Financial Accounting | Meaning of Financial Accounting 

Financial accounting is a branch of accounting specialized in company’s financial transactions.

This branch records financial transactions by using standardized guidelines.

Then summarized and presented in a financial statement.

It includes income statement, retained earnings, balance sheet and cash flow statement.

Company issues financial statements to out siders on a routine schedule.

These outsiders are internal and external users of financial statements.

They are shareholders, lenders, creditors, competitors, customers, employees, labour organizations and investment analysts etc.

Financial accounting uses common rules known as accounting standards.

Generally accepted accounting principles (GAAP), the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC) are used while preparing financial statements.

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Features of Financial Accounting | Characteristics of Financial Accounting

The major features of financial accounting are as follow:

Monetary transactions

Financial accounting records only monetary transactions.

Monetary means related to money.

It does not record any non-monetary transaction such as value of skilled labour and machine shut down due to load shedding.

Based on concepts

Financial accounting is based on accounting concepts like generally accepted accounting principles (GAAP), the Financial Accounting Standards Board (FASB).

These accounting concepts are followed worldwide.

Historical nature

Financial accounting records only took placed monetary transaction.

These transactions are historical in nature because they have already occurred.

It does not record any estimated or forecasting transactions.

Legal requirement

For Joint Stock Company, it is necessary to prepare financials statements.

It is legal requirement.

It is obligatory to get audited these statements from auditor.

These financial statements must to submit to company registrar office each accounting year.

External use

Generally, company prepares financial accounting for its external users.

They are investors, customers, suppliers, consumers, financial institutions etc.

They use financial statements to compare interest, dividend, price of goods or service etc.

Financial accounting process

Different accountants follow different accounting policies.

The process of financial accounting gets affected due to the different accounting policies.

Main different accounting policies are valuation of inventory and calculation of depreciation.

Bases for other accounting

Financial accounting forms the bases for other branches of accounting.

They are cost accounting, management accounting, tax accounting etc.

Finance is totally depended on financial accounting.

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Functions of Financial Accounting

There are many functions of financial accounting. The major functions are as under:

Recording

Recording is the basic function of financial accounting.

It is principally based on all financial transactions of business.

These financial transactions are recorded in chronological order.

They are initially recorded in the journal entries.

Classification

After recording financial transactions in journal entries, they are classified into different related group according to their nature. 

The work of classification is done in the book of ledger account.

Summarising

Classified data (ledger account) are summarised into trial balance.

Arithmetic accuracy is checked from trial balance.

From trial balance, different financial statements like trading account, profit and loss account and balance sheet are prepared at the end of accounting period.

Analysis and interpretation

The recorded financial data is analyzed.

It is interpreted in a manner that the end-users can make a meaningful judgment about the financial condition.

The data is also used for preparing the future plans and framing of policies for executing such plans in actions.

Communication

Different analysed and interpreted accounting information are to be communicated to the different interested parties.

They are shareholders, creditors, investors and trade union etc.

These are equally useful to management itself.

They use this information for various purposes according to their need.

This is done through preparation of accounting ratios, graphs, diagrams, funds flow statements etc.

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Objectives or Importance of Financial Accounting

What are the major objectives or importance of financial accounting?

The primary objectives or importance of financial accounting are as under:

Keep transactions

The main objectives of financial accounting are to keep financial transactions in systematics way.

Whenever, accounting data are needed is future, It will help to find out easily.

Find out profit or loss

Other objectives of financial accounting are to find out profit or loss of the organization.

It helps to find out profit or loss of the organization in an accounting year by preparing income statement (profit and loss account).

Find out financial position

Financial accounting helps to find out financial position of the organization in an accounting year by preparing balance sheet.

Balance sheet can be prepared for single year as well as comparative years.

Provide information

Financial accounting provides necessary information and upto date to related users.

Users are internal and external like management, creditors, employees and government etc. 

They take decision according to their need by comparing financial statement.

Fix the tax

Every state and country charges tax on income.

Income may be either personal or firm. 

Accounting helps to fixation of tax to pay the government in an accounting year.

Keep in Mind (KIM)

Limitation of Financial Accounting

Financial accounting contains journal entries, ledgers, trading account, profit and loss account, balance sheet, cash flow statement etc.

These accounts are helpful for cash position, assets and liabilities of organization.

But it has following limitations:

Differences between Cost Accounting and Financial Accounting

Cost accounting

Cost accounting is related to manufacturing.

In cost accounting, raw materials are converted into work-in-progress or finished goods with the help of men and machine.

Financial accounting

Financial accounting is a branch of accounting specialized in company’s financial transactions.

This branch records financial transactions by using standardized guidelines.

Then summarized and presented in a financial statement.

It includes income statement, retained earnings, balance sheet and cash flow statement.

Differences between Cost Accounting and Financial Accounting

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Management Accounting | Meaning of Management Accounting 

Management accounting is also known as managerial accounting.

Management accounting is the presentation of accounting information.

It helps to the management in the creation of policies and day to day operation of the organization.

From cost accounting and financial accounting, the managements make policy or planning, decision making, control, coordination, motivation etc.

Definition of management accounting

According to Robert N. Anthony, “Management accounting is concerned with accounting information that is useful to management.”

According to Meigs and Meigs, “Management accounting involves the preparation and use of accounting information for planning and controlling the operation of the business.”

Objectives of Management Accounting

The main objective of business organization is to earn maximum profit.

Management accounting provides information to management how to maximize the profit.

Planning

Management accounting helps to management for planning in advance; some planning is:

What to do,

How to do,

When to do,

Who is to do?

These plans may be short-term or long-term, introduce new product, increase sales volume in existing market, expand of market, additional fund for long term investment, additional fund for assets replacement etc.

Decision-making

To choose best alternative from more or many choices is called decision; some decisions are:

Fixation of price;

Whether price should be reduced or not to increase sales volume;

Whether factory should production full capacity or not;

Determination of most profitable level of production;

Whether to make or buy spare parts;

Whether new product should be introduced in the market;

Whether the product should be exported or not;

Whether the product should be discontinued from the market;

Whether new fixed assets should be purchased etc.

Controlling

Under cost accounting, planning is on estimation basis.

But in actual, they may different than estimated.

To find out causes of variances or deviation control is needed.

Coordinating

Management accounting helps to coordinating between or among:

Departments or branches

Department and sections.

Staffs etc.

Motivation

It is the new system of management accounting.

Under motivation, workers or staffs are encouraged to do work in their responsibility.

Some motivation factors are:

Wage or salary paid in time

Bonus and incentive

Training and seminar

Promotion etc

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Scope of Management Accounting

The scope of management accounting is very wide and broad. The main scopes of management accounting are:

Financial accounting

It provides historical information. From past data, management can take decision for future.

It contains journal entries, ledgers, trading account, profit and loss account, balance sheet, cash flow statement etc.

These accounts are helpful for cash position, assets and liabilities of organization.

Cost accounting

It provides cost information of product or service at different stage.

It includes cost sheet, job costing, variable costing, absorption costing, standard costing, contract costing and process costing etc.

Tax accounting

Every state and country has its government.

While doing business in state or country, organization has to pay tax or value added tax (VAT).

Management accounting is helpful to determine tax payable on income.

Auditing

To check financial transactions about correct or incorrect, auditing is required.

There are two types of auditing, internal auditing and external auditing.

Internal auditing is operated for checking up fraud and external auditing is done for approved to financial data by authorized auditors.

Budgeting and forecasting

Budgeting means arrange funds for various sections or department for operating business.

Forecasting means guess or think in advance.

Both budgeting and forecasting are required for management accounting.

Office service

Management accounting requires different types of data for decision making.

Office service helps to management accounting by providing report, data process, references, printing mail, drafting etc.

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Functions of Management Accounting

The basic function of management accounting is to assist the management.

The other functions of the management are planning, organizing, directing and controlling.

Provides data

Management accounting provides vital source of data for management planning.

The accounts and documents are related to past progress of the enterprise.

These data are for making forecasts for the future.

Modifies data

The accounting data required for managerial decisions is properly compiled and classified.

For example, purchase figures for different months may be classified into product-wise, supplier-wise and territory-wise.

Analyses data

The accounting data is analyzed for effective planning and decision-making.

For this purpose, the data is presented in a comparative form.

Then ratios are calculated.

Communication

Management accounting provides a means of communication.

The management plans upward, downward, inward and outward of the organization.

At the start, it identifies the feasibility (possibility) and consistency of the various segments of the plan.

At later stages, information is provided to all the parties about the plans.

Controls facility

Management accounting helps in translating given objectives and strategy into specified goals.

All this is made possible through budgetary control and standard costing.

They are integral part of management accounting.

Uses information

Management accounting does not limit itself to financial data.

It also helps to management in decision making.

But this information may not be capable to measure in monetary terms.

Such information may be collected form special surveys, statistical collecting, engineering records etc.

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Limitation of Management Accounting

Although management accounting has broad and wide scope yet it has following limitations:

Accuracy information

Management accounting looks-for accurate and correct information.

So, management decision may not be effective for financial, non-monetary and cost data.

Costly installation

Management accounting needs large scale manpower, many formalities, standard costing etc.

These require large cost.

It is suitable for large organization only.

Knowledge of different subjects

Effective management accounting needs knowledge of different subjects like accounting, economics, statistics, taxation etc.

It is not easy it find out these subjects knowledge in one person.

No specific procedures

It is used for different deviation or variation.

There is not specific data or procedures.

Therefore, past data or experience may not be suitable for present and future.

Sixth sense decision

Management accounting needs scientific and systematic decision for quantitative technique. 

In spite of these, management takes decision by intuition (sixth sense or insight).

No substitute of administration

Management accounting creates tools and techniques for decision making but it is not substitute of administration.

Differences between Cost Accounting and Management Accounting

Cost accounting

Cost accounting is related to manufacturing.

In cost accounting, raw materials are converted into work-in-progress or finished goods with the help of men and machine.

Management accounting

Management accounting is also known as managerial accounting.

Management accounting is the presentation of accounting information.

It helps to the management in the creation of policies and day to day operation of the organization.

From cost accounting and financial accounting, the managements make policy or planning, decision making, control, coordination, motivation etc.

Differences between Cost Accounting and Management Accounting

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