Conceptual foundation
Accounting- an information system
Accounting is an information system and it can be considered as a language of business as well. The overall objective of an accounting information system is to provide information to various users. There are four branches of accounting namely financial accounting, cost accounting. Management accounting and social responsibility accounting.
Accounting- an information system
Accounting is an information system and it can be considered as a language of business as well. The overall objective of an accounting information system is to provide information to various users. There are four branches of accounting namely financial accounting, cost accounting. Management accounting and social responsibility accounting.
Financial Accounting is concerned with recording the business transaction and directed towards the ascertainment of operating result as well as financial condition. Cost accounting is concerned with recording measuring and reporting the costs. Management accounting is concerned with providing the accounting information to the management for planning. Implementation and controlling. Similarly, social responsibility accounting is related with the communication, measurement and contribution made by the business organization to the society where the organization are born and grown.
Financial accounting
Concepts of financial accounting
Financial accounting is the process of identifying, measuring and communicating economic information to the users of such information. It is a branch of accounting which is primary related to recording, classifying, summarizing and presenting the day to day transactions. It aims to ascertain profit and loss incurred during a particular period of time through profit and aims to ascertain profit and loss incurred during a particular a particular period of time through profit and loss account. Similarly, it also shows the financial position on a given date through balance sheet.
Concepts of financial accounting
Financial accounting is the process of identifying, measuring and communicating economic information to the users of such information. It is a branch of accounting which is primary related to recording, classifying, summarizing and presenting the day to day transactions. It aims to ascertain profit and loss incurred during a particular period of time through profit and aims to ascertain profit and loss incurred during a particular a particular period of time through profit and loss account. Similarly, it also shows the financial position on a given date through balance sheet.
Financial accounting is historical in nature since it records the past transactions. It is the oldest branch of accounting which is equally applicable in all types of organizations. The other branches of accounting have their roots on it. It is based on money measurement concept since if records the transaction that can be measured in monetary terms only. The accounting principles and standard under financial accounting are generally accepted and universally practiced. It aims to provide information about result of the business operation and financial position to the internal and external parties.
Objective of financial accounting
The objectives of fianicla accounting are mentioned below:
1. To record the financial transactions: the main objective of financial accounting is to record the financial transaction of a business systematically and scientifically. The need of recording the transactions arises due to the limitation of memory power of human being. Under financial accounting, the tractions are recorded in different book of accounts.
2. To disclose the result of operation: another important objective of financial accounting is to disclose the result of operation i.e. profit earned or loss suffered during a particular period of time. This is achieved by preparing income statement.
3. To reveal the financial status: financial accounting also aims to reveal the financial condition of a firm on a given date. For this, a statement of assets and liabilities called balance sheet is prepared.
4. To supply necessary financial information: financial accounting aims to provided information to various parties like government, investors, creditors, owners etc. usually the information is supplies at the end of accounting period through various financial statement.
Limitation of Financial Accounting
Financial accounting suffers from some limitations which are as follows:
1. Discloses the overall result only: financial accounting discloses the overall result of a business. It fails to reveal the result of each department, process, products, jobs etc.
2. Not helpful in price fixation: financial accounting does not provided adequate information for fixation of selling of the products produced or services rendered by business. So, it is not able to prepare tender or quotations.
3. No control on cost: financial accounting does not provided proper system of controlling various elements of cost like material, labor and other expenses. Cost control procedure can be adopted by setting standers, but it lacks in financial accounting.
4. No classification of cost: financial accounting does not classify cost into different categories such as dirt and indirect, fixed and variable, controllable and uncontrollable, normal and abnormal, etc. it only dividends expenditures into two categories as capital and revenue.
5. Fails to offers a system of standards: financial accounting fails to measure the efficiency of material, labor another respires as it does not offer any system of standard.
6. Fails to offer cost information: financial accounting does not provide cost information to the management to make pans and decisions as well as controlling the operations.
7. Fails to ascertain cost of products and services: financial accounting fails to ascertain cost of products and services due to lack of cost information.
Cost accounting
Concept of cost accounting
Cost accounting is a branch of accounting that has evolved to overcome the limitation of financial accounting. It is the process of accounting for cost, which is concern need more with the ascertainment, allocation, distribution and accounting aspect of costs. It is that branch of accounting, which deals with the classification, recording, allocation, summarization and reporting of current and prospective costs. Actually, it is the formal mechanism by means of which costs of products and services are ascertained and controlled.
It is an internal reporting system that aims to assist the management for planning and decision making. It primarily emphasizes on cost and earls with collection, analysis, interpretation and presentation for managerial decision making on various business problems.
Cost accounting is more concerned with short-term planning and its reporting period is much lesser than financial accounting. It deals with historical data but it is also futuristic in approach. Cost accounting system cannot be installed without proper financial accounting system. Each organization can develop a costing system best suited to its individual needs. In financial accounting the major emphasis is given in cost classification based on types of transactions e.g. salaries repairs, insurance, stores etc. but in cost accounting, the emphasis is laid on functions, activities, products processes and on internal planning and control and information needs or the organization.
According to Harold J. Weldon "cost accounting is the classification, recording, and appropriate allocation of expenditure for the determination of the cost of products or services, and for the presentation of suitability arranged data a for the purposed of control and guidance of management."
Similarly, according to National association of Accountants – USA "cost accounting is a systematic set of procedures for recording and reporting measurements of the cost of manufacturing good and performing services in the aggregate and in details."
From the above information, it can be concluded that cost account is accounting for costs aimed at providing cost data, statements and reports for the purposes to assist the management in planning, decision making and controlling costs.
Objectives and functions of Cost accounting
The main objective and functions of cost accounting are mentioned below:
1. To ascertain cost: the main objective of cost accounting is to ascertain in the cost of goods and services. The expenses that are incurred while producing goods or rendering services are called costs. Some examples of cost are material, labour another direct and indirect expense. Under cost accounting, cost are collected, classified and analyzed with the aim of finding out total as well as per unit are cost of goods, services, process, contract etc.
2. To analyses cost and loss: another objective of cost accounting is to analyze the cost of each activity. The analysis of cost is necessary to classify the cost into controllable or uncontrollable, relevant or irrelevant, profitable or unprofitable etc. similarly, under cost accounting, the effects of misuse of material, idle time, breakdown or damage of machine on the cost is also analyzed.
3. To control cost: cost control is a technique that is used to minimize the cost of product and services without compromising on the quality. Cost accounting aims at controlling the cost by using various techniques, such as standard costing and budgetary control.
4. To help in fixation of selling price: another important objective of cost accounting is to help in fixation of selling price. The cost are accumulated, classified and analyzed to ascertain cost per unit. The selling price per unit is calculated by adding a certain profit on the cost per unit. Under cost accounting, different techniques such as job costing, batch costing, output costing services costing etc are used for determined the selling price.
5. To aid the management: cost accounting aims at assisting the management in planning and its imporemetation by providing necessary costing information that also enable the evaluation of the past activities as well as future panning.
Importance/advantages of cost accounting
The importance/ advantages of cost accounting are presented below:
1. Helps inn controlling cost: cost accounting helps in controlling cost by applying some techniques such as standard costing and budgetary control.
2. Provides necessary cost information: it provides necessary cost information to the management for planning, importation and controlling.
3. Ascertains the total and per unit cost of production: it ascertains the total and per unit cost of production of good and service that helps to fix the selling price as well.
4. Introduces cost reduction programmers: it helps to introduce and implement different cost reduction programs.
5. Discloses the profitable and non profitable activities: it discloses the profitable and non profitable activates that enable management to decide to eliminate or control unprofitable activities and expand or develop the profitable activities.
6. Provides information for the comparison of cost: it provides reliable data and information which enables the comparison of costs between periods, volumes of output, department and processes.
7. Checks the accuracy of financial accounts: it helps checking the accuracy of financial accounts. This is done by preparing cost reconciliation statement.
8. Helps investors and financial institutions: it is also advantages to investors and financial institutions since it discloses the profitability and financial position of the concern in which they intend to invest.
9. Beneficial to workers: it is beneficial to workers as well since it emphasizes the efficient utilization of labor and scientific system of wages payment.
Limitations of cost accounting
Besides a number of advantages, cost accounting suffers from a number of limitations. Some of them are mentioned below:
1. Lack of uniformity: cost accounting lacks a uniforms procedure. It is possible that two equally competent cost accountants may arrive at different result from the same information. Keeping this limitation in view, all cost accounting results can be taken as mere estimates.
2. Conceptual diversity: there are a large number of conversions, estimations and flexible factors such as classification of cost into its elements, issue materials on average or standard price, apportionment of overhead expenses, arbitrary allocation of joint costs, division of overhead into fixed and variable costs, division of costs into normal and abnormal and controllable and non-controllable and adoption of original and standard costs due to which it becomes different to have exact costs. In such a context, the reliable of cost accounting might be low.
3. Costly: there are many formalities which are to be observed by a small and medium size concern due to which the established and running costing system becomes more expensive.
4. Ignorance of futuristic situation: the contribution of cost accounting for handling futuristic situation has not been much. For example, it has not evolved so far any tool for handling inflationary situation.
5. Lack of double entry system: under cost accounting, double entry system is not adopted, so it does not enable to check the arithmetical accuracy of the transactions and locate the errors.
6. Developing stage: cost accounting is in developing stage since its principle, converts and conventions are not fully developed.
Different between financial and cost accounting
The different between financial accounting and cost accounting are mentioned in this following table.
Management accounting
Meaning and definition of management accounting
The term "management accounting' consists to two words 'management' and accounting', which is used to describe the modern concept of accounting as a tool of management in control to the conventional accounts prepared to show the financial position of concern. It is the study of managerial aspect of accounting. It shows how accounting functions can be reoriented so as to fit within the framework of management activity. In other words, management accounting is that accounting which is convened with providing information to managers- that is, people inside an organization that direct and control operation. It is that accounting which provides necessary information to the management for discharging its functions i.e. planning, organization, directing and controlling. It provides the required information for effective and effect performance of these functions. Managerial accounting provides to essential data with which the organization are actually run.
The above figure shows how accounting provides information to the management. The sources of information for management accounting are cost data and reports as well as financial statement and information as supplied by cost and financial accounting. The information provided by management accounting is used by management for carrying out its different activities like panning, organizing, decision-making, coordinating, and controlling.
T. lucey defines "management accounting is primarily concerned with the data gathering analysis, processing, interpreting and communicating the resulting information for use within the organization so the management can more effectively plan, make decision and control operations"
According to American accounting association "management accounting is the application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives and in the making of relational decision with a view to achieve these objectives."
In the words of J. Batty "management accounting is the term used to describe accounting methods, system and techniques which coupled with special knowledge and ability, assists management in its task of maximizing profits or minimizing losses."
From the above definition, it is clear that management accounting is concerned with assisting the management to carry out its activities. It relies on cost and financial accounting for necessary information.
Objective and importance/ advantages of management accounting
The main objective and importance/ advantages of management accounting are summarized as under:
1. To help in formulating plans: management accounting assists management in planning the activities of the business. Planning is deciding in advance what is to done, when it is to be done, how it is to be done and by whom it is be done. Planning is based on facts are provided by past accounts on which forecast of future transaction is made.
2. To help in the interpretation of financial information: management accountant presents the accounting in interpreting in an intelligent and simple manner. This will help the management in interpreting the financial data, evaluating alternative courses of action available and guiding it in taking decision to have the most desired financial results.
3. To help in controlling performance: under management accounting. The actual performance is compared with the targets, plans, standard and deviations are analyzed. Thus management accounting helps in controlling helps in controlling the performance and take suitable actions in order to correct the adverse deviations by revising the budgets if needed.
4. Helps in organizing: The management account recommends the use of budgeting responsibility accounting, cost control techniques and internal financial control. These all need the intensive study of the organization structure. In turn, it helps to rationalize the organizational structure.
5. Helps in solving business problems: management accounting provides accounting date to the management like whether labour should be replaced by machinery or not, whether selling price should be reduced or to along with recommendation as to choose which alternative will be the best. For such decision, the management accountant takes the help of marginal costing, cost volume profit analysis, standard costing, capital budgeting etc.
6. Helps in coordinating operations: management accounting helps the management in coordinating the activities of the concern by preparing functional budgets at first and coordinating the whole activities of the concern by integrating all functional budgets into one known as master budget. Thus, management accounting is a useful tool in coordinating the various operations of the business.
7. Helps in motivating employees: management accounting helps to increase the effectiveness of the organization and motivates the member of the organization. This is done by setting goals, planning the best and economical course of action and measuring the performance.
8. Communicating up-to-date information: management needs information for taking decision and for evaluating performance of the business. Such information can be made available to the different level of management by means of reports, which are an internal part of the management accounting. This helps taking suitable action for the purposes of control.
Scope of management accounting
The scope of management accounting is very wide and based as it includes a variety of aspects of business operations. The following are some of the areas of specialization includes within the scope of management accounting:
1. Financial accounting: it records all business transactions and profit and loss account is made to show the results of the business operations and balance sheet to show the financial position. This is forms the basis for analysis and interpretation for providing meaningful date to the management. Thus, financial accounting comes under the scope of management accounting.
2. Cost accounting: cost accounting refers to the classification, recording, and allocation of expenditures for the determination of the cost of products or services and ensuring the management to control over the same. This includes the determination of cost of every order, job, control, process or unit as required. Such information plays an important role for the management in carrying out its activities.
3. Forecasting and budgeting: this refers to the formulation of budgets and forecasts with the help of operating and other departments of a business concern. The ultimate success of any budgeting spends on the proper setting of target figure in the budgets and the actual realization of the same in practice.
4. Cost control techniques: these serve as effective tools for comparing the actual results with the predetermined figures determine in budgets. They greatly help in bringing the budgets into operating plans.
5. Statistical data: it is concerned with the supply of necessary statically data and particulars needed by various departments of the business concern. This included as stated earlier, statistical compilation of case studies, engineering records, and minutes of meeting, special servers and many other buns documents.
6. Taxation: this necessities the computation of profit in accordance with the provisions of the income tax act and also prompt filing of return periodically and payment of taxes.
7. Office services: this mainly relates to the maintenance of data processing and other office management service, stenciling and duplicating, dealing of inward and out way mains etc.
Limitations of management accounting
Management accounting, as any other branch of knowledge, is not free from limitations. Though the emergence of management accounting has greatly improved the managerial performance, yet it has to face certain challenges and constrains conditioned mostly by the external factors' there factors that ecstatic the effectiveness of management accounting are discusses below:
1. Continuance of intuitive decision-making: management accounting is supposed to eliminate the intuitive decision-making process of management and replace it with scientific decision-making. Unfortunately, much management is prone to take the easy and simple path of intuitive decision rather than the difficult but reliable but reliable scientific decision-making process in the day-to-day management.
2. Broad-based scope: the scope of management accounting is wide and broad-based and this creates many difficulties in the implementation process. It is easy to record, analyze, and interpret and historical event converted into monetary terms in most objective manner. But it will be difficult to perform the same functions in respect of future and unquantifiable situations in the light of the past records.
3. Based on other accounting: management accounting is based on financial accounting and cost accounting. The effectiveness of management accounting largely depends on the effectiveness of these accountings.
4. Evolutionary stage: management accounting is a new discipline and a growing subject too. It is still in the infancy stage and undergoing evolutionary process. Naturally, it faces certain obstacles before achieving, perfection and finality. This necessitates happening of the analytical tools and Improving of techniques for removing the air of doubt as regards uncertainly in their applications.
5. No an alternative to the management: management accounting is not an alternative to the management. It just helps the management to carry out its activities. This is not an end, rather a means only.
6. Costly installation: for installation of a system of management accounting in a business concern, an elaborate organization and a large number of manuals are essential. This in turn increases the cost due to which only large-scale organization can afford to install it.
Differences between cost and management accounting
The different between cost and management accounting are mentioned in the following table:
Differences between financial and management accounting
The difference between financial accounting and management accounting are mentioned below:
Social responsibility accounting
It is the discipline of accounting which is related with communication, measurement and contribution made by the business organization to the society where the organization are born and grown. It is the process of accounting for social responsibility aspects of a business. It is related with social cost incurred by the organization and social responsibility aspects of a business. It is related with social cost incurred by the organization and social benefits by it and reporting thereof. Example of contribution given by the business enterprise is environmental contribution, employment gyrations, financial aid to the society, providing residential accommodation and low cost education to the weak section of the society etc.
Meaning and definition of management accounting
The term "management accounting' consists to two words 'management' and accounting', which is used to describe the modern concept of accounting as a tool of management in control to the conventional accounts prepared to show the financial position of concern. It is the study of managerial aspect of accounting. It shows how accounting functions can be reoriented so as to fit within the framework of management activity. In other words, management accounting is that accounting which is convened with providing information to managers- that is, people inside an organization that direct and control operation. It is that accounting which provides necessary information to the management for discharging its functions i.e. planning, organization, directing and controlling. It provides the required information for effective and effect performance of these functions. Managerial accounting provides to essential data with which the organization are actually run.
The above figure shows how accounting provides information to the management. The sources of information for management accounting are cost data and reports as well as financial statement and information as supplied by cost and financial accounting. The information provided by management accounting is used by management for carrying out its different activities like panning, organizing, decision-making, coordinating, and controlling.
T. lucey defines "management accounting is primarily concerned with the data gathering analysis, processing, interpreting and communicating the resulting information for use within the organization so the management can more effectively plan, make decision and control operations"
According to American accounting association "management accounting is the application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives and in the making of relational decision with a view to achieve these objectives."
In the words of J. Batty "management accounting is the term used to describe accounting methods, system and techniques which coupled with special knowledge and ability, assists management in its task of maximizing profits or minimizing losses."
From the above definition, it is clear that management accounting is concerned with assisting the management to carry out its activities. It relies on cost and financial accounting for necessary information.
Objective and importance/ advantages of management accounting
The main objective and importance/ advantages of management accounting are summarized as under:
1. To help in formulating plans: management accounting assists management in planning the activities of the business. Planning is deciding in advance what is to done, when it is to be done, how it is to be done and by whom it is be done. Planning is based on facts are provided by past accounts on which forecast of future transaction is made.
2. To help in the interpretation of financial information: management accountant presents the accounting in interpreting in an intelligent and simple manner. This will help the management in interpreting the financial data, evaluating alternative courses of action available and guiding it in taking decision to have the most desired financial results.
3. To help in controlling performance: under management accounting. The actual performance is compared with the targets, plans, standard and deviations are analyzed. Thus management accounting helps in controlling helps in controlling the performance and take suitable actions in order to correct the adverse deviations by revising the budgets if needed.
4. Helps in organizing: The management account recommends the use of budgeting responsibility accounting, cost control techniques and internal financial control. These all need the intensive study of the organization structure. In turn, it helps to rationalize the organizational structure.
5. Helps in solving business problems: management accounting provides accounting date to the management like whether labour should be replaced by machinery or not, whether selling price should be reduced or to along with recommendation as to choose which alternative will be the best. For such decision, the management accountant takes the help of marginal costing, cost volume profit analysis, standard costing, capital budgeting etc.
6. Helps in coordinating operations: management accounting helps the management in coordinating the activities of the concern by preparing functional budgets at first and coordinating the whole activities of the concern by integrating all functional budgets into one known as master budget. Thus, management accounting is a useful tool in coordinating the various operations of the business.
7. Helps in motivating employees: management accounting helps to increase the effectiveness of the organization and motivates the member of the organization. This is done by setting goals, planning the best and economical course of action and measuring the performance.
8. Communicating up-to-date information: management needs information for taking decision and for evaluating performance of the business. Such information can be made available to the different level of management by means of reports, which are an internal part of the management accounting. This helps taking suitable action for the purposes of control.
Scope of management accounting
The scope of management accounting is very wide and based as it includes a variety of aspects of business operations. The following are some of the areas of specialization includes within the scope of management accounting:
1. Financial accounting: it records all business transactions and profit and loss account is made to show the results of the business operations and balance sheet to show the financial position. This is forms the basis for analysis and interpretation for providing meaningful date to the management. Thus, financial accounting comes under the scope of management accounting.
2. Cost accounting: cost accounting refers to the classification, recording, and allocation of expenditures for the determination of the cost of products or services and ensuring the management to control over the same. This includes the determination of cost of every order, job, control, process or unit as required. Such information plays an important role for the management in carrying out its activities.
3. Forecasting and budgeting: this refers to the formulation of budgets and forecasts with the help of operating and other departments of a business concern. The ultimate success of any budgeting spends on the proper setting of target figure in the budgets and the actual realization of the same in practice.
4. Cost control techniques: these serve as effective tools for comparing the actual results with the predetermined figures determine in budgets. They greatly help in bringing the budgets into operating plans.
5. Statistical data: it is concerned with the supply of necessary statically data and particulars needed by various departments of the business concern. This included as stated earlier, statistical compilation of case studies, engineering records, and minutes of meeting, special servers and many other buns documents.
6. Taxation: this necessities the computation of profit in accordance with the provisions of the income tax act and also prompt filing of return periodically and payment of taxes.
7. Office services: this mainly relates to the maintenance of data processing and other office management service, stenciling and duplicating, dealing of inward and out way mains etc.
Limitations of management accounting
Management accounting, as any other branch of knowledge, is not free from limitations. Though the emergence of management accounting has greatly improved the managerial performance, yet it has to face certain challenges and constrains conditioned mostly by the external factors' there factors that ecstatic the effectiveness of management accounting are discusses below:
1. Continuance of intuitive decision-making: management accounting is supposed to eliminate the intuitive decision-making process of management and replace it with scientific decision-making. Unfortunately, much management is prone to take the easy and simple path of intuitive decision rather than the difficult but reliable but reliable scientific decision-making process in the day-to-day management.
2. Broad-based scope: the scope of management accounting is wide and broad-based and this creates many difficulties in the implementation process. It is easy to record, analyze, and interpret and historical event converted into monetary terms in most objective manner. But it will be difficult to perform the same functions in respect of future and unquantifiable situations in the light of the past records.
3. Based on other accounting: management accounting is based on financial accounting and cost accounting. The effectiveness of management accounting largely depends on the effectiveness of these accountings.
4. Evolutionary stage: management accounting is a new discipline and a growing subject too. It is still in the infancy stage and undergoing evolutionary process. Naturally, it faces certain obstacles before achieving, perfection and finality. This necessitates happening of the analytical tools and Improving of techniques for removing the air of doubt as regards uncertainly in their applications.
5. No an alternative to the management: management accounting is not an alternative to the management. It just helps the management to carry out its activities. This is not an end, rather a means only.
6. Costly installation: for installation of a system of management accounting in a business concern, an elaborate organization and a large number of manuals are essential. This in turn increases the cost due to which only large-scale organization can afford to install it.
Differences between cost and management accounting
The different between cost and management accounting are mentioned in the following table:
Differences between financial and management accounting
The difference between financial accounting and management accounting are mentioned below:
Social responsibility accounting
It is the discipline of accounting which is related with communication, measurement and contribution made by the business organization to the society where the organization are born and grown. It is the process of accounting for social responsibility aspects of a business. It is related with social cost incurred by the organization and social responsibility aspects of a business. It is related with social cost incurred by the organization and social benefits by it and reporting thereof. Example of contribution given by the business enterprise is environmental contribution, employment gyrations, financial aid to the society, providing residential accommodation and low cost education to the weak section of the society etc.
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