UNIT 1

INTRODUCTION OF MANAGEMENT ACCOUNTING

KEY WORDS
Accounting framework includes generally accepted accounting principles (GAAP) or the basis
of which accounting data is processed, analysed and reported.
Accounting theory is a set of inter-related principles and propositions which provide a general
frame work for accounting practice and deal with new developments in the area.

INTRODUCTION
Accounting denotes any and every accounting techniques which may be helpful to management
in discharging its functions, viz., planning, controlling, co-coordinating, decision making,
budgeting, etc.
Accounting Concept:
(1) Entity Concept: according this concept business is treated as a Separate Entity it is different
from its owners, creditors, managers. Owners are also treated as creditors of the organization.
(2) Dual Aspect Concept: Every Transaction has a two sides (a) Debit side(B) Credit side
(3) Going Concern Concept: this concept assume that business will continue to exist for the
long run.
(4) Accounting Period Concept: Financial year
(5) Money Measurement Concept: In Management Accounting only those transaction & events
are included which are capable of being expressed in the terms of money.
(6) Cost Concept: value of assets is calculated on the basis of acquisition cost.
(7) Matching Concept: the determination of profit of a particulars accounting period is
essentially a process of matching the revenue recognised during the period and the cost to be
allocated to the period to obtain the revenue.
(8) Accrual Concept: this concept is concerned with the period in which the revenues and
expenses are to be related.
(9) Verifiable & objective: this concept means all the transaction that are recorded in the books
of accounts should be proved true or genuine.

Accounting Rules
Personal Accounts: Related to individual, Firm, Company, or an institution.(Ram, Mohan
,Capital a/c, Debtors, creditors a/c)
1 (A) Natural personal a/c : means Accounts of human being
2 (B) Artificial a/c: these do not have physical existence but they work as personal account.
3 (C) Representative a/c : when account represent a particular person or group of person .
Real Account: These account related to those entire thing whose value can be measured in the
terms of money and those are the properties of the business. These account also divided into the
two parts (tangible) & (intangible)
(Cash a/c, furniture account, goodwill a/c)
Nominal Account: These accounts related to income and expenses.( rent paid, salary paid , bad
debts)
1
2 CREDIT RULES
Account name
Debit
Credit
Personal Account
receiver
giver
Real Account
What comes in
What goes out
Nominal Account
The expenses& looses
Incomes &gains
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4
MANAGEMENT ACCOUNTING
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6

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Management accounting as defined by management Team of ANGLO-AMERICAN COUNCIL

ON PRODUCTIVITY The presentation of accounting information in such a way as to assist
management in creation of policy and in day to day operation of an undertaking.
Management Accounting is the term used to describe the accounting methods, systems and
techniques which coupled with special knowledge and ability, assist management in the task of
maximizing profits or minimizing losses. Management Accounting is the blending together into a
coherent whole financial accounting, cost accounting and all aspects of financial management.
9 J. Batty

10 Management Accounting may be defined as the application of accounting and statistical

techniques to the specific purpose of producing and interpreting information designed to assist
management in its functions of promoting maximum efficiency and in envisaging, formulating
and co-coordinating future plans and subsequently in measuring their execution.
Association of Certified and corporate Accounts of U. K.

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12 According to T. G. Rose - Management Accounting is the system of collecting classifying,
analyzing and interpreting of accounting information in such a way so as to assist the
management in its smooth functioning.
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14 The nature and functions of management accounting are very clearly mentioned in al above
definitions. Management Accounting is a service functions which provides information for
managerial decisions and reviewing their implementation Management Accounting involves
application of special techniques and concepts. It does not only and management in formulating
plans and making decisions but also assist in setting of goals and in the evaluation of alternative
objectives.

(1)

(2)
(3)

(4)

(5)
(6)

(7)
(8)

Objectives of Management Accounting:

Management Accounting is not a new form of accounting but is a new approach to the
function of accounting.
Making available statistical accounting and costing information and data for use in process of
planning. Management Accountant collects, arranges, classifies analysis and interprets the
data with a view to assist management in policy formulation and planning.
This system prepares necessary reports to be helpful to management for long term policy
formulation and decision making.
With the use of various techniques like Budgetary control CVP analysis, Fund Flow Analysis,
Ratio Analysis, Cash Flow Analysis, this system helps management for proper solution of
problem.
It analysis and interprets the data and prepares reports for different levels of management to
give proper direction to each department/section to achieve its goal/objectives surely and
smoothly.
It also helps to evaluate the capital expenditure projects and to decide the best and most
profitable project.
Management Accounting aids to prepare various Budgets like production Budget, Purchase
Budget, Sales Budget, Material Budget, Master Budget, etc. It provides necessary data and
statistical information for preparing budget.
It also helps in planning function by providing necessary information and data for long term
and short term forecasting and for future activities.
It also helps management in its control function by its various means. It aids to install
integrated and effective structure of control of various activities at different levels.

Management Accountancy is in short a combination of Management and Accountancy

functions. The function of traditional accountant was the post-mortem analysis of the past
activity, whereas that of a management accountant is to provide tools for drawing the clear

picture for future. The management accountant so presents the accounting data before
management that it forms a base for policy decisions. In other words, the management
accountant assists management in planning future course of action. The function of a traditional
accountant is like drawing a log-chart of a ship showing the route over which the ship has
traveled. The function of the management accountant resembles that of a navigating officer who
charts out the route over which the ship would move in future.
The management accountant discharges his function by presenting the accounting data in
the form of reports, on the basis of which the management can take corrective action without
delay, if necessary.

Characteristics of Management Accountancy :

From the above definitions, the characteristics of Management Accountancy can be stated
as follows :
(1) It is an accounting system which is helpful to the management in taking important business
decisions.
(2) It is based on accounting information. It starts working only after the accounting work is
over.
(3) It is concerned with analysis of all accounting information which may be useful to the
management.
(4) It is concerned with preparation of budgets and budgetary control.
(5) it presents accounting information in such a any where in the actual performance is compared
with standards as laid down in budgets.
(6) It is concerned with presentation of accounting information at regular intervals in the form of
reports before the management.
Scope of Management Accounting
As we have seen, management accountancy is concerned with presenting accounting
information to the management in such a way that in becomes useful to management in taking
important decisions. This prescribes the scope of management accountancy as follows :
(1) Financial Accounting : In fact, management accountancy is based on financial
accounting, because, it is the presentation of information from financial accounting to the
management. Thus without financial accounting, the management s not able to control the
working of the business.
(2) Cost Accounting : Management accountancy makes use of modern costing systems
such as standard costing, marginal costing, opportunity costs, differential cost, budgetary control
etc. Without the use of these system the management accountancy is incomplete. It is due to
these methods that management is able to control the performance of business enterprise.

(3) Budgetary Control : Budgetary control system is an integral part of management

accountancy. It includes preparing various budgets, comparing actual performance with budgeted
figures, compute the variances and control them or task necessary corrective steps.
(4) Inventory Control : to control business activities, it is very much necessary to
control inventory. Hence, management accountancy includes inventory control.
(5) Replacement Accounts : In order to maintain capital of business in facts it is
essential that account must be prepared on the basis of replacement value of assets, i.e. profit
must be calculated keeping in view the replacement values.
(6) Interim Reports : Reporting is an integral part of management accounting. The
accountant must present reports before the management at regular intervals which includes
monthly, quarterly or six monthly financial statements, cash-flow and fund-flow statements etc.
(7) Statistical Methods : In the presentation of accounting information before the
management, the statistical techniques of charts, graphs, pictorials, index numbers etc. are used
on large scale, because that makes the accounting data more intelligible and more meaningful.
(8) Taxation : The taxation is more important in accounts than any other matter, because,
the divisible profit depends on it. Hence, management accountancy covers in its scope the
presentation of effects of taxation on accounts and profit, filing of tax return, payment of taxes
etc.
(9) Office Services : Office services are essential for presenting accounting informations
before management. This includes collection of proper data, preparing information required by
processing data, use of mechanical and electronic devices etc.
(10) Internal Audit : For self control of business internal audit is required so that it can
be known whether the business activities are going on as planned and the malpractice or
irregularities may be brought to the notice of management.

Functions of Management Accountancy

The management accountancy performs the following functions in a business enterprise :
(1) Formulating budgets : The budgets are the bases, which are used to control the
business activities by the management. It is the job of management accountant to prepare various
budgets. Preparing sales budget on the basis of past figures of sales and intelligent forecasting,
preparing production budget on the basis of sales forecasts and production facilities available,
formulating material, labour and overhead budgets, preparing cash budget, capital budget, etc.
This requires determining business objectives, selecting proper strategy for achieving the
objectives.
(2) Classification and arrangement of data : The accounting data has to be classified
and properly arranged for presentation before the management. E.g. figures of purchase and sales
product-wise, region-wise and period-wise have to be arranged in a proper form. The formats of

regular reports must be prepared in advance, so that they may be presented regularly before
management as per their requirements.
(3) Presentation and Interpretation of Accounting Data : The accounting data must
be presented before the management in its proper perspective, so that it becomes meaningful.
The interpretation of accounting data by means of accounting ratios, cash flow statements,
charts, graphs etc. must be made so that he attention of management is drawn to those weak
points which needs the attention of management. It leads to management by exception.
(4) Routine Reports and Special Reports : The management accountant is required to
present two types of reports before the management : Routine reports and Special reports. When
some important change is to be made in the business, the management accountant is called upon
to present a special report on the effects of such change on profits and financial position. E.g. if a
new machine costing Rs.50 lakhs is to be installed for replacing an old machine, then its effects
on profit, cash flow, financial position, the source of getting finance etc. has to be calculated and
a special report thereon has to be presented by the management accountant.
Secondly, weekly, monthly or quarterly routine reports are to be presented before various
levels of management e.g. daily report of consumption of material and labour cost prepared
by the foremen and to be presented before production management etc.
(5) Making management control effective : The top management can not pay attention
to minute details of everything that is going on in the business. Hence, their attention must be
drawn to these activities only which are not proceeding as planned. This is called Management
by exception, This will save a lot of time and tension of the top management. It is the
responsibility of the management accountant to interpret the accounting data and draw the
attention to only such activities.
(6) Assisting in Evaluation of Capital Projects : Capital projects like replacement of
old machines by new machines, scheme for expansion of business, etc. involve considerably
large amounts of capital expenditure. The management accountant is called upon to evaluate
such projects in terms of profitability requirements of additional funds, the sources from which
they can be obtained etc. Alternative projects are compared and evaluated and management
accountant helps in selecting one project.
Difference between Management Accounting and Financial Accounting :
The basis of management accountancy is still financial accounting which provides basic
data to he former. However, they differ in the fundamental objective. The financial accounting
prepares Profit and Loss Account disclosing the results of years trading and a Balance Sheet
exhibiting financial position of the business. The management accounting on the other hand, is
concerned with analysis and interpretation of accounting data for the use of management. The

former is meant for outsiders, whereas the latter is prepared for internal use. The major points of
difference are summarised below :

Difference between Financial Accounting system and Management Accounting system:

Points
(1) Objective:

(2) Period
Time:

Financial A/c system

Management A/c system

Main objective of this accounting is

to provide information regarding
Profit/Loss financial position of the
company to shareholders, creditor
Govt. etc.

Main objective of this accounting is to

assist management in its function of
policy formulation, decision making,
planning, etc.

of Presents financial accounts at the Presents accounting statements, Reports

end of accounting year. Present during the year as per requirement and
accounting data for past year.
indicates future trends.

(3) Presentation:

Final accounts and audit reports are Various statements and reports are
presented to shareholders in Annual presented to Management, Board of
General Meeting.
directors.

(4) Accuracy:

Financial Accounting always records Management Accounting reports and

and shows actual figures of income shows estimates indicating future trends.
and expenditure.

(5) Audit
necessary:

As per provision of Companies Act, Reports and statements prepared by this

1956, audit of Financial Accounts is accounting have not to be audited. Audit
compulsory.
is not a necessity.

(6) Utility:

Useful for shareholders, Debenture Useful to Management/Board of directors/

holders,
creditors
Bankers, Top management officials.
Investors, etc.

(7) Subject
Knowledge:

Requires knowledge of accountancy Requires knowledge of accountancy, cost

only.
accountancy,
Maths,
Statistics,
Economics.

(8) Main
features:

Its main characteristics is to prepare

and maintain proper account
especially preparation of P & L A/c
and Balance sheet.

(9) Scope:

Scope of Financial A/c is limited. It Scope of Management A/c is wider.

only
records
the
financial Which not only records financial

Its main feature is to assist management in

long term policy formulation and decision
making process and for these purposes,
reports and statements are prepared and
presented.

transaction
done
accounting period.

during

the transactions but also consider nonfinancial transacting And from these data
prepares reports to indicate future trends.

Difference between Cost Accounting & Management:

Following differences are there between Cost accounting and Management accounting
system:
Points of
Cost Accounting System
Management Accounting System
difference
1.

In these accounts only information In these accounts information

regarding cost, cost audit, cost regarding accounts, cost accounts,
Presentatio reduction etc. are produced.
Human resources, Economic and
n
of
business environment etc. are
information
presented.

2. Scope

Scope of this accounting system is Scope of this accounting system is

limited because it deals with cost very wide in comparison with the
related matters only.
scope of cost accounting.

3. Relation

To ascertain cost, cost control and

cost audit are main area related with
cost A/c and cost records are kept for
this purpose.

While management A/c system thinks

for the policy formulation and
planning matters. Management A/c is
futuristic in its approach.

4. Use
of Information provided by this
information accounting system becomes the basic
and data
information for Management A/c
system.

With the help of information of cost

accounts
and
other
relevant
information prepares reports and
statement indicating future trends.

5. Place
of The place of cost accountant is lower The place of Management accountant
Accountant cadre than Management A/c.
is in senior cadre than Cost
Accountant.
6. Tax
planning

Cost accounting does not include Management accounting includes

financial
accounting
and
tax both cost account and financial
planning.
account and also tax planning.

7. Installation

Cost accounting system can be Management accounting system

installed
without
management cannot be installed without a proper
accounting.
cost accounting system.

8. Planning
factor

Cost accounting is more concerned Management accounting is concerned

with short term, planning and with short term as well as long term
decisions.
planning and decision.

9. Time
element

Most probably cost records are Reports

and
statements
of
prepared for related accounting Management A/c system are prepared
period i.e., for one year or one whenever required. There is no
month, etc.
definite period for it.

10. Function

Cost accounting is concerned with Management accounting system is

assisting the management functions.
concerned both with assisting
managements in its function as well
as evaluating the performance of
management.

Differences between cost accounting/Management Accounting/financial accounting

Financial Accounts

Cost Accounts

Management Accounts

1.Recording
2.Outsiders
3.Past
4.Statutory
5.Preparation of
profit/loss A/c
And balance sheet
6.Audit& reporting

1.Estimation and control

2.Internal
3. Future
4. Not for all
organizations
5.Costing records
6.Cost audit once in two
years

1.Collection Analysis and

decision making
2.Management
3.Future
4.Non-statutory
5.Using various techniques
6.Supply the required
information
To correct persons on time