It is not so easy to define accounting as this word had many broad applications in the business, but a very precise definition by American accounting association is "the process of measuring, communicating and identifying economic information to grant informed judgments and decisions of information made by the users!"
In today's world everyone follow the discipline of accounting weather they are in job sectors or running their own business. Its concepts are essential in their everyday lives. Accounting can provides facts and figures about various parts of the business and can show weather its earning profit or which technique can be used to minimize the costs. It provides proper accounts with accurate figures for accounts. It provides a full record of the assets, liabilities and monies invested in various projects. It provides reports which assess the financial position of the business and its profit ratio. It helps stakeholders assess the business performance. The investors can make decision by evaluating into the financial reports of the business. So the accountants play a major role in the day to day of the business.
There are two main types of accounting:
- Financial Accounting
- Management Accounting
Financial accounting provides accounting reports and various analyses to different department of the business. Financial accountants are the only persons who are responsible for creating and submitting the financial statements of the company. They provide accurate information to the managers and everyone can rely on its information provided as it is authentic in each way.
The financial statements summarize the yearly business activities which are later on used by the shareholders, banks and the public to calculate the monetary worth of the business. The financial statements are audited by accountants to eliminate any errors and give assurance to the readers.
The financial statements are made of five documents; income statement, balance sheet, shareholders equity or owners, cash flow and notes. In Financial statement, notes are actually the explanations of items. Any thing which has direct impact of the financial statements is explained here.
The balance sheet shows all the summary of assets and liabilities at every year end. The accounts show the total number of liquid assets and cash in hand, total debt of the company and how much money is spend in all the different categories. Firms of financial accounting use different ratios to analyze these values and determine the financial health by various calculations.
In financial accounting the most critical component is the income statement. It gives a list of sales, cost of sales, expenses and profit or loss for the year of the company. This provides overall inside review of sales performance and profitability of the firm.
A cash flow statement provides the details of funds weather they are disbursed or received. This statement gives the overall inside review of revenue values which are present in the income statement. Funds from interest bearing investments are also listed here.
Shareholder or owner's equity account shows the total number of net income and how it's distributed between the shareholders or sometimes reinvested in the company.
Opinions of authors for financial accounting:
J. EDWARD KETZis a professor for accounting at the Pennsylvania State University. Dr. Ketz's research and teaching mainly focuses on accounting ethics, accounting information systems and financial accounting. He has edited the book Accounting Ethics and an author of Hidden Financial Risk.
He believed that if CEOs and directors of the company will start caring about their creditors and investors and should start providing meaningful financial disclosures and reports instead of making it up by themselves. As today accounting reports are much bigger than used to be. But actually they contain much less information than before just because there is a lot of useless data which covers the real messages. Until directors and managers won't realize that they have to serve their capital providers the things will not improve.
The management accounting is a process of identifying, analyzing, interpretation, measurement, accumulation, preparation and flow of information which is used by the management to evaluate, control and plan within an entity and to make sure the appropriate use of resources. Management accounting also prepares the financial reports for tax authorities, shareholders, regulatory agencies and creditors which are all non-management groups. The management accounting extends to the following three areas:
- Strategic Management: provides a further role to the management accountant as a strategic partner in the company.
- Performance Management: its lets them to develop the practice of decision making and controlling the performance of the company.
- Risk Management: it contributes to the frameworks and also practices for managing, reporting, identifying and measuring risks to the objectives of the company.
A management accountant uses its skills and knowledge in presenting and preparing the financial and other information to help the management in making policies, controlling the undertaking operations and in planning processes.
The Management accountants are also seen as the "value creators" among all the accountants. They are always looking forward in taking those decisions which affects the future of the company. Its experience and knowledge can be taken from various functions and fields in the company like treasury, marketing, logistics, auditing, pricing, information management, efficiency, valuation, etc.
Management accounting generates monthly or weekly reports for the chief executive officer and the department managers. These reports shows the amount of cash, orders, sales revenue, account receivable, accounts payable, raw material, work in process, debts outstanding and sometimes may include variance analysis and trend charts. Management accounting is also called managerial accounting or cost accounting.
Difference between Financial and Management Accounting
Both financial and management accounting has many differences in a number of ways.
- The management accounts provide key financial, accurate and statistical information to managers for helping in their day to day short term decisions, but financial accounting produces the annual financial reports for the external stakeholders.
- Management accounting gives information which helps the management of the organization in panning and control, but the financial accounting main motive is to provide useful information to creditors of the company, stakeholders and many others.
- Management accountant's main objective is to prepare many kinds of reports. Some of these reports show that how well the business units and the managers have performed. Some provides day to day updates on main indicators which are sales of the company, capacity utilization check, orders received etc. Some analytical reports show the problems such as downfall in profitability of the product. But financial accounting is focused on producing quarterly and annual financial statements.
- Financial accounting reports to those individuals who are outside the organization such as lenders, regulators, owners and tax authorities. But the managerial accounting reports to the inside of the organization for motivating staff, directing the managers, performing performance evaluation, decision making and controlling.
- Financial accounting focuses on the summaries of the financial consequences in past activities. But the managerial accounting focuses on the decisions which directly affect the future.
- Verifiability and objectivity of the data in financial accounting are emphasized. But in managerial accounting the items which are relevant in decision making process is emphasized.
- For the whole organization only the brief data is prepared in financial accounting. But in managerial accounting a detailed reports are prepared about the products, the customers, employees of the company and for every departments.
- "GAAP" is always followed by the financial accounting, but managerial accounting does not.
- It is mandatory in financial accounting for the external reports, but it's not mandatory in managerial accounting.
- Managerial accounting is actually a managers oriented so it must proceed by the mutually consent with the managers, what information they require. But the financial accounting works individually.
- Financial accounting have to produce their financial statements for the 12 months period, but there is not time limitation in the management accounting.
- Financial accounting has to follow a specific IAS format for its financial statements so that it could be compared with different organizations easily, but there is no format made for the management accounting.
Sources of information for accountant
An accountant is employed for preparing financial statements and auditing books of accounts and gives an accurate review of the operating results and financial conditions. It's an accountant job to compile all the accounts in the form of final accounts which reveal the financial condition of the organization. To accomplish his mission he has to gather information from different sources, and this information is provided by the management of the company. All the invoices for inventory, cash vouchers, bank receipts, books of accounts for various debtors, creditors, loans, assets and many more are the sources of information to an accountant. All of these are verified by personally checking its source like for example counting the inventory etc. The accountant maintains the authority general ledger to ensure that the data is captured correctly. They produce monthly reports to check integrity, reasonableness and accuracy.