management accounting introduction essay

Management Accounting: The Main Aspects

Executive summary.

This report provides valuable information on management accounting in detail and explores various aspects of this concept. The analysis of management accounting in the body section of this report is divided into five sections with each section describing a crucial aspect of management accounting. The first section enables an understanding of management accounting in general and describes different management accounting systems. The second part analyzes the various methods used for management accounting reporting while the third section focuses on the benefits of management accounting systems and their advantages within the organizational context. The fourth section explains how management accounting systems and management accounting reporting are integrated within organizational processes. The fifth section of the body is an analysis of two planning tools used in management accounting. The last part of this report provides a conclusion of the contents and recommendations on management accounting.

Introduction

Management accounting or managerial accounting refers to the process of identifying, collecting, and analyzing both financial and non-financial data within an organization that aids in internal decision-making. Management accounting varies from financial accounting as the latter focuses on financial information analysis and is guided by fiscal policy and government standards (Weetman, 2019). Management accounting is only used by the management team for various purposes within the organization and is not disclosed to people or organizations outside management.

There are various management accounting systems and their requirements vary as detailed below. Product costing and valuation is a managerial accounting system that focuses on determining the costs involved in the production of goods and services (Weetman, 2019). A breakdown of costs into subcategories such as variable, fixed, direct, and indirect costs is crucial for this system. Managerial accountants calculate the overhead costs associated with a certain product to ascertain the expenses incurred. A crucial aspect of the product costing and valuation system is marginal costing that aids in the valuation of goods.

Cash flow analysis is another method of management accounting that enables the determination of the impact of business decisions on cash. A managerial accountant focuses on the impact of a specific decision on cash inflow or outflow in the business in this system (Reza, Kusumaningrum, and Edi, 2017). Inventory turnover analysis is vital and is essentially the calculation of how often an organization has sold and replaced inventory within a given period (Amanda, 2019). A management accountant seeks to particularly establish the carrying cost of inventory, the expense of unsold items on the company.

Constraint analysis seeks to establish existing constraints within a production line or sales process (Amanda, 2019). This method is specific to either of the mentioned components. When a management accountant focuses on challenges within the production line, they may identify difficulties that are responsible for diminished profits and increased losses within the company. Challenges within the sales process may vary from difficulties related to the company or difficulties that are specific to the clients.

Financial leverage metrics is another method of management accounting that refers to a business entity’s use of borrowed capital. The borrowed capital can be invested in acquiring additional assets or increasing return on investment (Amanda, 2019). This system includes a balance sheet analysis that can offer valuable insights into company debt and equity. Performance measures that are relevant in this case include return on equity, debt to equity, and return on invested capital.

Accounts receivable (AR) management is an additional method of management accounting and affects a firm’s bottom line. It enables a company’s management to decide on whether a certain customer is becoming a credit risk (Amanda, 2019). This method focuses on how long a client takes to pay their debt and it is classified based on time. Grouping different clients on this basis enable decisions on which clients the company should consider dropping. Budgeting, trend analysis, and forecasting is the final method of management accounting that will be analyzed in this report. Deviations from budgetary plans indicate flaws within the plans made by the company. An analysis of trends enables the prediction of future business possibilities while forecasting enables the setting of targets.

Methods Used for Management Accounting Reporting

Management accounting reporting methods vary based on the nature of the management accounting method initially applied and the intended purposes. Budgeting reports analyze past expenditures within an organization and seek to establish whether the past expenditures were in tandem with intended targets (Maheshwari, Maheshwari, and Maheshwari, 2021). Budget reports also carry out forecasts of future budgets to enable efficient planning within an organization. Accounts receivable aging reports deal with credits and customer creditworthiness within the organization.

Proper segregation of customers based on how long they take to pay their debts is the purpose of this report (Madhuri, 2020). The accounts receivable method classifies them in different categories such as those that pay in 30 days, those that pay in two months, and those that pay in three months. This classification enables a company to eliminate customers who are not creditworthy from their books and retain those who pay in desired time.

Job costs report provides an analysis of how much a project costs the organization. This report focuses on areas within a report that are ridden with wastes and enables the company to channel the excesses elsewhere while finding ways of reducing wastage (Madhuri, 2020). These reports may analyze a project upon completion or while it is in progress. A job cost report while a project or business venture is in progress ensures that the profitability, cost, and expenses of a venture are known beforehand.

Inventory and manufacturing reports are for companies involved in the manufacturing business to ensure efficiency in their business processes (Fay and Kazantsev, 2018). Labor cost, per unit overhead cost, and wastage are the most vital components of such a report and enable the managers to make comparisons between different assembly lines. The comparisons ensure management can make decisions on areas that require improvements within the manufacturing sector.

Performance reports contain information on calculated differences between actual results and budgeted performances. The performance report enables management to gauge the effectiveness of their plan for different employees and the business in general (Karevold, 2021). It enables management to identify prior errors and chart mitigation measures that ensure such errors do not occur in the future. Order information reports are additional reports for management accounting that provide vital information on orders made by customers. These reports gauge the effectiveness of ordering and delivery within the business.

The efficiency of the staff in meeting client demands can also be gauged by this type of report. It enables management to come up with measures that reduce the cost of placing orders and the management of these orders. Opportunity reports or a business situation report inform management of a particular event (Schaltegger, 2020). It enables management to understand occurrences within the business and make relevant decisions on the same. Situation reports are regularly made within an organization and are prompted by recent developments within the company that make their preparation crucial.

Benefits of Management Accounting Systems and Application within an Organization

Management accounting systems apply to companies and confer many benefits to the organizations that use them. Management systems are essential during the planning phase as plans are made based on sound information (Erokhin et al., 2019). Planning involves vital aspects such as budgeting. Planning how a company will utilize its funds is essential in guaranteeing long-term success. Planning also enables companies to effectively mitigate unprecedented challenges in operations.

Management accounting systems also offer grounds for efficient control of various operations within an organization (Pavia, 2019). Progress in various facets of a business can be measured and compared to a set standard that is anticipated. Various aspects such as production and sales can be assessed and evaluated based on these standards, ensuring profitability. Management accounting also enables better service delivery to customers hence ultimate customer satisfaction (Cuzdriorean, 2017). Better customer service is informed by adequate investigations into the internal running of the company. Recognizing flaws in customer service or quality of goods spurs reforms within the company that are geared towards the improvement of service delivery.

Management accounting also enables better organization within a company as the authority and jurisdiction of various managers within the company are set. Better organization by employees who clearly understand and adhere to their responsibilities ultimately ensures successful operations and success in business (Joseph and Wayne, 2020). Management accounting eases coordination within a company and ensures each department within a company is integrated into achieving departmental goals that eventually cause overall success.

Departmental goals ultimately lead up to greater company goals and coordination must be achieved within an organization. Efficiency is generally boosted within an organization that invests in management accounting (Joseph and Wayne, 2020). This is because avenues of time and resources wastage are identified and addressed. Management comes up with means of ensuring flawless flow in the work process ensuring minimal time wastage and also eliminates wastage of resources. Maximum utilization of time and resources ensures that a company can operate optimally and generate sufficient profits.

Management accounting ensures sufficient motivation within the workplace. Management accounting reports are usually submitted in the form of budget reports or situation reports and so on. These reports usually inform various essential decisions within an organization such as demotion and promotion of employees. These are crucial decisions that influence employee morale for those who are promoted to higher positions (Cuzdriorean, 2017). Those who are demoted are also encouraged to work harder and smarter in a bid to regain their previous positions. Good morale and motivation within a company are grounds for good performance and enhanced productivity.

Management accounting also contributes to better communication within an organization by ensuring the harmonization of information. Management accounting reports ensure that there is an efficient collection of data on the finances and business of a company (Ahmed, Ameen, and Hafez, 2018). Such information is relayed to employees and management in a clear and precise way. The net benefit of the benefits of management accounting listed above is enhanced profits within an organization. A company attains growth in profits and productivity as a result of management accounting. Tools used in management accounting are reliable ensuring unswerving data is provided to management.

Management Accounting Systems and Management Accounting Reporting Integration within Organizational Process

General management of a company and assignment of responsibilities within the organization is affected by management accounting systems. Management accounting reports are a great indicator of duties that should be performed by every member of the workforce (Hilorme et al., 2019). Such decisions are informed by flaws that are identified by performance reports and boundaries set for each employee to ensure effectiveness. Division of labor and specialization are vital aspects of production that are affected my management accounting reports due to the various insights discovered.

Acquisition of assets for organizational growth and assets assignment to various sectors of a business is also affected by management accounting reports. These reports identify the investments that are profitable for a business and encourage increased investment in these ventures (Doktoralina and Apollo, 2019). Additionally, they discourage investment in loss-making ventures, ensuring that a business can minimize wastage. Management accounting reports also identify sectors that are not adequately furnished with resources and enable management to make these decisions that increase allocation. Resource allocation does not necessarily refer to finances as it can also refer to the allocation of human resources to a department based on the reports.

Management is a crucial part of making decisions on employee hiring, demotion, and promotion based on both performance and customer demands. Management reports that indicate the input of various employees and sectors are integrated into the human resource department (Brierley, Gwilliam, and David, 2018). These reports can influence the hiring of additional employees if a business is booming and there is a need for a bigger workforce. The demotion of workers and the promotion of others can be necessitated by levels of customer satisfaction discovered by situation analysis reports.

Long-term decisions on the longevity of a business such as product diversification and stopping the production of a specific product are also affected. Budgeting and forecasting are affected by management accounting reports and these affect long-term business decisions (Ahmed, Ameen, and Hafez, 2018). Financial reports indicate the health of a business and negative finances may encourage management to quit on a product that is causing losses. Losses may also be necessitated by the rigidity of a company to one product and these reports necessitate diversification of production. Trendy products are often profitable at the start but gradually become loss-making ventures. Through management accounting, a company can forecast when that is likely to occur and make decisions that prevent this such as permanent closure.

Prior information of internal stakeholders before meeting external stakeholders and making decisions that mitigate flaws that may affect the external stakeholders is also a role of management accounting. Internal stakeholders essentially run a business but external stakeholders including the various management institutions are also crucial (Ahmetshina, Vagizova, and Kaspina, 2017). When internal management is capable of detecting a flaw within the system in time, they can rectify and evade potentially harmful effects of external stakeholders. This may include data of irregularities that were not previously detected.

Planning Tools in Management Accounting Analysis

Target costing is a management accounting planning tool that involves implementing a common set of tools on cost planning, cost management, and cost control. This method analyzes each stage of the production cycle and identifies costs at each phase of production and improves the technology used for efficiency (Cooper and Slagmulder, 2017). It evaluates techniques of market study, value analysis, reducing diversity, manufacturing technology, and the relationship between suppliers and customers.

Target cost refers to an estimated production cost for a specific product. This value is settled on by management after evaluating the facets mentioned above and aids in evaluating business progress (Ahn, Clermont, and Schwetschke, 2018). The targeted cost incorporates expected profits by the company and competition within the market. Management mostly moves in to control target costing due to their diminished control on the selling profits to ensure profitability.

Target costing is a very effective method of management accounting as it ensures that a business continuously makes profits given this is the primary role of a business. It also improves production technology as management settles for the cheapest and most effective means of production, generally boosting the company’s quality of goods (Ahn, Clermont, and Schwetschke, 2018). This tool also reaffirms management’s commitment to process improvements and product innovation to gain a competitive advantage. The detrimental effect of target costing may emanate from ruthless management that aims at achieving its target cost regardless of effects on employees (Cooper and Slagmulder, 2017). To minimize cost, management may lay off workers to ensure that minimal human resources are used for a cheap cost. In general, target costing ensures the setting of goals and their achievement by an organization.

Break-even analysis involves computing and probing the margin of safety for a company based on revenues accrued and associated costs. The analysis shows how many sales are made before the cost of doing business is paid (Sintha, 2020). This method is used for corporate budgeting of various projects to ensure they remain profitable. This tool relies on calculations that involve fixed costs and variable costs. The break-even analysis is usually used to ensure that if a scenario where a company does not make profits occurs, the company still doesn’t make losses. This point is considered the safe point for a company that ensures it can operate without making losses.

The break-even analysis is an important tool for any business as it ensures budgeting and setting of targets. This means that a business can plan for its available finances and ensure an equalization fund is in place to prevent stalling of projects (Vagner Iryna, 2020). This tool is also crucial for monitoring and controlling costs as the company can make only the products that do not jeopardize its operations. These products can be sold by the company without losses occurring. The company also produces a manageable amount of goods ensuring market saturation does not occur. Having the required amounts of goods in the market ensures that a company can effectively manage competition (Vagner Iryna, 2020). These benefits ensure that the method is very effective in management accounting.

Conclusions and Recommendations

In conclusion, management accounting is a crucial aspect of any business as demonstrated above. Management accounting ensures that the business remains healthy during operations without making catastrophic losses. It is recommended that management accounting be carried out regularly to ensure that flaws within the business are noted and rectified on time. It is also recommended that copies of the management accounting reports be availed to all the staff within the organization. Availing such crucial data ensures that all stakeholders are informed of the state of the company and act in the best interest of the business.

Reference List

Ahmed, M.F., Ameen, A.M. and Hafez, M.A. (2018). The impact of management accounting and how it can be implemented into the organizational culture . Dutch Journal of Finance and Management , [online] 2(1).

Ahmetshina, A., Vagizova, V. and Kaspina, R. (2017). The use of management accounting information in non-financial reporting and interaction with stakeholders of public companies. in: The Impact of Globalization on International Finance and Accounting . Springer, Cham, pp.433–439.

Ahn, H., Clermont, M. and Schwetschke, S. (2018). Research on target costing: past, present and future . Management Review Quarterly , [online] 68(3), pp.321–354. Available at:

Amanda, R. (2019). The impact of cash turnover, receivable turnover, inventory turnover, current ratio and debt to equity ratio on profitability. JOURNAL OF RESEARCH IN MANAGEMENT , 2(2).

Brierley, J.A., Gwilliam and David (2018). Human resource management issues in accounting and auditing firms: a research perspective . London; New York Routledge.

Cooper, R. and Slagmulder, R. (2017). Target costing and value engineering . [online] Routledge.

Cuzdriorean, D.D. (2017). The use of management accounting practices by Romanian small and medium-sized enterprises: a field study . Journal of Accounting and Management Information Systems , [online] 16(2), pp.291–312.

Doktoralina, C.M. and Apollo, A. (2019). The contribution of strategic management accounting in supply chain outcomes and logistic firm profitability. Uncertain Supply Chain Management , 7(2), pp.145–156.

Erokhin, V., Endovitsky, D., Bobryshev, A., Kulagina, N. and Ivolga, A. (2019). Management accounting change as a sustainable economic development strategy during pre-recession and recession periods: evidence from Russia. Sustainability , [online] 11(11), p.3139.

Fay, M. and Kazantsev, N. (2018). When smart gets smarter: how big data analytics creates business value in smart manufacturing . San Francisco: Thirty Ninth International Conference on Information Systems, pp.1–9.

Hilorme, T., Perevozova, I., Shpak, L., Mokhnenko, A. and Korovchuk, Y. (2019). Human capital cost accounting in the company management system – proquest. Academy of Accounting and Financial Studies Journal , 23, pp.1–6.

Joseph, A.-G. and Wayne, K.Y. (2020). The impact of management accounting practices on the performance of manufacturing firms; an empirical evidence from Ghana. Research Journal of Finance and Accounting , 11(20).

Karevold, K.I. (2021). Managers’ beliefs about false performance reports: how high goals and low performance levels can be unethical warning signals. Scandinavian Journal of Work and Organizational Psychology , 6(1).

Madhuri, M. (2020). Management accounting and its impact . Journal of Engineering Sciences , [online] 11(6), pp.1225–1230.

Maheshwari, N., Maheshwari, S. and Maheshwari, S. (2021). Principles of management accounting . [online] Google Books . Sultan Chand & Sons.

Pavia, S. (2019). A review on management accounting change. What’s next? Economia Aziendale Online , [online] 10(1), pp.107–134.

Reza, M., Kusumaningrum, R. and Edi, C. (2017). Information system of cash flow analysis for determining company’s health. International Journal of Computer Applications , 179(4), pp.30–34.

Schaltegger, S. (2020). Unsustainability as a key source of epi- and pandemics: conclusions for sustainability and ecosystems accounting. Journal of Accounting & Organizational Change , 16(4), pp.613–619.

Sintha, L. (2020). Importance of break-even analysis for the micro, small and medium enterprises. International Journal of Research- Granthaalayah , [online] 8(6).

Vagner Iryna (2020). Importance of break-even point analysis . [online] eLibrary.ru.

Weetman, P. (2019). Financial & management accounting . [online] Pearson UK.

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Essay: Management accounting

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Management accounting is those areas of accounting concerned with financial planning, principally through the interpretation and use of financial data for important management of the business. The role of accounting is to provide relevant information, which will assist management with decision-making, planning economic performance, controlling costs and improving profitability. However, note that the information generated by the management accounting function is just one component part of the decision-making process. It is not the ‘be all and end all’; it must be used in conjunction with other data. The purpose of this essay is outline the objectives of and the main stages in, a managerial planning, decision making and control process and describe the role served by managerial accounting in this process.

The aim of management accounting is to provide management with information, which will help them to:

• Achieve their objectives/goals.
• Formulate policy.
• Monitor and assess performance.
• Appreciate the financial implications of changes in the internal and external environment in which the organization operates.
• Plan for the future.
• Make comparisons between alternative scenarios.
• Manage more efficiently the scarce resources, which are at their disposal.
• Control the day-to-day operations.
• Focus their attention on specific issues, which really need their consideration.
• Solve a variety of problems, e.g. investment decisions.
• Take account of behavioural factors.

Understanding the nature of measurement and communication, the characteristics of economics information, the theories and practices of the decision making process and the identification of accounting information users are crucial to the understanding of accounting in general.

The major users in accounting information can be divided into three groups:

• Internal managers who use the information for short run planning and controlling everyday operation.
• Internal managers who use the information for making non-routine decisions and formulating overall policies and long run plans.
• External parties, such as investor and shareholders, who use the information for making decisions about the company in general.

An accounting system is a formal mechanism for collecting, arranging and communicating information about an organization’s activities. This will only be develops if the benefits from its use, in term of improved decisions, are expected to exceed the costs of establishing and operating it.

Differing from financial accounting, the focus of management accounting is usually on the information at a more details level, on results for any products and on costs for particular productive operations. Understanding the role of management accounting requires an appreciation of what is involved in management and the kinds of decision that management is faced with.

Information is important in management decision making. The objective of the management accounting system is to provide the best information for assessments of the amounts, timing and uncertainty of cash flows to the business from each alternative course of action available to the business.

The purpose of management accounting involves identifying the types of decision needed in management accounting in order to provide useful information for managers.

The main types of decision include:

• Output decision-These are decisions on what types of goods or services should be supplied, at what prices and in what quantities.
• Input decision-These are decisions on how the outputs should be produced, i.e. the allocation of quantities used in raw materials, labour etc.

I think that these two types of decisions are inter-connected, because the cost of resources to produce goods and provide services is relevant to decisions on the best production output and best pricing strategy required.

The framework for managerial planning, decision-making and control process incorporates seven stages, and this is illustrated by a flow chart.

Stage 1 Identify goals of organization

Stage 2 Collect and analyse data about Alternative courses of action

Stage 3 Choose decision rules

Stage 4 Rank alternative courses of action

Stage 5 Make a decision and state expected outcome

Stage 6 Report actual outcome of decision

Stage 7 Monitor actual outcome to ensure actions under control

Stage 1 : The identification of goals

The management process consists of a series of activities in a cycle of planning and control. Planning can be specified as the choice of company objectives and the methods of their attainment.

The most obvious goal of any organization is to maximize shareholders’ wealth, i.e. profit. This is normally assumed in a traditional microeconomics analysis. Maximizing owners’ wealth also implies maximizing market share and long growth. Management must devise realistic goals for it’s firm, achievable in the short term preferably, otherwise there will be no benchmark for comparison between a firm’s progress now and say, a year later. Having said that, it’s often difficult for a firm to follow realistic goals as different participants within the organization may have their own disparate interests.

However, the first and foremost objective in organizational planning is the maximization of the present value of the organization’s future cash flows. This is adapted for a number of reasons:

• It is quantitative and therefore provides a clear guide for future comparisons.
• Unlike conventional profit calculations, which are based on arbitrary accounting measurements therefore doesn’t have the problem of imprecision.
• It deals directly with cash available to individuals for them to acquire satisfactory products or services.
• It gives some leeway to the distribution of cash among all members concerned in the firm.

Stage 2 : The collection and analysis of data about alternative courses of action

The decisions made by management can be classified into long-term decisions, such as those involving significant changed with an organization’s operation, or short-term decisions such as those, which only affects its running for a short time like the production of a certain product.

Management has the responsibility to draw up and evaluate the relative costs and benefits to the organization whichever of the decisions they are undertaking.

Sometimes, a decision which appears to be easily quantified and clear cut on paper may not be so straight forward when put into practice, thus management must contemplate carefully as these decisions will ultimately determine whether a decision is correct or not.

For example, managers should not only take into accounts the costs, revenues, incomes, etc. But also the less obvious factors such as the competition environment, interest rates imposed by the government, future operating conditions and any other uncertainty associated with the costs and benefits contribution.

Stage 3 and 4 : The choice of decision rules and ranking of alternative courses of action

Making competent decisions depends on two indispensable criteria selected by managers:

• The appropriate basis for decision making
• The types of data to use in decision-making and, by implication, the types of data not to use.

Decision means choices, thus decision-making implies making choices between alternatives, competing course of action. If there is no available alternative, then decision-making is not necessary. Management has to assess whether choosing a particular product X has the overall benefits or choosing an alternative, Y i.e. compare the two products, and weight up any differences between choosing on and not the other.

Management accounting is a key part in an iterative decision making process:

• Alternative courses of actions are identified.
• Estimating is made of the results of each alternative.
• Preferred courses of actions are chosen in terms of business objectives.
• Actual results are compared with corresponding estimates.
• New course of action are identified.

This is a continuous process.

The fundamental question for consideration here is, “How is management to choose from among these so many possible alternatives so as to maximize the present value of the expected future cash flows?” The answer to this question is indirect. Each potential alternative will have different cash consequences and change continuously with time. Therefore, analyzing the differences between available alternatives is essential to good decision-making. This analysis is called ‘differential’ or ‘incremental’ cash analysis. This basically gives managers an overlook of the advantages and disadvantages of the choice of alternatives. The final decision is to accept the alternative with the greatest net present value or cash flow, i.e. NPV

Stage 5, 6 and 7 : The decision making and control processes

Stage 5 is the forecasting stage in which it predicts the most likely outcome of a decision, expressed in a budget form. The budget is prepared on estimates of differential costs and revenues in the chosen course of action with some valid assumptions.

Meeting budget targets can be implemented by monitoring the actual performance, this is known as the control process. This is illustrated in stage 6 and 7. Regular control reports provide a useful feedback for management to assess the progress so far.

A management control system may be used here. It is a logical integration of management accounting tools to gather and report data and to evaluate performance.

Management accounting has a role in all stages of the management process.

It evaluates capital expenditures, identifies and measures information on products and markets and is especially critical in short term planning through budgets.

• Implementation

It develops accounting standards for operations, provides an internal reporting system for a particular business structure and this is known as “responsibility accounting”.

This is broken down further into three aspects:

• Monitoring performance and results

Here, management accounting identifies any alterations from plans, gives prompt news on any unforeseen problems and explains the nature of results published with the organization.

It encourages staff to work at their best by rewards and incentives, and the budget and performance reports can influence outcome.

• Communicating

It serves as a language tool for most business organization and provides a useful link to information system.

In conclusion, management accounting ensures the transformation process from inputs, through the production process to output is viable, and it plays a principal role in management decision-making. Management accounting is the process of identifying, measuring, accumulating, analyzing, preparing, interpreting and communicating information that helps managers fulfill organization objectives. Accounting responds to the need for quantitative financial information. It is interpreted as a language of economic activity. The purpose of accounting is ultimately to assist someone to make decisions by the accumulation of all accounting information. The information to be provided by the accounting system depends on who is making the decisions and for what purpose.

BIBLIOGRAPHY

• Arnord and Turley,  Accounting for Management Decision , 3 rd  Edition, Prentice Hall
• Arnord, Carsberg and Scapens,  Topics in Management Accounting , 1 st  Edition, Philip Allan
• Chadwick,  Management Accounting , 1 st  Edition, Routledge
• Horngren and Sundem,  Introduction to Management Accounting , 9 th  Edition, Prentice Hall
• R. Hussey,  A Dictionary of Accounting , Oxford University Press

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Introduction to Management Accounting

Introduction to management accounting - essay example.

• Subject: Finance & Accounting
• Type: Essay
• Level: Masters
• Pages: 10 (2500 words)
• Downloads: 3
• Author: bsteuber

Extract of sample "Introduction to Management Accounting"

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CHECK THESE SAMPLES OF Introduction to Management Accounting

Financial analysis of a new company introduction, acc403, principles of accounting slp 3, acc403 mod 5 case slp, management accounting isssues, abstract of chapter 8, general perspective of management accounting, cost control and performance management.

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Essay on Accounting: Meaning, Functions, Importance, Principles and Limitations

Essay on Accounting :- 1. Introduction to Accounting 2. Meaning of Accounting 3. Functions 4. Importance 5. Systems 6. Principles 7. Concepts 8. Accounting Conventions 9. Limitations.

• Essay on the Limitations of Accounting

Essay # 1. Introduction to Accounting:

Several thousand years ago when human beings first developed the need to accumulate information about economic resources such as land, livestock and other personal property, accounting got originated. It emerged as an information system formulated for accountability in the exchange of goods and services.

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With the invention of money there was an ease in the manner in which commodities and services were exchanged. Money became a unit of measurement. Throughout history accounting profession has continued to grow in response to the ‘financial information needs’ of individuals and societies.

Accounting is a function of economic and social development. It is the language of business. It records business transactions on a monetary basis in a set of books in a scientific manner. Cash plays a vital role in all types of business activities. One party pays it and the other party receives it. Even in non-cash transactions, cash has to be paid or received in future. Accounting provides information in a classified and a summarized form as financial statements.

It comprises Trading Account, Profit and Loss Account, and Balance Sheet. Account is that aspect of accountability that accounts for the purpose for which cash is paid or received. Trading Account and Profit and Loss Account are prepared to ascertain the profits earned or losses incurred for a particular period. The balance sheet shows the financial position of a business as at a particular point of time.

Accountants are the practitioners of accountancy. They are information specialists who collect, process and report economic information about specific financial events for business and non-business activities. Today, we observe several million individuals engaged in professional accounting activities and several billions dependent on such information. Thus, accounting has a wide scope in the spectrum of economic and social development of any country, be it developed, developing or backward.

ADVERTISEMENTS: (adsbygoogle = window.adsbygoogle || []).push({}); Accounting 2. Meaning of Accounting:

Accounting is considered as ‘the language of business’. It is the language employed to communicate financial information of the business to various parties interested in such information. When an event is to be reported (say in English, Hindi, Kannada), certain rules are followed diligently so that what is communicated is understood by the readers appropriately.

Similarly, in accounting also the events of the business are to be communicated to the users by following certain set of rules diligently, so that the firm does not run into the risk of being misunderstood. Accounting language has two important components – (1) symbols in the form of ‘Debit and Credit’ and (2) grammatical rules in the form of generally accepted accounting principles (GAAP).

Accounting stems from ‘book-keeping’ the science and art of correctly recording in books of account all those business transactions that result in the transfer of money or money’s worth. Accounting relates to the work of maintaining various books of accounts, say, journal proper, subsidiary books, ledger, etc., which are generally done by junior employees as and when the transactions take place.

For this reason these books are called Books of Original Entry. Though the original records are maintained in a systematic way, they cannot by themselves provide information for judgement (decision) unless they are analysed and interpreted. Therefore, accounting comes into the picture.

Examining the cited definitions, we can infer that book-keeping is concerned with recording aspect. On the other hand, being comprehensive in nature, accounting includes book-keeping and spreads its tentacles to the analysis and interpretation of the data recorded. In fact, accounting designs proper system for recording the transactions.

The modern system of accounting is based on ‘double-entry principle’. Being scientific in character, double-entry principle of accounting has definite objectives to fulfill. It prescribes the process through which the objectives can be achieved. Accounting is a macro system.

In its micro system it includes several branches in the form of Financial Accounting, Cost and Management Accounting and others such as Government Accounting, HR Accounting, Inflation Accounting, Environmental Accounting, Farm Accounting, etc.

ADVERTISEMENTS: (adsbygoogle = window.adsbygoogle || []).push({}); Accounting 3. Functions of Accounting:

Functions of accounting may be broadly classified into four categories:

1. Historical Function:

The primary function of accounting is historical in nature, i.e., to maintain a correct record. It includes recording, classifying, summarizing, analysing and interpreting the recorded data of an enterprise (an accounting unit). The major objective of this function is to report at regular intervals to owners/shareholders, management and other interested parties in a desired form and format through financial statements.

2. Managerial Function:

The major purpose of this function is to maximize operational efficiency. In this form it helps in planning future activities, controlling day-to-day operations by comparing actual results with predetermined standards. In short, accounting helps in decision making.

3. Legal Function:

From the viewpoint of accountability, accounting should satisfy the legal requirements of Accounting Standards Board (ASB) as well as the government. For example, audit is compulsory for ensuring compliance of standards.

4. Communicating Function:

Accounting, as a language of business, should be in a position to communicate the information to the users of information say, owners/shareholders, management, creditors, employees, consumers, investors, government, etc.

Accounting 4. Importance of Accounting and its Users:

The importance of accounting is unique as it is useful not only to the internal users but also to the external users (direct and indirect users). The importance of accounting can be understood in the popular use of this systematic information by the interested parties (i.e., the data processed in the form and format meaningful to the user). This systematic information is used by interested persons for decision making.

However, there is no unanimity in different countries as to who these interested parties are. For example, Accounting Standards Board (ASB) of USA in its Statement of Financial Accounting Concepts (SFAC) No.1 states that ‘Present and potential investors, creditors and others are the users’. The Corporate Report (1975) London lists all types of users who need accounting information. The Stamp Report (1980) Canada states that because of broader accountability concept in Canada, the range of users is also broader.

However, the International Accounting Standards Committee (IASC) lists investors, employees, lenders, suppliers and other trade creditors, customers, government and their agencies, public and management as users in its framework (1989). Taking into consideration the above list of users, categorization is made as users of information having direct interest and users of information having indirect interest.

1. Users having Direct Interest:

The users having direct interest in accounting information are considered to be owners and potential owners/management, shareholders and potential shareholders, creditors and potential creditors, suppliers and potential suppliers, employees and consumers, government and tax authorities.

They are briefly discussed in the following list:

(a) The owners/shareholders provide funds to an enterprise in the form of capital. Hence, they are interested in accounting information to know whether the business is conducted on sound lines, whether the capital is used properly, whether it is in a position to provide best of the returns on their investment and whether the business is run on legal and ethical norms.

The income statement and the statement of affairs prepared from time to time should be in accordance with the accounting standards so that comparability and decision making become easier.

(b) The management is interested in financial accounting to determine whether the business is profitable, whether the position is sound and whether it has competitive advantage. Financial accounting, being the eyes and ears of management, facilitates decision making in relation to expansion, diversification, etc., and framing of suitable policies for future.

(c) The creditors are interested in the financial soundness of a business. They may be suppliers of goods on credit, lenders of money, bankers and others who would support the enterprise by providing credit facilities. Their main interest is security for credit, apart from income. They carefully scrutinize the income statement and position statement from time to time in addition to watching the business operations closely from outside by means of disciplined enquiry.

(d) The investors/prospective investors (apart from shareholders) are interested to know how far their investment is safe or is going to be safe. They examine carefully the statements of income and position to assess the soundness of the business. Altogether they are interested in the safety of their investment along with returns.

(e) The consumers are interested to get the goods at a fair price (comparatively reduced price). They are much interested to know the control mechanism adopted by the enterprise so that cost reduction is made possible.

(f) The employees are interested in accounting of the enterprise so as to assess the profitability which would be the basic factor for determining higher wages, bonus, better working conditions, etc. The sound financial position of the enterprise encourages them to contribute their best to the firm.

(g) The government (central, state and local bodies) is interested in accounting of the enterprise to know the earnings based on which taxes could be collected to formulate revenue. Further, for compiling ‘national income’ accounting prepared on the basis of accountability becomes essential.

(i) The general public is interested in the accounting of a firm from the point of view of the firm’s social responsibility. In addition, it may comprise prospective lenders, investors, consumers who would closely watch the financial progress of the enterprise.

(j) The researchers are equally interested in accounting of an enterprise. They utilize the data for their research purposes to interprete and suggest new ways of maintaining accounts based on standard measurement, usefulness and decision making.

Thus, the importance of accounting is recognized by its users and with the fact that accountability cannot be established without accounting.

2. Users having Indirect Interest:

The users having indirect interest in accounting information are considered to be financial analysts, stock exchanges, lawyers, regulatory authorities, registration authorities, financial press and reporting agencies, trade associations and labour unions. These users are generally agencies which help/protect such persons or potential persons having a direct interest in them.

Table 6.1 provides decision usefulness of accounting information.

BusinessEssay . (2022) 'Accounting and Financial Management'. 27 November.

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Bibliography

BusinessEssay . "Accounting and Financial Management." November 27, 2022. https://business-essay.com/accounting-and-financial-management/.

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