Accounting With “Tally” Tally –An account package Date: M.E.S. scheme, G.P.W sector – 10 By: Mohit Bansal
Syllabus Practical: Practical: 1. Tally fundamentals (learning how to use of tally processing transaction in tally). 2. Report generation (creating (creating statement like invoice, bill, profit & loss a/c). 3. Features of tally (company creation etc). 4. Recording of transaction. 5. Budgeting system, scenario mgt & variable analysis. Use tally for posting, ration analysis. 6. Cash Cash flow flow state stateme ment nt & fund fund flow flow state stateme ment nt.. An Anal alysi ysis s & mana managi ging ng inventory. 7. Point of sale, taxation, payroll accounting systematically. Administration & other utility.
Theory: Theory: 1. Accounting in computer. 2. Introduction & reports. 3. Business organization (different area like school, college, shop, factory etc). 4. Double entry system of book keeping. 5. Budgeting system. 6. Scenario mgt. 7. Variance analysis. 8. Costing system, understanding ratio’s analysis of financial statement. 9. Inventory basics. 10.
POS, TDS, TCS, FBT, VAT, service tax processing in tally.
11. in tally.
Interface in different language, processing in payroll, functions
12.
What is management control system?
Tally o
Introduction ntroduction of accounts:
Accoun Accounts ts include include accoun accountin ting g which which forms forms the basis basis for prepar preparati ation on of financi financial al statem statement ent.. An accoun accountt is to identi identifyin fying g recordi recording ng interp interpret reting ing presen presentin ting g the business transactions. For running a business successfully a businessman needs to make financial statement like trading, profit & loss a/c, balance sheet etc. to know the profit & loss of the company these statements provide a ratio like gross profit,
net profit ratio, stock turnover ratio, & liquid turnover ratio. There is different type of business transactions. These are:1.
Payment.
2.
Receipts.
3.
Sale.
4.
Purchase.
Tally is the account package. It is very helpful & useful for accounts person. In tally one has to enter only vouchers. Rest of the books/reports is prepared by tally. It automatically generates ledgers prepaid trial balance, profit & loss a/c and balance sheet. It has also provision for preparing a/c with inventory, taxes, vat, C.S.T are calculated by it. Tally is very to understand & operate by the person with accounts knowledge. However Non accounts person can also learn & became successful tally users. They must try to understand the fundamentals of the accounts.
Principle of accounts:
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1.
Real A/c:
-
Debit what comes in. Credit what goes out.
2.
Nominal A/c:
-
Debit all expenses/losses. Credit all income/gains.
3.
Personal A/c:
-
Debit the receiver.
Credit the giver.
Classification of accounts:
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1.
Personal Account :
2.
Impersonal Account : a) Real a/c b)
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Nominal a/c.
Personal Account:
The accounts which relates to an individual firm company or an institution are called personal accounts. o
Classification of personal accounts:
Natural Personal Accounts - Accounts of natural person’s 1. means the accounts of human beings. For e.g. Mohan’s account, Johan’s account. 2. rtificial Personal Personal Accounts Accounts - The accounts do not have Artificial physical existence as human being but they works as personal accounts. For e.g. any firm’s account. Any bank account.
Real Account:
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The account of all those whose value can be measured in terms of money and which are properties of the business are termed as real account such as, cash a/c, furniture a/c, goodwill a/c, etc.
Classification of real accounts:
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Tangible Real Account - Tangible account is the accounts of 1. those things which can be touched, felt, measured, sold, etc. For e.g. cash a/c , furniture a/c. 2. Intangible Real Account - These accounts represent such things which can’t be touched but of course their value can be measured in terms of money. For e.g. goodwill, patents a/c.
Nominal account:
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These accounts include the accounts of all expenses & income . Example: a) Relating to express are salaries, rent paid, bad debts etc. b) Relating to income are commission received, not-received etc. o
Modes of Accounting: 1. Journal - A journal is a book in which business transactions are entered in chronological.
Vouchers - A vouchers is a document containing details of 2. financial transactions.
Account - An account is a statement of transaction affecting 3. any particulars. Assets/liabilities, expenses or income. 4. maintain. o
ger Ledger
- Ledg Ledge er is a book book in whic hich all all acc account ounts s are are
Accounting System: Single Entry System - Single entry system is concerned only 1. with one side of transaction as either you pay someone or your services from someone. 2. ouble Entry Entry Syst System em - Base Based d on a fac fact that hat a sing single le Double transaction has a double sided affair. Two accounts are affected by a transaction. One account received a benefit is (Dr) and the other person or the account who give something to the business is (Cr).
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Book Keeping:
Book keeping is that branch of knowledge which tells us how to keep a record of financial transaction. The need for recording such transaction arises because:1. It is diffi difficu cult lt to reme rememb mber er the the vario various us finan financi cial al paym paymen entt & receipts taking place during the period of time. 2. In modern form of business organization the control of business rest with different person and the result are to be reported to the owners. 3. The financial information is required for the purpose of costing, budgeting, forecasting & planning. 4. Book keeping records are to be submitted to various government agencies like income tax, sale tax authority for taxation purpose. o
Process of Book Keeping: Identification of Transactions: All transactions & events in 1. nature related to the entity & have all documentary evidence identify for recording non financial activity are to be ignored. 2. Financial transactions transactions and events events Recording at first stage: Financial ide identif ntify y at firs firstt step step one one are are reco record rded ed in the the book book of orig origin inal al entr entry y (journal/sub journal).
Posting in the ledger: All transaction recorded in the book of 3. original entry relating to person, party, property, expenses, income, loss or gain are posted in the respective a/c maintain in the ledger. Ledger a/c provides latest information at a glance. Preparation of trial balance: All the balances of all on a 4. separate list with Dr. & Cr. columns. The list of balances is known as trial balance. It is prepared to cheek with metical accuracy of the book. If trial balance does not tally it indicates existence of errors which are located & rectify.
Objects of Book Keeping:
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1.
To have a permanent record of each transactions of the business.
2. To show the financial effect on the entity of each transaction recorded. 3. To ascertain the combined effect of all the transaction on the financial on the particular date. 4. To disclose the factor responsible for earning profit or suffering loss in a given period. 5. The amt. recoverable by the business from other and payment able to other. 6.
Determination of text liability of the business.
7.
Prevention of errors and frauds.
8.
Protection of assets.
9.
Measure of exercising the system of control.
Journal:
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The basic book of accounting is called journal preciously it is a book of prime entry which means day book. Trader records his totally daily transaction in it. The process of recor recordi ding ng the the trans transac acti tion on into into journ journal al is call called ed jour journal naliz izin ing. g. The The journ journali alize ze following the two functions: 1. To analysis each transaction transaction into Dr. & Cr. So as to enable that is posting in the ledger. 2.
To arrange transaction chronologically.
Need of journal - Journal is needed and useful in the following aspects.
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1.
Convenient recording of transaction.
2.
Maintaining & preventing the identification & transaction.
3.
Maintaining permanent record of transaction .
Vouchers:
Every transaction to be recorded in the books of accounts must be back by some docum document entary ary eviden evidence ce which which is known known as vouche vouchers. rs. E.g. receip receipts ts pay in slips, slips, invoices, Dr. & Cr. o
Objectives of Financial Accounting: To keep 1. keep sy syst stem emati atica call reco record rd of busi busine ness ss trans transac actio tion n According to specific rules complete record of business is maintained to avoid any kind of fraud entries first made in journal subsidiary book and then posted into ledger. 2. To calculate profit or loss - Financial accounting is helpful to ascertain whether the companies earning profit or suffering losses.
To prov 3. provid ide e info inform rmat atio ion n to vari variou ous s part partie ies s - The The othe otherr objectives of accounting are to communicate the accounting information to differe different nt partie parties s who who have have intere interest. st. Their Their owner owner emplo employee yees, s, bank, bank, creditors. Helpful to management - so it is useful to management is 4. many any ways ays com compari pariso son n of curr curren entt year year and and last last year year and and last last year year performance can be made. It helps to identify the weak case corrective decision can be takes accordingly. Future course of action can be decided. 5. To know the financial position of the business with the help of balance sheet - We can know the financial position of the business as it shown in the balance sheet within (asset/liabilities).
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Assumption: 1. Going concern - In the ordinary course accounting assumes that the business will continue to exist and carry in its operations for an
indefinite period in future. The entry is assumed to remain in operation sufficiently long to carry out its objects & plans. The value attached to the assets will be on the basis of its current worth. The assumption is that the fixed assets are not intended for resale. 2. There should should be uniform uniformity ity in accoun accounting ting Consistency - There process & policies from are period to another. Material changes if any should be disclosed even though there is improvement in techniques. A change of method from one period to another will affect the result of the trading materially.
Accrual concept - Accounting attempts to recognize non cash 3. events & circumstances as they occur. Accrual is the concerned with the fut future ure cash cash rec receipt ipts & paym payme ents. nts. It is an acc account ountin ing g pro process of recognizing assets, liabilities or income for amount expected to be receipts or paid in future. E.g. purchase & sale of goods & services. Interest, rent, wages, & salaries.
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Financial Relicense: Conventions - The conventions of relevance emphasis the 1. fact that only. Such information should be made available by accounting as is relevant and useful for achieving objectives. Objectivity - The conventions of objectivity emphasis that 2. acco account untin ing g info inform rmati ation on shoul should d be expre expresse sses s by stand standard ards s whic which h are commonly acceptable. E.g. stock of good, lying unsold at the end of the year should be valued at its cost price not at a higher price even if it is lightly to be so that a higher price in future.
Feasibility - The convention of feasibility emphasis the time 3. labor labor and cost cost of analyzi analyzing ng accoun accountin ting g inform informatio ation n should should be compare compare benefit arising of it. E.g. the cost of oiling & greasing the machinery is so small that is break up per unit produced will be meaningless and will amount to wastage of labor & time of the accounting staff. o
Concept:
Accounting period - Though accounting practice believe in 1. continuing entity concept. That is life of the business is perpetual but still it has to report the result of activity under taken in specific period. Thus accounting attempts to present the gain or loss earned or suffered by the business during the period under review. Normally it is calendar year (1 January to 31 December) but in other cases it may be financial year (1st April to 31 march) or any other period depending upon the convenience of the business concerned. st
st
st
2. Realization – This concept emphasis that profit should be considered only when realized. The question is at what stage profit should be deemed to have acquired at the time of receiving order, at the time of its execution or at the time of receiving of cash? For answering these questions the accounting is in conformity with law (sales and goods act) and recognize the principle of law i.e. the revenue earned only when the good are transferred. It means that profit is deemed to have acquired when property in goods passes to buyers.
Matching - Though the business is a continue job, yet its 3. continuity is artificial split into several accounting years for determining its periodic results the profit is the measure of the economic performance of a concerned and as such it increases prop writer’s equity. Since profit is an exce excess ss of reve revenu nue e over over expe expendi nditu ture re it beco become mes s nece necess ssary ary to bring bring together revenue and expenses relating to the period under review. Entity – Ac 4. Accord cording ing to this this concep conceptt the task task of measur measuring ing income and wealth is undertaken by accounting for an identifiable unit or entity entity the entity entity so identi identified fied is treate treated d differe different nt and distin distinct ct from its owner or contributors. Stabl 5. table e Moni Monito tory ry Unit nit – Ac Acco coun unti ting ng assu assum mes that that the the purc purcha hasin sing g powe powerr of moni monito tory ry unit unit stays stays the the same same thro through ughou out, t, thus thus ignoring the effect of rising or falling purchasing power of the monitory unit due to deflation or inflation. Cost - Thi 6. This conce oncept pt is close losely ly rela relate ted d to the the “Going Concern” concept according to this an asset is recorded in the book at the price at which it was acquired i.e. at its cost price this cost serves the basis for the accounting of this assets during the subsequent period. Conserv 7. onservati atism sm – This conce concept pt empha emphasis sis that that profit profit should should never be over stated or anticipated. Dual Extent Concept – This concept may be stated as for 8. every debt. There is a credit. Every transaction should have two sided effect to the same extent of same amount.
Inventory:
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It consist of raw materials and other items available for sales, or in the process of being made ready for sale in other words inventory is the money invested by an organization in raw materials ,work in progress and finished goods for expected future sale. The funds invested in inventory can’t be used for other purposes until cash is received on sale of goods. Inventory is a current asset as it is converted into cash on sale. o
Types of Inventories: 1.
Raw materials
2.
Work in progress.
3.
Finished goods.
Cash Book:
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In any business perhaps the largest number of transactions of one nature must relate to cash and bank it is so because every transaction must ultimately result in cash transaction now if every cash transaction is to be recorded in journal it will involve amount of labor in debiting or crediting cash or bank accounts in the ledger for each transaction. It is the cash book, to record such transactions.
Features of Cash Book:
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1.
Only cash transactions are recorded in the cash book.
2.
It performs the role of both journal and ledger.
3. Receipts are recorded on the debt side and payment on the credit side. 4. 5.
It records only one aspect of the transaction i.e. cash and bank. Transactions are recorded in chronological order.
6. Cash column must have debit balance and where as bank column may have debit on credit balance depending whether bank balance is deposited or over draft. 7. Non cash aspect of transaction is posted in ledger required no posting because cash amount is in the cash book itself.
8. Format of cash book is just like ledger i.e. having two sides L.H.S. and R.H.S. debit and credit side respectively. 9.
Unlike any other account or book. Cash book is balanced daily.
10. Cash book most show debit balance always, it cannot have credit balance because no one can pay more.
“Double entries completed by means of posting in the ledger to the respective account.”
A bit of Text is missing….! Business Organization:
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Business organization performs a variety of transactions and can be classified as follows: 1.
Service Organization
2.
Trading Organization
3.
Manufacturing Organization
The The basic basic desc descrip ripti tion on of busin busines ess s orga organi niza zati tion on such such as sole sole propri propriet etors orshi hip, p, partnership limited company is not relevant to this discussion as decision or legal entities are based on other consideration.
Service Organization - Service is defined as worked done for other in lieu of a paym paymen entt or a pric price. e. Servi Service ce does does not not have have a phys physic ical al form form and and organi organiza zati tion on providing services is called a service organization . o
Nature of Service Organization: 1. Servi Service ce orga organi niza zati tion on provi provide des s thei theirr servi service ce at the the poin pointt of consumption by the customer. 2. Serv Servic ice es are are peri perish shab able le so the the pre pressur ssure e on the the serv servic ice e organ organiz izat atio ion n to provi provide de servi service ces s is more more than than that that on manu manufac factu turin ring g organization or a trading organization.
3. Customer interaction is greater in service organization than in manufacturing or trading organization. 4. In a servi service ce organ organiz izat atio ion, n, servi service ces s are usual usually ly provi provide ded d by people. So service organization is more labor intensive then manufacturing organization. 5. Cus usto tom mer Goodw oodwil illl is an intan ntang gible ible asse assets ts for for serv servic ice e organiz organizatio ation n which which can be destro destroyed yed quickly quickly there there is often often no way to correct bad services.
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Uses of Accounting in Service Organization: 1. The organization maintain regular book of account. More services organization does does not not deal deal in inve invent ntor ory y and theref therefore ore do not not need need to maintain inventory record. 2. They do not follow a standard price of policy for all customers at all time. 3. In a servi service ce organ organiz izat atio ion n the the focus focus is an envi enviro ronm nmen entt is on effective utilization of human resources.
Trading Organization - An organization organization involved involved in the process process of buying buying and selling is called trading organization. Trading is defined as an exchange of goods for a fixed market rice trader’s act as chance that provides goods produced by the manufacturer at a convenient place, price, pack and time to the consumer. o
Nature of Trading Organization: 1. The actual market price established and is valid for a short period based on the current supply and demand. 2. The The valu value e of the the prod produc uctt is dete determ rmin ined ed by the the cust custom omer er expectation of the quality. 3. The customer of expectation of convenience in relation to the actual amount paid for it. 4. The traders deal with goods they repack them if necessary but do not process them. 5. Different customer may be changed different prices by weighing the percentage of discount in the price list.
Use of Accounting in Trading Organization: -
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The traders must keep track of stock availability, customer requirement and market chang changes es.. The acco account untan antt in a trad tradin ing g organi organiza zati tion on has has to maint maintai ain n inve invent ntory ory records apart from regular accounting.
Manufacturing Organization - The process of transferring raw materials into physical goods for consumer or for further processing by others in the channel is called manufacturing. The success of a manufacturing organization depend on it ability to carry out this process effectively and profitability.
“Manufacturing organization organization can be classified according to the production process undertaken:” 1.
These may range from extremely complex process to simple one.
2. Compare to service and trading organization a manufacturing organ rganiz izat atio ion n mus ustt consi onside dere red d more faci facili liti tie es it’s it’s defi define ne styl style e of functioning.
“The questions that the manufacturer would want answers for:” 1.
Should product be standard one or customer side one?
2. What will be the number of order and order volume based on the above combination? 3. What will be the time required by the production team from the receipt of order to production considering available resources. 4. What will be the requirement life cycle as agreed by both the customer and manufacturer?
“ After finding suitable answers to these questions the manufacturer may decide to:” 1.
Produce goods and stock them to sales.
2.
Produce goods against customer orders.
3. Keep Sub components at a strategic location to assemble. The final product and deliver to it customer in time.
Nature of Manufacturing Organization:
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1.
The production cycle and market cycle need not match.
2. Usually the entire cycle of procurement, production, distribution and realization is longer to others. 3.
For higher level of standardization is possible.
4.
Scientific method can be used to reduce the production cost which forms a major part of the total cost of the products.
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Accounting
in
the
Manufacturing
Organization: 1. A company needs to account for inventory like raw material WIP, finished goods to arrive at the profile made forth time. 2. Change Changes s in the invento inventory ry valuati valuation on metho method d change change the profit profit made during the period. 3. Acco Ac count unting ing in manufa anufact cturi uring ng organ organiz izat atio ion n requ requir ired ed more more planning preparation and scheduling as compared to accounting in trading and service organization. 4. Calculating cost of sales in relatively complex in manufacturing organization as compared to trading and services. o
Accounting System:
An effective accounting system must support the management in making these decisions. As the process of decision making changes the accounting system must also change and evolve to meet both internal and external needs.
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Benefits of Accounting on Computer: 1. Result Result in genera generatio tion n of timely timely report reports s in desired desired format and resolves real time enquiry needs quickly and accurately to enable faster decision making. 2. Facilit Facilitate ates s knowle knowledge dge sharing sharing betwe between en accoun accountant tants s across across different location of an organization. 3. Support financial planning tools such as budget and performance reports which in terms facilitate control and evaluation of the business process.
Factors Contributing to Change:
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1.
Changing Business needs.
2.
Change in technology.
3.
Better business process.
4.
Competitive Advantage.
hallen enge ges s Chall
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assoc associa iate ted d with with Ac Acco coun unti ting ng on
Computers: 1. Capturing Business accounting needs - The frequently asked questions of accounting on computers is whether it can address all the accoun accountin ting g needs needs of the busine business ss and the operati operational onal require requireme ments nts of accounts. 2. umed that the proc rocess of Implementation - It is assume implementing accounting system on the computer is a time consuming affair.
Rigidity - Ac 3. Acco coun untin ting g on comp comput uter er is ofte often n beli believ eved ed to introduce business. Processes are usually force fitted to suit the needs of the computerized accounting system rather than the other way around. 4. ecurity ty - The data in acco account unting ing on comp comput uter er must must be Securi protected against physical and ethical security threats.
Solutions:
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1.
Able to identify & addresses business accounting requirement.
2.
Simple to implement, configure & use.
3. Able to generate instant reports to keep the managers to take quick business decisions. 4.
Able to adapt to constant charges in business needs.
5. Able Ab le to upda update te real real tim time data data of all all rele releva vant nt reco record rds s and and eliminate duplication.
“The security threats of data violation and data loss can be protected against by insuring:” 1.
Regular Data backup.
2.
Logical assess control.
3.
Integrity of data at different stages such as data entry, storage, and process output & so on.
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Points to remember in Accounting System: 1. Accounting on computer facilitates knowledge sharing between accountants across different location of an organization. 2. The The data data perta pertain inin ing g to acco accoun unts ts on comp comput uter er need needs s to be protected against security threats. 3. Regular data backup and logical assess control can save guard from security threats of data violation and data loss.
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Features of Tally: A leading account package - The first version of tally was 1. released in 1988 and proved continuous development in recognized as one of the leading accounting packages across the globe with our quarter million customer. Tally market share is more than 90%. No Accounting Codes - Unlike other computerized packages 2. that that requ require ired d nume numeric ric code codes s tall tally y pion pionee eerr the the “No Accoun Accountin ting g Codes Codes Concept ”. ”. Complete Business Solution - Tally provides a 3. com compreh prehen ensi sive ve solu soluti tion on to the the acco accoun unti ting ng and and inve invent ntor ory y need needs s of business. The package comprises of financial accounting and book keeping and inventory accounting. 4. Flexible & Easy to use - Tally is very flexible and tally can adapt to any business needs rather than the using trying to change the way of business in run to adapt to the package.
Multi-platform availability - Tally is available on Windows 95, 5. 98, ME 2000 it runs on a single PC or network and is on a network scores excess by any combination of platforms.
Components of Tally
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Title Bar - Displays the version numbers, system data, time, 1. and tally serial number. 2. Gateway of tally - Displays menu screen, reports and except the choices and options you select to view data as you required. 3. also.
Calculator Facility - In tally they display the calculator facility
4. utton n Tool Tool Bar Bar - Disp Displa lays ys butt button on that that prov provid ide e quic quick k Butto interaction daily only buttons relevant to the current tasks will be visible.
Tally Clock - While tally processes the data a clock appears 5. on the screen it indicates that the request being processed. Once this clock disappears perform the next action. 6. uitting Tally (Ctrl + Q) - You can exist the program from Quitting Tally any tally screen but tally required all screen to be closed before it shut down.
Types of Cash Book:
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Single 1. ingle Colum Column n Cash Cash Book Book - In this this all cash cash rece receip ipts ts are recorded on the left (Dr) hand side and all cash payment are recorded on the right (Cr) hand side. 2. Double Column Cash Book - In this cash book there are two columns one is for cash and another is for discount cash column is meant for recording cash receipts and payments while discount column is meant for to recording discount receipts and allowed. The discount column on the (Dr) side represents the discount allowed while discount column on the (Cr) side represents the discount receipts.
Three Column Column Cash Book Book -
3.
This type of cash book book contains:
a)
Discount column for discount receipts are allowed.
b)
Cash Column for cash received and cash payment.
c) Bank column for money deposited and money withdraw from the bank.
Cash Receipts and Payment Book or Journal - In practice 4. cash receipts and cash payments book may be employed respectively to record cash receipts and payments especially when the cash transactions are made.
Ledgers:
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Ledger may be defined as a book which contains summarized and classified forms and a permanent record of every transaction. Personal account in a ledger shows how how much uch money oney the the firm firm owes owes to its its cred credit itor ors s and and how how much uch it has has to be recovered from its debtors. The real account shows the value of property and also the value of stock. The nominal account reflected the sources of income and also the amount spent on various items.
Posting of Entries:
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The Process of transferring the information contains in the journal to a ledger is called Posting.
I n Journal Entries: Posting of Account (Dr) In
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1.
Identify in the ledger the account to be debited.
2. Enter the date of transaction in the date column of the Dr Side of the account. 3. Write rite the the nam name of the the acco accoun untt whic which h has has been been CR in the the respective entries. 4.
Mark the page no of the Journal where the entries exist.
5.
Enter the amount in the amount column in the Dr Side.
Posting the Account (Cr) in Journal Entries: -
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1.
Identify in the ledger the account to be credited.
2. Enter the date of transactions in the column of the Cr side of the account. 3. Write rite the the nam name of the the acco accoun untt whic which h has has been been Dr in the the respective entries. 4.
Mark the page number of the Journal where the entries excise.
5.
Enter the amount in the amount column in the Cr side.
Advantages of Journal Entries:
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1. It reduces the possibilities of errors it can be compare to see that both Dr and Cr side are equal. 2. Journ Journal al provid provides es an expl explana anati tion on of trans transac acti tion ons s so that that it is possible to understand the entry properly. 3. Jour Journal nal Prov Provide ides s a chro chrono nolo logic gical al (Date (Date wise wise)) reco records rds of all transactions.
Disadvantages of Journal Entries:
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1. The journal will become very heavy if transactions are record in a particular book. 2. Firms may like check the cash balance every day in hand. They usuall usually y records records transac transactio tions ns directl directly y in separat separate e book. book. Theref Therefore ore it is necessarily of journalizing cash transaction in the journal. 3. By recorded different classes’ transactions in different book, book keeping, and accounting become easier and systematic since then the entries can often be made in totals.
Financial Statements:
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Fina Financ ncia iall stat statem emen ents ts are prep prepare ared d and prese present nted ed for for thei theirr exte externa rnall us user ers s of accounting information. In India a complete set of financial statements includes: 1.
Balance sheet.
2.
P & L account.
3.
Schedules & notes forming part of a P/L account.
Financ Financial ial statem statement ents s are the means means of commu communic nicatio ations ns accoun accounting ting informa informatio tion n which is generated in this various accounting process to the external users of accounts. The external user includes: 1.
Investors.
2.
Employees.
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3.
Lenders.
4.
Suppliers & other trade creditors.
5.
Customers.
6.
Agencies.
7.
Public at large.
Nature Of financial Statement: 1. Finan Financi cial al stat statem emen ents ts relat relate e to a pass pass peri period od and thes these e are historical documents. 2. term.
The statements are financial in nature i.e. express in monetary
3. Financial statements indicate financial position through balance sheet and profitability through P/L account.
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Purpose & significance of financial analysis: 1. Judging the earning capacity or profitability - On the basis of financial statement the earning capacity of the business concern may be computed. In addition to this the future earning capacity of the concern may be forecasting. 2. Judging the managerial efficiency - The financial statement analysis help to pin point the areas where in the managers have shown better efficiency and the areas of inefficiency.
Judging the short & long term solvency of the concern - On 3. the the basis basis of finan financi cial al stat statem emen entt the solve solvenc ncy y of the the conc concern ern may may be judged. Debentures, holders and lenders judge the ability of the company to the principle and interest as most of the companies raised a position of their their capita capitall require requireme ment nt by iss issuin uing g debent debenture ures s and raising raising long long term term loans. Interfirm Comparison - On the basis of financial statements a 4. comparative study may be undertaken for comparing various firms for various points of view.
Makin 5. aking g fore foreca cast st & prep prepar arin ing g Bu Budg dget et - Past Past fina financ ncia iall statement analysis keeps a great deal in assessing development in the future specially the next year.
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Limitations of Financial Statements: 1. Person Persons s like like share share holders holders,, invest investors ors are more more intere intereste sted d in knowing the likely position in the future. 2. Financ Financial ial statem statement ents s are the outcom outcome e of accoun accountin ting g with with the perso persona nall judg judgme ment nt.. Stoc Stock k valu valuat atio ion n treat treatme ment nt of defe deferre rred d reve revenu nue e expe expend ndit itur ure, e, prov provis isio ion n of depr deprec ecia iati tion on extr extra a is base based d on pers person onal al judgments and therefore is not free from bias. 3. The profit and the loss position or the financial positions excludes things which cannot be expressed or recorded in monetary terms. These statements do not include very important assets namely human resource in its position statement. 4. The number of parties interested in the financial statement is large and their interest different/ the financial statement cannot meet the purpose of all parties interested in them.
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Ratio Analysis: -
Ratio is an arithmetic relation between two related or interdependent items. Ratio analysis is the process of determining relationship between figures of the financial state stateme ment nt and abso absolut lute e figu figure re ofte often n does doesn't n't conve convey y much much mean meanin ing. g. E.g. E.g. A shopkeeper earns a profit of Rs 50,000 and another and earns 40,000 Rs which one is more efficient? We may be tempted to say that the one who earns higher profit is running his shop better. In fact to answer the questions we must how much it the capital employed by each shopkeeper. Suppose we ascertain a scertain that “A” has employed a capital of Rs 4, 00,000 “B “has employed a capital of Rs 3, 00,000.
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Advantages of ratios: Useful in analysis of financial statements - Accounting ratios 1. are useful to understand the financial position of concern. One may quickly receiv receive e the relatio relationsh nship ip witho without ut workin working-o g-out ut the ratio ratio but that nearly nearly
means that the ratio has roughly worked out is the mind e.g. when we see that a small business has earned a rather least profit. Thus accounting ratios are an extremely useful device for analyzing.
Useful 2. seful in judg judgin ing g the the oper operati ating ng expe expens nses es of busi busine ness ss Accounting ratios are essential for understanding the faire of their firm. Specially the operation efficiency. Accounting ratios are also helpful and useful for diagnosis of the financial help of the business concern. This is done by calculating liquidity, solvency and profitability ratio. Useful for forecasting purposes - Accounting ratios are also 3. very useful for forecasting purposes. Usefu 4. sefull in loc locatin ating g the the weak sp spo ots of the the busi busine ness ss Accounting ratios are of great assistant in locating the weak spots in the busi busine ness ss even even thou though gh the the over overall all perfo perform rmanc ance e may be quit quite e good good.. Manag Managem emen entt can can then then play play the the atte attent ntio ion n to the the weakn weaknes ess s and and take take reme remedi dial al acti action on.. e.g. e.g. if the the firm firms s find finds s that that incr increa ease se in dist distrib ribut utio ion n expe expens nses es more more than than the the prop propor ortio tionat nate e resu result lt achi achiev eved ed ther there e can can be examined in detail and debt to remove any wastage that may be there. Useful in comparison 5. comparison performance performance - A firm would like to compare its performance with that of other firm and its industries are general. The comparison is called interfirm comparison. If the performance of different units belonging to the same firm is to be compared it is called intrafirm comparison. o
Limitations of Ratio Analysis: Give 1. ive fals false e resu result lts s if the the rati ratios os are are base based d on in corr correc ectt accoun accountin ting g data data - Ac Acco count untin ing g ratio ratios s are base based d on acco accoun unti ting ng data. data. Therefore they can be only as correct as accounting data on which they are based. Different meaning is put on different term - Elementary and 2. sub element of financial statements is not uniquely defined. A firm may work out ratios on the basis of profit after interest and income tax; another firm may consider profit before interest but after income tax. A third firm may consider profit before interest and income tax. Therefore the ratios that will be worked out will be different and will not be comparable. Before comparison is made one may see that the ratios have been worked out on the same basis. Not comparable if difference firms followed different firm 3. policy - E.g. one firm may charge depreciation not the straight line basis and the other diminishing value. Such differences will not make some of
the the acco account untin ing g ratio ratios s stric strictl tly y uncom uncomfor fortab table le unle unless ss adju adjustm stmen entt for for different accounting policies followed is made.
Price level 4. level change changes s - Chang Changes es in the the pric price e leve levell of may may comparison of figure for various years difficult. E.g. the ratio of sales to fixed assets in year 2008 would be much higher than in 2004 due to rising prices. Results may be misleading in the absence of absolute data 5. Ratio sometimes gives a misleading picture in the absence of absolute data from which such ratios are derived eg. One firm produces 1000 units in one year and 2000 in next year and the other firm produces 6000 units in one year and 8000 units in next year. Ignores qualitative factors - Accounting ratios are as a matter 6. of fact tools of quantitative analysis. But sometime it is quite possible that the qualitative factors may override the quantitative aspects. 7. ifficul ultt to fore foreca cast st futu future re on the the basi basis s of past past facts facts Diffic Accounting ratios are worked out on the basis of past facts and figures. Thus the ratios can not reflect current conditions. Hence it is not desirable to use them for forecasting current and future events because past events may be quite different from the future events. 8. No single standard ratio for comparison - Another important to keep in mind is that there is almost no single standard ratio. There is almost no standard for comparison. Circumstances differ from firm to firm and the nature of each industry.
Ratio 9. atio may may be worked worked out for insign insignific ificant ant and unrelat unrelated ed figure - Accounting ratios may be worked out for any two figures even if they are not significantly related.
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Classification of ratios:
Ratios can be classified from various points of view. In reality the classification depends on the objective and available data. Ratios may be based on figures in balance sheet in the profit and loss account or in both. Thus they may be worked out on the basis of figures contained in the financial statement and therefore may be classified as follows: 1. Income Statement Ratio - These ratios are calculated on the basis of items of income statement only. E.g. G/P ratio, Stock turnover ratio.
2. Position Statement Ratios - These ratios are calculated on the basis of figure on position of statement only.E.g. Current ratio, Debt equity ratio 3. Inter Statement or Composite Ratio - These ratios are based on figures of income statement as well as position statement. E.g. fixed asset turnover ratio and net profit to capital employed.
“The above classified however are rather crude and unsuitable because analysis of position statement and income statement cannot be carried out out in isol isolat atio ion. n. They They have have to be stud studie ied d to toge geth ther er to dete determ rmin ine e the the profitability and the financial position of the business. Anyone including the management which is interested in acquiring knowledge about the busi busine ness ss is conc concer erne ned d with with thes these e two two asp aspects ects.. Rati Ratios os as to tool ols s fo for r estab establis lishin hing g true true profit profitab abili ility ty and financ financial ial positi position on of a compa company ny as under.” 1.
Profitability ratio
2.
Turnover ratio.
3.
Liquidity ratio.
4.
Solvency ratio.
Profitability
ratio - The main object of business concerns to earn profit. In
general terms efficiency in business is measure by profitability. Profit as compared to the capital employed indicated profitability of the concern. Thus profitability is of the the almo almost st impo import rtanc ance e of a conc concer ern. n. If a conc concer ern n goes goes on losin losing g his his finan financi cial al condition will definitely be bad, sooner or later.
Gross profit sales - This ratio shows the relationship of sales 1. with direct cost such as purchases, manufacturing cost. Gross profit sales = (Gross profit/net sales) x 100.
Operating profit ratio - Operating profit is given by net profit 2. before adjustment of non operating income and expenses and finance charges. Operating profit ration = (operating profit/net sales) x 100.
Net profit ratio: - A ratio of net profit to sales is called Net 3. Prof Profit it Rati Ratio. o. Net Net prof profit it is deri derive ved d by dedu deduct ctin ing g adm adminis inistr trat ativ ive e and and market marketing ing expens expenses, es, finance finance charge charges s and making making adjust adjustme ments nts for non operating expenses and incomes. Net profit ration = (Net profit/Net sales) x 100.
“Net profit is taken in two ways.” a) Profit before tax x 100.
= (Net profit before tax/net sales)
b) Profit Profit after after tax 100.
= (Net profit profit after after tax/net tax/net sales) sales) x
Operat 4. peratin ing g ratio ratio - This This ratio ratio measu measure re the the exte extent nt of cost cost incurred for making the sale. In other words this ratio matches cost of goods sold + other operating expenses on the one hand with net sales on the other. Operating ratio = [(all operating exp. + cost of goods)/net sales] x 100. 5. Expenses ratios - Expenses ratios are calculated to ascertain the relationship that exists between operating expenses and volume of sales. These ratios are calculated dividing the sales into each individual operating expense. o
Ratios of material uses to sales: Direct material cost to sale ratio. = (direct material a) cost/net sales) x 100. Direct factory cost ratio. = (Direct factory cost/Net b) sales) x 100. c) x 100.
Direct labor Direct labor cost ratio. = (Direct labor (Direct labor cost net sales
Selling & Distribution exp. Ratio. = (selling & d) distribution distribution exp. /Net sales) x 100. Office and administration ratio. = (office and admin. e) Exp. /Net sales) x 100.
Turnover
ratio - Profit depends on the ratio of turnover and margin. Turnover
ratio also term as performance or activity ratio judge how well facilities at the disposal of the concern are being used. The ratio is usually calculated on the basis of sales or cost of sales turnover ratio of each type of assets should be calculated separately.
a)
Capital turnover ratio = (sale/capital (sale/capital employed). employed).
b) Fixed asset turnover ratio or ratio of sales to fixed assets = (Sales/fixed assets). c) Net Net wo work rkin ing g capi capita tall turn turnov over er rati ratio o = (cos (costt of sales/net working capital). “Note: - Net working capital = (Net assets – Net liabilities.) liabilities.) d) Stock or inventory turnover ratio = (cost of goods sold/avg. stock invitatory). Cost of goods sold = (opening stock stock + + purchases + direct exp - closing stock). Or Cost of goods sold = sales – G.P. Avg. stock invitatory = (opening balance + closing balance.)/2
Debtor 1. ebtor turnov turnover er ratio ratio or Recei Receivabl vable e turnove turnoverr ratio ratio - This This ratio establish the relationship b/w net credit sales and avg. debtors of the year. a) Debtor turnover ratio = (Net credit sales/avg. account receivable) Or Debtor turnover ratio = (Total sales/accounts receivable). 2. Avg. collection period or Debtor days - This ratio deals with the same subject and shows the number of days for which normally sales remain uncollected it indicates the extent to which the debts have been collected in time.
Net credit sales per day = day = (total credit sales /365) Avg. collection period = period = (day in a year/debtors turnover) Or Avg. collection period = (month in a year/ debtor turnover)
3. Credit turnover ratio/accounts payable ratio - This ratio is calculated roughly as a debtor turnover ratio it indicated the velocity with which the payment of credit purchases are made to creditors. The term accounts payable includes creditors and bills payable.
Credit turnover ratio = (total purchases/avg. accounts payable)
Liquidity ratio (short term solvency): 1. urrent ratio/w ratio/worki orking ng capita capitall ratio ratio - This This ratio ratio is used used to Current access the short term financial position of the business concern.
Current ratio = (Current asset/Current liabilities)
Quick/liquid ratio/acid test ratio - liquid ratio is worked out to 2. test the short term liquidity of the firm in its correct form. Liquid assets include: Cash, bill receivable and marketable securities, Debtors Quick ratio = (liquid asset/ current asset/ current liabilities) liabilities)
Solvency ratio - The term solvency implies ability of a concern to meet its long term in debts and thus solvency ratio conveys a concerns ability to meet its long term obligations. Some important solvency ratios are: 1. Debt equity ratio - The debt equity ratio is worked to ascertain soundness of the long term policies of the firm.
Debt equity Ratio = Deb. (long term loans)/equity (shareholders funds).
Interest coverage ratio - When a business borrows money the 2. lend lender er is inte intere rest sted ed in find findin ing g out out whet whethe herr the the busin busines ess s would would earn earn sufficient profits to pay the interest charges. Interest coverage Ratio = Net profit before interest & tax/Interest on fixed loan or debtness.
Debt to total fund ratio - It is normally sufficient to measure 3. curren currentt assets assets against against curren currentt liabil liabiliti ities es for assessin assessing g the short short term term financial soundness of a corporation. The debt to total funds ratio is a measure for long term financial soundness. Debt to total fund ratio = debt/(equity + debt) 4. Fixed assets ratio: the ratio of long term loans to fixed assets is important and another aspect of long term financial policies.
Fixed assets ratio = (Share holder funds + long term loans)/net fixed assets 5. Propri Propriet etary ary ratio ratio - This This ratio ratio is esta establ blish ished ed the relationship relationship between proprietors fund and total assets. Proprietor fund means share
capital plus reserves and surplus. Both of capital and revenue nature loss should be deducted.
Proprietary ratio = proprietor funds/total assets o
Fund flow statements:
The The bala balanc nce e sh shee eett disc disclo lose ses s the the financ financia iall state state posit positio ion n of the the busin busines ess s on a particular date. It is merely a statement of the assets and liabilities . It may depic depictt the effe effect ct of vario various us trans transac acti tion ons s in a part partic icul ular ar peri period od and and sh show ow the the resources position after transactions in a particular period the balance sheet at the end of the period quite different from the balance sheet at the beginning of the year. But how the changes have come about is not reflected in the balance sheet. The analysi analysis s metho method d which which disclos discloses es these these change changes s clearly clearly is called called front front flow flow statements. In short short fund fund flow flow state stateme ment nt is a stat statem emen entt whic which h is prepa prepared red to disc disclo lose se the the changes in the financial data of balance sheet of two periods. The stateme statement nt is report report on major major financi financial al operati operations ons that that is change changes s flow flow or movements during the period. It changes is known by various other names like: 1. OR 2. o
Statement of source and application fund Statement of changes in financial positions.
Meaning of funds:
In a narrow sense the word fund is synonymous with cash. In this sense the fund flow statement is simply a statement of cash receipts and disbursement. Such a statement is called Cash flow statement . It portraits the inflow and outflow of cash during a period and consequently the balance in hand. The term funds however broader than cash. It means working capital that is a difference between current asset and current liabilities or the excess of current asset over Current Liabilities.
For example: The current asset is 5,00,000. The total of Current liability is 3,00,000. Then the working capital or fund would be 2,00,000. Therefore in accounting funds and working capital is used in same sense. o
Meaning of flow:
The term flow means changes in funds or changes in working capital. According to working capital the concept of funds the terms of flow of funds refer to the movement of funds as a flow in and out of working capital area. All flow of funds passes throw working capital. The working capital flow arises when the net effect of transactions is to increase or decrease in working capital means flow of funds. Some Some of thes these e tran transac sacti tion ons s may incr increa ease se a worki working ng capit capital al while while othe otherr may may decrease the working capital. While some may not make any change in working capital. If the transaction increases the working capital it is term to be a source of funds & application of if the transaction decreases the working capital it is termed to be a application funds. o
Objectives of front flow statement:
The basic objective of front flow statement is to indicate where funds came from and where they were used between two balances sheet dates. It is used widely by financial managers and credit granting institutions. Fund flow statement is prepared to know the periodic increase or decrease of working capital of business concern. It also enables the management to know with reasons the basic causes of the change in the net working capital. Fund flow statement highlights the sources in the financial structure of the firm between the 2 balance sheet dates. 1. How much funds have been generated from recurring and non recurring activities? 2. How much funds have been raised from external sources? 3. Where did the profit go? 4. How was it possible to distribute dividend in excess of current earning or or in the presence of net loss loss for the period? 5. Why are the net current assets up even though there was a net loss for the period? 6. How was expansion in plant and equipment financed? 7. How was increase in working capital financed?
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Uses and advantages of fund flow: It reveals the net results of operations during a year in terms of 1. cash - The figure is better than the figure of profit and thus the statement gives a better view of profitability since profit as such is subject to a rather pers person onal al dec decisio ision n of manag anage ement. nt. E.g. .g. dec decidi iding the the amo amount unt of deprec depreciati iation, on, If the amount amount of deprec depreciat iation ion is reduce reduced, d, the profit profit will will incre ncreas ase e. Profi rofitt can be dec decrea reased sed by increa reasin sing the amount of depreciation.
Information of funds inflow is a location of resources - Utilization 2. of funds funds depend depends s upon upon the informa informatio tion n of fund fund inflow inflows. s. The traditio traditional nal financial statement, the balance sheet and profit and loss accounts don not provide such information. 3. It acts as a processing the budgetary location - Since funds are the basis for carrying on operation. The fund flow statement prepared on the estimated basis for the next period.
It helps in borrowing operation - These days lending institutions 4. such as banks, ICFI, IDPI etc before extending any loan to any business. One has to satisfy themselves about the ability of the company to repay the loan and the investment. o
Cash flow statement:
In this the focus is on movement of cash and bank balances rather than on net working capital. Hence any change in working capital does not necessarily mean change in cash: cash flow statement is prepared to show the impact of various transactions on the cash position of the firm. it may be defined as a summary of receipts and disbursement (payment) reconciling the opening cash/ bank balance with the closing balance of the concern period with information about various items appearing in the balance sheet and profit and loss account. The transaction which the cash position of the entity is known as "inflow of cash" and those which the cash position is known as "Outflow of cash". o
Objectives of cash flow: Highl 1. ighligh ightt cash cash flow flow from from recu recurri rring ng acti activit vitie ies s - CFS CFS aims aims at highli highlight ghting ing the cash cash generat generating ing from recurri recurring ng activi activitie ties. s. P/L accoun accountt indicates net profit which is derived after adjustment of many non cash items. Planning - Cash is the center of all financial decision. Once the 2. volume of internally generated cash becomes known, it becomes easy to plan that how much cash should be raised from outside sources to cover the cash required in various investment projects. Cash flow information helps to understand liquidity - Liquidity is 3. the ability of the business to pay current liabilities as and when they become due. Bank and financial institutions mostly prefer generally CFS to analyze liquidity. 4. Dividend decisions - Dividend once declared by the company bec become omes a curre urrent nt liab liabil ilit ity y and and sh shou ould ld be paid paid withi ithin n 42 days days of declaration. 5. Prediction of sickness - Continuous cash loss is a symptom of sickness. Presently many CFS rating are used for financial analysis.
6. Com Compari pariso son n with with budg budget et - A com compari pariso son n of the the Cash ash flow flow Statements for the previous year with the budget (prepared before year commenced) for the year would indicate to what extent the resources of the concern were generated and apply according to the plan.
Difference
between cash flow statement and fund flow statement:
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Cash Flow Statements 1. It is based on narrow concept i.e. cash is equal to fund. It recognizes cash 2. basis of accounting. usef eful ul fo for r sh shor ortt 3. It is us term financial planning. high ghli ligh ghts ts on only ly th the e 4. It hi causes of cash variations. 5. It analysis an increase in a cur urre rent nt li lia abil ilit ity y or decrease in a current asse as sett (o (oth the er th tha an cash sh)) results in increase in cash.
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Fund Flow Statements It is based on a 1. broad bro ader er con concep ceptt i.e i.e.. fun fund d is equal to working capital. prep epar ared ed on th the e 2. It is pr accr ac crua uall (f (fut utur ure e ef effe fect cts) s) basis of accounting. It is us usef eful ul for lo long ng 3. term financial planning. 4. It discloses all causes of overa overall ll work working ing capi capital tal variant. In this increase in 5. current liabilities or decrea dec rease se in cur curren rentt ass asset et results in increase of working capital.
Budgetary control:
Budget
- A budget is prepared to have effective utilization of fund and for the realization of objectives as effectively as possible.
“An “An anal analys ysis is of this this defi defini niti tion on reve reveal als s the the fo foll llow owin ing g esse essent ntia ials ls of a budget:” 1. 2. 3. 4.
It is a plan expressed in monitory terms. It is related to a definite future period. It is approved by the management for implementation It also shows capital to be employed during the period
Thu Thus s a budg budget et fixe fixes s a targ target et in term terms s of rupe rupee es agai agains nstt whic which h the the actu actual al performance is measured.
Budgetar udgetary y
contro controll - It is applied to a system system of manage manageme ment nt and accoun accounting ting control by which all operation and output are forecasted as far as possible and actual results when known are compared with the budget estimates. o
Essential of budgetary control: 1. The establishment of budget for each functional and section of the organization. 2. Executive responsibility in order to perform the specific task. 3. Continuous comparison of the actual performance with that of the budget so as to achieve the desired result as given in the budget. 4. Revision of budget in the light of changed circumstances.
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Budget, Budgeting and Budgetary control:
"Budgets are the individual objectives of department etc.” “Budgeting may be said to be the act of building budgets." "Budgeting control embrac embraces es all this this and in additi addition on include includes s the science science of plan planni ning ng the the budg budget ets s to affec affectt an over overall all mana manage geme ment nt tool tool for for the the busi busine ness ss planning and control." o
Objectives of budgetary control:
Budgeta Budge tary ry cont contro roll is plan planne ned d to assis assistt the manag managem emen entt in the alloc allocati ation on of responsibilities and authority to aid in making estimate and plan for future and to develop basis of measurement or standards with which to evaluate the efficiency of operations. The general objectives of budgetary control are as follows:
Planning - A budget is a plan of the policy to be perused during 1. the defined period of time to attain a given objective. A budget as a plan of action achieves the following purpose. a. The The budg budget et serv serve es as a mecha echani nism sm thro throug ugh h whic which h management's objectives and policies are affected. b. It is a bridge through which communication is established betw betwee een n the the top top manag anagem emen entt and and the the oper operat ativ ives es who who are are to implement the policies of the top management. c. The most profitable course of action is selected from the various available alternatives. Co-ordination - The budgetary control co-ordinates the various 2. activities of the firm and secures co-operation of all concerned so that the
common objective of the firm may be successfully achieved. It is also helpful in co-coordinating the policies, plans and actions. 3. ontrol ol - Bu Budg dget etar ary y cont contro roll makes akes poss possib ible le cont contin inuo uous us Contr comparison of actual performance with that of the budget so as to report the variations from the budget to the management of corrective action. Thu Thus s budg budget etin ing g sy syst stem em inte integr grat ates es key key manag anager eria iall func functi tion on as it link links s top top management's planning function with the control function performed at all levels in the management hierarchy. A more more accu accurat rate e budg budget et can can be deve develo lope ped d for for thos those e acti activi vitie ties s where where dire direct ct relationship relationship exists between between inputs & outputs. outputs. The relationship relationship between between inputs and outputs becomes the basis of developing budgets and exercising control. o
Organization for a budgetary control ü Sales manager: Sales budget including advertising, selling and distribution cost. ü Production manager: Production and plant utilization budget. ü Purchase manager: Material budget. ü Personnel manager: Labor budget. ü Accountant: Cost and Master Budget.
Chief executive is the head of the budgetary control system (BCS). He delegates his pow power/a er/aut utho hori riti ties es to the the budg budget et offi office cer, r, who who see sees that that all all the the budg budget ets s are are coordinated and drawn in time. The other managers will prepare the budgets as assigned to them. The chief executive should appoint a budget officer who should be given the specific duty of administrating the budget. As in who will deal with the preparation and co-ordination of budget involving figure, he will usually be a person with with accoun accountin ting g knowle knowledge dge.. He should should also have a technic technical al knowled knowledge ge of the business. He is to make sure that budgets are being prepared according to the budget manual. His function is to give advice to the line manager. The budget controller is assisted by the budget committee which includes general manager or chief executive, Sales manager, Work managers, Accountant or budget controller, personnel manager and departmental managers. The functional mangers will prepare the budget and submit the report to the the comm commit itte tee e for approv approval. al. It is the the duty duty of the budg budget et comm committ ittee ee to make make nece necess ssary ary adju adjust stme ment nts s in the the budg budget et,, Co-o Co-ordi rdinat nate e all all the the budg budget et and and final finally ly approve the budgets. The budget committee is thus an advisory committee as it examines examines budget, records records and recommend recommends s corrective corrective actions actions for discrepancie discrepancies s between actual budgets if required.
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Duties of budget controller:
1. To create co-ordination among managers and provide guidance. 2. To revise and amend the budget manual as and when required. 3. To prepare prepare budget budget program programs s and iss issue ue instruc instructio tion n for proper proper executions of each program. 4. To revise and scrutinize the budget received from various budget departments. 5. To prepa prepare re su summ mmary ary budge budgets ts in cons consul ultat tatio ion n with with budg budget et comm commit itte tee e and plac place e all info inform rmati ation on and budg budget ets s befo before re the the budg budget et committee. o
Analysis of variances:
Contr ontro ol is the very very impo import rtan antt func functi tion on of manag anage ement thro throug ugh h contro ntrol, l, management ensures that performance of the organization confirms to its plans and objectives. Analysis of variances is helpful in controlling the performance and achieving the profits that have been planned. The deviation of the actual loss or profit or sale is known as variances. When actual cost is less than standard cost or actual profit is better than standard standard profit is known as favorable variance and such a variance is usually a sign of efficiency of the organization. On the other hand when actual cost is more than standard cost or actual profit or turnover, it is called unfavor unfavorable able/ad /adver verse se varianc variance e and is usually usually an indicat indication ion of ineffic inefficien iency cy of an organization, organization, The favorable/un favorable/unfavorable favorable variance are also known as debit/credi debit/creditt variance respectively. Variances of different items of cost provide the key to cost control because they they disclo disclose se whethe whetherr and to what what extent extent standar standards ds set have have been been achiev achieved ed.. Anothe Anotherr way of classi classifyin fying g the varianc variance e may may be contro controlla llable ble or uncont uncontroll rollable able vari varian ance ces. s. If a vari varian ance ce is due due to inef ineffi fici cien ency cy of cost cost cent center er,, it is said said to be controllable variance. Such a variance can be corrected by taking a suitable action. for e.g. if actual quantity of material uses more than the standard quantity the firm concerned would be responsible for it nut if excessive use is due to defective supply of material and wrong setting of standards, the purchasing department or the cost acco account unt depa depart rtme ment nt is resp respon onsi sible ble for for it. it. On the the othe otherr hand hand uncon uncontro troll llab able le variances do not relate to an individual or department but it arises due to external reasons like an increase in the price of material. This type of variances is not controllable and no particular individual can be held responsible for it. There are number of reasons that give rise to variances and the analysis of variance will help to locate the reason & person or department responsible for a particular variance. The manager may not pay attention to items or departments proceeding according to standards laid down; it is only in case of unfavorable items that the management has has to exer exerci cise se cont contro rol. l. This This type type of manag anagem emen entt tech techni niqu que e is know known n as managements are exceptions. This type of technique as considered as an efficient way of exercising control because management devotes limit time to every item. The deviation of total actual cost from total standard costing is known as total cost variances. It is a net variance which is the aggregate of all variances relating to various elements of cost both favorable and unfavorable analysis of variances may be done in respect of each element of cost and sales.
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Cost and sales variance: 1. 2. 3. 4.
Direct material variances. Direct labor variances. Overhead variances. Sales variances.
In
case of material the following may be variances: o
1. 2. 3. 4. 5. o
Material cost variance. Material price variance. Material usage variance / Quantity. Material mixed variance. Material yield variance.
Computer Input and output devices:
Input device -
A hardware device that sends information into the CPU. Without any input devices a computer would simply be a display device and not allow users to interact with it, much like a TV. Below is a listing of different types of computer input devices. 1. 2.
Digital camera Joystick
3.
Keyboard
4.
Microphone
5.
Mouse
6.
Scanner
7.
Web Cam
Output device - Any peripheral that receives and/or displays output from a computer. Below are some examples of different diff erent types of output devices commonly found on a computer. 1. 2. 3. 4. 5. 6.
Monitor. Printer Projector Sound card Speakers Video card
Printer - An external hardware device responsible for taking computer data and generating a hard copy of that data. Printers are one
of the most used peripherals on computers and are commonly used to print text, images, and/or photos. The image to the right is a visual example of the Lexmark Z605 Inkjet printer and is an example of what a printer may look like.
Types of printers 1. 2. 3. 4. 5.
Dot Matrix printer Inkjet printer Laser printer Thermal printer LED printer
Printer interfaces 1. 2. 3. 4. 5. 6.
Firewire MPP-1150 Parallel port SCSI Serial port USB
