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WHAT IS ACCOUNTING?
Quite simply, accounting is a language: a language that provides information about the financial position of an organization. When you study accounting you are essentially learning this specialized language. By learning this language you can communicate and understand the financial operations of any and all types of organizations.
This is because the information required by most organizations is very similar and can be broken down into three main categories:
ACCOUNTING INTRODUCTION
Operating Information
This is the information that is needed on a day-to-day basis in order for the organization to conduct its business. Employees need to get paid, sales need to be tracked, the amounts owed to other organizations or individuals need to be tracked, the amount of money the organization has needs to be monitored, the amounts that customers owe the organization need to be checked, any inventory needs to be accounted for: the list goes on and on. Operating information is what constitutes the greatest amount of accounting information and it provides the basis for the other two types of accounting information.
Financial Accounting Information
This is the information that is used by managers, shareholders, banks, creditors, the government, the public, etc… to make decisions involving the organization and its operations. Shareholders want information about what their investment is worth and whether they should buy or sell shares, bankers and other creditors want to know whether the organization has an ability to pay back money lent, managers want to know how the company is doing compared to other companies. This type of information would be very difficult to extract if every company used a different system for recording their financial position. Financial accounting information is subject to a set of ground rules that dictate how the information is reported and this ensures uniformity.
Managerial Accounting Information
In order for the managers of a company to make the best decisions for a company they need to have specific information prepared. They use this information for three main management functions: planning, implementation and control. Financial information is used to set budgets, analyze different options on a cost basis, modify plans as the need arises, and control and monitor the work that is being done.
As you can see, accounting is a multifaceted system involving different people with different needs and after analyzing the various uses and applications of accounting information the American Accounting Association has come up with this definition: “the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.”
In order to facilitate the informed use of this financial information, accounting has come to be based on specified rules or conventions called “principles.” These principles provide general laws or rules that are used to guide accounting activity and are called
Accounting Principles, or GAAP
for short. These principles are established by the Financial Accounting Standards Board (FASB) which is a nongovernmental agency funded by the accounting profession and contributions from business organizations. While there is no legal obligation for companies to adhere to GAAP, there are strong practical reasons to do so. From auditing to reporting earning to the US Securities Exchange Commission to applying for a loan, there are very compelling reasons for organizations to conform to the generally accepted standard.
What Is The End Result Of All This Accounting Information?
nd the end result of all of this recording is the preparation of financial statements. These statements let people see, at a glance, the financial position of an organization. These statements provide summaries of the operating information and are used extensively by people within and external to the company. The statements fall into one of two categories:
· Status/Stock – these statements show the financial status of an organization at one specified instant in time. Stock reports = a snapshot.
· Flow Report – these statements show the flow of financial information over a period of time. Flow reports = motion picture
GAAP requires the preparation of three different statements:
Balance Sheet
A Balance Sheet is a status report that shows information about the organization’s resources at one given time. Examples of information found on a balance sheet are how much cash is in the bank, what is owed to creditors, and the value of the company’s assets.
Income Statement
An Income Statement (also called a Statement of Earnings, Statement of Operations, or a Profit and Loss Statement) is a report that shows the flow of revenues (amounts earned from business activity) and expenses (amounts paid in the course of operations) over a given period of time, typically a month, quarter, or year.
Statement of Cash Flow
As the name suggests, this is also a flow statement that details the movement of cash through the organization over a specified period.
The whole purpose of accounting is to provide information that is useful and relevant for interested parities when making decisions regarding the company and its operations. In order to do that effectively, a specific language and subsequent rules have been developed for users of the information. By learning accounting you learn these rules and can then communicate financial information with others in a comprehensible and comparable manner.
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Financial accounting vs. Managerial accounting: Managerial accounting differs from financial accounting in a number of ways
that are briefly discussed below.
Click here for a detailed study of the
difference between financial and managerial accounting.
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Financial Accounting |
Managerial Accounting |
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Reports to those outside the
organization owners, lenders, tax authorities and regulators. |
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Reports to those inside the organization
for planning, directing and motivating, controlling and performance
evaluation.
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Emphasis is on summaries of
financial consequences of past activities.
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Emphasis is on decisions affecting the
future. |
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Objectivity and verifiability of data
are emphasized. |
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Relevance of items relating to decision
making is emphasized.
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Precision of information is required. |
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Timeliness of information is required.
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Only summarized data for the entire
organization is prepared. |
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Detailed segment reports about
departments, products, customers, and employees are prepared.
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Must follow
Generally Accepted Accounting Principles (GAAP). |
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Need not follow
Generally Accepted Accounting Principles (GAAP).
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Mandatory for external reports. |
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Not mandatory.
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Managerial accounting is managers oriented therefore its study must be
preceded by some understanding of what managers do, the information managers
need, and the general business environment. Accordingly we shall briefly examine
these subjects.
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Need for Managerial Accounting Information: Every organization-large and small-has managers. Someone must be
responsible for making plans, organizing resources, directing personnel, and
controlling operations. Every where mangers carry out three major
activities-planning, directing and motivating, and controlling.
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History of Managerial Accounting: Managerial accounting has its roots in the industrial revolution of the 19th
century. During this early period, most firms were tightly controlled by a
few owner-managers who borrowed based on personal relationships and their
personal assets. Since there were no external shareholders and little
unsecured debt, there was little need for elaborate financial reports.
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Code of
Conduct for Management Accountants: Practitioners of management accounting and financial management have an
obligation to the public, their profession, the organization they serve, and
themselves, to maintain the highest standards of ethical conduct. In
recognition of this obligation, the Institute of management Accountants has
promulgated the following standards of ethical conduct for practitioners of
management accounting and financial management. Adherence to these standards
internationally is integral to achieving objective of management accounting.
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The Certified Management Accountant (CMA):
A management accountant who possesses the necessary qualification and who
possesses a rigorous professional exam earns the right to be known as a
certified Management Accountant (CMA). In addition to the prestige that
accompanies a professional designation, CMAs are often given greater
responsibilities and higher compensation than those who do not have such a
designation. Information about becoming a CMA and CMA program can be
accessed on the
Institute of Management Accountants
To become a Certified Management Accountant, the following four steps must
be completed:
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File an application for
admission and register for the CMA examination
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Pass all four parts of
the CMA examination within a three year period
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Satisfy the experience
requirement of two continuous years of professional experience in
management and/or financial accounting prior to or within seven years
of passing the CMA examination.
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Comply with the
standards of ethical conduct for practitioners of management
accounting and financial management.
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In Business
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How's the Pay?
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In 1998 Ronald Madison
reported that, with normal progress in a larger corporation, a
management accountant should be earning $45,000 with in three to
four years and after five to six years, $60,000. The salaries
would be even higher now.
Source: Ronald Mason, How do I start career in financial
management?" imastudents.org magazine, winter 1998, pp. 16-20.
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Sources:
Free Managerial Accounting Articles
Introduction to Managerial Accounting,
Ray H. Garrison Eric W. Noreen
Cost and Management Accounting, Adolph Matz Milton F. Usry
Advanced Financial Accounting
Managerial Accounting Help
Financial and Managerial Accounting
Accounting Management TD Gupta
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