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Chapter: 4: Fields of Accounting

Session 5: Financial and Management Accounting

Learning 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;
Participation in the planning process at both strategic and operational levels. This
a) involves the establishment of policies and the formulation of plans and budgets
which will subsequently be expressed in the financial terms.
The initiation of and the provision of guidance for management decisions. This
b) involves the generation, analysis, presentation and interpretation of appropriate
information.
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.
c) 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
A management accounting system
produces information that is used within an
organization, by managers and employees
Management accounting helps
management to record, plan and control
activities and aids the decision making
process.
There are no legal requirements for an
organization to use management
accounting.
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.
Management accounting information may
be monetary or alternatively non
monetary.
Management accounting provides both an
historical record of the immediate past and
a future planning tool
No time span for producing financial
Financial statements
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
Management accounting has no specified
format. There are no specific statements
which should be produced.
Feature of useful management accounting
• It should be relevant for its purpose.
• It should be complete for its purpose.
Financial accounting
A financial accounting system produces
information that is used by parties
external to the organization, such as
shareholders, bank and creditors.
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.
Limited companies must, by law prepare
financial accounts.
Financial accounting concentrates on the
organization as a whole, aggregating
revenues and costs from different
operation. Financial accounts are an end
themselves.
Most financial accounting information is of
a monetary nature.
Financial accounting presents an
essentially historical picture of past
operation.
Financial statements are required to be
produced for the period of 12 months.
Financial accounting must operate within
a framework determined by law
and IASs. In principle the financial
accounts of different organizations can be
easily compared.
Financial accounts are supposed to be
produced in accordance with a specified
format by IAS or law.
 • 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.