CHAPTER 2: INTRODUCTION TO
COST AND MANAGEMENT
ACCOUNTING
2.1 Double-Entry Bookkeeping
Assets – Liabilities = Capital + (Income –
Expenditure) – Drawings. Every transaction either
affects the same component twice or two different ones
from opposing sides, the end result would be the
accounting equation balancing. Assets are resources
controlled by the entity, due to a past event, from
which future economic benefits can be generated (e.g.
prepayments). Liabilities are resources owed by the
entity, as a result from a past event, the settlement of
which will result in the outflow of economic benefits
(e.g. accrued expenses), it is the opposite of an asset.
Capital is comprised of capital invested by the owner
along with profits, they are however netted by drawings
and/or loss (e.g. retained earnings, shareholder capital
and reserves). Hence, expenditure reduces capital and
income increases it. The value of remaining assets after
all liabilities have been met (Net Assets).
Double-entry is a method of recording transactions in
the general ledger while displaying their dual nature.
i.e. Dr. and Cr. DEA LER. Dr.
Drawings/Expenses/Assets and Cr.
Liabilities/Equity(capital)/Revenue(income), when
increased.
The value of all purchases (expense) initially affects
the accounting equation. Regardless of whether it’s
cash or credit, the equation will still balance.
This was a topic of confusion. Memorize the effect
the above 2 transactions have on the accounting
equation to avoid making the same mistakes again.
The general ledger contains individual ledger
accounts for all the DEA LER components.
2.2 Financial and Management Accounting
You need to be able to distinguish between these 4
different types of accounting: Financial Accounting
(records, reports and analyzes historical/past financial
transactions. This is usually mandatory by law.);
Financial Reporting (standard reporting to produce
financial statements for external entities. They are
standard to all businesses, and must follow certain
guidelines. E.g. absorption costing over marginal
costing.); Cost Accounting (internal information to
identify the costs associated with the provision of a
product); Management Accounting (focuses on both
past and future data to allow managers to analyze
performance and make decisions. It is internal,
obviously.).
Bookkeeping is concerned with the processing and
recording of transactions. Entering them into an
accounting system where all transactions are initially
recorded.
2.3 Computerized Systems
The data cycle includes inputting, processing data to
relevant accounts/records, creating documents and
analyzing it into reports. Fields are individual items of
data in a record (date, amount, etc.). Records are
collections of data relating to one unit of information in
a file (individual customer account). Files are a
collection of records with similar characteristics
(receivables ledger). Each record has a Key Field, an
identification field (e.g. credit customer code).
Transaction files contain records related to individual
transactions (such as invoices) and Master Files store
“standing” or reference data, like a supplier’s name or
historical figures). Modules are different individual
functions used in an accounting software (e.g. payables
ledger, non-current assets, general ledger, etc.).
Integrated accounting software packages contain
multi-modules. Features: enforce accounting rules;
linked separate modules; real-time processing
(updates info immediately, rather than in batch
processing where data is only up to date of the last
batch.); automated period-end routines; easy querying;
and automated production of reports (trial balance,
aged receivable analysis, etc.). there’s a variety of
accounting software packages in the market.
2.4 The Purpose of Management
Information
Managers use management information provided
inorder to plan (plan a course of action), control (stay
on decided course) and make decisions (select best
possible action).
Management accounting information is a subset of
general management information. Typically contains
information related to management accounts: budgets
(in time, amount, etc.); forecasts (predictions);
variance analysis (compare actual and planned
figures); and cost accounting information. Note:
Management accounts contain both financial and non-
financial information.
2.5 The Limitations of Management
Information
Limitations of using management information: leaps
in assumptions; over confidence in computer generated
reports which may be inputted with insufficient data;
time-taking and costly to produce; may not be up-to-
date; overreliance on financial information and
dismissing other significant factors; and no way to
know if something significant is missing.