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Concepts of Cost Accounting Following are the main concepts of cost  accounting : Cost There is a cost involved to purchase or produce anything. Costs may be different for the same product, depending upon the stages of completion. The cost changes according to the stage a product is in, for example, raw material, work in progress, finished goods, etc. The cost of a product cannot be perfect and it may vary for the same product depending upon different constraints and situations of production and market. Expenses Some costs are actual, such as raw material cost, freight cost, labor cost, etc. Some expenses are attributable to cost. To earn revenue, some expenses are incurred like rent, salary, insurance, selling & distribution cost, etc. Some expenses are variable, some are semi-variable, and some of fixed nature. Loss Expenses are incurred to obtain something and losses are incurred without any  compensation . They add to the cost of product or services without

Financial Management Financial Management  deals with accounting, budgeting and charging activities for services. It determines all the costs of IT organization on the basis of direct and indirect costs. This process is used by all three types of service providers – internal, external or shared service providers. Financial Manager is the process owner of this process. Benefits of Financial Management Here are some of the benefits of Financial Management: Enhanced decision making Speed of change Service portfolio management Operational control Value capture and creation Key decisions for Financial Management Cost centre, value centre or  accounting centre ? It is important to decide that how funding will be replenished. Clarity around the operating model greatly contributes to understanding the requisite, visibility of service  provisioning cost s, and funding is a good test of the business’s confidence and perception of IT. The IT financial cycle starts wi

Accounting - Classification of Accounts Accounting Classification It is necessary to know the classification of accounts and their treatment in double entry system of accounts. Broadly, the  accounts  are classified into three categories: Personal accounts Real accounts Tangible accounts Intangible accounts Let us go through them each of them one by one. Personal Accounts Personal accounts may be further classified into three categories: Natural Personal Account An account related to any individual like David, George, Ram, or Shyam is called as a  Natural Personal Account . Artificial Personal Account An account related to any artificial person like M/s ABC Ltd, M/s General Trading, M/s Reliance Industries, etc., is called as an  Artificial Personal Account . Representative Personal Account Representative personal account represents a group of account. If there are a number of accounts of similar nature, it is better to group them like salary payable a

Accounting Systems There are two systems of accounting followed – Single Entry System Double Entry System Single Entry System Single entry system is an incomplete system of accounting, followed by small businessmen, where the number of transactions is very less. In this system of  accounting , only personal accounts are opened and maintained by a business owner. Sometimes subsidiary books are maintained and sometimes not. Since real and nominal accounts are not opened by the business owner, preparation of profit & loss account and balance sheet is not possible to ascertain the correct position of profit or loss or  financial position  of business entity. Double Entry System Double entry system of accounts is a scientific system of accounts followed all over the world without any dispute. It is an old system of accounting. It was developed by  ‘Luco Pacioli’  of Italy in 1494. Under the double entry system of account, every entry has its dual aspects of debit and

Accounting Conventions Convention of Consistency To compare the results of different years, it is necessary that  accounting  rules, principles, conventions and accounting concepts for similar transactions are followed consistently and continuously. Reliability of financial statements may be lost, if frequent changes are observed in accounting treatment. For example, if a firm chooses cost or market price whichever is lower method for stock valuation and written down value method for depreciation to fixed assets, it should be followed consistently and continuously. Consistency also states that if a change becomes necessary, the change and its effects on profit or loss and on the financial position of the company should be clearly mentioned. Convention of Disclosure The Companies Act, 1956, prescribed a format in which  financial statements  must be prepared. Every company that fall under this category has to follow this practice. Various provisions are made by the Companies

Accounting/Business entity Accounting Concepts The business is an entity (or body) separate from its owner. Entity means a distinctive existence. ii. Consistency The accounting treatment applied to an item should be the same for all  accounting  periods, unless there is a valid reason for change and the effect of such changes are disclosed. This is to enable meaningful comparisons between two or more accounting periods to be made. iii. Accounting period Assuming that the business is a going concern, the life span of a business entity is divided into fixed periods of time to enable financial reports to be prepared for that particular period. iv. Accrual concept Revenue is recognized when earned and expenses when incurred. Revenue received (or expenses paid) but not yet earned (incurred) cannot be recognized. v. Duality concept This is the concept at the heart of the system in accounting known as “double entry system” (see Chapter 3). It relies on the fact that each

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