SESSION AUG/SEP 2023

PROGRAM MASTER OF BUSINESS ADMINISTRATION (MBA)

SEMESTER I
COURSE CODE & NAME DMBA104- FINANCIAL AND MANAGEMENT
ACCOUNTING
STUDENT NAME SABARI NATHAN C
ROLL NO 2314519359
1. Explain different types of accounting concepts in detail.
Answer 1.
Accounting concepts are the main foundation upon which the entire accounting structure is
built over. The concepts under them serve as a guideline to professionals involved in reporting,
accounting and financial transactions. To understand these principles are the key to succeed in
accounting.
The key concepts are
• Going Concern Concept • Matching Concept
• Accrual Concept • Entity Concept
• Consistency Concept • Money Measurement
• Prudence • Realization Concept
• Historical Cost • Dual Aspect Concept
Going Concern Concept
The concept of going concern is that a business entity will continue operating indefinitely. It is
assumed that a company will not liquidate in future. It is very crucial as it justifies the basis of
recording assets and liabilities which may not be realized immediately.
Accrual Concept
Accrual concepts are recorded when transactions occur and not when cash is handed over. The
revenue is identified when received and expense is identified when incurred. Hence the accrual
concepts ensures that revenue and expenses are recorded during the same period.
Consistency Concept
This concept ensures that, once an accounting principle is adopted this has to be followed until
a better solution is arrived. So, that transactions across various periods can be cross verified
consistently. This will make the trends reasonable.
Prudence Concept
This concept is also called as conservatism. The accounting professionals should be very
careful that, that liabilities and losses are not understated and assets and profits are not
overstated. Hence the users of the financial institution do not receive any false report on
financial health.
Historical Concept
As per this concept the assets should be recorded on its actual purchase price. Even though the
market value fluctuates, the assets will be remaining in the same cost that we had incurred in
the books. This will provide a stable and consistent validation method.
Matching Concept
The matching concept is also closely related to accrual type. This required the revenue and
associated expenses should be accounted in the same financial period. This will ensure that
both profit and loss of that particular period will reflect the period’s actual performance.
Entity Concept
Each business is considered as a separate entity from its owners. This means that the personal
transactions of owners don’t get mixed with business transactions. This will make sure that
financial statements will only reflect business activities,
Money Measurement
Only expressions of transactions in the monetary terms get recorded as per this concept. It
means the qualitative factors, like skills of a company workforce are not captured in the
financial statements.
Realization Concept
According to this concept, Revenue is recognised when the realized sale take place and there
is a legal right to receive the payment, irrespective of when the cash is actually received.
Dual Aspect Concept
Every financial transaction will have a dual effect. If a business is taking loan, it will receive
cash and will have a liability. This is called double entry system in accounting.
To conclude, the accounting concepts will act as backbone of accounting professionals. They
will give uniformity, clarity and integrity in financial statements. This will allow the
stakeholders which will have confidence in the financial health and its operations.

2. Write a detailed note on different types of subsidiary books and their importance in
recording accounting transactions. Also demonstrate specimen of any 2 types of
subsidiary books
Answer 2.

Subsidiary Books in Accounting

Subsidiary books are also called as daybooks / special journals. They play a pivotal role in the
accounting process. These books allow businesses that will record specific types of transactions
in a detailed manner. This will ensure that the main ledger remains uncluttered and easy to
interpret. The use of subsidiary books expedites the accounting process and enhances the
accuracy.

Following are the different types of subsidiary books and their significance,

Types of Subsidiary Books

Sales Journal / Day Book: This will record the credit sales of goods. Cash sales gets recorded
in the cash book. Every entry includes details like the date of the sale, invoice number, name
of the purchaser and the amount.
Purchase Journal / Day Book: It is used to record credit purchases of goods. Like the sales
journal, cash purchases aren't recorded here but in the cash book.

Sales Return Journal / Returns Inward Book: When the goods are returned by the customer
due to defects or other reasons, these are recorded in this journal.

Purchase Return Journal (or Returns Outward Book): It keeps a record of goods returned
to suppliers due to any discrepancies in the order or defects.

Bills Receivable Journal: Records the bills which the business has to receive, i.e., amounts
owed to the business by customers.

Bills Payable Journal: It keeps track of the bills the business has to pay to its suppliers or
creditors.

Cash Book: It’s a unique book that functions as both a ledger and a subsidiary book. It records
all cash transactions – both receipts and payments.

IMPORTANCE OF SUBSIDIARY BOOKS:

Efficiency: By categorizing transactions, subsidiary books make the process of recording and
posting transactions more efficient.

Accuracy: Specialized books reduce the chances of errors. A clear, dedicated space for a
specific type of transaction ensures accurate recording.

Detailed Record: These books offer a detailed record of transactions, allowing businesses to
easily track any specific transaction.

Ease of Reference: With transactions categorized, it becomes easier for accountants to refer
back to a particular transaction type.

Uncluttered Main Ledger: By recording transactions in subsidiary books first, the main ledger
remains succinct with.

The following are the Specimen for Two Types of Subsidiary Books:

1. Sales Journal:
Date Invoice No Buyers Name Amount
01/09/23 S001 XXX Foundations 1000
04/09/23 S002 YYY Limited 2000
2. Purchase Journal:

Date Invoice No Supplier Name Amount

02/09/23 P001 CBC Textiles 3000
06/09/23 P002 RET Deliveries 2000

To conclude, the subsidiary books will provide an organized, efficient, and accurate way of
recording transactions. They will serve as a foundational element in the accounting process,
ensuring that data flowing into the main ledger is well-structured and verified.

3. For the following balances extracted from a trial balance, prepare a trading account.

Particulars Amount in Rs.

Stock on 1-1-2022 70700
Returns inwards 3000
Returns outwards 3000
Purchases 102000
Debtors 56000
Creditors 45000
Carriage inwards 5000
Carriage outwards 4000
Import duty on materials received from abroad 6000
Clearing charges 7000
Rent of business shop 12000
Royalty paid to extract materials 10000
Fire insurance on stock 2000
Wages paid to workers 8000
Office salaries 10000
Cash discount 1000
Gas, electricity, and water 4000
Sales 250000
Answer 3.

Trading Account for the Year Ended 31-12-2022

A trading account provides a detailed summary of gross profit or loss of a business. To derive
the gross profit, it is essential to take into account direct incomes and direct expenses.

Direct Incomes:

• Sales: The main income for any trading business. For the given period, sales amount to
Rs. 250,000.

• Stock on 1-1-2022: The beginning inventory is considered in the trading account to

compute the cost of goods available for sale. This amount is Rs. 70,700.

Direct Expenses: These are the expenses directly linked to the production or procurement of
goods.

• Purchases: This is the primary direct expense which represents the cost of goods
bought for resale. For the given period, the purchases amount to Rs. 102,000.

• Returns Outwards: Deducted from purchases because these represent goods sent back
to the suppliers. Here, it is Rs. 3,000.

• Carriage Inwards: Expenses related to bringing the goods to the place of business. Rs.
5,000 for this period.

• Import Duty: Cost incurred for goods imported from foreign countries, which is Rs.
6,000.

• Clearing Charges: Amount paid for customs clearance of goods, amounting to Rs.
7,000.

• Royalty Paid to Extract Materials: A specific amount paid for extracted materials,
which is Rs. 10,000 in this period.

• Wages to Workers: Wages paid to workers who are directly involved in converting
raw material into finished goods or for handling goods. This is Rs. 8,000.

Deductions from Income:

• Returns Inwards: Deducted from sales as they represent goods returned by customers.
The given amount is Rs. 3,000.
Now, let us prepare the trading account:

Trading Account for the Year Ended 31-12-2022

Particulars Amount (Rs.) Particulars Amount (Rs.)

To Stock on 1-1-2022 70,700 By Sales 2,50,000
To Purchases 1,02,000 By Return Inwards 3,000
To Import Duty 6,000
To Cleaning Charges 10,000
To Royalty 8,000
To Wages 8,000
To Return Outwards 3,000
Total Direct Expenses 2,11,700 Total Direct Income 2,47,000
To Gros Profit (c/d) 35,300
Total 2,47,000 Total 2,47,000

From the above trading account, the gross profit for the year ended 31-12-2022 is Rs. 35,300.
This profit is derived after deducting direct expenses from direct incomes. This account will
provide a clear picture of the company's trading operations and helps in understanding the
direct costs associated with the core operations of the business.

Assignment Set – 2

4. Following is the balance sheet for the period ending 31st March 2018 and 2019. If the
current year’s net loss is Rs.38,000, calculate the cash flow from operating activities.

31st MARCH
2018 2019
Short-term loan to employees 15,000 18,000
Creditors 30,000 8,000
Provision for doubtful debts 1,200 -
Bills payable 18,000 20,000
Stock in trade 15,000 13,000
Bills receivable 10,000 22,000
Prepaid expenses 800 600
Outstanding expenses 300 500
Answer 4.

Cash Flow from Operating Activities Calculation

The calculation of cash flow from operating activities is primarily based on the changes in
working capital items and the net profit or loss for the year. Using the indirect method, we start
with the net income (or net loss) and make adjustments for changes in current assets and current
liabilities.

Starting Point: Net Loss for the current year: Rs. 38,000

Adjustments for Changes in Current Assets and Liabilities:

1. Short-term loan to employees:

➢ 2018: Rs. 15,000

➢ 2019: Rs. 18,000
➢ Increase in short-term loan (outflow): Rs. 3,000
2. Creditors:

➢ 2018: Rs. 30,000

➢ 2019: Rs. 8,000
➢ Decrease in creditors (outflow): Rs. 22,000
3. Provision for doubtful debts:

➢ 2018: Rs. 1,200

➢ 2019: Rs. 0 (since no value is given, assuming it is nil)
➢ Decrease in provision (inflow): Rs. 1,200
4. Bills payable:

➢ 2018: Rs. 18,000

➢ 2019: Rs. 20,000
➢ Increase in bills payable (inflow): Rs. 2,000
5. Stock in trade:

➢ 2018: Rs. 15,000

➢ 2019: Rs. 13,000
➢ Decrease in stock (inflow): Rs. 2,000
6. Bills receivable:

➢ 2018: Rs. 10,000

➢ 2019: Rs. 22,000
➢ Increase in bills receivable (outflow): Rs. 12,000
7. Prepaid expenses:

➢ 2018: Rs. 800

➢ 2019: Rs. 600
➢ Decrease in prepaid expenses (inflow): Rs. 200
8. Outstanding expenses:

➢ 2018: Rs. 300

➢ 2019: Rs. 500
➢ Increase in outstanding expenses (inflow): Rs. 200
Net Cash Inflow/(Outflow) from Changes in Working Capital:

Net Cash Flow = (Rs. -3,000) + (Rs. -22,000) + Rs. 1,200 + Rs. 2,000 + Rs. 2,000 + (Rs. -
12,000) + Rs. 200 + Rs. 200 = (Rs. 31,600)

Cash Flow from Operating Activities: = Net Loss + Net Cash Inflow/(Outflow) from
Changes in Working Capital = Rs. -38,000 + (Rs. -31,600) = Rs. -69,600

In conclusion, the cash outflow from operating activities for the year ending 31st March 2019
amounts to Rs. 69,600. This is indicative of the firm's operating inefficiencies or other factors
leading to a negative cash position from its core operations during the year. It's vital for the
management to delve deeper into its operating segments to ascertain the causes and take
corrective measures.

5. Define Marginal Costing. Discuss in detail the assumptions and limitations of Marginal
Costing. 2+8

Ans 5.

MARGINAL COSTING

Marginal costing, often referred to as direct, variable, or contribution costing, is a method of

costing in which only variable costs are charged to products, processes, or services, while fixed
costs are treated as period costs and written off during the period in which they are incurred.
The main focus is on the change in the total cost due to a change in one unit of production. It
helps managers in making decisions regarding production, pricing, and other business
strategies by focusing on the marginal or incremental costs and benefits.

ASSUMPTIONS OF MARGINAL COSTING:

Separation of Costs: Costs are categorized as fixed and variable. Fixed costs remain constant
irrespective of the level of production, while variable costs vary in direct proportion to the
volume of production.

Cost Behavior: It assumes that total variable cost changes proportionately with the level of
activity, while total fixed costs remain constant across different activity levels.

Sales Mix: In multi-product scenarios, the sales mix is assumed to remain constant.

Stock Valuation: Stocks, if any, are valued at marginal cost. Unsold goods carry only variable
cost, and no part of the fixed cost is assigned to closing stocks.

Steady Production Rate: The production rate remains consistent, and any fluctuation in sales
is reflected in the inventory levels.

LIMITATIONS OF MARGINAL COSTING:

Over-simplified Classification: The rigid classification of costs into fixed and variable can be
oversimplified. In reality, few costs are strictly fixed or variable. For instance, a cost that is
fixed in the short term might vary in the longer term.

Ignoring Fixed Costs: By treating fixed costs as period costs and not considering them while
pricing or decision-making, there's a risk of under-pricing products in the long run, which can
lead to reduced profitability.

Short-term Focus: Marginal costing is predominantly suitable for short-term decision-

making. Relying solely on it for long-term decisions might lead to sub-optimal strategies, as
the importance of fixed costs becomes more pronounced over extended periods.

Constant Sales Mix Assumption: In multi-product scenarios, the assumption that the sales
mix remains constant might not be realistic. Fluctuations in demand for different products can
significantly affect profitability.

Potential Misleading Decisions: If managers base decisions solely on marginal costs without
considering the holistic view of total costs, it can lead to potentially misleading decisions. For
example, a product with a positive contribution margin (sales - variable costs) might still be
unprofitable if fixed costs aren't covered.

Not Suitable for External Reporting: Marginal costing does not conform to generally
accepted accounting principles (GAAP) and hence is not suitable for external financial
reporting. Financial statements based on marginal costing may not show the actual profit or
loss of the organization.

Not Reflective of Realistic Situations: In scenarios where production is curtailed due to

factors like machine breakdowns, labor strikes, etc., the assumption of steady production rate
under marginal costing becomes unrealistic.

Change in Production Patterns: The method assumes that production patterns remain
consistent, but in real-world scenarios, economies of scale, technological changes, or learning
curves can change production costs and patterns over time.

In conclusion, while marginal costing provides valuable insights for managerial decision-
making, especially in the short term, it's essential to be aware of its limitations. Businesses
should use it in conjunction with other costing methods and financial data to make informed
decisions.

6. Define budgetary control? Elaborate essential features of budgetary control.

Answer 6.

BUDGETARY CONTROL: DEFINITION AND ESSENTIAL FEATURES

Definition of Budgetary Control: Budgetary control is a system of managing costs through

preparation of budgets. It entails the process of preparing budgets for a specific period,
comparing the actual results with the budgeted figures, and taking corrective action if any
discrepancies exist. It serves as a vital tool for management in planning, coordinating, and
controlling various business activities, ensuring resources are utilized efficiently.

ESSENTIAL FEATURES OF BUDGETARY CONTROL:

Planning: One of the primary features of budgetary control is planning. Businesses must
forecast their future operations, expenses, and revenues. A well-prepared budget provides a
clear roadmap, detailing what is to be achieved during a specified period. This allows
organizations to allocate resources optimally.

Standard Setting: Budgetary control involves setting standards for performance. These
standards or benchmarks serve as a reference point against which actual performance can be
measured. They can be in terms of revenue targets, cost limits, or any other financial metrics.
Coordination: For a budget to be effective, coordination across various departments and units
is crucial. This ensures that the objectives of one department align with another and support
the overall organizational goal. For instance, the sales department's targets should be in sync
with the production department's capabilities.

Recording: Every financial activity must be recorded. This feature ensures that there's a
systematic record of all transactions, which can then be compared against the budgeted figures.
This not only helps in monitoring but also ensures transparency in operations.

Comparison and Analysis: One of the primary reasons for preparing a budget is to compare
actual performance with budgeted figures. If actual figures deviate from the budget,
management can investigate the reasons. Analysis helps in understanding whether the variance
was due to external factors, inefficiencies, or perhaps the budget itself was unrealistic.

Feedback Mechanism: Budgetary control provides a feedback loop. After comparing the
actuals with the budgeted figures, the findings are reported back to the concerned departments
or units. This feedback can be used to take corrective actions or make strategic decisions.

Corrective Action: Merely identifying variances is not enough. Effective budgetary control
ensures that corrective action is taken to address any discrepancies. For instance, if expenses
are overshooting, management might look into ways to cut costs or optimize operations.

Flexibility: While a budget provides a roadmap, it should not be so rigid that it cannot be
changed. External factors such as market conditions, competition, and economic shifts can
affect business operations. Hence, a good budgetary control system allows for revisions,
ensuring that the budget remains relevant.

Future-Oriented: Budgetary control is inherently future-oriented. While it takes historical

data into account, its primary focus is on forecasting and planning for the future. This proactive
approach ensures that businesses are better prepared for upcoming challenges and
opportunities.

Control Mechanism: Above all, budgetary control acts as a control mechanism. It ensures that
every department or unit operates within its allocated resources, preventing overspends and
promoting efficiency. Through this, it ensures that the organization as a whole remains on track
to achieve its financial objectives.
In conclusion, budgetary control is an indispensable tool for modern businesses. It not only
provides direction but also offers a means to measure performance, ensuring efficiency and
financial prudence. Its essential features, from planning and coordination to feedback and
corrective actions, enable organizations to navigate the complexities of the business world
effectively.