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TitleMBA-Financial and Management Accounting
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Table of Contents
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Page 1

Financial and Management Accounting 
MB 0025 


Unit 1 

Financial Accounting – An Introduction  1 

Unit 2 

Accounting Concepts, Principles, Bases and Policies  14 

Unit 3 

Double Entry Accounting  29 

Unit 4 

Primary Books  48 

Unit 5 

Secondary Books  71 

Unit 6 

Trial Balance  86 

Unit 7 

Final Accounts  105 

Unit 8 

Introduction to Management Accounting  140 

Unit 9 

Financial Statement Analysis  149 
Edition: Fall 2008

Page 2

Unit 10 

Funds Flow Analysis  184 

Unit 11 

Cash Flow Analysis  229 

Unit 12 

Understanding Cost  243 

Unit 13 

Marginal Costing and Break Even Analysis  264 

Unit 14 

Budgetary Control  281 

Unit 15 

Standard Costing  300 

Edition: Fall 2008 

BKID – B0668

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Financial and Management Accounting Unit 2

Sikkim Manipal University 21

2. A payment which is revenue in nature is expenditure. Is it true or false?

3. Plant is purchased and payment is made. Is it an expenditure or acquisition of asset?

4. All revenue expenses are charged against ––––––––––––– .

5. Capital payments resulting in acquisition of assets appear in the balance sheet. True or


2.4.3 Principle of Matching Cost and Revenue

Revenue earned during a period is compared with the expenditure incurred to earn that income,

whether the expenditure is paid during that period or not. This is matching cost and revenue

principle, which is important to find out the profit earned for that period. Here costs are reported

as expenses in the accounting period in which the revenue associated with those costs is

reported. For example, sales revenue reported in 2005 is Rs 50 lakh. The expenses to earn this

revenue, comprising purchases, wages, salaries, sales commission and so on amount to Rs. 30

Lakh. It is possible that some of these costs might be payable actually in 2006. Even then, they

are considered only for the period 2005, when the sales revenue was earned. Adjustments are

made for outstanding and prepaid expenses as well as outstanding and pre received incomes

while preparing the final accounts for the accounting period.

Self Assessment Questions 11:

1. Matching concept of accounting considers only revenue incomes and expenses relating to a

particular accounting period. True or False?

2. Incomes and expenses for an accounting period are considered to compute _____ .

3. Expenditure paid or payable and revenue earned whether realised or not in cash are taken

into account to find out profit or loss. True or False?

4. For the actual revenue received, outstanding incomes are ________ and pre-received

incomes are_________________ to find out the revenue income for the given period.

5. For the actual revenue expenses (costs) paid during the accounting period, outstanding

expenses are _____ and prepaid expenses are _____ to find out expenses for the accounting


2.4.4 Principle of Historical Costs

This is called ‘cost’ principle. All assets are recoded at the cost of acquisition and this cost is the

basis for all subsequent accounting for the assets. The expenses and the goods purchased are

all shown at the value at which they are incurred. The assets are constantly reduced in their value

by charging depreciation against their cost to present their book value in the balance sheet. For

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Financial and Management Accounting Unit 2

Sikkim Manipal University 22

example, land bought for Rs.5,00,000 will be shown at that price only and market value will not

be considered. In financial statements, historical cost is considered but not market value for the

purpose of consistency. However, on account of inflationary situations, this cost concept does not

portray correct picture of the business and so inflation accounting has emerged.

Self Assessment Questions 12:

1. All assets are shown at historical cost in balance sheet. True or False?

2. Depreciation is charged against the historical cost of assets. True or False?

3. Historical cost is the cost at which an asset is actually purchased. True or False?

4. A machinery is bought for Rs.200000 and its market value is Rs.80000. Which of these

values, do you consider reasonable to mention in the balance sheet?

5. Inflation accounting has emerged as a result of limitation of historical cost concept. True or


2.4.5 Principle of Full Disclosure

The business enterprise should disclose relevant information to all the parties concerned with the

organization. It means that any information of substance or of interest to the average investors

will have to be disclosed in the financial statements. For example, the liabilities of the business

should be stated along with assets. If only assets are exhibited without disclosing liabilities, it

amounts to fraud. The Companies Act, 1956 requires that income statement and balance sheet

of a company must give a fair and true view of the state of affairs of the company.

Self Assessment Questions 13:

1. The principle of full disclosure implies that information which is of ___________ should be

stated in financial statements.

2. The material information that is disclosed should be of great interest to the average investors.

True or False?

3. Non-disclosure of material information amounts to ___________.

4. Disclosing about assets without disclosing about liabilities is against to the principle of full

disclosure. True or False?

2.4.6 Double Aspect Principle

This concept is the most fundamental one for accounting. A business entity is an independent

unit and it receives benefits from some and gives benefits to some other. Benefit received and

benefit given should always match and balance. For instance capital, say Rs.20000 provided by

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Financial and Management Accounting  Unit 9 

Sikkim Manipal University  182 

Self Assessment Questions  18: 

1.  Debtors velocity 

2.  credit sales 

3.  Gross value 

4.  Bad debts and reserve e for doubtful debts 

5.  Trade debtors and Bill receivable 

6.  Written 

7.  Three months 

8.  Current assets 

9.  Debtors + Bills receivable / net credit sales x number of working days. 

10.  Sales minus return inwards 

11.  Velocity of debt collection 

12.  DTO 3.56 

13.  Collection period 43 days. 

Self Assessment Questions  19: 
1.  Credit purchases 

2.  Trade creditors + bills payable 

3.  Current liabilities 

4.  Creditors + BP / credit purchases x Number of days. 

5.  Credit purchases minus return outwards. 

Self Assessment Questions  20: 

1.  Relation of debt and equity 

2.  Capital structure. 

Self Assessment Questions  21: 

1.  Fixed cost bearing securities. 

2.  Preference share capital + debentures. 

3.  Fixed cost bearing securities / variable cost bearing capital . 

4.  Equity share capital + reserves and surplus. 

Self Assessment Questions 22: 

1.  debt, equity 

2.  Long term loans and liabilities 

3.  Long term debt 

4.  relative

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Financial and Management Accounting  Unit 9 

Sikkim Manipal University  183 

5.  comfort zone 

6.  2 : 1 

7.  Long term debts / Shareholders’ funds + long term debt 

Self Assessment Questions  23: 
1.  Comprehensive and practical knowledge 

2.  Ends but means 

3.  In totality 

4.  Standards 

5.  Price level changes 

Answer for Terminal Questions: 

1.  Refer to units 9.7 

2.  Refer to units 9.8 & 9.13 

3.  (1) Decrease (2) decrease (3) decrease (4) increase 

4.  (a) increase (b) increase (c) decrease (d) no change (e) no change

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