By: BIBEK PRAJAPATI
E Mail ID:- cmabibek@gamil.com
M No: 09437557342

 Meaning/ WHY
 Benefits
 Key Personal Responsibility
 Type of business
 Financial planning
 Three principle of corporate Finance
 Why Financial Accounting
 Fundamentals of Financial Accounting
 Procedural Aspects of Accounting
 Objectives of accounting
 Function of Accounting
 Accounting – Classification
 Difference between Management
Accounting and Financial Accounting
 Bookkeeping &Process of accounting
 Steps/Phases of Accounting Cycle
 User of accounting Information
 BASIC ACCOUNTING TERMS
 Types of Accounts
 Accounting Equation
 ACCRUAL BASIS AND CASH BASIS OF
ACCOUNTING
 CAPITAL AND REVENUE
TRANSACTIONS
 Cost Accounting meaning ,
objective
 ROLE OF A COST ACCOUNTANT IN A
MANUFACTURING ORGANISATION
 COST CONCEPT, TYPES AND
CLASSIFICATION
 Cost centre and cost unit
 ELEMENTS OF COST
 CLASSIFICATION OF COST
 TYPES / TECHNIQUES OF COSTING

 METHODS OF COSTING & THEIR
APPLICABILITY
 COGS, INVENTRY
 Capacity
 Budget
 Corporate objective
 Cost control and variance
 Standard costing
 Cash flow statement
 Annual Report
 Ratio analysisis
 Capital Budgeting
 Risk and Return
 Regulators
 Constitutional Aspects of Taxation
by the Union and States
 Financial Relations between the
 Union and the States
 Indirect Taxes : Union and the
States
 Taxation by the Union and the States
 REVENUE ADMINISTRATION
 Gst
 Existing Indirect Tax System
 ACTIVE INTERFACE WITH IT
SYSTEMS
 INCOME TAX LAW : AN INTRODUCTION
 Income-tax Act
 The Finance Act
 CONCEPT OF INCOME
 Stapes of TOTAL INCOME AND TAX
PAYABLE
 Deductions from Gross Total Income
 RETURN OF INCOME

 The ability to effectively read financial reports and data is crucial to the
processes of day-to-day management, strategic planning and
decision-making in any firm.
-The proper understanding of the various
financial concepts and instruments and their implications to the firm’s
health and performance in the market place are indispensable for
managers who typically come from various functions within the firm.
-The comprehensive program of Finance for Non-Finance Managers
has been carefully designed to meet the needs of executives and
managers who come from nonfinancial backgrounds across the
corporate landscape.
-The two-staged program provides theparticipants with a comprehensive
understanding of key financial principles and practices and empowers them
with the tools to effectively interpret and use financial data in the decision-
making process in their respective functions of sales, marketing or planning.

 Finance for Non-Finance Managers I, is dedicated to laying
the ground foundation. Through a mixture of examples, case studies
and analyses, it covers the key concepts of financial reporting and
explores the links between finance, accounting and economics.
It also offers an introduction to ratio analysis and analyzing financial
decisions.
 Stage two of the program, Finance for Non-Finance Managers II,
builds on the foundation and the concepts covered in stage one.
It covers more advanced topics in financial analysis based on ratio analysis.
 It further explores concepts of budgeting and through
practical examples and cases constructs a number of budgets, from
sales to cash and analyses implications of cash and other currents on
working capital.

 Financial planning is a process laid down to help an investor reach
from the current financial position to the desired financial position.
As we can see in this slide, the process, like any other process, has
certain steps. These steps are:
 Determine current financial situation
 Develop financial goals
 Identify alternative courses of action
 Evaluate alternatives
 Consider:
 Life situation
 Personal values
 Economic factors
 Assess:
 Risk
 Opportunity cost
 Create and implement financial action plan
 Review and revise the financial plan

 INVESTMENT PRINCIPLE
Every business Invest assets and Incurred Debt.
FINANCE PRINCIPLE
Business can finance their operation with mix tools
,investment, assets acquire, debt borrowing and
willing to take risk.
DIVEND PRINCIPLE
A successful business nned to satisfy their investor by
paying dived .

 What is Business ?
 What's Objective of business ?
 Recording of business Transactions for
earning profits and to maximize the wealth
for the owners and satisfied stake holder.
 Best utilization of natural recourses.
 Better financial picture.
 Uniform in recording of transaction.

 . Accounting Process
 (a) Theoretical Framework ( meaning, scope and usefulness of
Accounting; Generally Accepted
 Accounting Principles, Concepts and Conventions)
 (b) Capital and Revenue transactions- capital and revenue
expenditures, capital and revenue receipts
 (c) Measurement, Valuation and Accounting estimates
 (d) Double entry system, Books of prime entry, Subsidiary Books
 (e) Recording of Cash and Bank transactions
 (f) Preparation of Ledger Accounts
 (g) Preparation of Trial Balance- interpretation and usefulness
 (h) Rectification of Errors
 (i) Opening entries, Transfer entries, Adjustment entries, Closing
entries

 Definition by the American Institute of Certified Public
Accountants (Year 1961):
 “Accounting is the art of recording, classifying and
summarizing in a significant manner and in terms of money,
transactions and events which are, in part at least, of a
financial character, and interpreting the result thereof”.
 Definition by the American Accounting Association (Year
1966):
 “The process of identifying, measuring and communicating
economic information to permit informed judgments and
decisions by the users of accounting”.

(i) Generating financial information and
(ii) Using the financial information.

 1. Recording – This is the basic function of accounting. All business transactions of a
financial character, as evidenced by some documents such as sales bill, pass
book, salary slip etc. are recorded in the books of account.
 2. Classifying – Classification is concerned with the systematic analysis of the
recorded data, with a view to group transactions or entries of one nature at
one place so as to put information in compact and usable form. The book
containing classified information is called “Ledger”.
 Summarising – It is concerned with the preparation and presentation of the
classified data in a manner useful to the internal as well as the external users
of financial statements.
 This process leads to the preparation of the following financial statements:
 (a) Trial Balance (b) Profit and Loss Account (c) Balance Sheet (d) Cash-flow
Statement.
 4. Analysing – The term ‘Analysis’ means methodical classification of the data
given in the financial statements.
 5. Interpreting – This is the final function of accounting. It is concerned with
explaining the meaning and significance of the relationship as established by
the analysis of accounting data.
 6. Communicating – It is concerned with the transmission of summarised,
analysed and interpreted information to the end-users to enable them to
make rational decisions.

 (i) Providing Information to the Users for Rational Decision-making
 The primary objective of accounting is to provide useful information for decision-
making to stakeholders such as owners, management, creditors, investors, etc.
 (ii) Systematic Recording of Transactions
 keep a systematic record of all financial transactions of a business enterprise which is
ensured by bookkeeping.
 (iii) Ascertainment of Results of above Transactions
 ‘Profit/loss’ is a core accounting measurement. It is measured by preparing profit and
loss account for a particular period.
 (iv) Ascertain the Financial Position of Business
 Financial position is identified by preparing a statement of ownership i.e., Assets and
Owings i.e., liabilities of the business as on a certain date. This statement is popularly
known as balance sheet. Various other accounting
 (v) To Know the Solvency Position
 Balance sheet and profit and loss account prepared as above give useful information to
stockholders regarding concerns potential to meet its obligations in the short run as
well as in the long run.

 The main functions of accounting are as follows:
 (a) Measurement: Accounting measures past
performance of the business entity and depicts
its-current financial position.
 (b) Forecasting: Accounting helps in forecasting
future performance and financial position of the-
enterprise using past data.
 (c) Decision-making: Accounting provides relevant
information to the users of accounts to aid
rational decision-making.

 (d) Comparison & Evaluation: Accounting assesses
performance achieved in relation to targets
 and discloses information regarding accounting policies and
contingent liabilities which play an important role in
predicting, comparing and evaluating the financial results.
 (e) Control: Accounting also identifies weaknesses of the
operational system and provides feedbacks
 regarding effectiveness of measures adopted to check such
weaknesses.
 (f) Government Regulation and Taxation: Accounting
provides necessary information to the government to
exercise control on die entity as well as in collection of tax
revenues.

 As defined by Carter, ‘Book-keeping is a science and art of
correctly recording in books-of accounts all those business
transactions that result in transfer of money or money’s
worth’.
 Book-keeping is an activity concerned with recording and
classifying financial data related to business operation in order
of its occurrence.
 Book-keeping is a mechanical task which involves:
 • Collection of basic financial information.
 • Identification of events and transactions with financial
character i.e., economic transactions.
 • Measurement of economic transactions in terms of money.

 (i) Financial Accounting – It covers the preparation and
interpretation of financial statements and communication to the
users of accounts.
 (ii) Management Accounting – It is concerned with internal reporting
to the managers of a business unit. To discharge the functions of
stewardship, planning, control and decision-making, the
management needs variety of information.
 (iii) Cost Accounting –CIMA “the process of accounting for cost
which begins with the recording of income and expenditure or the
bases on which they are calculated and ends with the preparation
of periodical statements and reports for ascertaining and
controlling costs.”
 (iv) Social Responsibility Accounting – The demand for social
responsibility accounting stems from increasing social awareness
about the undesirable by-products of economic activities.
 (v) Human Resource Accounting – Human resource accounting is an
attempt to identify, quantify and report investments made in
human resources of an organisation that are not presently
 accounted for under conventional accounting practice.

The steps or phases of accounting cycle can be developed as under:

 (a) Recording of Transaction : As soon as a transaction happens it is at first
recorded in subsidiary book.
 (b) Journal : The transactions are recorded in Journal chronologically.
 (c) Ledger : All journals are posted into ledger chronologically and in a
classified manner.
 (d) Trial Balance : After taking all the ledger account closing balances, a
Trial Balance is prepared at
 the end of the period for the preparations of financial statements.
 (e) Adjustment Entries : All the adjustments entries are to be recorded
properly and adjusted
 accordingly before preparing financial statements.
 (f) Adjusted Trial Balance : An adjusted Trail Balance may also be prepared.
 (g) Closing Entries : All the nominal accounts are to be closed by the
transferring to Trading Account
 and Profit and Loss Account.
 (h) Financial Statements : Financial statement can now be easily prepared
which will exhibit the true
 financial position and operating results.

 Investor
 Employee
 Landers
 Supplier creditors
 Customers
 Govt.
 Media
 society

 (i) Transaction: It means an event or a business
activity which involves exchange of money or
money’s worth between parties. The event can be
measured in terms of money.
 EX-Purchase of good s, sales, Exp. Made
 (ii) Goods/Services : These are tangible article or
commodity in which a business deals.
 (iii) Profit: The excess of Revenue Income over
expense is called profit. It could be calculated for
each transaction or for business as a whole.
 (iv) Loss: The excess of expense over income is
called loss. It could be calculated for each
transaction or for business as a whole.

 (v) Asset: Asset is a resource owned by the business with the
purpose of using it for generating future profits. Assets can be
Tangible and Intangible.
 Tangible Assets are the Capital assets which have some
physical existence. They can, therefore, be seen, touched and
felt, e.g. Plant and Machinery, Furniture and Fittings, Land and
Buildings, Books, Computers, Vehicles, etc.
 Intangible Assets are cannot be seen or felt although they
help to generate revenue in future, e.g. Goodwill, Patents,
Trade-marks, Copyrights, Brand Equity, Designs, Intellectual
Property, etc.
 Current Assets -It is due to be realized within 12 months after
the Reporting Date, or
 It is Cash or Cash Equivalent unless it is restricted from being
exchanged or used to settle a Liability for at least 12 months
after the Reporting Date.

 Non-Current Assets – All other Assets shall be classified as e.g.
Machinery held for long term etc.
 (vi) Liability: It is an obligation of financial nature to be settled at
a future date. It represents amount of money that the business
owes to the other parties. E.g. goods are bought on credit.
 Current Liabilities –It is due to be settled within 12 months after
the Reporting Date.
 Non-Current Liabilities – All other Liabilities shall be classified as
Non-Current Liabilities. E.g. Loan taken for 5 years, Debentures
issued etc.
 (vii) Internal Liability : These represent proprietor’s equity, i.e. all
those amount which are entitled to the proprietor, e.g., Capital,
Reserves, Undistributed Profits, etc.
 (viii) Working Capital : In order to maintain flows of revenue from
operation, every firm needs certain amount of current assets.
 Time required to convert R M in to FG and cash realized.
 Working Capital (Net) = Current Assets – Currents Liabilities.

 (x) Capital : It is amount invested in the business by its owners. It
may be in the form of cash, goods, or any other asset which the
proprietor or partners of business invest in the business activity.
(xi) Drawings : It represents an amount of cash, goods or any
other assets which the owner withdraws from business for his or
her personal use.
 (xii) Net worth : It represents excess of total assets over total
liabilities of the business.
 (xv) Debtor : is known as Sundry Debtors or Trade Debtors, or
Trade Payable, or Book-Debts or Debtors. In other words,
 Debtors are those persons from whom a business has to recover
money on account of goods sold or service rendered on credit.
These debtors may again be classified as under:
 (i) Good debts : The debts which are sure to be realized are called
good debts.
 (ii) Doubtful Debts : The debts which may or may not be realized
are called doubtful debts.
 (iii) Bad debts : The debts which cannot be realized at all are
called bad debts.

 (xvi) Creditor : A creditor is a person to whom the business
owes money or money’s worth. e.g. money payable to
supplier of goods or provider of service. Creditors are
generally classified as Current Liabilities.
 (xvii) Capital Expenditure : This represents expenditure
incurred for the purpose of acquiring a fixed asset
Capital expenditure forms part of the Balance Sheet.
 (xviii) Revenue expenditure : This represents expenditure
incurred to earn revenue of the current period.
 e.g. repairs, insurance, salary & wages to employees, travel
etc. It forms part of the Income statement.
 (xix) Balance Sheet : It is the statement of financial position
of the business entity on a particular date.

 (xx) Profit and Loss Account or Income Statement :
This account shows the revenue earned by the business
and the expenses incurred by the business to earn that
revenue.
 (xxi) Trade Discount : It is the discount usually allowed
by the wholesaler to the retailer computed on the list
price or invoice price.
 (xxii) Cash Discount : This is allowed to encourage
prompt payment by the debtor. This has to be recorded
 in the books of accounts. This is calculated after
deducting the trade discount. e.g. if list price is
 `

 (1) Personal Account : As the name suggests these are
accounts related to persons.
 (a) These persons could be natural persons like Suresh’s A/c,
Anil’s a/c, Rani’s A/c etc.
 (b) The persons could also be artificial persons like companies,
bodies corporate or association of persons or partnerships etc.
Accordingly, we could have Videocon Industries A/c, Infosys
Technologies A/c, Charitable Trust A/c, Ali and Sons trading
A/c, ABC Bank A/c, etc.

 (2) Real Accounts : These are accounts related to assets or properties or
possessions.
 Depending on their physical existence or otherwise, they are further
classified as follows:-
 (a) Tangible Real Account – Assets that have physical existence and can be
seen, and touched.
 e.g. Machinery A/c, Stock A/c, Cash A/c, Vehicle A/c, and the like.
 (b) Intangible Real Account – These represent possession of properties that
have no physical existence but can be measured in terms of money and have
value attached to them. e.g. Goodwill A/c, Trade mark A/c, Patents & Copy
Rights A/c, Intellectual Property Rights A/c and
 the like.
 (3) Nominal Account : These accounts are related to expenses or losses
and incomes or gains
 e.g. Salary and Wages A/c, Rent of Rates A/c, Travelling Expenses A/c,
Commission received A/c, Loss by fire
 A/c etc.

 Double entry book-keeping, debits and credits
(abbreviated Dr and Cr, respectively) are entries
made in account ledgers to record changes in
value due to business transactions.
 • Debit is derived from the latin word “debitum”,
which means ‘what we will receive’. It is the
destination, who enjoys the benefit.
 • Credit is derived from the latin word “credre”
which means ‘what we will have to pay’. It is the
 source, who sacrifices for the benefit.

 There are two approaches for deciding an
account is debited or credit.
 1. American Approach or Modern Approach
 2. British Approach or Accounting Proces
Traditional Approach

 Illustration
 Ascertain the debit and credit from the following particulars
under Modern Approach.
 (a) Started business with capital.
 (b) Bought goods for cash.
 (c) Sold goods for cash.
 (d) Paid salary.
 (e) Received Interest on Investment.
 (f) Bought goods on credit from Mr. Y
 (g) Paid Rent out of Personal cash.

 (i) Accrual Basis of Accounting
 Accrual Basis of Accounting is a method of recording transactions
by which revenue, costs, assets and liabilities are reflected in the
accounts for the period in which they accrue. This basis includes
consideration relating to deferrals, allocations, depreciation and
amortization. This basis is also referred to as mercantile basis of
accounting.
 (ii) Cash Basis of Accounting
 Cash Basis of Accounting is a method of recording transactions by
which revenues, costs, assets and
liabilities are reflected in the accounts for the period in which
actual receipts or actual payments are made.
 III.Hybrid or Mixed Basis
 Under the hybrid system of accounting, incomes are recognised as
in Cash Basis Accounting i.e. when are received in cash and
expenses are recognised on accrual basis i.e. during the
accounting period in which they arise irrespective of when they
are paid.

 • Capital Transactions:
 Transactions having long-term effect are known
as capital transactions.
 • Revenue Transactions:
 Transactions having short-term effect are known
as revenue transactions.

 Capital Expenditure
 Capital expenditure can be defined as expenditure incurred on the purchase,
alteration or improvement of fixed assets. For example, the purchase of a car to be
use to deliver goods is capital expenditure.
 Included in capital expenditure are such costs as:
 • Delivery of fixed assets;
 • Installation of fixed assets;
 • Improvement (but not repair) of fixed assets;
 • Legal costs of buying property;
 • Demolition costs;
 • Architects fees;
 Revenue Expenditures
 Revenue expenditure is expenditure incurred in the running / management of the
business.
 example,
 the cost of petrol or diesel for cars is revenue expenditure. Other revenue
expenditure:
 • Maintenance of Fixed Assets;
 • Administration of the business;
 • Selling and distribution expenses.
 C

 Capitalized Expenditure
 Expenditure connected with the purchase of fixed asset are called capitalized
expenditure e.g. wages paid for the installation of machinery.
 The Treatments of Capital and Revenue Expenditures
 Capital expenditures are shown in the Balance Sheet Assets Side while
Revenue Expenditures are shown in the Trading and Profit And Loss Account
debit side.
 Revenue Receipts
 Amount received against revenue income are called revenue receipt.
 Capital Receipts
 Amount received against capital income are called capital receipts.
 Capital Profits
 Capital profit which is earned on the sale of the fixed assets.
 Revenue Profit
 The profit which is earned during the ordinary course of business is called
revenue profit.
 Capital Loss
 The loss suffered by a company on the sale of fixed assets.
 Revenue Loss
 The loss suffered by the business in the ordinary course of business is called
revenue loss.

 An expenditure can be recognised as capital if it is incurred for the
following purposes :
 • An expenditure incurred for the purpose of acquiring long term assets
(useful life is at least more than one accounting period) for use in business
to earn profits and not meant for resale, will be treated as a capital
expenditure. For example, if a second hand motor car dealer buys a piece
of furniture with a view to use it in business; it will be a capital
expenditure. But if he buys second hand motor cars, for re-sale, then it
will be a revenue expenditure because he deals in second hand motor
cars.
 • When an expenditure is incurred to improve the present condition of a
machine or putting an old asset into working condition, it is recognised as
a capital expenditure. The expenditure is capitalised and added to the
cost of the asset. Likewise, any expenditure incurred to put an asset into
working condition is also a capital expenditure.
 • For example, if one buys a machine for ` 5,00,000 and pays ` 20,000 as
transportation charges and 40,000 as installation charges, the total cost of
the machine comes upto ` 5,60,000. Similarly, if a building is purchased
for ` 1,00,000 and ` 5,000 is spent on registration and stamp duty, the
capital expenditure on the building stands at ` 1,05,000.

 • If an expenditure is incurred, to increase earning capacity
of a business will be considered as of capital nature. For
example, expenditure incurred for shifting ‘the ‘factory for
easy supply of raw materials. Here, the cost of such shifting
will be a capital expenditure.
 FUNDAMENTALS OF ACCOUNTINGI
 • Preliminary expenses incurred before the commencement
of business is considered capital expenditure. For example,
legal charges paid for drafting the memorandum and articles
of association of a company or brokerage paid to brokers, or
commission paid to underwriters for raising capital.
 • Thus, one useful way of recognising an expenditure as
capital is to see that the business will own something which
qualifies as an asset at the end of the accounting period.

 (i) Purchase of land, building, machinery or
furniture;
 (ii) Cost of leasehold land and building;
 (iii) Cost of purchased goodwill;
 (iv) Preliminary expenditures; (v) Cost of additions
or extensions to existing assets;
 (vi) Cost of overhauling second-hand machines; (vii)
Expenditure on putting an asset into working
 condition; and (viii) Cost incurred for increasing the
earning capacity of a business.

Any expenditure which cannot be recognised as capital expenditure
can be termed as revenue expenditure. A revenue expenditure
temporarily influences only the profit earning capacity of the business.
An expenditure is recognised as revenue when it is incurred for the
following purposes :
 Expenditure for day-to-day conduct of the business, the benefits of
which last less than one year.
 Examples-are wages of workmen, interest on borrowed capital, rent,
selling expenses, and so on.
 Expenditure on consumable items, on goods and services for resale
either in their original or improved
 form. Examples are purchases of raw materials, office stationery, and
the like. At the end of the year, there may be some revenue items
(stock, stationery, etc.) still in hand. These are generally passed over
to the next year though they were acquired in the previous year.
 Expenditures incurred for maintaining fixed assets in working order.
For example, repairs, renewals and
 depreciation.

 (i) Salaries and wages paid to the employees;
 (ii) Rent and rates for the factory or office
premises;
 (iii) Depreciation on plant and machinery;
 (iv) Consumable stores;
 (v) Inventory of raw materials, work-in-progress
and finished goods;
 (vi) Insurance premium;
 (vii) Taxes and legal expenses; and
 (viii) Miscellaneous expenses

 Deferred revenue expenditures represent certain types of
assets whose usefulness does not expire in the year of
their occurrence but generally expires in the near future.
 These type of expenditures are carried forward and are
written off in future accounting periods. Sometimes, we
make some revenue expenditurebut it eventually becomes
a capital asset (generally of an intangible nature).
 Exp- absolute items. Old Nokia telephone set

 Illustration
 State whether the following are capital, revenue
or deferred revenue expenditure.
 (i) Carriage of ` 7,500 spent on machinery
purchased and installed.
 (ii) Heavy advertising costs of ` 20,000 spent on
the launching of a company’s new product.
 (iii) ` 200 paid for servicing the company vehicle,
including ` 50 paid for changing the oil.
 (iv) Construction of basement costing ` 1,95,000
at the factory premises.

 Solution :
 (i) Carriage of ` 7,500 paid for machinery purchased
and installed should be treated as a Capital
Expenditure.
 (ii) Advertising expenses for launching a new
product of the company should be treated as a
Revenue Expenditure. (As per AS-26)
 (iii) ` 200 paid for servicing and oil change should
be treated as a Revenue Expenditure.
 (iv) Construction cost of basement should be
treated as a Capital Expenditure.


The Institute of Cost and Management Accountants of England
defines Cost Accountancy as follows:
 "The application of costing and cost accounting principles,
methods and techniques to the science, art and practice of cost
control and the ascertainment of profitability. It includes the
presentation of information, derived therefrom for the purpose of
managerial decision making."
 Thus cost accountancy is a very comprehensive term.
2. COST ACCOUNTING
2.1 Definition of Cost Accounting :
 Based on the terminology published by the Institute of Cost and
Management Accountants of England, Cost Accounting is defined as
the process of accounting for cost. This process begins with the
recording of income and expenditure or the bases on which they are
calculated and ends with the preparation of periodical statements
and reports for the purpose of ascending and controlling costs.

 Following are the main objectives of Cost Accounting -
 (i) Ascertainment of Cost:
It can be done in two ways, namely,
 (a) Post Costing, where the ascertainment of cost is done
based on actual information as recorded in financial
books.
(b) Continuous Costing, where the process of
ascertainment is of a continuous nature i.e. where cost
information is available as and when a particular activity
is completed, so that the entire cost of a particular job is
available the moment it is completed.
 (ii) Determination of Selling Price:
 Though there are various other considerations for fixing
the selling price of a product (like the market conditions
etc.), cost of the product is an important factor which
cannot be sidelined.

 (iii) Ascertainment of Profit :
 The purpose of any business activity is to earn a profit and
profit can be computed by matching the revenue and cost
of that particular product/activity.
 (iv)Cost Control and Cost Reduction:
 Cost Control and Cost Reduction are two different
concepts.
 Cost Control aims at maintaining the costs in
accordance with established standards. It involves the
following steps -
 Determination of target cost
 Measurement of actual cost
 Analysis of variation with respect to target cost
 Initiation of corrective action.

 Cost Reduction on the other hand aims at
improvement established targets. It is defined as
"the achievement of real and permanent
reduction in the unit cost of goods
manufactured or services rendered without
impairing their suitability for the use intended
or diminution in the quality of the product."
 vi) Assisting Management in Decision-making :
 Decision-making is a process of choosing between
two or more alternatives, based on the resultant
outcome of the various alternatives. A Cost
Benefit Analysis also needs to be done. All this
can be achieved through a good cost accounting
system.

 (i) Helps optimum utilization of men, materials and
machines
 (ii) Identifies areas requiring corrective action
 (iii) Identifies unprofitable activities, losses, inefficiencies
 (iv) Helps price fixation
 (v) Facilitates cost control and cost reduction
 (vi) Facilitates use of various cost accounting techniques,
like, variance analysis, value analysis etc.
 (vii) Helps management in formulation of policies
 (viii)Helps management in making strategic financial
decisions. For eg: the technique of marginal costing helps the
management in making various short term decisions.
 (ix) Helps in formation of cost centres and responsibility
centres to exercise control
 (x) Marginal Cost having a linear relationship with production
volume enables in formulation and solution of "Linear
Programming Problems".

 He establishes a cost accounting department in his
concern.
 He ascertains the requirement of cost information which
may be useful to organisational managers
 He develops a manual, which specifies the functions to be
performed by the cost accounting department.
 Usually, the functions performed by a cost accounting
department includes -cost ascertainment, cost comparison,
cost reduction, cost control and cost reporting.
 Cost ascertainment, requires the classification of costs into
direct and indirect.
 Cost comparison is the task carried out by cost accountant
for controlling the cost of the products manufactured by the
concern. Cost analysis may also be made by cost Accountant
for taking decisions like make or buy and for reviewing the
current performance.
 Cost accountant also plays a key role in the preparation of
cost reports.

 1. Cost - Concepts and Terms
 6.1 Cost
6.2 Pre-determined Cost
6.3 Standard Cost
6.4 Estimated Cost
6.5 Marginal Cost
6.6 Differential Cost
6.7 Discretionary Cost
6.8 Decision Driven Cost
6.9 Managed / Policy Cost
6.10 Postponable Cost
6.11 Imputed / Notional Cost
6.12 Inventoriable / Product Cost
6.13 Opportunity Cost
6.14 Out-of-pocket Cost
6.

 15 Joint Cost
6.16 Period Cost
6.17 Sunk Cost
6.18 Committed Cost
6.19 Shut down Cost
6.20 Relevant Cost
6.21 Replacement Cost
6.22 Absolute Cost
6.23 Cost Centre
6.24 Cost Unit
6.25 Cost Allocation
6.26 Cost Apportionment
6.27 Cost Absorption
6.28 Responsibility Centre
 2.

 Elements of Costs
 7.1 Material Cost
7.2 Labour Cost
7.3 Expenses
7.4 Overheads
 3. Classification of Costs
 8.1 By Nature
8.2 By Behaviour
8.3 By Element
8.4 By Function
8.5 By Controllability
8.6 By Normality
8.7 By Time When Computed

 4. Types / Techniques of Costing
 9.1 Historical Costing
9.2 Uniform Costing
9.3 Standard Costing
9.4 Direct Costing
9.5 Marginal Costing
9.6 Absorption Costing
9.7 Difference Between Various Types of Costing
 5. Methods of Costing
 10.1 Job Costing
10.2 Batch Costing
10.3 Contract Costing
10.4 Process Costing
10.5 Operating Costing
10.6 Single Output or Unit Costing
10.7 Multiple Costing

 6. COST - CONCEPTS AND TERMS
 6.1 Cost - Cost represents the amount of expenditure
(actual or notional) incurred on or attributable to a given
thing. It represents the resources that have been or must
be sacrificed to attain a particular objective.
 6.2 Pre-determined cost - It is the cost which is computed
in advance, before the production starts, on the basis of
specification of all the factors affecting the cost.
 6.3 Standard cost - It is a pre-determined cost which is
arrived at, assuming a particular level of efficiency in
utilisation of material, labour and other indirect services.
It is the planned cost of a product and is expected to be
achieved under a particular production process under
normal conditions. It is often used as a basis for price
fixing and cost control.

 6.4 Estimated Cost - It is an approximate assessment of
what the cost will be. It is based on past data adjusted to
anticipated future changes.
 (Note : Standard cost Vs Estimated cost [Nov'92]
 Although pre-determination is the essence of both
standard cost and estimated cost, they differ from each
other in the following respects:
 Difference in computation
 Difference in emphasis
 Difference in use
 Difference in records
 Difference in applicability
 6.5 Marginal cost - It is the amount at any given volume
of output by which aggregate cost changes if the volume
of output changes increases/decreases) by one unit.

 6.6 Differential cost - It is the difference in the total
cost between alternatives calculated to assist decision
making Thus, it represents the change in total cost (both
fixed and variable) due to a change in the level of
activity, technology, process or method of production,
etc.
 6.7 Discretionary cost - It is an "escapable" or
"avoidable" cost. In other words, it is that cost which is
not essential for the accomplishment of a particular
objective.
 6.8 Decision-driven cost - It is that cost which is
incurred following a policy decision and continues to be
incurred till that decision is altered. It does not vary
with changes in output or with operational activities.

 6.9 Managed / Policy cost - It is that cost which is
incurred as a matter of policy eg: R & D cost. This cost has
two important features :
 It arises from periodic (usually annual) decisions regarding
the maximum outlay to be incurred
And
 This cost is not tied to a cause and effect relationship
between input and output.
 (Note : Decision-driven cost Vs Managed / Policy
cost while managed / policy cost arises from periodic
decisions (usually annual), decision-driven cost has no such
fixed frequency).
 6.10 Post-ponable cost - It is that cost which can be
shifted to the future with little or no effect on the
efficiency of the current operations.

 6.11 Imputed / Notional cost - CIMA defines notional
cost as "the value of benefits where no actual cost is
incurred". Thus, imputed cost is that cost which does not
involve any cash outlay. Though it is a hypothetical cost,
it is relevant for decision making. Interest on capital, the
payment for which is not actually made, is an example of
imputed cost.
 6.12 Inventoriable / Product cost - It is the cost which
is assigned to the product. For eg : Under marginal
costing ® variable manufacturing cost. Under absorption
costing ® total manufacturing cost (fixed and variable)
constitute product or inventoriable cost.
 6.13 Opportunity cost - It refers to the value of
sacrifice made or benefit of opportunity forgone in
accepting an alternative course of action. For e.g. If Mr.
A works in his brother’s firm instead of working in X Ltd.,
then the loss of salary Mr. A suffers by foregoing
employment in X Ltd., is the opportunity cost of working
in his brother's firm.

 6.14 Out of pocket cost - It is that portion of total cost
which involves cash outlay. It is a short term cost concept
and is used in short- term decision making like make or
buy, price fixation during recession. Out of pocket cost can
be avoided if a particular proposal under consideration is
not accepted.
 6.15 Joint cost - It is the cost of the process which results
in more than one main product.
 6.16 Period cost - It is the cost which is not assigned to
the product but is charged as an expense against the
revenue of the period in which it is incurred. All the non-
manufacturing costs like administrative, selling and
distribution expenses are treated as period costs.
 6.17 Sunk cost - Historical cost which is incurred in the
past is known as sunk cost. This cost is not relevant in
decision making in the current period. For eg. In the case
of a decision relating to the replacement of a machine, the
written down value of the existing machine is a sunk cost
and hence irrelevant to decision making.

 6.18 Committed cost - It is a fixed cost which results
from decisions of prior period and is not subject to
managerial control in the present. Examples of
committed cost are depreciation, insurance premium and
rent.
 6.19 Shut down cost - The fixed cost which cannot be
avoided during the temporary closure of a plant is known
as shut down cost. Examples of shut down cost are
depreciation and rent.
 6.20 Relevant cost - CIMA defines relevant cost as " cost
appropriate to a specific management decision".
 6.21 Replacement cost - It is the cost of replacement in
the current market.
 6.22 Absolute cost - It is the total cost of any product or
process. For e.g.: in a cost sheet, both absolute cost and
cost per unit are depicted.

 Meaning - The term cost centre is defined as a location,
person or an item of equipment or a group of these for
which costs may be ascertained and used for the purposes
of cost control.
 For the installation of a cost accounting system, the
organization is divided into sub-units.
 Cost centre is the smallest organisational sub-unit for which
separate cost collection is attempted.
 It is defined as a location, a person or an item of
equipment (or group of these) for which cost may be
ascertained and used for the purpose of cost control.
 Cost centres can be personal cost centres, impersonal cost
centres, operation cost centres and process cost centres.

 - Primarily there are two types of cost centres, namely:
 Personal cost centre - consisting of a person or a group of
persons
 Impersonal cost centre - consisting of a location or an item of
equipment (or a group of these).
 Functionally, there are two types of cost centres, namely:
 Production cost centre - It is a cost centre where both direct
and indirect expenses are incurred for the production.
Following are the examples of production cost centres-
machine shop, milling and turning shop, assembly shop.
 Service Cost Centre - A cost centre which renders services to
production cost centres is termed as service cost centre. It
serves as an ancillary unit to the production cost centre.
Powerhouse, boiler plant, repair shop, material service
centre, all are examples of service cost centres.

 - Meaning – The term cost unit is defined as a unit of
quantity of product, service or time (or a combination of
these) in relation to which costs may be ascertained or
expressed. It can be for a job, batch, or product group.
 Once the cost of various cost centres is ascertained, the
need arises to express the cost of output (product /
service).
 A cost unit is defined as a unit of quantity of product,
service or time (or a combination of these) in relation to
which costs may be ascertained or expressed.

Cost units are usually units of physical measurement like
number, weight, time, area, length, volume etc.

 Examples – 2.A few typical examples of cost units , with
Method of costing used are given below :
 Industry Method of costing Unit of
cost
 (i) Nursing Home Operating Per Bed per week or
per day
 (ii) Road transport Operating Per Tonne Kilometer or
per mile
 (iii) Steel Process Per Tonne
 (iv) Coal Single Per unit
 (v) Bicycles Multiple Each unit
 (vi) Bridge constructio Contract Each
contract
 (vii) Interior Decoration Job Each Job
 (viii) Advertising Job Each Job
 (ix) Furnitur Multiple Each unit
 (x) Sugar company Process Per Quintal/Tonne

 According to CIMA, matrial coat is”the cost of commodities
supplied to an undertaking” Material cost includes Cost of
Procurement, frights inwards, taxes, insurance etc. Trade
discount ,rebate, sales taxes etc are deducted from
material cost
 Direct Materials - Materials which are present in the
finished product or can be identified in the finished product
are called direct materials.
 For eg. Clay in bricks, lather in shoes, steel in Machine,
Timber in furniture, Cloth in garments , coconuts in case of
coconut oil , wood in a wooden cupboard.
 Indirect Materials - Indirect materials are those materials
which do not normally form part of the finished products or
which cannot be directly traced to the finished product. For
eg. Lubricating oil, Nuts and bolts, Small tools,stores, oil,
grease, cotton wool etc.

 CIMA define “This is the cost of remuneration (wages,
salaries’, commission, bonuses, PF,ESI, Gratuity Over time
& idle time wages etc) of employee of an undertaking. “
 Direct Labour - Labour which can be attributed wholly to a
particular product, process or job is called direct labour. It is
the labour utilised in converting raw materials into finished
products. For eg. Machine operator, Shoe maker, Cartpenter,
Tailor, labour employed in the crushing department of an oil
mill.
 Indirect Labour - Labour which cannot be identified with a
particular product, process or job is called indirect labour.
Indirect labour cost is apportioned to cost units or cost
centres. For eg. Super visor, Inspector, Clark, Peon,
Watchman, maintenance workers.

 CIMA define “the cost of services provided to an
undertaking and internal coat of the use of owned
assets”
 Direct Expenses – Direct Expenses are those expenses
which can be identified with and allocated to cost centre or
units. Expenses
incurred (except direct materials and direct labour)
specifically for a product, process or job is known as direct
expenses. They are also called "chargeable expenses". For
eg. High ring charges for a machine specifically hired for a
particular process, Cost of drawing and design and lay out.
 Indirect Expenses - Expenses incurred other than direct
expenses are called indirect expenses. For eg. factory rent
& insurance, power, general repairs.

 Overheads is the sum total of indirect
materials, indirect labour and indirect
expenses. Functionally overheads can be
classified as under -
 Production / Works overheads
 Administrative overheads
 Selling overheads
 Distribution overheads

 Direct cost - Direct cost is that cost which can be
identified with a cost centre or a cost unit. For e.g. cost
of direct materials, cost of direct labour.
 Indirect cost - Cost which cannot be identified with a
particular cost centre or cost unit is called indirect costs.
For e.g. wages paid to indirect labour.
 8.2 Classification By Behaviour :
 Fixed cost - Fixed cost is that cost which remains
constant at all levels of production. For e.g. rent,
insurance.
 Variable cost - The cost which varies with the level of
production is called variable cost i.e., it increases on
increase in production volume and vice-versa. For e.g.
cost of materials, cost of labour.
 Semi-variable cost - This cost is partly fixed and partly
variable in relation to the output. For e.g. telephone bill,
electricity bill.

 Production cost - It is the cost of the entire process of
production. In other words it is nothing but the cost of
manufacture which is incurred upto the stage of primary
packing of the product.
 Administrative cost - It is the indirect cost pertaining to
the administrative function which involves formulation of
policies, directing the organisation and controlling the
operations of an undertaking. This cost is not related to any
other functions like selling and distribution, research and
development etc.
 Selling cost - Selling cost represents the indirect cost which
is incurred for
(a) seeking to create and stimulate demand
and
(b) securing orders.

 Distribution cost - It is the cost of the sequence of operations
which begins with making the packed product available for
despatch and ends with making the reconditioned returned empty
package, if any available, for re-use.
 R&D cost - "Research Cost" and "Development cost" are two
different types of costs.
Research cost is the cost of researching for new products, methods
and applications. Development cost is the cost of the process
which begins with the implementation of the decision to produce
the new product
 Pre-production cost - It is that part of the development cost
which is incurred for the purpose of a trial run, before the
commencement of formal production.
 Conversion cost - It is the cost incurred for converting the raw
material into finished product. It comprises of direct labour cost,
direct expenses and factory overheads.
 Prime cost - Prime cost is the aggregate of direct material cost,
direct labour cost and direct expenses. The term ‘direct’ indicates
that the elements of cost are traceable to a particular unit of
output.

 Controllable cost - The cost, which can be
influenced by the action of a specified person in
an organisation, is known as controllable cost. In
a business organisation, heads of each
responsibility centre are responsible to control
costs. Costs that they are able to control are
called controllable costs and include material,
labour and direct expenses.
 Uncontrollable cost - The cost which cannot be
influenced by the action of the person heading
the responsibility centre is called uncontrollable
cost. For e.g. all the allocated costs and the fixed
costs.

 Normal cost - It is the cost which is normally
incurred at a given level of output, under the
conditions in which that level of output is normally
attained. Normal cost is charged to the respective
product / process.
 Abnormal cost – It is the cost which is not
normally incurred at a given level of output in the
conditions in which that level of output is normally
attained.
 This cost is charged to the costing profit and loss
account i.e., the product / process does not bear
the abnormal cost.

 9.1 Historical Costing - It is the ascertainment of costs
after they have been incurred. This costing is based on
recorded data and the cost arrived at are verifiable by
past events. This type of costing has limited utility.
 9.2 Uniform Costing - CIMA defines it as " the use by
several undertakings of the same costing system, i.e., the
same basic costing methods, principles and techniques."
 9.3 Standard Costing - CIMA defines standard costing as "
a control technique which compares standard costs and
revenues with actual results to obtain variances which
are used to stimulate improved performance."

 9.4 Direct Costing - Under direct costing, a unit cost is
assigned only the direct cost, i.e., all the direct costs are
charged to the relevant operations, products or processes.
The indirect costs are charged to the profit and loss account
of the period in which they arise. As a result, inventory is
valued at direct cost only.
 9.5 Marginal Costing - Under marginal costing, marginal
cost is ascertained by differentiating between fixed and
variable costs. In this type of costing, variable costs are
charged to cost units and fixed costs of the period are
written off in full against the aggregate contribution.
 Absorption Costing - It is the technique of assigning all
costs i.e. both fixed and variable, to the respective
product/service.

 10.1 Job Costing - The objective under this method of costing is to ascertain the cost of
each job order. A job card is prepared for each job to accumulate costs. The cost of the
jobs is determined by adding all the costs against the job when it is completed.
 This method of costing is used in printing press, foundaries, motor- workshops, advertising
etc.
 10.2 Batch Costing - This method of costing is used where small parts/components of the
same kind are required to be manufactured in large quantities. Here a batch of similar
products is treated as a job and the cost of such a job is ascertained as mention in (10.1)
above
 For e.g. in a cycle manufacturing unit, rims are produced in batches of 1,000 units each,
then the cost will be determined in relation to a batch of 1,000 units.
 10.3 Contract Costing - If a job is very big and takes a long time for its completion, then
the method appropriate for costing is called contract costing. Here the cost of each
contract is ascertained separately.
 It is suitable for firms engaged in erection activities like construction of bridges, roads,
buildings, dams etc.
 10 4 Process Costing - This method of costing is used in those industries where the
production comprises of successive and continuous operations or processes. Here specific
units lose their identity in the manufacturing operation. Under this method of costing,
costs are accumulated by ‘processes’ for a particular period regardless of the number of
units produced.
 This method of costing is followed by chemical industry, soap industry, rubber industry,
paints industry.

 10.5 Operating Costing - The method of costing used in service
rendering undertakings is known as operating costing.
 This method of costing is generally made use of by transport
companies, gas and water works departments, electricity supply
companies, canteens, hospitals, theatres, schools etc.
 10.6 Single Output/Unit Costing - This method of costing is
used where a single product is produced. The total production
cost is divided by the total number of units produced to get the
unit/single output cost.
 This method of costing is normally used in marble quarrying,
mining, brick-kilns, breweries, etc.
 10.7 Multiple Costing - It is a combination of two or more
methods of costing mentioned above. Suppose a firm
manufactures bicycles, including its components, the parts will
be costed by way of batch costing but the cost of assembling the
bicycle will be done by unit costing. This method is also called
composite costing.
 Some other industries using this method of costing are those
manufacturing – radios, automobiles, aeroplanes etc.

Characteristics Financial Accounting Management accounting
Users: •External Parties
•Managers Managers
Focus: Entire business Segments of the business
Uses of Cost Information: Product costs for
calculating cost of goods
sold and finished goods,
work in process, and raw
materials inventory using
historical costs and GAAP.
•Budgeting
•Special decisions such as
make or buy a
component, keep or
replace a facility, and sell
a product at a special
price.
•Nonfinancial information
such as defect rates, % of
returned products, and on-
time deliveries
Cost Accounting System

Merchandiser Manufacturer
Beginning merchandise
inventory
Plus purchases
Merchandise available for sale
Less ending merchandise
inventory
Cost of good sold
Beginning finished goods
inventory
Plus cost of goods
manufactured
Finished goods available for
sale
Less ending finished goods
inventory
Cost of good sold

Most manufacturers maintain a
perpetual inventory system that uses
FIFO, LIFO, or moving average methods
of costing.
An inventory ledger is maintained to
provide support for the control
accounts.
Some manufacturers may use a factory
ledger, which contain all of the
accounts relating to manufacturing.

Merchandiser
Current assets:
Cash
Accounts receivable
Merchandise
inventory
Manufacturer
Current assets:
Cash
Accounts receivable
Inventories:
Finished goods
Work in process
Materials

Direct Materials
Direct Labor
Factory Overhead
Prime Cost
Conversion
Cost
Elements
of Cost

Direct Materials
Direct Labor
Factory Overhead
Work in Process
(Assets)
Finished Goods
(Assets)
Cost of Goods Sold
(Expenses)

Direct Materials
Direct Labor
Factory Overhead
Work in Process
Account
Finished Goods
Account
Job Cost Sheets

Work in Process
Dept. 1
Work in Process
Dept. 2 Finished Goods
Factory
Overhead
Direct
Labor
Direct
Materials
Direct
Materials
Direct
Labor
Factory
Overhead

Risk and investing go hand in hand
Risk increases as the expected potential return increases
No-risk, what’s that?
Manage the risks

 Various regulators in Indian
financal markets are:
◦ Securities & Exchange Board of India
(SEBI)
◦ Reserve Bank of India (RBI)
◦ Forward Markets Commission (FMC)
◦ Insurance Regulatory & Development
Authority (IRDA)
◦ Ministry of Corporate Affairs (MCA)
◦ Ministry of Finance (MoF)

 Nature of Grievance
 In case of Public issue, Non receipt of
-Refund order
-Interest on delayed refund or allotment advice
-Share certificates
 Listed security ,non receipt of the certificated
after
-Transfer ,Transmission &Conversion
-Endorsement
-Consolidation, splitting &duplicates
 Regarding listed Debentures ,non –receipt of
-Interest due
-Deposits in CIS & units of MF
- FD in bank & Finance Companies
 Can be taken up
with
-SEBI
-MCA
-ST
-SEBI
-MCA
-ST
-SEBI
-SEBI
-RBI

INDIRECT TAXES IN INDIA
UNION & STATES

 Q4 2007 Highlights
 Sustaining Competitive Advantage
 Management Outlook
 Appendices
FINANCIAL ARRANGEMENTS UNDER CONSTITUTION --
• DISTRIBUTION OF TAXATION HEADS (ARTICLES
246 248 AND 265 READ WITH THE LISTS I AND
II)
AND
• DISTRIBUTION OF REVENUES AND SHARING OF
RESOURCES BETWEEN THE UNION AND THE STATES
(CHAPTERS I & II OF PART XII OF THE
CONSTITUTION).

Financial Relations between the Union and the
States
Distribution of Revenues
268
268A
Duties levied by the Union but collected and appropriated by the
State.
Service tax levied by Union and collected and appropriated by the
Union and the States. [88th amendment – 15.01.2004]
269 Taxes levied and collected by the Union but assigned to the
States.
270 Taxes levied and distributed between the Union and the States.
271 Surcharge on certain duties and taxes for purposes of the Union.

Financial Relations between the Union and the
States
DISTRIBUTION OF TAXATION POWERS
• SEPARATE HEADS OF TAXATION FOR THE UNION AND
THE STATES ARE PROVIDED IN LISTS I AND II.
• NO TAX CAN BE LEVIED UNLESS IT IS RELATED TO A
SPECIFIC HEAD OF TAXATION IN LIST I OR LIST II.
• THERE IS NO HEAD OF TAXATION IN THE CONCURRENT
LIST (UNION AND THE STATES HAVE NO CONCURRENT
POWER OF TAXATION).
• TAXATION POWERS OF UNION & STATES ARE MUTUALLY
EXCLUSIVE.

Financial Relations between the Union and the
States
DISTRIBUTION OF TAXATION POWERS
• FOURTEEN TAXATION HEADS IN ENTRIES
82 TO 92C IN THE UNION LIST.
• NINETEEN TAXATION ITEMS IN ENTRIES
45 TO 63 OF THE STATE LIST.
• RESIDUARY POWER OF TAXATION VESTS
IN THE UNION – ENTRY 97 OF UNION
LIST.

Contact :
Financial Relations between the Union and the
States
BROAD PRINCIPLE OF ALLOCATION OF TAXATION
HEADS
 TAXES WHICH ARE LOCATION-SPECIFIC AND
SUBJECTS OF LOCAL CONSUMPTION – ASSIGNED
TO THE STATES.
 TAXES WHICH ARE OF INTER-STATE
SIGNIFICANCE AND WHERE THE TAX-PAYER CAN
GAIN OR EVADE TAX BY SHIFTING HIS HABITAT
OR WHERE THE PLACE OF RESIDENCE IS NOT A
CORRECT GUIDE TO THE TRUE INCIDENCE OF
TAX – ASSIGNED TO THE UNION.

Financial Relations between the Union and the
States
Some Major Central & State Taxes

The present state of coordination and conflict
in the context of indirect taxes --
 Income Tax and VAT/Sales Tax
 Central Excise Duty and VAT/Sales Tax
 Customs Duty and VAT/Sales Tax
 Service Tax and VAT/Sales Tax
 Other Taxes by the State
Indirect Taxes : Union and the States

Contact :
Taxation : Union and the States
Income Tax – income from non-business, personal
transactions are also incorporated for the purpose
of income tax but not for the State taxes
Income Tax – detection of evasion – unreported
income cannot always be treated as through
suppression of sales
Undisclosed Income – voluntary disclosure scheme
under the Income Tax Act – disclosure did not result
in payment of the relevant sales tax

Taxation : Union and the States
Income Tax vis-a-vis Profession Tax –
Constitutional provision limiting the amount of
profession tax at Rs. 2500 per year –
Limit remains unchanged even since
recommendation by the 11th Finance Commission
for raising the limit to Rs. 7500 per year

Taxation : Union and the States
CENTRAL EXCISE – TAX LIABILITY UNDER CENTRAL EXCISE ACT IS
NOT ALWAYS COTERMINOUS WITH TAX LIABILITY UNDER THE
SALES TAX/VAT ACTS – MANUFACTURING FOR OTHERS AND
MANUFACTURING BY OTHERS – TAX IMPLICATIONS
MOTOR CAR MANUFACTURERS – A RECENT NOTIFICATION THAT
SUCH MANUFACTURERS ARE TO PAY CENTRAL EXCISE DUTY ON
THE MANUFACTURING COST OF CARS AND NOT ON TRANSACTION
VALUE – VAT IS PAYABLE ONLY ON TRANSACTION VALUE
ROLLING MILLS – MONTHLY FIXED AMOUNT OF CENTRAL EXCISE
DUTY ON THE BASIS OF ASCERTAINED PRODUCTION CAPACITY –
NO ACCOUNTS RELATING TO SUCH MANUFACTURING IS REQUIRED
TO BE MAINTAINED – IMPLICATIONS FOR SALES TAX

Taxation : Union and the States
CUSTOMS DUTY – ADDITIONAL DUTY OF CUSTOMS IN
LIEU OF SALES TAX – THE RATES OF ADDITIONAL DUTY
REMAINED UNCHANGED THOUGH THE OTHER ELEMENTS OF
CUSTOMS DUTY WERE RAISED SIGNIFICANTLY

Contact :
Taxation : Union and the States
SERVICE TAX ON PROMOTERS AND DEVELOPERS ETC – SERVICE TAX IS
PAYABLE ON A PORTION [25%] OF THE TOTAL VALUE FOR CONTRACTS
INVOLVING CONSTRUCTION OF COMPLEX OR BUILDING FOR SALE WHERE
ANY PART OF THE CONSIDERATION IS RECEIVED BEFORE THE COMPLETION
OF THE BUILDING [NEGATIVE LIST -- “WHERE THE ENTIRE
CONSIDERATION IS RECEIVED AFTER ISSUANCE OF CERTIFICATE OF
COMPLETION BY A COMPETENT AUTHORITY” ] –
IMPLICATION ON THE SALE OF THE IMMOVABLE PROPERTY ON WHICH
ONLY THE STATE HAS THE POWER TO LEGISLATE AND IMPOSE TAX.

Taxation : Union and the States
TRANSFER OF RIGHT TO USE GOODS UNDER VAT –
CORRESPONDING ENTRY IN SERVICE TAX LEGISLATION – USE OF
THE EXPRESSION “POSSESSION AND CONTROL” IN THE
DEFINITION IN SERVICE TAX INSTEAD OF THE JUDICIALLY
DEFINED EXPRESSION “POSSESSION AND EFFECTIVE CONTROL”

Contact :
THE TERM “SERVICE IN RELATION TO RENTING OF
IMMOVEABLE PROPERTY” DOES NOT IMPLY THAT SUCH
RENTING IS A SERVICE. THE INTERPRETATION THAT RENTING OF
IMMOVEABLE PROPERTY BY ITSELF CONSTITUTES A SERVICE
LIABLE TO SERVICE TAX, IS INCORRECT AND CONSEQUENTLY
ULTRA VIRES THE FINANCE ACT -- DELHI HC 2009 [HOME
SOLUTIONS RETAIL VS UOI ]
TAX ON LAND COVERED UNDER ENTRY 49 OF STATE LIST
Taxation : Union and the States

Turnkey (A contract for) a job
in which the contractor is to
complete the entire operation,
leaving the building, a plant etc.
ready for use – designed and
ready for immediate use by the
contractee
Composite contracts --
contracts, other than
works contracts,
comprising supply of goods
and provision of services
Building
Contracts
(WCT)
Composite
Contracts
Turnkey
Projects
(WCT)
Works
Contr
actors
Build-
ers
Hiring
Contracts
(RTU)
•Rent-a-Cab
•Intellectual
Property
•Mandap
•Caterers
•Event Mgt.
•Convention
•Erection /
Installation
•Auth. Serv.
Station
•Repair
•Photography
•Bus.Auxil.
•Complex
Construct
•Commer. /
Indl. Const.
VAT vis-à-vis SERVICE TAX

Taxation by the Union and the States
TEMPORARY TRANSFER OR PERMITTING THE USE OR
ENJOYMENT OF ANY INTELLECTUAL PROPERTY RIGHT
ARTICLE 366 (29A) (d)
NOT BE DISTURBED
SERVICES TO OWN MEMBERS BY AN EXEMPT ENTITY BY
WAY OF REIMBURSEMENT OF CHARGES
ARTICLE 366 (29A) (e)
NOT BE DISTURBED.
TOLLS EXCEPT SERVICES IN RELATION TO COLLECTION OF
TOLLS
COVERED IN STATE LIST,
ENTRY 59.
BETTING AND GAMBLING EXCEPT SERVICES IN RELATION
TO PROMOTING, MARKETING OR ORGANIZING GAMES OF
CHANCE, INCLUDING LOTTERY SERVICES
COVERED IN STATE LIST,
ENTRY 34 & ENTRY 62.
ADVERTISEMENTS OTHER THAN ADVERTISEMENTS
PUBLISHED IN NEWSPAPERS OR BROADCAST BY RADIO OR
TV OR DISPLAYED IN OTHER ELECTRONIC MEDIA
COVERED IN STATE LIST,
ENTRY 55.
SERVICE TAX OR VAT ?

Contact :
Change in Service Tax w.e.f. 01.04.2012--
Description of service Existing
taxable
portion
Proposed
taxable
portion
1. Service portion in the supply
of food or any other article of
human consumption or drink
at a restaurant
30% 40%
2. Service in outdoor catering 50% 60%
3. Convention center or mandap
with catering
60% 70%

Taxation : Union and the States
TAX REVENUE
UNION & STATE
GOVERNMENTS
TRENDS …….

0
5
10
15
20
25
30
35
40
45
50
Total Tax Revenue as % of GDP
Source : Index of Economic Freedom, Heritage Foundation,
2012
India’s Tax Revenue - Comparative Status

CORPORATION
TAX
INCOME
TAX
CUSTOMS
DUTY
EXCISE
DUTY
SERVICE TAX
BREAK-UP OF TOTAL UNION TAXES
SHARE OF TAXES 2001-02SHARE OF TAXES 2011-12
CORPORATION
TAX
INCOME TAX CUSTOMS
DUTY
EXCISE DUTY SERVICE TAX
37
%
18
%
11
%
17
%
17
% 39
%
22
%
20
%
17
%
2%

0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
Tax Revenue - Direct Tax & Indirect
Tax
Direct Taxes Indirect Taxes
India’s Tax Revenue

Contact :
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
Indirect Tax Collections - Centre &
States
Centre - Indirect Taxes States - Indirect Taxes

Direct Taxes Trend
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
GROWTH RATES COMPARISON
GDP GROWTH RATE GOI DIRECT TAX GROWTH RATE

Contact :
Union and the States : States Growing Faster

Service Tax - New Tax Source for the States ?
NEGATIVE LIST OF SERVICES - ANY SIGNIFICANT
CHANGE IN 2012-13 ?
132,49
8
35.
9ALL SERVICES , OTHER THAN THOSE IN NEGATIVE LIST,
MADE TAXABLE

Scope for improved coordination and tax
implication
 360° profiling
 IT oriented synchronisation
 IT and Data Architecture -
synchronisation and mismatch
Indirect Taxes : Union and the States

Contact :
Taxation : Union and the States
INFORMATION SHARING -- WITHIN UNIT, AMONG UNITS, WINGS,
DIRECTORATES, DEPARTMENTS, STATES & CENTRE
WHETHER SHARING SHOULD BE DISCRETIONARY
OR COMPULSORY – IT DRIVEN MECHANISM
PROFESSION TAX SLAB LINKED TO TURNOVER
OF BUSINESS – CHECKING WITH VAT RETURNS
MOTOR VEHICLES DATA – CHECKING FOR
VEHICLE INFORMATION – CHECKING OF VEHICLE
REGISTRATION DATA WITH THE SALE DATA
REPORTED BY DEALERS

REVENUE ADMINISTRATION
Indicators of Effectiveness
QUALITATIVE INDICATORS
PERCEPTION OF TAXPAYERS REGARDING:
 RISK OF DETECTION OF NON-COMPLIANCE AND SEVERITY OF
CONSEQUENCES.
 QUALITY OF ASSISTANCE PROVIDED BY THE ADMINISTRATION TO
ENABLE TAXPAYERS TO COMPLY WITH LEGAL OBLIGATIONS.
 EFFECTIVENESS OF THE RA IN RESOLVING TAXPAYER PROBLEMS.
 PUBLIC PERCEPTION REGARDING THE DEGREE OF CORRUPTION IN THE
RA.
 RA MORALE AND SELF-IMAGE.

REVENUE ADMINISTRATION : Indicators
of EfficiencyQUANTITATIVE INDICATORS:
 AVERAGE NUMBER OF DAYS TAKEN TO IDENTIFY AND NOTIFY NON-FILERS & NON-
PAYMENT OR UNDERPAYMENT OF DECLARED TAX LIABILITIES.
 NUMBER OF TAXPAYERS/ NUMBER OF EMPLOYEES.
 ADMINISTRATIVE COSTS/ TOTAL REVENUE COLLECTED.
 DIRECT AND INDIRECT COMPLIANCE COSTS INCURRED BY TAXPAYERS INCLUDING:
 LEGAL ADVICE TO UNDERSTAND AND INTERPRET THE TAX LAWS.
 PREPARATION AND FILING OF DECLARATIONS.
 PAYMENT OF TAXES.
 REPRESENTATION BEFORE THE RA IN AUDIT PROCEEDINGS.
 FILING OF OBJECTIONS AND APPEALS AGAINST ASSESSMENTS.
 GETTING REFUND OF EXCESS TAXES PAID.
 MEETING INFORMATION REQUIREMENTS OF THE RA (SALES AND PURCHASE DATA,
INFORMATION REGARDING TRANSACTIONS WITH THIRD PARTIES ETC.).
 ATTENDING TO FIELD OPERATIONS (SURVEY, SEARCH AND SEIZURE OPERATIONS,
CHECKING OF ISSUE OF VAT INVOICES, INSPECTION OF GOODS ETC.).
 WITHHOLDING TAXES COLLECTED ON BEHALF OF THE REVENUE ADMINISTRATION.

REVENUE ADMINISTRATION

EFFECTIVE COORDINATION & SYNERGY

Indirect Taxes : Union and the States
Appropriate Tax Policy Reform to
harness the beneficial effects of
synergy
 Implications for GST
 Applicability even before introduction
of GST

ABOUT SOME ASPECTS OF IT SYSTEM :--
1. PROBLEMS IN OUR CURRENT IT SYSTEMS
2. DESIRED FORM OF THE IT SYSTEM
3. WHAT IT SYSTEM SHOULD DO FOR US

 DIFFERENT STATES ARE AT DIFFERENT LEVELS OF
COMPUTERISATION
 EVEN WHERE THERE IS SOME DEGREE OF
COMPUTERISATION, THERE IS MUCH SCOPE OF
IMPROVEMENT IN IT ORIENTED FUNCTIONING
 THERE ARE PROBLEMS IN IT INFRASTRUCTURE --
HARDWARE, SOFTWARE, CONNECTIVITY (WITHIN THE TAX
DEPARTMENT ITSELF AND WITH DEALERS)

 SECONDARY DATA, i.e. MANUAL ENTRY OF DATA –
INHERENTLY ERROR-PRONE
 PARTIAL CAPTURE OF DATA – NOT AMENABLE TO
COMPUTER ORIENTED WORK-FLOW
 LACK OF EXTENSIVE INTERFACE WITH OTHER
DEPARTMENTS WITHIN THE SAME STATE GOVT – MVD /
RTO, TREASURY ETC
 ONLY PARTIAL DATA-SHARING WITH OTHER STATES
THROUGH TINXYS
 NO INTERFACE WITH OTHER TAX DEPARTMENTS –
INCOME TAX, CENTRAL EXCISE ETC

 SOFTWARE – NOT ALIGNED TO CHANGING NEEDS – TIME
LAG IN UPDATION / UPGRADATION
 LOWER LEVEL OF IT SKILLS AMONG THE STAFF
 POOR RESPONSIVENESS TO THE DEALERS’ NEEDS

 EXTENSIVE IT COVERAGE WITHIN EACH STATE
 SIMILARITY THROUGHOUT INDIA – SOFTWARE, INTERFACE,
DATA STRUCTURE, PROCESSES
 INTEGRATED SUB-MODULES AS PER INDIVIDUAL STATE’S
REQUIREMENTS
 WORK-FLOW THROUGH IT AND NOT SIMPLY DIGITISATION
OF DATA
 INTERACTIVE DATABASES – WITH THAT OF THE OTHER
STATE & CENTRAL TAXATION DEPARTMENTS

 FACILITY TO THE AUTHORISED OFFICERS TO LOG-IN TO
DEPARTMENT’S IT SYSTEM EVEN FROM OUTSIDE THE SYSTEM
– SIMILAR TO “WORK-FROM-HOME”
 IT TO BE THE SERVANT – NOT THE MASTER

192
RBI/ Banks
(Payments)
CBDT
(PAN Verification)
CAG
(Audit & Accounting)
CGA/SAG
(Accounting)
Facilitation
Centre
E-Services
Centre
States
Tax
Administration Tax Payer
Interface
• The present systems at Centre and States do not share data.
• Limited sharing amongst States through TINXSYS
Department
Offices
CUSTOMS
CEN. EXCISE
SERVICE TAX
VAT
OTHER TAXES

193
RBI / Banks
(Payments)
CBDT
(PAN Verification)
CAG
(Audit & Accounting)
CGA/SAG
(Accounting)
Facilitation
Centre
E-Services
Centre
State A
GST
PORTAL
Tax Administration Tax Payer Interface
Customs
CGST
IGST
SGST
• Proposed common GST Portal – To act as common interface, will provide core services of
Registration, Returns & Payments, Accounting of taxes
State B
SGST

194
Centre
State A
CUSTOMS ROCINCOME TAX
SGST
State B
SGST
GST
PORTAL
STATE IT SYSTEM SHOULD AUTOMATICALLY DISPLAY
SOME REQUIRED INFORMATION FROM I TAX/CUSTOMS
M
A
Y
B
E
U
S
E
D
E
V
E
N
I
N
V
A
T

INCOME TAX LAW : AN INTRODUCTION

 Let us begin by understanding the meaning of tax. Tax is a fee charged by
a government on a product, income or activity.
 There are two types of taxes . Direct taxes and indirect taxes.
 If tax is levied directly on the income or wealth of a person, then it is a
direct tax e.g. income-tax, wealth tax.
 If tax is levied on the price of a good or service, then it is called an
indirect tax e.g. excise duty, custom duty, service tax and sales tax or
value added tax. In the case of indirect taxes, the person paying the tax
passes on the incidence to another person.

 The reason for levy of taxes is that they constitute the basic source of
revenue to the government. Revenue so raised is utilised for meeting the
expenses of government like defence, provision of education, health-care,
infrastructure facilities like roads, dams etc.

 Income-tax is the most significant direct tax. In this material, we would be
introducing the students to the Income-tax law in India. The income-tax
law in India consists of the following components.
 Income Tax Act
 Annual Finance Acts
 Income Tax Rules
 Circulars/Notifications
 Legal decisions of Courts

 The levy of income-tax in India is governed by the Income-tax Act, 1961. We
shall briefly refer to this as the Act.
 This Act came into force on 1st April, 1962.
 The Act contains 298 sections and XIV schedules.
 These undergo change every year with additions and deletions brought about
by the Finance Act passed by Parliament.
 In pursuance of the power given by the Income-tax Act, rules have been
framed to facilitate proper administration of the Income-tax Act.

 Every year, the Finance Minister of the Government of India presents the Budget
to the Parliament.
 Part A of the budget speech contains the proposed policies of the Government in
fiscal areas.
 Part B of the budget speech contains the detailed tax proposals.
 In order to implement the above proposals, the Finance Bill is introduced in the
Parliament.
 Once the Finance Bill is approved by the Parliament and gets the assent of the
President, it becomes the Finance Act.

 The administration of direct taxes is looked after by the