are meant for internal use only.
• Legal compulsion –
 Financial accounting has become compulsory for companies
where as management accounting is not.
___________________________________________

End of Unit-1
 Journal
Problems
Problem 1:
•On April 01, 2016 Mr.Anees started business with Rs.
100,000 and other transactions for the month are:
•April 02. Purchase Furniture for Cash Rs. 7,000.
•April 08. Purchase Goods for Cash Rs. 2,000 and for Credit
Rs. 1,000 from Khalid Retail Store.
•April 14. Sold Goods to Khan Brothers Rs. 12,000 and Cash
Sales Rs. 5,000.
•April 18. Owner withdrew of worth Rs. 2,000 for personal
use.
•April 22. Paid Khalid Retail Store Rs. 500.
•April 26. Received Rs. 10,000 from Khan Brothers.
•April 30. Paid Salaries Expense Rs. 2,000
Journal solution for Problem
1.
 Journal problem
2
Prepare general journal entries for the following transactions of a
business called Pose for Pics in 2016:
• Aug. 1: Hashim Khan, the owner, invested Rs. 57,500 cash and Rs.
32,500 of photography equipment in the business.
• Aug 04: Paid Rs. 3,000 cash for an insurance policy covering
the next 24 months.
• Aug 07: Services are performed and clients are billed for Rs. 10,000.
• Aug 13: Purchased office supplies for Rs. 1,400. Cash paid Rs. 400
and remaining outstanding.
• Aug 20: Received Rs. 2,000 cash in photography fees earned
previously.
• Aug 24: The client immediately pays Rs. 15,000 for services
to be performed at a later date.
• Aug 29: The business acquires photography equipment. The
purchase price is Rs. 100,000, pays Rs. 25,000 cash and signs a note
for the balance.
Problem No.2
Mr. Ramu has the following transactions in the month of July.
Record them into the journal and show postings in the ledger and balance the accounts.
July 1st Ramu started business with a capital of 75,000
1st
Purchased goods from Manu on credit 25,000
2nd
Sold goods to Sonu 20,000
3rd
Purchased goods from Meenu 15,000
4th
Sold goods to Tanu for cash 16,000
5th
Goods retuned to Manu 2,000
6th
Bought furniture for 15,000
7th
Bought goods from Zenu 12,000
8th
Cash paid to Manu 10,000
9th
Sold goods to Jane 13,500
10th
Goods returned from Sonu 3,000
11th
Cash received from Jane 5,500
12th
Goods taken by Ramu for domestic use 3,000
13th
Returned Goods to Zenu 1,000
14th
Cash received from Sonu 12,000
15th
Bought machinery for 18,000
16th
Sold part of the furniture for 1,000
17th
Cash paid for the purchase of bicycle for Ramu's son 1,500
19th
Cash sales 15,000
20th
Cash purchases 13,500
 Cash a/c
Dr Cr
Date Particulars Amount Date Particulars Amount
01/10/_5 To Capital a/c 75,000 06/10/_5 By Furniture a/c 15,000
04/10/_5 To Goods/stock a/c 16,000 08/10/_5 By Manu a/c 10,000
11/10/_5 To Jane a/c 5,500 15/10/_5 By Machinery a/c 18,000
14/10/_5 To Sonu a/c 12,000 17/10/_5 By Drawings a/c 15,000
16/10/_5 To Furniture a/c 1,000 20/10/_5 By Goods/stock a/c 13,500
19/10/_5 To Goods/stock a/c 15,000 30/07/_5 By Balance c/d 53,000
tl 1,24,500 tl 1,24,500
31/07/_5 To Balance b/d 53,000

Capital a/c
DrCr
Date Particulars Amount Date Particulars Amount
30/07/_5 To Balance c/d 75,000 01/10/_5 By Cash a/c 75,000
tl 75,000 tl 75,000
31/07/_5 By Balance b/d 75,000
 Purchases a/c
Dr
Cr
Date Particulars Amount Date Particulars Amount
01/10/_5 To Manu a/c 25,000 02/10/_5 By Sonu a/c 20,000
03/10/_5 To Meenu a/c 15,000 04/10/_5 By Cash a/c 16,000
07/10/_5 To Zenu a/c 12,000 05/10/_5 By Manu a/c 2,000
10/10/_5 To Sonu a/c 3,000 09/10/_5 By Jane a/c 13,500
20/10/_5 To Cash a/c 13,500 12/10/_5 By Drawings a/c 3,000
30/07/_5 To Balance c/d 2,000 13/10/_5 By Zenu a/c 1,000
19/10/_5 By Cash a/c 15,000
tl 70,500 tl 70,500
31/07/_5 By Balance b/d 2,000
Manu a/c
Dr Cr
Date Particulars Amount Date Particulars Amount
05/10/_5 To Goods/stock a/c 2,000 01/10/_5 By Goods/stock a/c 25,000
08/10/_5 To Cash a/c 10,000
30/07/_5 To Balance c/d 13,000

tl 25,000 tl 25,000
31/07/_5 By Balance b/d 13,000
 Sonu a/c
Dr Cr
Date Particulars Amount Date Particulars Amount
02/10/_5 To Goods/stock a/c 20,000 10/10/_5 By Goods/stock a/c 3,000
14/10/_5 By Cash a/c 12,000
30/07/_5 By Balance c/d 5,000
tl 20,000 tl 20,000
31/07/_5 To Balance b/d 5,000

Meenu a/c
Dr Cr
Date Particulars Amount Date Particulars Amount
30/07/_5 To Balance c/d 15,000 03/10/_5 By Goods/stock a/c 15,000
tl 15,000 tl 15,000
31/07/_5 By Balance b/d 15,000
Furniture a/c
Dr Cr
Date Particulars Amount Date Particulars Amount
06/10/_5 To Cash a/c 15,000 16/10/_5 By Cash a/c By Balance 1,000
30/07/_5 c/d 14,00
0
tl 15,000 tl 15,000
31/07/_5 To Balance b/d 14,000
 Trial Balance
Problems
Problem 1: Prepare a Trial Balance for Shining Brothers Pvt. Ltd. at
March
31st, 2017?
Trading Account
format
Profit and Loss
Account format
 Sheet
format
Adjustments:
1.Provide for wages Rs.5000.
2.Write off 5% depreciation on
freehold premises and 10% on office
furniture.
3.Insurance to the extent of Rs.200
belongs to 2010.
4.Closing stock as on 31.12.2009 is
Rs.52000.
5.Charge interest on capital @ 5%.
Prob.2 From the following particulars taken out from the books of Abdul Hanan & Co. You are
required to prepare Trading and Profit & Loss Account and Balance Sheet as at December 31 st, 2019

Adjustments:
(a)Closing stock Rs, 35,000.
(b)Provision for doubtful debts at 5% of sundry debtors.
(c)Depreciation furniture and machinery by 10%.
(d)Commission of Rs. 3,600 has been earned but not received till the closing of accounts .
 Prob: 3 From the following trial balance of Faris Ali Qureshi & Bros. and additional
information, prepare Trading and Profit & Loss account and Balance sheet for the year
ended June 30th, 2019.

Additional Information
1.Depreciation furniture by 10% by written down method (WDM).
2.A provision for doubtful debts is to be created to the extent of 5% on sundry debtors.
3.Salaries for the month of June, 2019 amounting to Rs. 3,000 were unpaid which must be provided for. However,
salaries included Rs. 2,000 paid in advance. Office expenses outstanding Rs. 8,000.
4.Insurance amounting to Rs. 2,000 is prepaid.
5.Stock use for private purpose Rs. 6,000 and closing stock Rs. 60,000.
Solution
:
 Problems 4: The following are the balances taken from the books of Muhammad Zain Ammar Safdar & Co. on
May 31st, 2020. You are required to prepare Trading and Profit and Profit and Loss Account / Income Statement
for the year ended May 31st, 2020 and Balance Sheet as on that date.

Adjustments:
1.Depreciation furniture and machinery at 10% p.a. 2.Insurance is
paid in advance to the extent of Rs. 200.
3.Reserve for discount is no longer required and is to be written
back. 4.Closing stock is valued at Rs. 100,000.
5.Interest on bank loan is outstanding.