2. OUTLINE
• Part 1: General Overview
• Part 2: Financial Accounting
• Part 3: Management and Cost Accounting
3. PART ONE
A GENERAL OVERVIEW
Introduction
Accounting vs Finance: A distinction
Financial vs Management Accounting: User
perspective
4. INTRODUCTION TO FINANCIAL
ACCOUNTING
“Accounting is the art of recording, classifying and summarizing in a significant
manner and in terms of money transactions and events which are, in part at
least, of a financial character and interpreting the results thereof.” AICPA
“It is the process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of the information.”
AAA
Its purpose is to communicate or report the results of business operations and
its various aspects.
5.
6. CONT’D
On analyzing the above definitions, the following characteristics of accounting
emerges:
Accounting is the art of recording and classifying different business transactions.
Generally the business transactions are described in monetary terms.
In accounting process, the business transactions are summarized and analyzed so
as to arrive at a meaningful interpretation.
The analysis and interpretations thus obtained are communicated to those who are
responsible to take certain decisions to determine the future course of business.
7. OBJECTIVES OF ACCOUNTING
To record the business transactions in a systematic manner.
To determine the gross profit and net profit earned by a firm during a specific period.
To assess the taxable income and the sales tax liability.
To know the financial position of a firm at the close of the financial year by way of
preparing the balance sheet.
To facilitate management control.
To provide requisite information to different parties, i.e., owners, creditors,
employees, management, government, investors, financial institutions, banks etc.
8. USERS OF ACCOUNTING INFORMATION
External Users
•Lenders
•Shareholders
•Governments
•Consumer Groups
•External Auditors
•Potential Investors
Internal Users
•Managers
•Officers
•Internal Auditors
•Sales Staff
•Budget Officers
•Controllers
1-8
9. CONT’D
•Accounting Information(AI): A Means to an End
Accounting information is not an end , but is a
means to an end i.e. its final product is decision which
is ultimately enhanced by the use of accounting
information, whether that decision made by owners,
management, creditors, government bodies, labor
unions ,etc.
10. Concept Questions
•Why accounting is being called as “the
language of business”?
•Why Accounting information is a means
to an end, not the end in itself?
11. FINANCIAL ACCOUNTING & MANAGEMENT ACCOUNTING
Financial Accounting:
• Financial accounting information provides information about the financial
resources, obligations, & activities of an enterprise that is intended for use
primarily by external decision makers.
• Financial accounting information appears in financial statements that are
intended for external use.
• The primary questions about an organization’s success that decision makers want
to know are:
• What is the financial picture of the organization on a given day?
• How well did the organization do during a given period?
12. CONT’D
•Accountants answer these primary questions with three
major financial statements.
•Balance sheet- Shows financial picture on a given day.
•Income statement- shows performance over a given period.
•Statement of cash flows- shows performance over a given
period.
13. CONT’D
Management Accounting:
Management accounting involves the development and interpretation of
accounting information intended specifically to assist managing in
operating the business.
Management accounting information is for internal use & provides special
information for managers.
Managers use this information in
setting companies goals,
evaluating the performance of departments and individuals,
deciding whether to introduce a new line of products, and
making virtually all types of managerial decisions.
14. •Management accounting generates information
that managers can use to make sound decisions
such as:
•Financial,
•Resource allocation,
•Production &
•Marketing decisions
CONT’D
15. FINANCIAL ACCOUNTING VS
MANAGEMENT ACCOUNTING
• Financial accounting is aimed to provide accounting
information to external users.
• Managerial Accounting is aimed to provide accounting
information to internal users.
• Although there is a difference in the type of information
presented in financial and managerial accounting, the
underlying objective is the same; to satisfy the information
needs of the user.
16. Financial Accounting Managerial Accounting
It describes the performance of the
business over a specific period. This
specific period referred to as “accounting
period”. It has one year long.
It is used to help management record,
plan and control the activities of a
business and to assist in the decision
making process. It can be prepared for
any period (for daily, quarterly or
annually).
It is required by law to prepare and
publish financial statements.
There is no legal requirement to prepare
management reports.
The format of published financial statement
is determined by several different regulatory
bodies: Company Law, Accounting standards,
Stock exchange etc.
There is no pre-determined format for
managerial accounting. It can be as detailed
or brief as management wish.
17. Financial accounting concentrate on the
business as a whole rather than analyzing the
component parts of the business.
For example, sales are aggregated to provide
a figure for total sales rather than published
product wise.
Management Accounting can focus on
specific areas of a business activities.
For example, it can provide insight into
performance of products, departments,
markets etc.
Financial accounting includes
information that can only be expressed
in monetary terms.
Managerial accounting usually include
a wide variety of financial and non-
financial information.
Example, number and productivity of
employees, sales volumes (units sold)
etc.
18. Its focus is on reporting to external
users of accounting information.
Its focus is on reporting to internal
users (Management).
It provides financial statements
based on Generally Accepted
Accounting Principle (GAAP).
It is not guided by Generally
Accepted Accounting Principles
(GAAP).
Financial accounting presents a
historic perspective on the financial
performance of the business.
Managerial accounting emphasis
on the future, e.g., sales budget and
on influencing the behavior of
managers.
19. Concept Question
What is the purpose of the 3 major financial statements?
How are the three major financial statements related?
Discuss the differences between managerial and financial
accounting.
