LaiACCT3500/fall 20 (lecture 1)

ADA University, School of Business

ACCT3500 Managerial Accounting, Fall 2020
Lecture 1 - Introduction to Accounting

 Branches / types of accounting:

(a) Financial accounting – reporting of the financial position and performance of a firm
through financial statements issued on a periodic basis (agency issue); includes
book-keeping (the mechanical task of recording financial transactions in books of
account).
(b) Management accounting – contains three main parts: cost accounting; differential
accounting (for decision-making); responsibility accounting (for planning and
control). Function of management accounting – provides information to assist
managers to plan, control the organizational activities and to make decisions.
(c) Auditing – the examination of the accounting procedures / accounts of corporations
to ascertain their credibility. Auditors can be external or internal. Can external
auditors be completely independent?
(d) Tax accounting – the computation of tax payable by both entities and individuals.

* The above list is not exhaustive. Only management accounting will be covered in this
module.

 Objectives of company managers:

o Generation of profits to be distributed to shareholders in the form of dividends.
o Maximization of the company’s share price so shareholders can make capital
gains; and company is not easily taken over.

 Users of accounting information – all the stakeholders of an entity are interested in its
accounting information, that is, owners, managers, employees, suppliers and other
creditors, lenders, customers, government agencies, potential investors, public.
For tutorial discussion - for what respective reasons or motives are each of the individual
stakeholders interested in the accounting information of an entity?

 Characteristics of accounting information:

o The conclusion to be derived from the discussion above is the accounting system
is an information system, thus what are the desirable characteristics of
accounting information?
 Understandable – use of accounting jargon does not facilitate this;
 Objective – unbiased, neutral.
 Comparable – consistency in preparation and presentation of financial
statements over time. However, consistency should not be at the expense
of realism to reflect changed circumstances.

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 LaiACCT3500/fall 20 (lecture 1)

Relevant – able to influence decisions; timeliness; has predictive and

confirmatory values (however, using past information to predict the
future).
 Reliable – faithful representation; objective; neutral; free from material
error; complete; prudent.
 Material – significant in influencing decisions; necessary to aggregate
small transactions into larger wholes; impractical to record / report every
detail of an entity’s activities.
 Cost effective – cost less than benefit.
o Do the above characteristics conflict?

 Comparison of Management and Financial Accounting:

  Management Accounting Financial Accounting

Primary users Internal. Internal and external.

Purpose of Help managers plan, Help investors, creditors, and

information control business others make investment,
operations and make credit, and other decisions.
decisions. Management Financial accountant as
accountant as prober custodian of assets.
and investigator.
Focus and time Future oriented. Records the past.
dimension

Constraints No constraints, internal Financial statements must

reports not restricted by conform with Generally
Generally Accepted Accepted Accounting
Accounting Principles Principles, SSAPs and FRSs.
(GAAP).
Verification No independent audit. Annual independent audit
by certified public
accountants.
Scope and Detailed reports on Reports on the company as a
frequency of sections of the company whole, usually on a quarterly
information on a daily, weekly or or annual basis. Reports
monthly basis. Reports mandatory.
non-mandatory.

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Collaboration and Needs to communicate Can work in isolation.
cooperation with other departments
and management team.
Nature Monetary and non- Monetary information.
monetary information.

● Financial management:
• At its simplest, we can say that financial management is the bridge between
management accounting and financial accounting
• As well as other sources, information provided by management accounting is used
by the financial manager to ensure that the best results are reported by the financial
accountant.
• Deals with sources and uses of funds, dividend policy.

Readings:
 Drury, C, “Cost and Management Accounting”, 9th edition, 2015, Cengage Learning,
chapter 1.
 F Wood & A Sangster, Business Accounting 1, 13th edition, 2015, Pearson, chapter 1.

Tutorial questions:
(a) Briefly explain the purpose of both Financial accounting and Management accounting, AND
identify the main differences between them.

(b) For what respective reasons or motives are each of the individual stakeholders interested in
the accounting information of an entity?