A.

Financial Accounting

Financial accounting is also a specific branch of accounting involving a process of

recording, summarizing, and reporting the myriad of transactions resulting from business

operations over a period of time. These transactions are summarized in the preparation

of financial statements, including the balance sheet, income statement and cash flow

statement, that record the company's operating performance over a specified period.

Work opportunities for a financial accountant can be found in both the public and private

sectors. A financial accountant's duties may differ from those of a general accountant,

who works for herself rather than directly for a company or organization.

How Financial Accounting Works.

Financial accounting utilizes a series of established accounting principles. The selection

of accounting principles to use during the course of financial accounting depends on the

regulatory and reporting requirements the business faces. For U.S. public companies,

businesses are required to perform financial accounting in accordance with generally

accepted accounting principles (GAAP). The establishment of these accounting

principles is to provide consistent information to investors, creditors, regulators, and tax

authorities.

The financial statements used in financial accounting present the five main

classifications of financial data: revenues, expenses, assets, liabilities and equity.

Revenues and expenses are accounted for and reported on the income statement. They

can include everything from R&D to payroll.

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Calculations Involving Financial Accounting

One of the key aspect of financial accounting is a balance sheet. On a balance sheet, the

three components will show how a business is financially operating. The assets include

the valuable resources, while the liabilities include any debts or obligations owed. If the

assets are financed by debt, it will be listed as a liability on the balance sheet. Assets

financed by investors and common stock will be listed as shareholder’s equity on the

balance sheet.

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 B. Management Accounting

Management accounting is the process of preparing reports about business operations that

help managers make short-term and long-term decisions. It helps a business pursue its

goals by identifying, measuring, analyzing, interpreting and communicating information

to managers.

Internal management accounting systems are used to provide critical information to

management to be used in operational business decision-making. A manufacturing

company might use these systems to help in the costing and managing of their process. A

hospital might use management accounting systems to assist them in insurance billing

and other in-house requirements.

These systems vary within the industries they are used within and allow for

functionalities and reports specific to that industry.

Management accounting helps managers within a company make decisions.

Also known as cost accounting, management accounting is the process of identifying,

analyzing, interpreting and communicating information to managers to help achieve

business goals.

The data collected encompasses all fields of accounting that informs the management of

business operations relating to the costs of products or services purchased by the

company. Management accountants use budgets to quantify the business’ plan of

operations.

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The process of creating organization goals by identifying, measuring, analyzing,

interpreting and communicating information to managers is call management or

managerial accounting.

Management accounting focuses on all accounting aimed at informing management about

operational business metrics. It uses information relating to costs of products or services

purchased by the company. Budgets are often used to quantify the decisions made in

operational planning. Management accountants use performance reports to note variances

between actual results from budgets.

The main difference between management accounting and financial accounting is

financial accounting is the collection of accounting data to create financial statements,

while management accounting is the internal processing used to account for business

transactions.

EXAMPLE OF CALCULATIONS INVOLVING MANAGEMENT ACCOUNTING

The example given below deals with the comparison between traditional cost calculation

method and ABC cost calculation.

Example of cost calculation On the basis of a comparison between TCA and ABC

method in a specific company, it is possible to identify activities that consume excessive

amount of costs and bring little value. It is necessary to eliminate them or to limit them at

least. Is such a measure necessary also in a company with following characteristics? The

company produces two products: product A and product B. Manufacturing one piece of

product A takes 1 hour of work. Manufacturing of product B takes 2 hours of work.

TCA method

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Product A: Direct labour costs: 1hour x 3 currency units/hour = 3 currency units Volume

of production: 100 pieces

Product B: Direct labour costs: 2 hours x 3 currency units/hour = 6 currency units

Volume of production: 950 pieces

Total overhead costs of the company: 3000 currency units Number of hours worked:

2000 3000/2000 = 1.5 currency units/hour

If product A consumes 1 hour of work, then overhead costs are 1.5 currency units.

If product B consumes 2 hours of work, then overhead costs are 3.0 currency units.

ABC cost calculation method

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This simple example shows that there is a significant difference in costs of two products

calculated according to TCA method and ABC method. Using the TCA method, the total

costs of the product A were 4.5 p.j. and 9 p.j. for the product B. Overhead costs were

matched to different products according to the number of hours needed to produce them.

For the ABC method the total costs for the product A represented 10.35 p.j. and 8.38 p.j.

for the product B.

C. COST ACCOUNTING

Cost accounting is the reporting and analysis of a company's cost structure. Cost

accounting is a process of assigning costs to cost objects that typically include a

company's products, services, and any other activities that involve the company.

Cost accounting is helpful because it can identify where a company is spending its

money, how much it earns, and where money is being lost. Cost accounting aims to

report, analyze, and lead to the improvement of internal cost controls and efficiency. In

short, cost accounting is a system of operational analysis for management.

Even though cost accounting is commonly referred to as a costing method, the scope of

cost accounting is far broader than mere cost. Cost accounting has elements of

traditional bookkeeping, system development, creating measurable information, and

input analysis.

Modern methods of cost accounting first emerged in the manufacturing industries,

though its advantages helped it spread quickly to other sectors. For many firms, cost

accounting helps create and measure business strategy in a more organic way.

Companies that are looking to expand their product line would need to understand the

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cost structure. Cost accounting helps management plan for future capital expenditures,

which are large purchases of plant and equipment.

Often, the simplest and most important objective of cost accounting is to determine

selling prices. A business that sells sandwiches, for example, would need to track the

cost of bread, lettuce, sandwich meats, mustard, and other ingredients. Otherwise, it

would be difficult to calculate how much to charge for a sandwich.

Cost accounting is also used to help with cost controls. Firms want to be able to spend

less on their inputs and charge more for their outputs. Cost accounting can be used to

identify inefficiencies and apply the necessary improvements needed to control costs.

These controls can include budgetary controls, standard costing, and inventory

management.

Cost accounting can help with internal costs such as transfer prices for companies that

transfer goods and services between divisions and subsidiaries. For example, a parent

company overseas might be the supplier for its U.S. subsidiary, meaning the U.S.

company would be charged by the parent for any purchases of materials.

Cost accounting can contribute to the preparation of the required financial statements, an

area otherwise reserved for financial accounting. The prices and information developed

and studied through cost accounting are likely to make it easier to gather information for

financial accounting purposes. For example, raw material costs and inventory prices are

shared between both accounting methods.

Entrepreneurs and business managers rely on actionable information before making

allocation decisions. Cost accounting buoys decision-making because it can be tailored

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to the specific needs of each separate firm. This is different than financial accounting, in

which GAAP and International Financial Reporting Standards (IFRS) regulate method

and presentation.

EXAMPLE OF COST ACCOUNTING

Adamu owns a pizzeria. He wants to calculate the full cost of his business. First, he starts

with the direct costs and figures out the cost of his employees and the cost of his

restaurant licenses and certificates. Next, he calculates the indirect costs. He discovers

how much he spends every year on rent, utilities and his own salary. Finally, he estimates

the variable costs. For his pizzeria, he looks at how many pizzas he sells per day and

from there generates the cost of how many raw materials he needs to purchase every

week. Once he's finished calculating those expenses, he adds them together to discover

his yearly full cost of running his pizzeria.

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DIFFERENCES BETWEEN THE DIFFERENT TYPES OF ACCOUNTING

SYSTEMS

Differences between Management and Financial Accounting

Basis of

Difference Management Accounting Financial Accounting

The primary objective of the

The main objective of management financial accounting is to record

accounting is to provide the various transactions and to judge

information to the management for the financial position and

formulating the policies and plans. profitability of the concern on due

thus, it involves internal reporting. date. it involves reporting to

Management accounting is owners, creditors and government.

primarily an internal reporting Financial accounting is primarily

Objective system. and external reporting system.

Nature Management accounting is mainly Financial accounting is concerned

concerned with future plans and with past records. It records the

policies. Management accounting transaction already taken place. In

uses historical data for taking financial accounting actual figures

decisions for future. In are used.

management accounting projected

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 figures are used.

Financial accounting is concerned

Management accounting deals with assessing the results of whole

separately with different units, business i.e. position of a business

Subject departments and concerns. It covers as a whole. It covers all the

Matter only vital and significant aspects. aspects.

Management accounting considers

the standards fixed by management In financial accounting the

itself. So it is free in its approach accounts are prepared in

and more flexible as compared to accordance with standards fixed

Flexibility the financial accounting. by auditor.

A business is free to install or not

to install a system of management

accounting. Thus, management The preparation of financial

accounting is adopted on voluntary accounts is compulsory in certain

Legal basis to increase the management undertakings while these are

Compulsion efficiency. necessary in others.

Precision In management accounting Under financial accounting it is

approximate figures are considered necessary to record the

more useful than the exact figures. transactions with perfect accuracy

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 and precision. all the transactions

hence no emphasis is given to the are therefore recorded at actual

actual figures. amount involved.

In management accounting both

monetary and non-monetary events

are recorded. the factors like

competition in market, impact of

political changes, a situation of

trade cycles and such other factors In financial accounting only those

are also considered in management transactions can be recorded

accounting, though these cannot be which can be measured in

Description measured in monetary terms. monetary terms.

Management accounting covers

concerns only a part of activities

data i.e. important for taking Financial accounting covers all

decisions whether financial or non- the business activities which can

Coverage financial. be measured in financial terms.

Publication Management accounting reports are As financial accounts are useful

prepared for internal use and these for outsiders, these accounts are

are not published. published for the benefit of public.

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 Under company law every

registered company is supposed to

supply a copy of profit and loss

account and balance sheet to the

registrar of company at the end of

the year.

Financial accounts are prepared

There are no specific periods for for a particular period. Profit and

which management accounts are loss account is generally prepared

Period prepared. for one year.

Financial accounting is governed

No such set of principles are generally by the generally

Accounting followed in management accepted principles and

principles accounting. conventions.

It is not possible to get

management accounts audited as

projected data is also included in Under companies law, auditing of

Audit management accounts. accounts is compulsory.

Reporting But under management accounting, Under financial accounting,

immediate and prompt financial reports are prepared not

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 communication of data is very

much required. Management

accounting reports are meant for

internal use only. There is no only for benefit of the concern but

binding for preparing management also for outsiders. But in financial

accounting reports. The period of accounting prompt and quick

reporting is much longer in communication of information

financial accounting as compared and keeping them up to date is not

to management accounting. required.

Presentation Management accounting reveals

of predetermined and past Financial accounting presents

information information. historical information.

In management accounting the

main focus is on certain units of

Center of special importance and not on In financial accounting the main

focus business as a whole. focus is business as a whole.

In management accounting both

Non- monetary and non-monetary events In financial accounting only

monetary like technical changes, competition monetary transactions are

information are recorded. recorded.

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 In management accounting the In financial accounting all the

information is collected and transactions relating to nominal

analyzed according to accounts, real accounts and

Methodology responsibility centre or cost centre. personal accounts are recorded.

Differences between Management and Cost Accounting

Basic of

Difference Management Accounting Cost Accounting

Cost accounting is having

The scope of management accounting is narrow scope. It is limited

wider than that of cost accounting and uses only to those transactions

data from both cost and financial accounts which are related to cost of

and supplies the information to production. So, scope is

Scope management for managerial uses. only limited to cost.

The main objective of management

accounting is to use accounting The main objective of cost

information to take various managerial accounting is to sustain the

decisions and to maximize the value of the cost of production and to

Objective firm. control the cost.

Tools Used Management accounting uses all the tools Cost accounting in order to

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 used by the cost but as its role is wider

than cost accounting it uses another tools control the cost uses various

like ratio analysis, fund flow analysis, techniques like standard

operations research, statistical methods to costing, marginal costing,

analyse and interpretate the data for use of budgetary control and unit

management. costing etc.

As management accounting is for the use

of the management. The users interpret the

results and apply that methods and Cost accounts are prepared

procedures for preparation of accounts according to some set of

Method which suits their needs. rules and standards.

Double entry It is applied in cost

system It is not applied. accounting.

Management accounting is for the use of In cost accounting accounts

the management. The users interpretate the are prepared normally for

results and apply that methods and current year activities and

Accounting procedures for preparation of accounts no futuristic approach is

Period which suits their needs. there.

Evolution Management accounting has taken birth Cost accounting has taken

from the limitation of the cost accounting. birth due to limitation that

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 As costing only highlights on the cost and

management accounting is a continuous financial accounting fails to

watchful process to collect the data predict the information

available from cost and financial records relating to cost aspects of

and assess the need for their revision and particular product or a

improvement. product line.

The cost accountant will

The management accountant will not only compare actual performance

make variance analysis but also suggest with standard performance

Variance the ways and means for improving the and report to management

Analysis operations. for necessary actions.

Status in

hierarchy Management accountant is placed at Cost accountant is placed at

level higher hierarchy level. lower level in hierarchy.

Management accounting system is

dependent upon the information supplied Cost accounting system

by cost accounting so it cannot be installed may be installed without

Dependence without it. management accounting.

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Similarities Between Financial, Management and Cost Accounting

Accounting is a broad field with many applications. Some accountants focus all of their

efforts on tax returns, while others do nothing but investigate the forensic evidence in

accounting records. Managerial accounting and financial accounting are similar in that

they're financially focused, produce financial reports, have a specific set of users and

require a deep understanding of accounting theory.

1. Both Provide Accounting Information to Users

Both managerial and financial accounting exist to provide useful financial information

to users. Who those users are differs, though. The Financial Accounting Standards

Board states that the purpose of financial accounting and reporting is to provide

information to existing and potential investors, lenders and creditors so they can make

informed decisions about lending or buying and selling equity and debt instruments.

Managerial accounting, on the other hand, seeks to provide relevant information to

internal company managers so they can make decisions about how to better run the

company. In this sense, financial accounting focuses on the needs of outside

stakeholders and managerial accounting focuses on the needs of internal users.

2. Both Practices Generate Financial Reports

Financial accountants and managerial accountants both put accounting information in a

report format for managers and executives to review. The formats, however, tend to be

different. Generally accepted accounting standards strictly govern how financial

accounting data is presented so that data can easily be compared across different

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 companies. Financial accountants in publicly traded companies must generate the

following documents:

 A balance sheet that shows company position at a certain period.

 An income statement that details expenses and revenues during a period.

 A statement of cash flows that shows how cash levels have changed. 

 A statement of changes in stockholders' equity that shows how equity has changed.

Reports and formatting for managerial accounting are less regulated. Companies aren't

required to perform managerial accounting, so there are no standards for what type of

information reports must contain or how the information is presented. Generally,

though, managerial accounting reports place a heavier focus on costs the company has

incurred. A typical managerial accounting report may compare budgeted costs to actual

cost, analyze sources of revenue or explore the relationship among cost, volume and

profit.

3. Both Require Accounting Education Expertise

Managerial accounting and financial accounting are both widely recognized and

accepted fields of accounting. Accounting programs typically require students to take

classes in both managerial and financial accounting before they're awarded an

accounting degree.

Companies value both fields and may require accountants to have specialized

knowledge in the area or a certain certification. The certified public accountant

designation -- CPA for short -- is the gold standard for accountants who want to

practice financial accounting. The certified management accountant designation, or

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CMA, is a designation that focuses more specifically on the cost management,

performance management and decision analysis that managerial accountants practice

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