Session 5: Financial and Management AccountingLearning Objectives - Outline to participants on the major differences between financial and management accounting
- Explaining to the participants on the role management accountant in an organization.
- Briefing the participants on the useful qualities of management information.
Important Terms - Financial accounting
- Management accounting
- Data
- Information
Management accounting is the 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. Management accounting also comprises the preparation of financial reports for non management groups such as shareholders, creditors, regulatory agencies and tax authorities. (CIMA official terminology.) The core activities of management accounting include; | a) | Participation in the planning process at both strategic and operational levels. This involves the establishment of policies and the formulation of plans and budgets which will subsequently be expressed in the financial terms. | | b) | The initiation of and the provision of guidance for management decisions. This involves the generation, analysis, presentation and interpretation of appropriate information. | | c) | Contributing to the monitoring and control performance through the provision of reports on organisational performance, including comparisons of actual with planned or budgeted performance, and their analysis and interpretation.
Financial accounting is the periodic reporting of accounting as required by statue for shareholders, government agencies and other parties external to the business. As such, various conventions and rules are necessary to ensure consistency between the sets of accounts. |
Management Accounting Compared with Financial Accounting
The following table summarises the main differences between management accounting and financial accounting. | Management accounting | Financial accounting | | A management accounting system produces information that is used within an organization, by managers and employees | A financial accounting system produces information that is used by parties external to the organization, such as shareholders, bank and creditors. | | Management accounting helps management to record, plan and control activities and aids the decision making process. | Financial accounting provides a record of the performance of an organization over a defined period and the state of affairs at the end of that period. | | There are no legal requirements for an organization to use management accounting. | Limited companies must, by law prepare financial accounts. | | Management accounting can focus on specific areas of an organisation’s activities. Information may aid a decision making rather than be an end product of a decision. | Financial accounting concentrates on the organization as a whole, aggregating revenues and costs from different operation. Financial accounts are an end themselves. | | Management accounting information may be monetary or alternatively non monetary. | Most financial accounting information is of a monetary nature. | | Management accounting provides both an historical record of the immediate past and a future planning tool | Financial accounting presents an essentially historical picture of past operation. | | No time span for producing financial Financial statements | Financial statements are required to be
produced for the period of 12 months. | | No strict rules govern the way in which management accounting operates. The management accounts and information are prepared in a format that is of use to managers | Financial accounting must operate within a framework determined by law
and IASs. In principle the financial accounts of different organizations can be easily compared. | | Management accounting has no specified format. There are no specific statements which should be produced. | Financial accounts are supposed to be produced in accordance with a specified format by IAS or law. |
Feature of useful management accounting - It should be relevant for its purpose.
- It should be complete for its purpose.
- It should be sufficiently accurate for its purpose.
- It should be clear to the manager using it.
- The manager using it should have confidence in it.
- It should be communicated to the appropriate manager.
- Its volume should be manageable.
- It should be timely.
- It should be communicated through appropriate channel of communication.
- It should be provided at a cost which is less than the value of the benefits it provides.
The Role of Management Accountant Assistance in planning The management accountant assists planning by providing information. This information may be about pricing, capital expenditure projects, product costs or competition. In the short-term planning process of budgeting, the management accountant provides information on past costs and revenues which may be used as guidance. The management accountant is also involved in the budgeting process itself. Assistance in controlling The management accountant supplies performance reports which compare actual performance with the planned performance and which therefore highlight those activities which are not conforming to plan. Assistance in organising By ensuring that the accounting system is tailored to the organisational structure, the management accountant reinforces the objectives of the organisational framework. Assistance in motivating Budgets prepared by the prepared by the management accountant serve to motivate managers and subordinates to attempt to achieve the organisation’s objectives. Formalized targets are more likely to motivate than vague comments.
Performance reports produced by the management accountant for the control process also motivate by communicating performance information in relation to the targets which have been set. Assistance in decision making The management accountant is a vital cog in the organisation’s decision making process. He or she collects and analyses data, and presents information to managers to help in the decision making.
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