PROJECT

ON

TOOLS FOR

MANAGERIAL ACCOUNTING

Submitted by: - Jatin Trika (91012)

Submitted To:- Anju Katyal
THERE ARE DIFFERENT TOOLS WHICH ARE USE IN
MANAGERIAL ACCOUNTING

• Budgeting
• Financial statement
• Fund flow statement
• Accounting ratio
Financial statement
Financial statement which shows result of business
operations during an accounting period

USERS OF FINANCIAL STATEMENT

1. Management: The financial statements help assessing the

profitability of various activities and various departments. On
their basis, the management can review the progress of the
business and take decisions for controlling the non-
profitability activities.
2. Investors: They can assess the short-term and long-term
financial soundness and earning capacity of the business with
help of financial statement. They can also study the trend of
sales, trend of profits, shortcoming and the prospects of
future growth of the enterprise.
3. Short-term creditors: on the basis of financial statement they
assess whether the enterprise will be able to pay their debts
when they fall due and may decide to extend, maintain or
restrict the credit allowed to the enterprise.
4. Employees: On the basis of financial statements they can
judge as to how much bonus and increase in their wages is
possible from profits of enterprise.
5. Government: Government uses the financial statements to
study the profit margins of various industries to announce or
withdraw various concessions and to increase or decrease the
excise duty.
6. Taxation authorities: for assessment of income tax , sale tax
etc.
7. Other users : Such as trade associations, consumer
organizations, researchers etc
Financial statement further divides in
• Trading account
• Profit and loss account
• Balance sheet

Trading account

Trading account is prepared for calculating the gross profit or gross

loss arising or incurred as result of the trading activities of a
business.

PREPARATION OF TRADING ACCOUNT

Trading account is nominal account and all expenses which relate

to either purchase or manufacturing of goods are written on the Dr.
Side of Trading Account.

Items written on Dr. Side

1. Opening stock:-the stock of goods remaining unsold at the
end of the last year is termed as the opening stock of the
current year. In other words, the closing stock of the last
year.
a) Opening stock of raw material,
b) Opening stock of semi-goods and
c) Opening stock of finished goods
2. Purchase and purchase returns:- goods which have been
bought for resale are termed as purchase . Purchase returns
will be shown as a deduction from purchase on the debit side
of trading account.
3. Direct Expenses:-all expenses incurred in purchasing the
goods, bringing them in godown.
a) Wages:- wages are paid to workers who engage in
production.
b) Carriage or carriage inwards or freight:- expense
incurred in bringing goods to factory.
c) Dock charges:-charges levied on ships and their cargo
while entering or leaving docks.
d) Import duty or custom duty:-paid on import as well on
export of goods
e) Excise duty:-this is paid to the government on
manufactured goods and therefore, debited to trading
account.
f) Octroi:- this is levied by the Municipal Committee
when the goods enter the city and hence debited to
trading account.
g) Royalty:- this amount paid to owner of mine or patent
for using his right or patent
ITEMS WRITTEN ON THE CR. SIDE

1. Sales and sales returns:- Both cash and credited sales

will be included in sales. Sales return will be deducted
out of sales.
2. Closing stock:-the goods remaining unsold at the end of
the year are known as closing stock. It is valued cost
price or market price whichever is less.

PERFORMA OF TRADING ACCOUNT

Form of Trading Account

TRADING ACCOUNT
(for the year ended)

PARTICULARS AMT. PARTICULARS AMT.

To Opening st By sales
To purchase Less: sale returns
Less: purchase returns By closing stock
To wages By gross loss
To direct expenses transferred to P&L A/C
To carriage inwards
To gas, fuel and power
To dock charges and
Clearing charges
To import duty
To excise duty
To royalty
To factory expenses
To gross profit
Transferred to P&L A/C

PROFIT AND LOSS ACCOUNT

 Profit & loss Account is prepared which contains all the
items of losses and gains pertaining accounting period.

NEED OF PROFIT & LOSS A/C

1. To ascertain the net profit or net loss:-It provides the
net profit to proprietor and credited to his capital
account.
2. Comparison with previous year’ profits:-we can
compare current year profit with last year’s profit.
3. Control on expenses:-P&L Account helps in
comparing various expense with the expense of
previous year. Such comparison helps in taking
concrete steps for controlling the unnecessary
expenses.
4. Helpful in the preparation of Balance sheet :- A
balance sheet can only be prepared after ascertain the
net profit through the preparation of P&L account.

PREPARATION OF PROFIT AND LOSS ACCOUNT

A profit and Loss account is started with the amount of gross profit
or gross loss brought down from Trading Account.

ITEM INCLUDED ON THE DR. SIDE OF P & L ACCOUNT

1. Gross profit: - if trading account discloses gross loss, it is

shown on the debit side first of all.
2. Office and administrative expenses: - such as salary of office
employees, office rent, lighting, postage, printing, legal
charges, audit fees etc.
3. Selling and distribution expenses: - such as advertisement
charges, commission, carriage outwards, bad-debts,
packaging charges etc.
4. Miscellaneous expenses: -such as interest on the loan, interest
on capital, repair charges, charity etc.

ITEM INCLUDED ON THE CR. SIDE OF P & L ACCOUNT

1. Gross profit: - the starting point of the CR. Side of the P & L
Account is the gross profit brought down from the Trading
Account.
2. Other income and gains: - all items of incomes and gains are
shown on the credit side of the Profit & Loss Account, such
as income from investment, rent received, discount received,
commission earned, interest received etc.

PERFORMA OF PROFIT AND LOSS ACCOUNT

 PROFIT AND LOSS A/C
(For the year ending on 31st march, 2007)
PARTICULARS AMT PARTICULARS AMT

To gross loss b/d By gross profit b/d

OFFICE EXPENSES:-
To salaries By rent from tenant
To Rent, Rates & Taxes By rent
To lighting By Dividend on shares
To legal charges By Bad-debts recovered
To audit fees By Income from other source
To General expense By Net loss
TO Advertisement
To commission
To bad-debts
To repairs
To interest
To donation & charity
To net profit-
Transferred to cap a/c
BALANCE SHEET

Balance sheet is statement at particular date showing on the one

side the trader’s property and possessions and on the other hand
the liabilities.

NEED AND IMPORTANCE OF BALANCE SHEET

1. The main purpose of preparing a Balance sheet is to ascertain

the true financial position of the business at a particular point
of time.
2. It helps in ascertaining the nature and cost of various assets
of the business.
3. It helps in ascertaining the nature and amount of various
liabilities of the business.
4. It gives information about the exact amount of capital
5. it helps in finding out whether solvent or not.
6. It helps in preparing the opening entries at the beginning of
the next yer.

PERFORMA OF BALNCE
SHEET
 BALANCE SHEET
As on 31st march,2007

Liabilities Amt Assets Amt

Current liab.:- current assets:-

Bank overdraft cash in hand
Bills payable Cash at bank
Sundry creditor Bills payable
Outstanding exp Sundry debtors
Unearned income closing stock
Fixed assets:- Long term ivestment:
Long term asset Fixes assets:-
Reserves Furniture
Capital Loose tools
Add: net profit land ad building
Less: drawing Goodwill

BUDGETING
Budget is estimation for the future related some activity
Budgeting is a process of preparing budget and controlling the
performance of activity on the basis of budget is called budgeting
control.

TYPES OF BUDGETING
1. On the basis of time
a) Long term budget
b) Short term budget
c) Mid term budget
2. On the basis of function
a) sales budgeting
b) production budgeting
c) raw material budgeting
d) cash budgeting
e) material budgeting
3. Other budget
a) Program budgeting
b) Responsibility budgeting
c) Zero base budgeting

FUND FLOW STATEMENT

A statement of change in financial position summarizes for the
period covered by it, the changes in the financial position including
the source from which funds were obtained by enterprise and the
specific uses to which such funds were applied.

IMPORTANCE OF FUND FLOW STATEMENT

1. Helpful in finding the answer to some important financial

questions
A) What have been the main source and application of
funds during the period?
B) Where did the profits go?
C) Why were dividends not larger?
2. Helpful in financial analysis.
3. Helpful in proper management of working capital
4. It helps in the preparation of budget for the next period.
5. It provides more reliable figure of the profit and loss of the
business.
6. It enables to know whether fund have been properly use.
7. It helps a firm in borrowing operations.
8. Helpful in determining dividend policy.
9. Useful for shareholder.

LIMITATION OF FUND FLOW SATEMENT

 1. Fund flow statements ignore the certain non-fund
transactions which have equal bearing on the financial
position of the firm just like other fund transaction.
2. It reveals only the changes in working capital and does not
shows the changes in cash position.
3. It is historical in nature because it reports what has happened
in the past. It is quite difficult to predict the future on the
basis of past records.

ACCOUNTING RATIO
A ratio is simply one number expressed in terms of another. It is
found by dividing one number into another.

RATIO CAN BE EXPRESSED IN FOLLOWING FOUR WAYS

1. ‘Proportion’ or pure ratio or simple Ratio

2. ‘Rate’ or ‘so many times’
3. Percentage
4. Fractions

ADVANTAGES OF ACCOUNTIN RATIO

1. Helpful in analysis of Financial statement

2. Simplification of accounting data
3. Helpful in comparative study
4. Helpful in locating the weak spots of business
5. Helpful in forecasting
6. Estimate about the trend of the business
7. Fixation of ideal standards
8. Effective control
9. Study of financial soundness

CLASSIFICATION OF RATIO

a) Liquidity ratios
b) Solvency ratios
c) Activity or Turnover ratios
d) Profitability ratios or Income ratios

a) LIQUIDITY RATIOS
 Current ratio or Working capital ratio:- This ratio explains
the relationship between current assets and current liabilities
of a business. The formula is :-
Current ratio = current Assets/current liabilities

Current assets include those assets which can be converted

within one year.

Current assets = Cash in hand + Cash at bank + B/R +

debtors + prepaid expenses
Current liabilities = bank overdraft + B/P + creditors +
unclaimed dividends + outstanding expenses

Ideal ratio for Current ratio should be 2:1

Quick ratio = Liquid assets/current assets

Liquid assets = Current asset – stock –prepaid expenses

b) Solvency ratios: - These ratios are calculated to assess the

ability of the firm to meet its long-term liabilities.

i. Debt Equity ratios (Debt/equity) [ safe ratio 2:1]

ii. Total assets to debt ratio (Total assets/debt)

iii. Proprietary ratio (equity/Total assets)

C) Activity ratios :- These ratios are calculated on the basis of ‘cost
of sales’, , therefore , these ratios are also called as ‘Turnover
ratios’.

i. Inventory turnover ratio (cost of goods sold/average stock)

Cost of goods sold = net sales –Gross profit
ii. Debtors turnover ratio (net credit sales/{avg. debtors+
avg. B/R})

iii. Creditors turnover ratio

iv. Working capital turnover ratio

d) Profitability ratios: - With the help this ratio , a analyst can

easily evaluate about the profitability of a firm.

1. Gross profit ratio ( gross profit/net sales *100)

[Net sales = sales – sales return]

2. operating ratio ( cost of goods sold + operating expenses)

Net sales