Wednesday, September 30, 2009


Materiality is a concept which is of huge importance in the Audit of an organization. An item which appears in the Financial Statements of an organization can be termed as material if the omission of it from the Financial Statements results in some serious distortion. Likewise, if the same item is mis-stated and that also causes some serious fallacy then such an item is termed as Material.
Materiality is normally the element which governs the overall depth of the audit. Although audit is carried on the basis of a sample of the whole data, but which things are to be looked into depends on their level of materiality. Similarly, the extent of scrutiny of the item is also governed by this element.
To sum it into a few words, it's all about the significance of the item on the overall Financial Statements. If the impact is likely to be significant then we must surely check in sufficient detail.

Budgets - An Overview

Budgeting involves setting out a plan of action which serves as a yardstick to measure the future performance of a business. Secondly it also helps motivate the staff by setting some targets for them, so they strive harder and the organization benefits from it. The outcome of the entire budgeting exercise depends on how it is implemented within the organization.

A Top-down approach is one where the top-management of the company create the budget and impose it on the lower managers and staff. Such a budget might not have the desired effect. On the contrary a Participative Budget approach involves the managers of all different functions to actively participate and provide their input into the budgeting process. Because of their participation they naturally own the budget and are motivated to achieve the targets set.

However, some times the managers involved in the budget preparation process intentionally set mediocre targets. This is called Padding the Budget. The managers in such a situation set only what can be achieved with an average performance.

Budgets should be ideally challenging but still realistic so that the organization can grow larger and at the same time the managers remain motivated to work towards the organizational objectives.

Friday, April 24, 2009

Relevant Costs in Decision-Making

Decision-making is an integral part of the subject of Management Accounting. As I mentioned before, this trade is all about providing the top-management of the organization with the key information which is precise and timely. This assists them in making strategic decisions at the right time.

In order to gather the information, the Management Accountant has to make his way through the large data that is at his disposal. He has to extract only the "Relevant" data associated with the decision on hand. This brings us to the concept of Relevant Costs. Relevant Costs as the name suggests are the costs that have a bearing on our decision on hand. These costs differ among the alternatives and so ultimately they affect our choice. For example, if a business owns a machine and after some time they are contemplating the purchase of a new machine. In such a case only the costs that differ among the alternatives are relevant. To purchase the new machine the business will have to expend some money. This cost is relevant to our decision, because it's a future cost and it differs among the alternatives; this cost is avoidable if we choose not to purchase the new machine.
So, Relevant costs are the key to making effective decisions and whenever we are required to make an analysis the first thing which is advisable, is to determine the relevant costs.

Sunday, April 19, 2009

Interview Questions for an Accountant Job

As per the query of one of the visitors of "accounting concepts explained", I am going to mention here some of the important interview questions which one has to counter when he/she applies for an accountant's job.
Here are some of the common questions which you should be prepared for before an interview:
  • How many methods of depreciation are available and name them?
  • What is Accrual Basis of Accounting?
  • Sometimes the interviewer asks specific questions regarding treatment of some item or the entry for some transaction like purchase of machinery, stock, etc. Especially the question of depreciation is also important because often the students of B.Com are not well-acquainted with the use of Accumulated Depreciation a/c.
  • Some basic knowledge of IAS/IFRS (International Financial Reporting Standards) is also required. It may only be limited to IFRS 1 and Inventories.
  • The interviewee must also have good working knowledge of MS Excel because it will be a definite plus for him.
  • What is the difference between shares and debentures?
  • What are the tax rates for companies?

Remember, that overall good knowledge and clear concepts can help you in any interview even if you are under-prepared. And this pays you off at every stage of your professional career.

Accrual Basis of Accounting

One method which is available to accountants for keeping record of business transactions is called the Accrual Basis of Accounting. Accrual method of record-keeping means that the items are recorded in the books of accounts based on the Matching Principle.

Matching Principle means that an item which relates to the Year 2000, is recorded in the books of accounts related to that period. For example, if during the Year 2000 the company pays insurance premium for the coming year then although it will be recorded in the books but not exactly as an expense. Rather it is a prepaid expense, which relates to the coming year.

Hence, Accrual method means that any income which has been earned but which has perhaps not been collected, is recorded as an earning.

In the above shown entry of sales, the income comprises of two parts i.e. the cash part and the one which is based on credit. This part is still collectible and the company's books will continue to show Debtors worth 500 against this income.
But because the books are being maintained on Accrual basis, so the entire sales of 1,500 is recorded. In an alternative method of record-keeping the treatment will differ. That method is known as the Cash Based System of Accounting.

Posting Into Ledgers

After the basic recording of daily business transactions takes place, this information needs to be summarized in order for it to be of any material use for the users of such information. These users mainly include the management of the business itself, so that it can evaluate the overall performance of the company's operations during a particular period. Other users include potential investors, the current shareholders, taxation authorities and other regulatory bodies.

All the journalized transactions are put under various distinct heads. For instance, if electricity expense is being incurred then it will be put under the head Electricity. And each electricity bill which is paid during the period will fall under this head.

The same is done for each and every head of the business. At the end of period these heads are balanced to determine, the credit or debit balance of the head.
Below the Furniture account is shown for the year with basic entries during the year, and finally the account is totalled to determine the balance.

From this example of the Furniture account, the simple concept of posting entries related to Furniture into its respective ledger can be understood. The first item shown is the balance of Furniture which was available at the beginning of the period Jan-1. Then on 31-Mar new furniture was purchased for cash. This is shown on the right side of the ledger which represents the debit side. We know from past experience that an increase in an asset is debited.
Then, some of the furniture was sold for cash on 14-Sep. This will be represented on the credit side of the account as the asset is decreasing or going out of the business. At the close of the period, the account is totalled. This is done by adding all items on the heavier side of the ledger which in this case is the Debit side. After this total is achieved the items on the other side are simply subtracted from it. This closing balance is the figure which will be shown on the balance sheet.

Sunday, March 22, 2009

An Introduction to Management Accounting

For many years it was thought that accounting is just simple book-keeping and maintaning books of accounts which could provide a business no more benefit than the determination of the profitability of the company.
All of this has changed now, as today accounting is being used as a decision-making tool which assists the management of a company in getting the right and timely information for any decision which may have long term implications. Not only that, but today more and more finance professionals are moving up the ladder within organizations and reaching executive positions. Accounting is no more bound by the elementary record-keeping which is so unfairly associated with the subject.
The subject of Management Accounting is the invention of the decision-making necessity within all organizations. It is a form of accounting which focuses on just what I mentioned above that is extracting the relevant information for any particular decision on hand.
This is the field in accountancy which has made the subject a lot more interesting and vibrant. Something which the future accountant must keep in mind while he chooses the specialist field within the broad umbrella of Accounting.