Previous Lesson: Objectives of Accounting
Just as there are many types of economic decisions, so there are many types of accounting information. Financial Accounting, Management Accounting and Tax accounting often are describing three types of accounting information that are widely used business decisions.
The accounting system, as developed originally, concerned only the financial state of affairs and the financial results of operations. This is called financial accounting. It includes preparation of accounts, generally on historical basis, so as to enable the management to prepare the financial statements showing result of operations and the financial state of affairs, to exercise full control over their property and assets if the firm or the institution concerned and to prepare returns and statement concerning taxation.
Financial accounting refers to information describing the financial resources, obligations and activities of an economic entity. It is the maintenance of daily record of all financial transactions in such manner that it would help in the preparation financial statements. This information is designed primarily to assist investors and creditors. Accounting information is also used for preparation of income tax return. Financial accounting information is used for so many purposes that it often is called “General-Purpose Accounting”.
End results of financial accounting are financial statement. These statements must comply with accounting rules published by the various advisory and regulatory bodies. In other words, an organization does not have a completely free hand. This accounting is partly concerned with summarizing the transactions of a period and presenting the summary in a coherent form. This again is because financial statements are intended for outside consumption. The outsiders who have a need for and a right to information are entitled to receive it at defined intervals, and not at the whim of management.
Cost and Management Accounting
Cost and management accounting developed because of the limitations of financial accounting in respect of information relating to the cost of individual jobs, products, etc. this information is needed for purpose of making numerous decision like price to be quoted to a special customer.
Cost and management accounting is meant specifically to assist the management in its operational and strategic planning. This objective is achieved through preparation periodic reports about product, activities, departments and individuals. Cost accounting and responsibility accounting are the two significant parts of management accounting. The most important role of management accounting is to set targets in the form of functional budgets or standards, measure the actual performance and then make variance. It is specific purpose accounting.
Cost and Management accounting can be described as:
This is process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources.
The financial statements are prepared according to the General Accepted Accounting Principles (GAAP), International Accounting Standards (IAS), International Financial Reporting Standards (IFRS) and/or prevailing rules of country. Since these rules and regulation allow flexibility in the accounting treatment of different items, some of them may not be acceptable to tax authorities. Taxable profit must be calculated according to the tax laws of country, based on information provided by the financial statements. The preparation of tax returns has therefore become a specialized field. Every enterprise would like to minimize tax return. This required tax planning.
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Mukharji, A., & Hanif, M. (2003). Financial Accounting (Vol. 1). New Delhi: Tata McGraw-Hill Publishing Co.
Narayanswami, R. (2008). Financial Accounting: A Managerial Perspective. (3rd, Ed.) New Delhi: Prentice Hall of India.
Ramchandran, N., & Kakani, R. K. (2007). Financial Accounting for Management. (2nd, Ed.) New Delhi: Tata McGraw Hill.