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Cost CH-1

The document provides an overview of accounting, defining it as the process of identifying, measuring, and communicating economic information for decision-making. It distinguishes between management accounting, which serves internal users, and financial accounting, which serves external users, highlighting their different roles and reporting requirements. Additionally, it discusses the importance of ethical considerations and guidelines for management accountants in providing valuable information for strategic and operational decisions.

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dawit amsalu
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0% found this document useful (0 votes)
3 views17 pages

Cost CH-1

The document provides an overview of accounting, defining it as the process of identifying, measuring, and communicating economic information for decision-making. It distinguishes between management accounting, which serves internal users, and financial accounting, which serves external users, highlighting their different roles and reporting requirements. Additionally, it discusses the importance of ethical considerations and guidelines for management accountants in providing valuable information for strategic and operational decisions.

Uploaded by

dawit amsalu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Chapter One

INTRODUCTION

Definition of Accounting and Purpose of


an Accounting System
Definition
• There are many definitions of accounting; among
them the definition formulated by the American
Accounting Association (AAA) is the most prominent.
• It describes accounting as the process of
identifying, measuring and communicating
economic information to permit informed
judgments and decisions by users of the
information.
• In other words, accounting is concerned with
providing both financial and non-financial
information that will help decision makers to
make good decision.
Purpose of accounting system
• The purpose of an accounting system is to
provide sufficient information to meet the
needs of various users at the lowest
possible cost.
• Obviously, the benefit derived from using an
information system for decision making must be
greater than the cost of operating the system.
Who are the users of accounting information?
• 1. Internal parties within the organization;
2. External parties such as shareholders,
creditors and regulatory agencies, outside the
organization.
CONT…
• It is possible to distinguish between two
branches of accounting that reflect the
internal and external users of accounting
information.
• Management accounting is concerned with
the provision of information to people
within the organization to help them make
better decisions and improve the efficiency
and effectiveness of existing operations,
• financial accounting is concerned with the
provision of information to external
parties outside the organization.
CONT…
• Thus, management accounting could
be called internal accounting and
financial accounting could be called
external accounting.
Management Accounting, Financial Accounting and Cost Accounting

• Basically, management accounting and financial


accounting have different roles.

• Management Accounting measures, analyzes and


reports financial and non-financial information that helps
managers make decisions to fulfill organizational goals.
• Mangers use management accounting information to
choose, communicate, and implement strategy.

• They also use management accounting information to


coordinate product design, production, and marketing
decisions.
• Therefore, management accounting focuses on internal
reporting.
CONT…
• Examples of activities performed by managerial
accountants are:
1. Determining the cost of providing a service or
making a good.
2. Assist management in profit planning and
formalizing the plans into budgets.
3. Determine the behavior of costs and how profit
will change as sales and production volumes
change.
4. Compare actual costs and financial results with
budgeted costs and results.
5. Providing cost and sales information necessary
for management to use to make a decision.
CONT…
• Financial Accounting focuses on reporting to external
parties.

• It measures and records business transactions and provides


financial statements that are based on the accounting
standards( IFRS, GAAP), the broad rules that assure the user
of the underlying framework supporting the information.

• Managers are responsible for financial statements issued to


investors ,government regulatory institutions and other
outsider institutions which are interested on the status of
the firm (Suppliers and Banks for instance).

• Hence, managers are interested in both management


accounting and financial accounting.
CONT…
• Cost Accounting refers to the
measurement, analysis and reporting of
financial and non-financial information
relating to the cost of acquiring or
utilizing resources in an organization.
• Therefore, Cost accounting includes those
parts of both management accounting
and financial accounting in which cost
information is collected and analyzed.
Basic Management Accounting and Financial Accounting

Financial Accounting Managerial Accounting


► Reports to those outside the organization like owners, lenders, ► Reports to those inside the organization for planning, directing
tax authorities and regulators. and motivating, controlling and performance evaluation.

► Emphasis is on summaries of ► Emphasis is on decisions affecting the future.


financial consequences of past activities.

► Objectivity and verifiability of data are emphasized. ► Relevance of items relating to decision making is emphasized.

► Precision (acuracey) of information is required. ► Timeliness of information is required.

► Only summarized data for the entire organization is prepared. ► Detailed segment reports about departments, products,
customers, and employees are prepared.

► Produces general purpose reports to its users. ► Provides special purpose reports to managers.

► Must follow Generally Accepted Accounting Principles (GAAP). ► Need not follow Generally Accepted Accounting Principles
(GAAP).
► It is Mandatory for firms to prepare and publish external reports in ► Not mandatory to prepare and publish managerial accounting
the form of financial statements. reports.

► It describes the performance of the business over a specific ► It can be prepared for any period (for daily, weekly, monthly,
period referred to as “Accounting Period”. Usually covers one quarterly or annually) to help management.
quarter or one year.

► Reports should keep specific formats by different government ► No specific formats are required to prepare managerial
regulatory agencies. E.g. Tax authorities. accounting reports.

► Verification of the accuracy of financial statements through an ► Internal reports of managerial accounting are not subject to
audit procedure is must. auditing.
Role of Management
Accountants in an Organization
• Scorekeeping- accumulating data
and reporting reliable results to all
levels of management.

• Examples are the recording of sales,


purchase of materials, and payroll
payments.
Cont…
• Attention Directing- making visible both
opportunities and problems on which
managers need to focus.

• Examples are highlighting rapidly growing


markets where the company may be
underfunding investment and highlighting
products with higher than expected rework
rates or customer return rates.
• Attention directing should focus on all
opportunities to add value to an organization
and not just on cost reduction opportunities.
Cont…
• Problem Solving- making
comparative analysis to identify the
best alternatives in relation to the
organizations goals.

• An example is comparing the


financial advantages of leasing a
fleet of vehicles rather than owning
those vehicles.
Guidelines for Management Accountants

• There are three major guidelines that


help management accountants provide
the most value to their companies in
strategic and operational decision
making. Those are:
 Employing a cost-benefit approach,
 Give full recognition to behavioral and
technical considerations, and
 Use different costs for different
purposes.
Ethical Considerations in
Management Accounting.
• Accountants have special obligations
regarding ethics, given that they are
responsible for the integrity of the
financial information provided to
internal and external parties.
.

• THANK YOU.

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