Financial Accounting

It’s the discipline concerned with the provision of information to external parties outside the
organization. It’s the process of measuring, classifying, summarizing and reporting financial
information used in making economic decisions. It’s also concerned with the preparation of
financial statements to be used by the firm’s stakeholders.

Key differences between Management Accounting (MA) and Financial Accounting (FA)

MA FA
Users Internal External
Nature Future Historical
Details More detailed Summarized
Legality Not legal Legal
Format Not standard Standard

It is important to define cost accounting at this point.

Cost accounting

It’s the process of cost ascertainment and cost control. It is a formal system of accounting by
means of which cost of product and services are ascertained and controlled.

1.2ATTRIBUTES OF GOOD INFORMATION

FAST FORWARD: Information produced for decision making must be of good quality.

Information is anything that is communicated and is sometimes said to be processed data. It’s
data processed in such a way as to be of meaning to the person receiving it.
A lot of costs go into the production of information. Therefore if information is judged as being
poor and ignored by management because of its unworthiness, we experience some waste of
resources (time and money). To ensure this does not happen, the following should be
considered.

i. Economic reality

The information should correctly reflect the underlying economic realities. This is the prime
requirement and may mean adjusting conventionally prepared accounting information to show
more effectively the economic consequences.

ii. Accuracy of information

As stated in the introduction to management accountant, information should

always be sufficiently accurate for its intended purpose. Accuracy will be
determine e.g. by collection and processing technique. However, there’s no
such thing as absolute accuracy. This may mean that a realistic, speedily
prepared estimate may be more useful than a more precise answer produced
some time later.
Inaccuracy can occur as a result of systematic bias or error.
Systematic bias - Inaccuracy due to a feature of the system used
for collection and processing data.

Collection bias - it distorts by withholding some information. This

could mean that the system had either been deliberately or
accidentally designed in such a way to fail to collect relevant data.

Presentation bias - when data is presented in such a way that it

only presents one point of view.

TEXT
Error - usually occurs as a result of the inherent variability in the
system used to record data. Other sources include incorrect
methods of data collection and measurement, loss of data and

STUDY
failure to process some data.

iii. Relevance

The information must be relevant for the person and purpose intended.
Relevance is the attribute of data which amongst other things is meaningful.
In designing the system, planners will define informational requirements and
from this, relevant data can be identified.

iv. Timing

The information must be produced in time for it to be used effectively. The age
of data is the time that has elapsed since the data was collected.

v. Understandability
The information must be capable of being understood by the recipient. To
increase
comprehension one can:
• avoid the use of jargon
• use charts and diagrams
• exception reporting and comparative figures