Finance and Management

Accounting Techniques
-Ananth H. Iyer

LO1: Understand Financial and Management Accounting

Systems
 Aim of the Course

• To develop knowledge and understanding of fundamental financial and management

accounting techniques used by managers in organisations and to enable learners to
apply these techniques.

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Learning Outcomes
❖ LO. 1.1 Compare management and financial accounting systems
❖ LO. 1.2 Analyse financial and management techniques used for recording
financial information
❖ LO. 1.3 Evaluate the usefulness of financial and management accounting
statements to stakeholders
❖ LO. 1M1. Evaluate the benefits of financial and management accounting systems
for a specific business organisation
❖ LO. 1D1 Evaluate how a specific business organisation integrates financial and
management accounting systems into their organisational processes

1-3
Introduction

How Much Money Came In?

Key Questions of Business Where did the Money go?

How much Money is Left?

Introduction
❑ Planning:
Emphasizes on the overall event objectives.

❑ Sourcing:
Focuses on sources of raising funds: debt, equity, etc.

❑ Allocation:
Distribution of funds: types of events

❑ Monitoring:
Keep a check about the inflow and outflow of funds

❑ Recording and Evaluation:

Record the transactions and analyse the overall profitability
position
LO 1.1 Understanding Financial Accounting
• “Nothing happens until someone sells something.”
❖ Accounting takes over from this point as soon as the sale happens.

• Also known as language of business

“Accounting is 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 ”
-American Institute of Certified and Public Accountants Committee
Financial Accounting (Contd.)
• Helps in providing financial information to the stakeholders.

• Examines the financial position of a corporation and helps in future

planning.

• Follows a prescribed set of rules and regulations as prescribed by the

relevant authorities.
LO 1.1 Understanding Management Accounting

• “the process of identification, measurement, accumulation, analysis, preparation,

interpretation and communication of information used by management to plan,
evaluate and control within an entity and to assure appropriate use of and
accountability for its resources”

- Chartered Institute of Management Accounting

Management Accounting (Contd.)
It aims to facilitate:

• Strategy Formulation
• Planning and Construction of Business Activities
• Decision-making
• Safeguarding of Assets
• Optimal Use of Resources
Financial Accounting Vs Management Accounting

Source: Financial Accounting, The Institute of Company Secretaries of India, Kolkata, India, pp.14
Users of Financial Information
Users of Financial Information
Users of Financial Information (Contd.)
Monthly/Quarterly Accounts

Cycle What reporting should happen A relevant procedure

Monthly Report on income and expenses and Enter all income made and expenses
review of monthly budget. incurred at the end of each month.
Quarterly Report on the figures for the quarter
After the third month’s data is
and review of the budget variances.entered, extract a report from the
Student may refer to BAS. financial accounting system for the
three-month period.
Annually Annual report and review of the Extract the annual figures and review
profit and loss and balance sheet. actual vs budgeted figures.
Ratio Analysis
● Ratios refers to a mathematical number derived as a relationship
between two or more variables.

● It can be expressed in percentage, fraction, proportion or number of

times.

● “Financial Ratio” refers to the number derived from calculating

variables forming part of financial statements.
Ratio Analysis Types
LO 1.3 The Accounting Cycle in an Event Enterprise

• First book of entry -

Recording Journal

• Segregation of transactions -
Classifying Ledger

• Preparing transaction summary –

Summarising Trial Balance

• Preparing and analysis -

Analysing & Financial Statements,
Evaluating Ratios

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LO. 1.1 Accounting Terms
Portrayal of Accounting Terms

Assets Income Expenditure

Liabilities Balance Sheet

Income Statement/
Capital Profit & Loss Account
Accounting Equation

Assets Liabilities Stockholder’s

= + Equity

Common Stock Retained Earnings

+

Revenues - Expenses - Dividends

Double Entry Bookkeeping
Double Entry Bookkeeping (Contd.)
Golden Rules of Accounting
Personal Account
• Debit the Receiver; Credit the Giver

Real Account
• Debit what Comes in; Credit what Goes out

Nominal Account
• Debit all Expenses and Losses; Credit all Incomes and Gains
Accounting Process
Recording Transactions in the Journal
A complete journal entry includes
• The date of the transaction

• The title of the account debited (placed flush left in the Accounts
and Explanations column)

• The title of the account credited (indented slightly)

• The currency amount of the debit (left)

• The currency amount of the credit (right)

• A short explanation of the transaction (not indented)

Example of Journal
Ledger
Generally, in manual bookkeeping, the bookkeeper makes
journal entries, then posts the entries to a ledger.

A ledger is a book that has each account on a separate

page. All of the amounts that affect that account are
entered there, and a running total is kept.

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Ledger Example

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Trial Balance

● At any time during the month, but usually at the end of the
month (or accounting period) one can prepare a trial balance. A
trial balance is just a list of accounts in chart-of-accounts order
with their balances-to-date

● On a trial balance, there are two columns of numbers, debits and

credits. all of the debits go in the left-hand column (debit
columns) and credits in the credit column.

● They have to equal each other.

Trial Balance (Contd.)

● The Trial Balance is a list of accounts and their balances at a

given time.

● The primary purpose of a trial balance is to prove debits =

credits after posting.

● If debits and credits do not agree, the trial balance can be

used to uncover errors in journalizing and posting.
Trial Balance (Contd.)

● The Trial Balance is a list of accounts and their balances at a

given time.

● The primary purpose of a trial balance is to prove debits =

credits after posting.

● If debits and credits do not agree, the trial balance can be

used to uncover errors in journalizing and posting.
Trial Balance Proforma

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Financial Statements

Financial Statement
Profit & Loss Shows profit/loss from operating
activities of the business. Also
Account known as Income Statement

Shows the financial position of the

Balance Sheet business
Profit and Loss Account

❖ Also called as Income Statement Major Components:

provides the summary of the firm’s • Revenues
expenses, revenues and profit/loss • Cost of Goods Sold
• Administration Expenses
earned over a period of time. • Selling and Distribution
Expenses
❖ It can be presented in horizontal and • Depreciation
vertical format. • Interest
• Taxes
• Operating Profit/Loss
• Net Profit/Loss

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Profit and Loss Account Horizontal Format Proforma

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Profit and Loss Account Vertical Format Proforma

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Balance Sheet

❖ It portrays the assets owned by the

firm and the sources of funds used for Major Components:
financing the assets. • Fixed Assets
• Current Assets
• Investments
❖ Shows the net worth of the business on • Capital
a given date. • Long-term Liabilities
• Current Liabilities
❖ It can also be presented in horizontal
or vertical format

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Balance Sheet Horizontal Format Proforma

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Balance Sheet Vertical Format Proforma

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Management Accounting
● “Any form of accounting which enables a business to be conducted more
efficiently can be regarded as Management Accounting.”
-The Institute of Chartered Accountants of England and Wales

● “Management Accounting is the application of professional knowledge and

skill in the preparation of accounting information in such a way as to assist
management in the formation of policies and in the planning and control of
the operations of the undertaking.”
-Chartered Institute of Management Accountants

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Cash Flow Forecasting

Management Accounting Systems

Management Accounting Systems
Budgeting &
Cost Accounting Cash Flow Forecasting
Budgetary Control

Inventory Capital Investment

Break-even Analysis
Management Appraisal

Marginal &
Absorption Costing

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Cost-Accounting Systems
● It enables in calculation of prices of goods and services at any given point
of time.

● The information collected by management accounting is used by cost

accounting in decision-making process.

● The decision cane be used in making budgets, studying deviations and so

on.

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Inventory Management Systems
● Management accounting helps in efficient management of the inventories
available.

● It helps in creating a balance between the ordering quantity, ordering cost

and transportation costing.

● The various concepts like Economic Order Quantity, LIFO, FIFO

Methods

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Cash Flow Forecasting
● It helps in forecasting of future cash flows.

● Based on the timing of cash flows the organisation can plan for their
expenses and investment.

● Also, it helps in liquidity management of the business.

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Capital Investment Appraisal
● Focuses on the long-term investment decisions of the firm

● Helps to assess the financial viability of the investment.

● Also, emphasizes on the time value of money.

● Methods:
○ NPV
○ IRR
○ Payback Period
○ Discounted Payback Period

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Budgeting and Budgetary Control
● Budgeting is a process of preparing budgets by taking various steps for
the attainment of predetermined objectives

● Budgetary Control seeks to study the areas whether the budget is

controlled or not.

● Emphasize on spendings and income

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Marginal and Absorption Costing
● Marginal costing is also a cost controlling technique which takes into
consideration only the variable or marginal cost while taking decisions by
the management.

● Absorption Costing is an accounting method that you can use to capture

all of the manufacturing costs associated with the production of one unit
of goods.

● Management accounting uses the data from both these areas to determine
various decisions like deciding profit margin, production vs outsourcing
and so on.

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Break-even Analysis
● Break Even Point is that point of sales at which firm has no profit or no
loss. In other words, total sales and total cost or firm are equal.

● Management accounting helps to determine the break-even point for

manufacturing and services.

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Session 1: Summary
Thank You!
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