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The Modern Business Involves Several Transactions

The Modern Business Involves Several Transactions

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Published by: MadhurGupta on Sep 25, 2011
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Management Accounting – An Overview

The Modern business involves several transactions. The efficiency and success of business depends upon how management of the business deals with such transactions. The transactions which take place in a business can be measured and expressed in terms of money value. Since business is effected by such transactions, they are to be recorded, analysed and reported to management. This helps the management to evaluate the performance of the business. In fact, three branches of accounting have emerged to deal with these aspects. As a first step financial accounting system was developed and it is concerned with money, an economic resources. The American Institute of Certified Public Accountants (AICPA) defines financial accounting as “The art of recording classifying and summarising in a significant manner and in terms of money, transactions and events which are in part atleast of a financial character and interpreting the results thereof. “Financial Accounting is concerned with preparation of two statements, viz., income statement and position statement. Through these two statements it furnishes useful information to external parties of a business. However, financial accounting suffers from certain limitations for which reason, cost accounting system was evolved” While financial accounting is concerned with money as an economic resource, cost accounting is concerned with money as a measure of economic performance. Cost accounting is concerned with classification, collection, recording, allocation and control of costs. It consists of systems, methods and techniques which are used to measure, analyse and ascertain the cost of production. It provides useful information to management and profitability of products, departments, process, etc. Management accounting is concerned with presentation of information which helps management in the formulation of policy and to facilitate management in discharging its day-to-day activities. It is the process of identification, measurement, accumulation analysis, interpretation and communication of financial information to facilitate management in planning, evaluating and controlling the activities and accountability of its resources.

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control and supervision. Page 2 . The functions of planning and decision-making. A system of information is needed to help the management to analyse. costing and other information to assist the management in the performance and evaluation of their functions. They are large in size and their activities are wide spread. Delegation of authority and the decentralisation of decision-making process has necessitated the use of some mechanism of performance.Management Accounting – An Overview Modern business is complex in nature. measure and check the functioning of each division and unit for their proper coordination to achieve the objectives of the with utmost economy and efficiency. coordination and staffing are no longer personal. evaluation and responsibility accounting. management accounting meets the need of the management. Management accounting is a system of utilising financial. Their ownership is different from management. interprets and present information regarding past activities and current and future events and helps management in decision-making. The Management Accountant basically collects. Thus. Instead of owners. analyses. Even the development of cost accounting does not provide adequate data needed by the management. the professional managers run and look after management.

co-ordinating and controlling functions of management.Management Accounting – An Overview Management Accounting is comprised of two words “Management” and “Accounting”. under the auspices of Anglo-American Council on Productivity.S.” According to this definition management accounting adapts financial information. 2) Robert N. It is that system of accounting which helps management in carrying out its functions more efficiently.” Management accounting deals with the presentation of information so that it is helpful to management.G Rose: “Management Accounting is the adaptation and analysis of accounting information and its diagnosis and explanation in such a way as to assist management.A. Anthony: “Management Accounting is concerned with accounting information that is useful to management” 3) T. The term “Management Accounting” is of a recent origin. The terminology of cost accountancy had no reference to the word management accountancy before the report of this study group. Management will like to base its policy decisions on some information and the information should be presented according to the needs of management. The information is selected. The information is made more useful by giving details and explanation. control of execution and appreciation of effectiveness. The complexities of business environment have necessitated the use of management accounting for planning. The emphasis of management accounting is to redesign accounting in such a way that it is helpful to the management in formation of policy. classified and analysed in such a way that it helps the management in carrying out various operations systematically and effectively.” Page 3 . This term was first used in 1950 by a team of accountants visiting U. It is the study of managerial aspects of accounting. 4) The Institute of Chartered Accountants of India: “Such of its techniques and procedures by which accounting mainly seeks to aid the management collectively have come to be known as management accounting. The term “Management Accounting” can be explained with the following definitions: 1) Anglo-American Council on Productivity: “Management Accounting is the presentation of accounting information in such a ways as to assist management in the creation of policy and the day-to-day operation of an undertaking.

” 9) Smith R.L.M.” 10) Broad and Carmichael: “The term „Management Accounting‟ covers all those services by which the accounting department can assist top management and other departments in the formation of policy. controlling and decisionmaking. Treasury: “The application of accounting knowledge to the purpose of producing and of interpreting accounting and statistical information designed to assist management in its functions of promoting maximum efficiency and in formulating and coordinating future plans and subsequently in measuring their execution. for choosing among alternative business actions and for control through the evaluation and interpretation of performances. the control of its execution and appreciation of its effectiveness.Management Accounting – An Overview 5) The Institute of Cost & Works Accountants India: It defines Management Accounting as “a system of collection and presentation of relevant economic information relating to an enterprise for planning.” Page 4 .” 6) The American Accounting Association: “Management Accounting includes the methods and concepts necessary for effective planning.” 8) John Sizer: “Management Accounting may be defined as the application of accounting techniques to the provisions or information designed to assist all levels of management in planning and controlling the activities.: “Management Accounting is a more intimate merger of the two older professions of management and accounting wherein the informational needs of the manager determine the accounting means for their satisfaction.” 7) H.

 Use of Special Techniques and Concepts: Management accounting uses special techniques and concepts to make accounting data more useful. share capital.  Increase in Efficiency: The purpose of using accounting information is to increase efficiency of the concern.  Cause and Effect Analysis: Financial accounting is limited to the preparation of profit and loss account and finding out the ultimate result. Management accounting goes a step further. The figures of profits are compared to sales.. project appraisal. The implications of various alternative decisions are also taken into account while taking important decisions. Page 5 . The collection and classification of data is the primary function of accounting departments. It supplies necessary information to the management which may base its decisions on it. The performance appraisal will enable the management to pin point efficient and inefficient spots.  Concerned with Forecasting: The management accounting is concerned with the future. interest payable. So the study of cause and effect relationship is possible in management accounting. The historical information is used to plan future course of action. The constant review of working will make the staff cost-conscious. The technique usually includes financial planning and analysis. If there is a profit. The „cause and effect‟ relationship is discussed in management accounting. An effort made to take corrective measures so that efficiency is improved. The type of technique to be used will be determined according to the situation and necessity. etc. The information so collected is used by the management for taking policy decisions. etc.  Taking Important Decisions: Management accounting helps in taking various important decisions. It helps the management in planning and forecasting. different expenditures. standard costing. control accounting. i. budgetary control. marginal costing. the factors directly influencing the profitability are also studied.e. The information is supplied with the object to guide management for taking future decisions. The historical data is studied to see its possible impact on future decisions. profit or loss. Management Accounting involves the presentation of information in a way it suits managerial needs. the reasons for the loss are probed. If there is a loss. Management accounting is a service function and it provides necessary information to different levels of management . Everyone will try to control cost on one‟s own part. The accounting data is used for reviewing various policy decisions. current assets.Management Accounting – An Overview  Providing Accounting Information: Management Accounting is based on accounting information. The efficiency can be achieved by setting up goals for each department or section.

a distinct discipline by itself.  Management Accounting is a Branch of Knowledge: Though management accounting is considered to be a branch of accounting.  Management Accounting is an Art: It is an Art as management accountants requires the ability and skill in applying tools and techniques to various management problems. marginal cost. auditing. i. Management accountant is only to guide and not to supply decisions. financial management. This is evident to fact. the principles and rules vary from industry to industry. etc. taxation. Management accounting employs most of the techniques of costing.. First setting up various professional bodies such as National Association of Accountants in U. operation. So. However. office management and so on. The analysis of data depends upon the person using it. By using the knowledge of management accounting it is possible to present. The deriving of conclusion also depends upon the intelligence of the management accountant. The data is to be used by management for taking various decisions. research. such as standard costing. Historical data is used for formulating plans and setting up objective.e.  It is a Profession: In recent years management accounting has become one of the most important and challenging profession. every concern has its own rules and by-rules for analysing the data.A. It is an organised body of knowledge having its own concepts and conventions. The Institute of Cost and Work Accountants India and other professional bodies both in developed and developing countries have in created the growing Page 6 .S. „How is the data utilised‟ will depend upon the calibre and efficiency of the management. in a recent the time it is regarded as an important branch of knowledge. Statistics. The decisions are to be taken by the top management.Management Accounting – An Overview  Supplies Information and not Decisions: The management accounting supplies information to the management.  No fixed Norms followed: No specific rules are followed in management accounting.  Achieving of Objective: In management accounting the accounting information is used in such a way that it helps in achieving organisational objective.  Management Accounting is a Science: It is a Science as it is a body of systematic knowledge relating to a wide variety of subjects such as financial and cost accounting. budgetary control. analyse and interpret the data. preparation of plans and controlling the operations.  It is an extension to Coat Accounting: Some authorities view management accounting as an extension to cost accounting. to assist management in formulation of policy. Every concern uses the figures in its own way.

Management Accounting – An Overview awareness of management accounting profession among some people. Secondly.” Page 7 . a large number of management accountants are rendering the professional service to various organisations which is called as “Management Consultancy Service.

It is also helps in developing realistic approach to future course of action. The main aim is to help management in its function of planning. The statement prepared under financial accounts forms the basis for analysis and interpretation which serves as a meaningful data for managerial decision making.Management Accounting – An Overview Management Accounting is a new approach to accounting. posting them into the concerned ledger accounts. It also provides a number of sophisticated analytical tools like marginal costing. Cost accounting also helps in finding out economical and non-economical fields of production. mathematics. etc. Its main aim is to use business funds in such a way that earnings are maximised. statistics. It provides techniques for the interpretation of accounting data. The recorded facts about an organisation are useful for planning the future course of action. financial management has emerged as a separate subject. So management accounting is closely related to financial accounting. which are widely being used by the management accountants to discharge his duties and responsibilities. standard costing. So cost accounting is an essential of management accounting. It uses financial data for finding out cost of various jobs. inter firm comparison. The following facts of management accounting are of a great significance and form the scope of this subject:  Financial Accounting: Financial accounting is primarily concerned with recording of transactions in a set of books. The control aspect too is based on financial data. products or processes. Finance has become so much important for every business undertaking that all managerial activities are connected with it. budgetary control. operation research. Page 8 . It seeks to study not only the financial and cost accounting data for planning and control purposes but it derives tools and techniques of other disciplines such as economics. preparing trial balance and thereafter preparing final accounts.  Financial management: Financial management is concerned with the planning and controlling of the firm. Financial accounting deals with the historical data. Although. directing and controlling. etc.  Cost Accounting: Cost accounting provides various techniques for determining the cost of manufacturing products or cost of providing services. Its deals with raising of funds and their effective utilizations. management accounting includes and extends to the operations of financial management also. The efficiency of different departments is judged by setting up standards and finding out variances. There is hardly any aspect of business which is not covered by management accounting. Management accounting is related to a number of fields.

import duty and filing of returns promptly is undertaken the direct supervision of Management accounting. He will be expected to deal with data processing. MRPT Act. filing.  Tax Accounting: The computation of income tax. Both budgeting and forecasting are useful for management accounting in planning various activities. etc. policies and goals of the enterprise for a definite period in future. copying.  Interpretation of Data: Management accounting interprets various financial statements to the management.  Law: Modern business functions within the legal environment. Management is able to know deviations in performance. So taxation is an important aspect of management accounting. communicating.  Internal Audit: Internal audit system is necessary to judge the performance of every department. management accounting relies heavily on low of the country. If the statements are not properly interpreted then wrong conclusion may be drawn. These statements give an idea about the financial and earning position of the concern. Forecasting on the other hand. The actual performance of every department and individual is compared with the pre-determined standards. The comparison of actual performance with budgeted figures will give an idea to the management about the performance of different departments. Hence. Foreign Exchange Management Act.Management Accounting – An Overview  Budgeting and Forecasting: Budgeting means expressing the plans. The targets are set for different departments and responsibility is fixed for achieving these targets.  Control procedures and Methods: Control procedures and methods are needed to use various factors of production in a most economical way. So interpretation is important as compiling of financial statement. The studies about cost and relationship of cost and profits are useful for using economic resources efficiently and economically. and other labour legislations. Decisions are also affected by the provisions of some of the important legislation such as Companies Act. is a prediction of what will happen as a result of a given set of circumstances. sales tax. Page 9 . He will also be reporting about the utility of different office machines. Forecasting is a judgement whereas budgeting is an organisational object. Internal audit helps management in fixing responsibility of different individuals.  Office Services: Management accountants may be required to control an office. excise duty. duplicating.

Management accounting will guide management as to when and from where to purchase and how much to purchase.. minimum level. i. So the study of inventory control will be helpful for taking managerial decisions.Management Accounting – An Overview  Inventory Control: Inventory is used to denote stock of raw materials. The management should determine different levels of stock. re-ordering level for inventory control. Inventory control is significant as it involves large sums. Page 10 . The control of inventory will help in controlling costs of products. goods in the process of manufacture and finished goods.e. maximum levels.

It records only those transactions which have already taken place. There is no binding for preparing management accounting reports. It is only a service function and is helpful to the management in administration of he business. In it results of different departments are evaluated separately to find out their performance differently. It is undertaken voluntarily to benefit management. Financial reports such as profit and loss account and These reports are meant for internal use only. The preparation of accounts is laid down by the statutes concerned. In this no emphasis is given to actual figures. It uses historical data only for taking decisions for the future. It is concerned in analysing data from different angles. 5) In this only actual figures are recorded and there is no room for using approximate figures.Management Accounting – An Overview Financial Accounting 1) Its object is to record various transactions with the purpose of maintaining accounts and to know the financial position and to find out profit or loss at the end of the financial year. It is futuristic in its approach. The approximation figures are considered more useful than the exact figures. In financial accounting actual figures are used. In this overall performance is judged and it is concerned with details. plans and in controlling the execution of different operations. Management Accounting It is essential to help management in formulation policy. 2) It is mainly concerned with assessing the results of the whole. 4) It is to be prepared compulsorily by higher form of organisations. These are prepared for the benefit of different levels of management. 6) They are prepared to find out profitability and financial position of the concern. The transactions are recorded only when they have taken place so exact figures are used. The main idea for preparing these reports is to enable the Page 11 . These reports are prepared not only for the benefits of the concern but also for outdoors. 3) It is historical in nature. In management accounting projected or estimated figures are used. It deals not only with the business as a whole but also each and every segment of the business. It deals with projection of data for the future.

7) Only those things are recorded in financial accounting which can be measured in monetary terms. Management is fed with reports at regular intervals. It reveals the financial position of the concern on that date. consideration is given to the period. There are no specific periods for which management accounts are prepared. Management accountant supplies information from time to time during the whole year. Various figures are required to take managerial decisions at different levels of management. All the items relating to that year are taken to P/L Account. 10) Financial accounts are generally prepared for a particular period. Reporting of management accounting is very quick. Profit and loss account is generally prepared for one year. impact of political changes. Anything which cannot be recorded in figures is outside the scope of financial accounting. 9) They are governed by the No set principles are followed in generally accepted principles and management accounting as it is used conventions. They are rather future projections of figures. Page 12 . Management is able to know the profitability and financial position only after the preparation of final accounts. The competition in the market. though these cannot be measured in monetary terms. Balance sheet is prepared on a particular date. 8) Reporting of financial accounting is slow and time consuming. Profit and loss account and balance sheet are prepared at the end of the financial year. a situation of trade cycle and such other factors are also considered in management accounting.Management Accounting – An Overview balance sheet are prepared for a management to have a view about the specific period and on a particular position of the concern and no date. It uses both monetary and nonmonetary events. for taking policy decisions so. methods of presenting figures differs from concern to concern.

Management Accounting – An Overview 11) Financial accounts like profit and loss accounts and balance sheet are published for the benefit of the public. Under Company Law. Under Companies Law every registered company is supposed to supply a copy of Profit and Loss Account and Balance sheet to the registrar of Companies at the end of the financial year. So. auditing of financial accounts is compulsory. They are not based on actual figures and projected data are also used in management accounting. Management Accounting statements are prepared for the benefit of the management only and these are not published like the financial statements are published. Both Financial Accounting and Management Accounting are complementary and are necessary in running the concern efficiently. it is not possible to get management accounts audited. 12) Financial accounts can be got audited. Page 13 . Management accounts cannot be audited.

wikipedia. Websites referred: 1) www.Management Accounting – An Overview Books referred: 1) Management Accounting by M.google.com 2) www.K. Sharma. 2) Management Accounting by Khan & Jain.E. Thukaram Rao.com Page 14 . 3) Management Accounting by Shashi K. Gupta & R.

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