Thursday, 10 June 2010

Financial Accounting and Management Accounting

The posts so far have been concerned with the basics of accounting.

In the first post, we saw that "accounts" provide details of business transactions and show how legal obligations have been discharged. Later posts discussed the mechanics of keeping accounts, and significance of double entry bookkeeping that recorded the essence of business transactions, viz. giving and receiving of value.

We went on to look at the Income Statement that summarized the revenue and expenses during a period and showed how the business earned a profit or incurred a loss. We also looked at analyzing the Income Statement to glean meaningful insights about its performance.

Next came the Balance Sheet, or financial position statement that revealed the financial position of a business as on a particular date, such as the financial year ending date. We looked at analyzing the Balance Sheet to get an idea about the business' financial soundness.

Finally, we looked at cash flows; the critical role actual cash has on the continued survival of the business. We learnt how to compute the speed with which a business was turning over its cash through the inventory-> receivables-> cash cycle and how to prepare cash forecasts.

The Income Statement, Balance Sheet and Cash Flow Statement are intended mainly for an external audience - investors, lenders, suppliers, employees, customers, government and the public. For day to day management of business operations, these reports are practically useless. A special field of accounting, known as management accounting, has emerged to support business managers with decision-making information.

We will now start looking at management accounting.

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