The Chartered Institute of Management Accountants (CIMA) in its Official Terminology describes accounts as follows:
The classification and recording of actual transactions in monetary terms, and The presentation and interpretation of these transactions in order to assess performance over a period and the financial position at a given date.
The American Accounting Association (AAA) supplies a slightly more succinct definition of accounting:
"....the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of information."
Another way of saying this is that accounting provides information for managers to help them make good decisions.
Cost accounting is referred to in the CIMA Terminology as:
"That part of management accounting which establishes budgets and standard costs and actual costs of operations, processes, departments or products and the analysis of variances, profitability or social use of funds. The use of the term costing is not recommended."
Management accounting is defined as:
"The provision of information required by management for such purposes as:
(1) formulation of policies;
(2) planning and controlling the activities of the enterprise;
(3) decision taking on alternative courses of action;
(4) disclosure to those external to the entity (shareholders and others);
(5) disclosure to employees;
(6) safeguarding assets.
The above involves participation in management to ensure that there is effective:
(a) formulation of plans to meet objectives (long-term planning);
(b) formulation of short-term operation plans (budgeting/profit planning);
(c) recording of actual transactions (financial accounting and cost accounting);
(d) corrective action to bring future actual transactions into line (financial control);
(e) obtaining and controlling finance (treasurership);
reviewing and reporting on systems and operations (internal audit, management audit)."
Financial accounting is referred to as:
"That part of accounting which covers the classification and recording of actual transactions of an entity in monetary terms in accordance with established concepts, principles, accounting standards and legal requirements and presents as accurate a view as possible of the effect of those transactions over a period of time and at the end of that time."
All three branches of accounting should be integrated into the company's reporting system.
1. Financial accounting maintains a record of each transaction and helps control the company's assets and liabilities such as plant, equipment, stock, debtors and creditors. It satisfies the legal and taxation requirements and also provides a direct input into the costing systems.
2. Cost accounting analyses the financial data into more detail and provides a lot of the information used for control. It also provides key data such as stock valuations and cost of sales which are fed back into the financial accounting system so that accounts can be finalized.
3. Management accounting draws from the financial and cost accounting systems. It uses all available information in order to advise management on matters such as cost control, pricing, investment decisions and planning. Users of financial accounting are usually external – shareholders, the tax authorities etc.
Management Accounting users are internal – the managers at different levels.
Objectives of Management Accounting
(a) Planning: all organisations should plan ahead in order that they can set objectives and decide how they should meet them. Planning can be short- or long-term and it is the role of the management accounting system to provide the information for what to sell, where and at what price. Management accounting is also central to the budgetary process which we shall look at in more detail later.
(b) Control: production of the company's internal accounts, its management accounts, enables the firm to concentrate on achieving its objectives by identifying which areas are performing and which are not. The use of management by exception reports enables control to be exercised where it is most useful.
(c) Organisation: there is a direct relationship between the organisational structure and the management accounting system. It is often difficult to determine which has the greater effect on the other, but it is necessary that the management accounting system should produce the right information at the right cost at the right time, and the organisational structure should be such that immediate use is made of it.
(d) Communication: the existence of a budgetary and management accounting system is an important part of the communication process; plans are outlined to managers so that they are fully aware of what is required of them and the management accounts tell them whether or not the desired results are being achieved.
(e) Motivation: more will be said about the motivational aspects of budgeting later, but suffice to say here that the targets included in any system should be set at such a level that managers and the people who work for them are motivated to achieve them.
(f) Decision Making: all businesses have to make decisions, may of which are short term like whether a component should be made or bought from an outside supplier, pricing and eliminating loss making activities.
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