jayalakshmi engg mba

7/29/2019 Jayalakshmi Engg MBA

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K.S.R

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ineering ACCCOUNTING FOR

MANAGEMENT

ContemporaryAccountingPractices

Facilitator

Dr.S.M. Uvaneswaran

M.B.A.,M.com.,M.phil(EDP).,M.Phil(com)., PGDCA., Ph.D

Professor and Head

Dept. of Business Administration

K.S.R College of Engineering


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Preface of Lecture Topics

Inflation Accounting

Human Resources

Accounting

Computerized

Accounting System andEnvironment

Tuesday, September 10,2013 2


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Inflation Accounting

accounting systems designed tocorrect problems arising from

historical costaccounting (HCA)

used in high inflation orhyperinflationcountries

For example, IASB requires corporate

financial statements to be adjusted forchanges in purchasing powerusing a

price index.

http://localhost/var/www/apps/conversion/tmp/scratch_8/What%20is%20inflation.docxhttp://en.wikipedia.org/wiki/Historical_costhttp://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Hyperinflationhttp://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Purchasing_powerhttp://en.wikipedia.org/wiki/Price_indexhttp://en.wikipedia.org/wiki/Price_indexhttp://en.wikipedia.org/wiki/Purchasing_powerhttp://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Hyperinflationhttp://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Historical_costhttp://localhost/var/www/apps/conversion/tmp/scratch_8/What%20is%20inflation.docx


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Historical costs basis in

Inflation Accounting Fair value accounting (also called

replacement cost accounting or currentcost accounting)

Used in the 19th and early 20thcenturies, but historical cost accountingbecame more widespread after valuesoverstated during the 1920s were

reversed during the Great Depression ofthe 1930s.

principles ofhistorical cost accountingwere developed after the Wall Street

Crash of 1929,Tuesday, September 10,2013 5
http://en.wikipedia.org/wiki/Fair_valuehttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Historical_costhttp://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929http://en.wikipedia.org/wiki/Historical_costhttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Fair_value


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Measuring unit principle

Inflation leads two basic problems under

HCA

1. irrelevant numbers on financial

statements

2. numbers on financial statementsrepresent dollars expended at different

points of time different amounts in

Purchasing power.

Rs.10,000 held on December 31, 2002, with

Rs.10,000 representing the cost of land

acquired in 1955 is a dubious operation -

different amount of purchasing powerTuesday, September 10,2013 6


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Contd..

Likewise subtracting dollar amountsthat represent different amounts of

purchasing power may result in an

apparent capital gain which is actuallya capital loss.

If a building purchased in 1970 for

Rs.20,000 is sold in 2006 forRs.200,000 when its replacement cost

is Rs.300,000, the apparent gain of

Rs.180,000 is illusory.Tuesday, September 10,2013 7
http://en.wikipedia.org/wiki/Capital_gainhttp://en.wikipedia.org/wiki/Capital_gain


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History of inflation accounting

Early 1900s, Accountants in the UK and the US have discussed theeffect of inflation on financial statements with index numbertheory

and purchasing power.

Irving Fisher's 1911 book The Purchasing Power of Money was used

as a source by Henry W. Sweeney in his 1936 book Stabilized

Accounting, which was about Constant Purchasing Power

Accounting.

This model by Sweeney was used by TheAmerican Institute of

Certified Public Accountants for their 1963 research study (ARS6)

Reporting the Financial Effects of Price-Level Changes, and later

used by theAccounting Principles Board (USA), the Financial

Standards Board (USA), and the Accounting Standards SteeringCommittee (UK).

Sweeney advocated using a price index that covers everything in the

gross national product. In March 1979, the Financial Accounting

Standards Board (FASB) wrote Constant Dollar Accounting, which

advocated using the Consumer Price Index for All Urban Consumers

(CPI-U) to adjust accounts because it is calculated every monthTuesday, September 10,2013 8
http://en.wikipedia.org/wiki/Index_numberhttp://en.wikipedia.org/wiki/Purchasing_powerhttp://en.wikipedia.org/wiki/Irving_Fisherhttp://en.wikipedia.org/wiki/Constant_Purchasing_Power_Accountinghttp://en.wikipedia.org/wiki/Constant_Purchasing_Power_Accountinghttp://en.wikipedia.org/wiki/American_Institute_of_Certified_Public_Accountantshttp://en.wikipedia.org/wiki/American_Institute_of_Certified_Public_Accountantshttp://en.wikipedia.org/wiki/Accounting_Principles_Boardhttp://en.wikipedia.org/wiki/Gross_national_producthttp://en.wikipedia.org/wiki/Financial_Accounting_Standards_Boardhttp://en.wikipedia.org/wiki/Financial_Accounting_Standards_Boardhttp://en.wikipedia.org/wiki/Consumer_price_indexhttp://en.wikipedia.org/wiki/Consumer_price_indexhttp://en.wikipedia.org/wiki/Financial_Accounting_Standards_Boardhttp://en.wikipedia.org/wiki/Financial_Accounting_Standards_Boardhttp://en.wikipedia.org/wiki/Gross_national_producthttp://en.wikipedia.org/wiki/Accounting_Principles_Boardhttp://en.wikipedia.org/wiki/American_Institute_of_Certified_Public_Accountantshttp://en.wikipedia.org/wiki/American_Institute_of_Certified_Public_Accountantshttp://en.wikipedia.org/wiki/Constant_Purchasing_Power_Accountinghttp://en.wikipedia.org/wiki/Constant_Purchasing_Power_Accountinghttp://en.wikipedia.org/wiki/Irving_Fisherhttp://en.wikipedia.org/wiki/Purchasing_powerhttp://en.wikipedia.org/wiki/Index_number


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Contd.. During the Great Depression, some corporations

restated their financial statements to reflectinflation.

At times during the past 50 years standard-setting

organizations have encouraged companies to

supplement cost-based financial statements withprice-level adjusted statements.

During a period of high inflation in the 1970s, the

FASB was reviewing a draft proposal for price-level

adjusted statements when the Securities andExchange Commission (SEC) issued ASR 190,

which required approximately 1,000 of the largest

US corporations to provide supplemental

information based on replacement cost. The FASB

withdrew the draft proposal.Tuesday, September 10,2013 9
http://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Replacement_costhttp://en.wikipedia.org/wiki/Replacement_costhttp://en.wikipedia.org/wiki/Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Great_Depression


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Current Inflation

current inflation /countryinflation period monthlybasis

yearlybasis

Inflation Germany october2012 0.00 % 1.98 %

Inflation Great Britain october2012 0.57 % 2.64 %

Inflation Greece october2012 0.82 % 1.62 %

Inflation Hungary october2012 0.15 % 6.00 %

Inflation Iceland october2012 0.27 % 4.20 %

Inflation India september2012 0.47 % 9.14 %

Inflation Indonesia october2012 0.16 % 4.61 %

Inflation Ireland october2012 -0.10 % 1.23 %

Inflation Israel october2012 -0.19 % 1.83 %

Inflation Italy october2012 0.00 % 2.60 %

Inflation Japan september2012 0.20 % -0.30 %

Inflation Luxembourg october2012 0.13 % 2.90 %

Inflation Mexico october2012 0.51 % 4.60 %

Inflation Norway october2012 0.53 % 1.07 %

Inflation Poland october2012 0.41 % 3.27 %

Inflation Portugal october2012 0.31 % 2.13 %

Inflation Russia september2012 0.56 % 6.57 %

Inflation Slovakia october2012 0.37 % 3.82 %

Inflation Slovenia october2012 0.14 % 2.71 %

Inflation South Africa october2012 0.72 % 5.61 %

Inflation South Korea october2012 -0.09 % 1.39 %

Inflation Spain october2012 0.85 % 3.48 %

Inflation Sweden october2012 -0.07 % 0.37 %

Inflation Switzerland october2012 0.12 % -0.22 %

Inflation The Netherlands october2012 0.57 % 2.90 %

Inflation Turkey october2012 1.96 % 7.80 %

Inflation United States october2012 -0.04 % 2.16 %

Current inflation by country / region (CPI)
http://localhost/var/www/apps/conversion/tmp/scratch_8/Current%20inflation.docxhttp://www.inflation.eu/inflation-rates/germany/inflation-germany.aspxhttp://www.inflation.eu/inflation-rates/great-britain/inflation-great-britain.aspxhttp://www.inflation.eu/inflation-rates/great-britain/inflation-great-britain.aspxhttp://www.inflation.eu/inflation-rates/greece/inflation-greece.aspxhttp://www.inflation.eu/inflation-rates/greece/inflation-greece.aspxhttp://www.inflation.eu/inflation-rates/hungary/inflation-hungary.aspxhttp://www.inflation.eu/inflation-rates/iceland/inflation-iceland.aspxhttp://www.inflation.eu/inflation-rates/iceland/inflation-iceland.aspxhttp://www.inflation.eu/inflation-rates/india/inflation-india.aspxhttp://www.inflation.eu/inflation-rates/indonesia/inflation-indonesia.aspxhttp://www.inflation.eu/inflation-rates/indonesia/inflation-indonesia.aspxhttp://www.inflation.eu/inflation-rates/ireland/inflation-ireland.aspxhttp://www.inflation.eu/inflation-rates/ireland/inflation-ireland.aspxhttp://www.inflation.eu/inflation-rates/israel/inflation-israel.aspxhttp://www.inflation.eu/inflation-rates/italy/inflation-italy.aspxhttp://www.inflation.eu/inflation-rates/japan/inflation-japan.aspxhttp://www.inflation.eu/inflation-rates/luxembourg/inflation-luxembourg.aspxhttp://www.inflation.eu/inflation-rates/luxembourg/inflation-luxembourg.aspxhttp://www.inflation.eu/inflation-rates/mexico/inflation-mexico.aspxhttp://www.inflation.eu/inflation-rates/norway/inflation-norway.aspxhttp://www.inflation.eu/inflation-rates/poland/inflation-poland.aspxhttp://www.inflation.eu/inflation-rates/portugal/inflation-portugal.aspxhttp://www.inflation.eu/inflation-rates/russia/inflation-russia.aspxhttp://www.inflation.eu/inflation-rates/slovakia/inflation-slovakia.aspxhttp://www.inflation.eu/inflation-rates/slovenia/inflation-slovenia.aspxhttp://www.inflation.eu/inflation-rates/south-africa/inflation-south-africa.aspxhttp://www.inflation.eu/inflation-rates/south-korea/inflation-south-korea.aspxhttp://www.inflation.eu/inflation-rates/south-korea/inflation-south-korea.aspxhttp://www.inflation.eu/inflation-rates/spain/inflation-spain.aspxhttp://www.inflation.eu/inflation-rates/spain/inflation-spain.aspxhttp://www.inflation.eu/inflation-rates/sweden/inflation-sweden.aspxhttp://www.inflation.eu/inflation-rates/sweden/inflation-sweden.aspxhttp://www.inflation.eu/inflation-rates/switzerland/inflation-switzerland.aspxhttp://www.inflation.eu/inflation-rates/the-netherlands/inflation-the-netherlands.aspxhttp://www.inflation.eu/inflation-rates/turkey/inflation-turkey.aspxhttp://www.inflation.eu/inflation-rates/turkey/inflation-turkey.aspxhttp://www.inflation.eu/inflation-rates/united-states/inflation-united-states.aspxhttp://www.inflation.eu/inflation-rates/united-states/inflation-united-states.aspxhttp://www.inflation.eu/inflation-rates/united-states/inflation-united-states.aspxhttp://www.inflation.eu/inflation-rates/turkey/inflation-turkey.aspxhttp://www.inflation.eu/inflation-rates/the-netherlands/inflation-the-netherlands.aspxhttp://www.inflation.eu/inflation-rates/switzerland/inflation-switzerland.aspxhttp://www.inflation.eu/inflation-rates/sweden/inflation-sweden.aspxhttp://www.inflation.eu/inflation-rates/spain/inflation-spain.aspxhttp://www.inflation.eu/inflation-rates/south-korea/inflation-south-korea.aspxhttp://www.inflation.eu/inflation-rates/south-africa/inflation-south-africa.aspxhttp://www.inflation.eu/inflation-rates/slovenia/inflation-slovenia.aspxhttp://www.inflation.eu/inflation-rates/slovakia/inflation-slovakia.aspxhttp://www.inflation.eu/inflation-rates/russia/inflation-russia.aspxhttp://www.inflation.eu/inflation-rates/portugal/inflation-portugal.aspxhttp://www.inflation.eu/inflation-rates/poland/inflation-poland.aspxhttp://www.inflation.eu/inflation-rates/norway/inflation-norway.aspxhttp://www.inflation.eu/inflation-rates/mexico/inflation-mexico.aspxhttp://www.inflation.eu/inflation-rates/luxembourg/inflation-luxembourg.aspxhttp://www.inflation.eu/inflation-rates/japan/inflation-japan.aspxhttp://www.inflation.eu/inflation-rates/italy/inflation-italy.aspxhttp://www.inflation.eu/inflation-rates/israel/inflation-israel.aspxhttp://www.inflation.eu/inflation-rates/ireland/inflation-ireland.aspxhttp://www.inflation.eu/inflation-rates/indonesia/inflation-indonesia.aspxhttp://www.inflation.eu/inflation-rates/india/inflation-india.aspxhttp://www.inflation.eu/inflation-rates/iceland/inflation-iceland.aspxhttp://www.inflation.eu/inflation-rates/hungary/inflation-hungary.aspxhttp://www.inflation.eu/inflation-rates/greece/inflation-greece.aspxhttp://www.inflation.eu/inflation-rates/great-britain/inflation-great-britain.aspxhttp://www.inflation.eu/inflation-rates/germany/inflation-germany.aspxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/Current%20inflation.docxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/Current%20inflation.docx


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Inflation accounting models

Inflation accounting is not fair valueaccounting.

Inflation accounting, also called pricelevel accounting, is similar to convertingfinancial statements into anothercurrency using an exchange rate.

Under some (not all) inflation accounting

models, historical costs are converted toprice-level adjusted costs using generalor specific price indexes.

f f
http://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Exchange_rate


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Methods of accounting for

price level changes

Methods ofAccounting for

price level changes

Hybrid MethodCurrent Cost

Accounting

CurrentPurchasing power

method & General

purchasing

method


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Merits

Charging of less depreciation

Balance sheet are shown in current

value.

Profit and loss account reveals correctprofit

Better comparison of profit for old and

product lines It helps to take managerial decisions.

ROI is more reliable than the

historical costing.


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Demerits

Complex process

Deprecation on replacement cost was

not acceptable by income tax

authorities.Accounts prepared in acts in india on

historical cost method but inflation

accounting may be guide. Document evidence are lapsed for

purchase of any asset.


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Definition of HRA

American AccountingAssociation defines HRA as

the process of identifying andmeasuring data about human

resources and communicating

the information to interestedparties.


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Human Resources

Accounting

Resources of an

Organization

Human Resources

(Men & Women)

Non-human resources (

Money, material &

machines)


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Objectives of HRA

To assist management in acquiring,maintaining and developing humanresources.

To help management utilize thehuman resources effectively.

To calculate the return on investmentmade in human resources.

To communicate systematically themonetary worth of employees to theorganisation and to the outsiders.


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Methods for valuation of

Human Resources Historical Cost Approach

Replacement Cost Approach

Opportunity Cost Approach

Standard Cost Method

Present Value Approach

Reward Valuation Method

Total Cost Method


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Advantages

Helps management to execute HRpractices

Employee aware about the

profitability.Assess the future growth to financial

analyst and investors

Makes management to change theattitude towards to the labourers.

Efficient utilization of non-human

resources achieves the goal in an


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Disadvantages

no universally accepted method forvaluing human resources of aconcern.

HRA is not recognized by Tax laws lacks empirical evidence on efficient

management of human resources Indian Laws does not recognize

human resource as an asset. Duration of stay of employee in

organization is uncertain.


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HRA practices in India

BHEL, Cement Corporation of India ONGC, Engineers India Ltd.,

National Thermal Corporation,

Minerals and Metals Trading Corporation

Madras Refineries, Oil India Ltd.,

Associated Cement Companies,

SPIC,

Metallurgical and Engineering consultants India Limited,

Cochin Refineries Ltd. Etc. are some of the organizations,

which have started disclosing some valuable information

regarding human resources in their financial statements.



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Computerized Accounting

Environment Computer accounting system (CAS)

environment exists when one or more

computers of any type or size are

involved in the processing of financialinformation, including quantitative data

of significance to the audit, whether

those computers are operated by theentity or by a third party.


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Features

Process of financial information by one ormore computers

Computers may be operated by the entity orthird party

Process of financial information by thecomputer will be done by one or moresoftware. Ex.Tally

Computer softwareany programs or routine

that performs a desired functions Acquired software consist of spread sheet

package or accounting software

Large organizations may use ERP


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Significance of Computer

Accounting system Replace of manual form into computerized

accounts

Past difficulties are balancing of trial balance,correct posting into general ledger andsubsidiary ledger.

Computerized accounts make a cashexpense and cash payment ,ledger posting ofthe expenses

Concerns for control, security and integrity of

the computer are more or more Threat of usage is unauthorized access to the

data by internet, local area network andhacking into the company server.


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Codification and grouping of

accounts Use coding system or not all the

softwares.

Coded accounting system is more

convenient , have numerous accountheads and complexity is high

Proper codification requires a

sytematic grouping of accounts


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Groups or heads

Assets

Liabilities

revenue receipts

Capital receipts

Revenue expenditure

Capital expenditure


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Sub groups/minor heads

Cash

Receivables

Payables

Grouping and codification is depend

upon the organization

Extent of sub groups on the basis of

profit centre and product lines


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Classification of heads

Major heads - receipt heads (revenuea/c),line of business Ex. Car manufacturingimages

Minor heads

Sub heads and detailed heads (exenditurea/c) ex. Salaries, office expenses , salesmanexpenses, workshop overhead

The above are four tier arrangement of the

classification structure of accounts Major and minor will be approved by Top

management

Reviewed by the auditor before introducing

CAS


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Maintaining the hierarchy of

ledgers Account master files created by codes and

classification of accounts

Accounting software's allows ledgers andsubsidiary ledgers to create main ledgers.

Subsidiary is sub divided into sub subsidiaryledgers allow to group various profit centers.

Above ledgers used when coded is notpresent.

Coded system is easy to achieve the all the

types of heads (major, minor, sub anddetailed heads)

Apart from general and subsidiary ledger ,the other ledger is created automatically as

debtors and creditors ledger.


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Accounting packages &

consideration of their selectionAccount maintained by using spread

sheet

Users should his knowledge and skills ofspread sheet to control figures

Spread sheets should control locked orprotected by password/formuleas

Double entry is not possible

Spread sheet allows grouping ofaccounts, replication of cell contents,formulae's and macros, pivot table,calculations and functions helps in

maintenance of accounts


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Prepackaged Accounting

Software Used by small and medium sized

companies

Software are easy to use, relatively in

expensive and readily available Installation of software are very

simple

Disc or CD is provided used to installthe software and user manual alsoprovided .

Vendor updates the version based on

the changes of laws amendement


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Contd..

Provides a section for creation ofcompany

Name, address, phone numbers and

other details of the company VATregistration number, TAN numbers.

Accounting period should be set by

inserting the first and last day of the

financial year

Creation of accounts cash, bank,

debtors, creditors.stock and system like

LIFO and FIFO, Weighted averages.


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Master File

Company

Accounts

Sub ledger

Customer

Vendor

Product

division


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Entry screen

Cash receipts and payment entry Bank receipts and payment entry

Petty cash vouchers entry

Journal entry Purchase order, GRN, Bill, Purchase

return entry

Sales order, challan, invoice , sales

return entry Debit notes & credit notes

Cash sales & credit sales


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Contd..

Production & Consumption Stock transfer (each screen provided

with add,modify or delete option andspecial options like date modificationsand voucher number modifications

Reports sections cash book, bankbook, petty cash book, purchase book,

sales book cash sales book, cashpurchase book, sales return book, creditand debit note register,stock ledger,stock movement ledger, production

ledger


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Contd..

Documents printing are purchaseorder, challans , bills , sales order

challans and invoices , declaration

forms and return forms. Trial balance, profit & loss account

and balance sheet , BRS report, MIS

reports (aging of debtors, slowmoving and non-moving stocks)


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Advantages

Easy to install Relatively inexpensive

Easy to use

Backup procedure is simple

Flexibility

Very effective for small and medium

size business


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Disadvantages

Does not cover peculiarities of specificbusiness

Does not cover all functional areas

Customization may not be possible inmost such software

Reports generated is not sufficient orserve the purpose.

bugs in the software

Lack of security


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Selection of Pre-packaged

accounting software Fulfillment of business requirements Completeness of reports

Ease of use

Cost

Reputation of the vendor

Regular updates


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Softwares


Quickbooks PRO

Sage Peachtree CompleteAccounting

MYOB

AccountEdge

BookKeeper

DacEasy

Simply AccountingCYMA Accounting for

Windows

Netsuite Small Business

Cougar Mountain

Small Business Manager

(Microssoft)

Accpac from Sage

Syspro 6.1Epicor Enterprise from Epicor

Great Plains

JD Edwards EnterpriseOne & JD

Edwards World from Oracle

Navision

ExactSAP Business One

SAP R/3 from SAP

Microsoft Dynamics from Microsoft

Movex from Intentia

NetERP from NetSuite Inc.

Oracle e-Business Suite from

Oracle

PeopleSoft from Oracle


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CollegeofEngineering QUERIES



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THANK YOU

Success is the sum of small efforts,

repeated day in and day out. ~ RobertCollier