The accounting system is the major quantitative information system in almost every company and it should provide information for three broad purposes:
1. Internal reporting to managers, for use in planning and controlling routine operations;
2. Internal reporting to managers, for use in making nonroutine decisions and in formulating major plans and policies;
3. External reporting to stockholders, government, and other outside parties, for use in investor decisions, income tax collections, and a variety of other applications.
The third purpose, external reporting, emphasizes the historical, custodial, and stewardship aspects of accounting. This area is usually called financial accounting. Financial accounting is concerned with identifying, measuring, recording, and communicating the economic transactions of companies. On the other hand, internal reporting, the first two purposes, focuses on management planning and control. This area is usually called management accounting. Management accounting is the identification, measurement, accumulation, analysis, preparation, and communication of information that assist executives in fulfilling organisational objectives.
Accounting cuts across all facets of a company. The study of modern cost accounting which is often called management accounting yields insight and breadth regarding both the accountant's role in a company. A management accountant is concerned with identifying why the information is required so that the most appropriate technique can be used to supply information to managers which will be of value. Management needs this information to enable them to plan the progress of the company, control the activities and see the financial implications of any decisions they may take.
Financial accounting aims to present a true and fair view of business transactions and is conducted within a regulatory framework. This means that there are certain legal and other obligations which different companies must adhere to. Management accounting is concerned with providing financial information which is of value to managers. It therefore offers a number of general advantages, such as helping the organisation to be more profitable.
Not all companies employ a management accountant. In a very small company the owner may keep the financial records and employ a firm of accountants to draw up the financial statements and sort out tax matters at the year end. In larger companies an accountant is more likely to be employed. In large companies it is normal to employ some staff who specialize in financial accounting and some who specialize in management accounting.
The purpose of management accounting is to provide managers with financial and statistical information which will help them carry out their responsibilities. The responsibilities of managers in any organisation can be classified as planning, controlling and decision making. Therefore the financial information they require should help them to control the resources for which they are responsible, plan how those resources can be most effectively used and decide what course of action they should take when a number of options are open.
A major purpose of management accounting is to accumulate the costs of an organisation's products and services. This product-costing purpose helps managers. For instance, managers can use product costs to guide the setting of selling prices. In addition, these product costs are used for inventory valuation and income determination.
Management accountants and financial accountants are often members of professional accountancy bodies, usually the Chartered Institute of Management Accountants (CIMA), the Association of Chartered Certified Accountants (ACCA), Institute of Chartered Accountants (ICA) etc. Members of these noble professional bodies would have trained as accountants in industry and passed a number of rigorous examinations. After the examinations they are also entitled to use letters like FCA, FCCA, ACMA, FCMA, CMA, and CPA.
Richmond Anyidoho - Richmond Anyidoho is a professional Management Consultant, a Business Coach, an Author an Entrepreneur and a teacher. He has taught and ...
