This is an internal management tool that is used to identify, measure, accumulate, analyze, prepare, interpret and communicate information required by the managers for planning, evaluating and controlling the resources within an organization. Management accounting ensures appropriate use of resources and accountability of the management in their duties. According to Chartered Institute of Management (CIMA), management accounting enables non-managerial groups within the organization to prepare their financial reports. Such groups are shareholders, creditors, tax authorities and regulatory agencies. The American Institute of Certified Public Accountants (AICPA) divides management accounting into three: strategic management, performance management and risk management. Strategic management increases the knowledge of laying down strategies within the organization. Performance management is a tool for developing decisions and managing performance of the organization. Risk management helps the managers identify measure, manage and report risks (Bhimani, 2003).
Management accounting focuses on the future of the business. It is used to add value to the business by forecasting future trends within the organization which may create opportunities to the organization. The data required for management accounting is collected from various sources, for example, marketing information, pricing, logistics and many more (Cheatham & Cheatham, 1993).
Financial accounting refers to the process of preparing financial statements for use by the various stakeholders within the organization. The stakeholders concerned with financial statements are shareholders, suppliers, bankers, workers, partners, the government, and others. The function of financial accounting is to report the performance of the organization. The management team serves as an agent to various stakeholders of the organization. The financial statements monitor the progress of the organization and report to the interested users. Financial accounting has the function of preparing financial statements, providing managers with information required to plan and manage the business, and they ensure that the legal regulations are adhered to. Countries have their own Generally Accepted Accounting Principles (GAAP) which regulates all the organizations within the jurisdiction of the country. There are international regulatory standards which focus on the global business activities. The GAAP should follow the guidelines established by the international accounting standards (Hopwood, Pfaff & Leuz, 2004).
The accounting equation equates the assets of the organization to the sum of liabilities and owners’ equity. Financial statements are prepared on this knowledge. Double entry system of accounting is used to prepare the trial balance. Profit and loss statements and the balance sheet are prepared from the trial balance. The preparation of the financial statements follows certain formats which have been stipulated by the standards of accounting. Financial statements show the income and expenditure of the company over a given duration of period. A summary of the total value of assets, liabilities and shareholders is presented on the balance sheet. Debit balances on the financial statements result from the assets, expenses and withdrawals. Credit balances are caused by liabilities, revenue and capital (Riper, 1994).
Financial accounting is used to report about the past (Solomons, 1986). The need of the financial statements is to reflect the past performance of the organization. The roadmap to success can only be made through clear analysis of the past to predict the future. Managers use the financial accounting results to prepare management accounting mechanisms. Financial accounting is a stepping stone to the preparation of management accounting systems (Hopwood, Pfaff & Leuz, 2004).
Innovative management accounting practices have been established to improve the management of resources within the organization. Cost accounting is used to control the cost of production. The costs of any business entity should not exceed the sales. Cost accounting provides the managers with methods of regulating the costs to avoid losses. Variance analysis is a traditional tool in management accounting that compares the actual and budgeted results. Raw materials, labour and overheads can be regulated through the variance analysis. Life-cycle cost analysis is used to regulate modern problems experienced in management accounting. Activity-based costing is used to control the costs of various activities within the organization. Life-cycle costing regulates the costs of products at the design stage (Riahi-Belkaoui, 1992).
Management accounting ensures the continuous flow of production activities within the organization. The activity-based costing helps regulate the number of activities in a production process. This is a control measure which reduces the costs involved in the production of commodities. The profitability of a company depends on minimization of costs and maximization of sales. Management accounting increases the ability of the managers to reduce the cost of production. There are various tools that managers have to use to regulate the costs of production and to ensure the future success of the company (Bhimani, 2003).
Management accountants manage the business teams and report the financial matters of the organization. They provide decisions concerning the financial and operational activities of the organization. The internal activities of the business are properly regulated using management accounting tools (Cheatham & Cheatham, 1993).
Management accounting enables the managers forecast and plan about the future of the organization. Variance analysis creates awareness about deviations from the planned activities. This helps control the strategies that the organization has established and to direct the resources towards the achievement of a common goal. Costs are reviewed and monitored to ensure that profitability of the organization is achieved (Hopwood, Pfaff & Leuz, 2004).
Management accounting has enhanced the development of operations research about the activities of the organization. Operation’s research increases efficiency in resource allocation. It ensures optimum allocation of resources and the regulation of the business activities. Profitability of the organization is well monitored using the mechanisms of operations research. Costs are minimized and all other relevant factors contributing to the success of the business is integrated in an effective manner (Garner & Tsuji, 1995).
Sales management is an aspect of management accounting that creates ability of the management to regulate sales in the market. Sales are the determinant factors about the profitability of the organization. The management of the clients and customers is possible by use of a good sales management system (Holzer & Riahi-Belkaoui, 1986).
Financial accounting is essential to the people outside the organization who may be affected by the activities of the organization (Barsky & Jablonsky, 2001). The internal activities of the organization are regulated by use of the management accounting while the external affairs are regulated by the financial accounting. The activities of the management team need to be assessed by both the internal and external factors so that any loopholes can be avoided. The success of the organization depends on the cooperation of internal and external environment. Managers should integrate both management accounting and financial accounting systems to monitor the success of the organization (Solomons, 1986).
Local and international regulations about financial accounting standards have been established to control the planning, presentation and use of financial accounting data. The management should ensure appropriate measures have been put in place to avoid misuse of the financial accounting standards. Any irregularities in the application of the standards attract penalties from the legal systems within the country and the international bodies. These measures create success in business by ensuring the proper utilization of resources. Financial accounting gives a report about the profit trends of the organization. These reports are scrutinized by external bodies to ensure no irregularities in the preparation of the accounts (Garner & Tsuji, 1995).
There are several professional qualifications that have been established to regulate the activities of accountants. For example, Chartered Certified Accountant (ACCA), Chartered Accountant (CA), Certified Public Accountant (CPA) and others. The American Academy of Financial Management offers Chartered Cost Accountant (CCA) which regulates costs within an organization. These bodies regulate the professional activities of accountants and prevent malpractices in accountancy. The success of the business will exclusively depend on the ability to apply the guidelines provided by the professional bodies (Mckee, Garner, & Mckee, 2002).
It is mandatory to prepare the financial accounts of a business (Riper, 1994). To regulate the activities of the managers, the legal systems have established a mandatory rule in the preparation of financial accounts on annual basis. This creates accountability in the performance of business activities. Management accounts are prepared according to the discretion of the managers. There are no legal requirements to prepare these accounts. Regular preparation of the financial and management accounts is important to create a vision that the business targets to achieve. They also show the efficiency of the management. Decision making within the organization requires the analysis of the business activities by the use of management and financial accounts. All the departments should be represented in decision making. The accounts indicate the performance of all sectors of the organization and are essential in analyzing departmental performance (Holzer & Riahi-Belkaoui, 1986).
The management accounts analysis indicates the profit centers and the costs centers. The information about each department is summarized. The profitable departments are maintained while the unprofitable ones are improved. The decision about creating new investments is assessed using management accounts and this avoids blind investment. The processes that increase costs are cut down and better ones introduced. Successful business activities are facilitated by effective control about all the departments’ costs (Riahi-Belkaoui, 1992).
Risk management increases the security of business activities. Management accounting evaluates the risks that are attached to certain investment plans and gives the managers a clear path to follow in their business venture. Entrepreneurship is possible only through proper mechanisms of risk evaluation and management. Modern business is based on entrepreneurship and the management should establish systems that encourage employees to be innovative. Innovation involves creativity and implementation of new ideas. The use of management and financial accounting measures the increase in knowledge about production. Managers should apply leadership skills in the workplace. Leadership will enable the employees contribute to the goals and objectives of the organization. The managers should use the management and financial accounting systems as tools to measure their ability to create an innovative environment as well as ability to use leadership in management (Mckee, Garner, & Mckee, 2002).
The role of managers is to combine the internal and external business environment to create successful ventures. Management accounting and cost accounting tools should be effectively used to create professional business practices which lead to the success of the organization. The management should provide all the resources required in the preparation of the management and financial accounts. These resources may be manpower, funds, legal protection, and other support materials and services. The process of preparing these accounts should be monitored by responsible individuals to avoid misuse of resources and misplacement of information. Auditing of the financial reports should be done on a regular basis to ensure all the information is properly used. The auditors also ensure the assets of the organization are safeguarded. The managers should give all the necessary support to internal and external auditors and create a good environment for verification of all accounts. The auditors should check that the proper accounting guidelines are followed by the accountants.
The government has a role to ensure all the legal requirements are adhered to by the accountants to maintain professionalism. The stakeholders to an organization should focus on the quality of accounting practices done by the management to ensure the business does not create losses. Investors to a business should access the financial accounts of a business to know the viability of their investment. Decision making within the organization should focus on how successful and profitable the various departments are. Information about the performance of each department are well analyzed in the accounts and should guide the managers in their decision making process. Department heads should be responsible for the performance of their departments. The overall management team has the duty to integrate the activities of the organization and to ensure profitability of each department.
Barsky, N. P. & Jablonsky, S. F. 2001. The Manager’s Guide to Financial Statement Analysis. John Wiley & Sons. New York.
Bhimani, A. 2003. Management Accounting in the Digital Economy. Oxford University Press. Oxford.
Cheatham, L. R. & Cheatham, C. B. 1993. Updating Standard Cost Systems. Quorum Books. Westport, CT.
Garner, P. & Tsuji, A. 1995. Studies in Accounting History: Tradition and Innovation for the Twenty-First Century. Greenwood Press. Westport, CT.
Holzer, H. P. & Riahi-Belkaoui, A. 1986. The Learning Curve: A Management Accounting Tool. Quorum Books. Westport, CT.
Hopwood, A., Pfaff, D. & Leuz, C. 2004. The Economics and Politics of Accounting: International Perspectives on Research Trends, Policy, and Practice. Oxford University Press. Oxford.
Mckee, Y. A., Garner, D. E. & Mckee, D. L. 2002. Crisis, Recovery and the Role of Accounting Firms in the Pacific Basin. Quorum Books. Westport, CT.
Riahi-Belkaoui, A. 1992. The New Foundations of Management Accounting. Quorum Books. New York.
Riper, R. V. 1994. Setting Standards for Financial Reporting: FASB and the Struggle for Control of a Critical Process. Quorum Books. Westport, CT.
Solomons, D. 1986. Making Accounting Policy: The Quest for Credibility in Financial Reporting. Oxford US. New York.