What leads to an increase in capital in the course of business operations is income; what leads to a reduction in capital is expense or loss. But transactions also cover the acquisition of assets, like the purchase of an office building, raising a loan, payment of liabilities, etc.; all transactions are not expenses or incomes. To know the net profit earned or loss suffered, the expenses, losses, and incomes must be assembled in the Profit and Loss Account; the transactions concerning assets and liabilities will affect items in the Balance Sheet which portrays the financial position. So, what has discussed this article: Understand Capital and Revenue Expenditure in Accounting.
The Concept of Capital and Revenue Expenditure, in the Accounting, explains why they exist in Financial Management.
The following expenditures below are;
Capital Expenditure:
What is Capital Expenditure? Capital expenditures (CAPEX) refer to funds that are used by a company for the purchase, improvement, or maintenance of long-term assets to improve the efficiency or capacity of the company. Capital expenditure can be tangible, such as a copy machine, or it can be intangible, such as a patent. In many tax codes, both tangible and intangible capital expenditures are counted as assets because they have the potential to be sold if necessary.
Revenue Expenditure:
What is Revenue Expenditure? A revenue expenditure (REVEX) is a cost that is charged to expense as soon as the cost is incurred. By doing so, business is using the matching principle to link the expense incurred to revenues generated in the same reporting period. The amount incurred on maintaining the earning capacity of the business, The benefit of which is direct and would be in the same accounting year itself in which such expenditure has been incurred is termed as revenue expenditure.
The Concept of Capital and Revenue Expenditure:
Expenses, losses, and incomes are also known as revenue items since they together will show up the net profit or revenue earned. Other transactions are of capital nature. One must be clear in one’s mind regarding the nature of an item of expenditure. This is an important aspect of the matching principle and without it; financial statements cannot be properly prepared.
Capital expenditure is that expenditure which results in the acquisition of an asset, tangible or intangible, which can be later sold and converted into cash or which results in an increase in the earning capacity of a business or which affords some other advantage to the firm.
In a nutshell, if the benefits of expenditure are expected to accrue for a long time, the expenditure is capital expenditure. Obvious examples of capital expenditure are land, building, machinery, patents, etc. All these things stay with the business and can be used over and over again.
Other examples are money paid for goodwill (the right to use the established name of an outgoing firm) since it will attract the old firm’s customers and, thus, result in higher sales and profits; money spent to reduce working expenses.
For example, conve$ion of hand-driven machinery to power-driven machinery and expenditure enabling a firm to produce a large quantity of goods. Expenditure which does not result in an increase in capacity or in the reduction of day-to-day expenses is not the capital expenditure unless there is a tangible asset to show for it.
It should be noted that all amounts spent up to the point an asset is ready for use should be treated as capital expenditure. Examples are fees paid to a lawyer for drawing up the purchase deed of land, overhaul expenses of second-hand machinery, etc. Interest on loans raised to acquire a fixed asset is particularly noteworthy.
Such interest can be capitalized, i.e., added to the cost of the asset but only for the period before the asset is ready for use interest paid for the subsequent period cannot be capitalized. An item of expenditure whose benefit expires within the year or expenditure which merely seeks to maintain the business or keep assets in good working condition is revenue expenditure
Examples are salaries and wages, fuel used to drive machinery, electricity used to light the factory or offices, etc. Such expenditure does not increase the efficiency of the firm, nor does it result in the acquisition of something permanent.
The following items of expenditure seem to be revenue expenditure, but in actual practice, these are treated as capital expenditure since they lead to the business being established and run efficiently:
Expenses for the formation of a company—preliminary expenses.
Cost of issuing shares and debentures and raising loans, such as legal expenses underwriting commission, etc.
Interest on capital up to the point production is ready to commence, where the nature of the business is such that construction work must go on for a long period before production can start.
Expenses on acquisition and installation of assets, for example, legal fees to acquire property, or expenses incurred to renovate machinery bought secondhand or wages of workmen who install the machinery.
Diminution in the value of assets due to wear and tear or passage of time is the revenue loss. For instance, a piece of machinery is bought at the beginning of the year for $ 1, 00,000; at the end of the year, its value to the business may only be $ 90,000. The diminution—known as depreciation—is a revenue loss. Stocks of materials bought will be an asset unless consumed—to the extent, the materials are used up, they will be revenue expenditure, so also the cost of goods sold.
However, the distinction is not always easy. In actual practice, there is a good deal of difference of opinion as to whether a particular item is capital or revenue expenditure. A cinema converts its ordinary screen into one for cinemascope. Is the expenditure-revenue or capital?
One may say that since the eating capacity of the hall does not change, the expenditure is revenue expenditure. On the other hand, it may be argued that since cinemascope pictures attract large audiences, the hall will be full oftener. Therefore, the expenditure will result in higher earnings and should be classified as capital expenditure. There is truth on both sides.
Unde$tand Capital and Revenue Expenditure in Accounting, Image credit from #Pixabay.
What is Social Accounting? Any business accountant of an enterprise or any organization can describe the conditions of that organization. Social accounting is that kind of movement by which everyone can analyze the same thing as like a business accountant. The main aim of social accounting is to produce data, indices and other information to help everyone about an organization. Social Accounting can also be termed as Corporate Social Reporting, Non- Financial reporting or sustainability accounting. It is a way by which a business seeks to place a value on the impact on society of its operations. So, what discusses is – Understand Essay of Social Accounting in Accounting.
The Concept of Social Accounting is to explain the Meaning, Definition, Scope, Qualities, Features, and Benefits.
The concept of ‘Social Accounting’ has gained importance as a result of high-level industrialization which has brought prosperity as well as many problems in society. It has necessitated the corporate sector, with huge amounts of funds at their disposal, to invest substantial amounts in social activities so as to nullify the adverse effects of industrialization.
Social accounting is also known in various names. These are social and environmental accounting, corporate social reporting, corporate social responsibility reporting, non-financial reporting or sustainability accounting. This is actually a procedure of communicating in which the social and environmental belongings of organizations (NGO, Charities, maybe Government agencies etc.) are included. This is a way by which an organization can express the level to which it meets its societal or ethical goals.
Meaning of Social Accounting:
Social accounting is distinct from evaluation in that it is an internally generated process whereby the organization itself shapes the social accounting process according to its stated objectives. In particular, it aims to involve all stakeholders in the process. It measures social and environmental performance in order to achieve improvement as well as to report accurately on what has been done.
There are some key factors in social accounting by which everyone can understand the difference between social accounting and conventional accounting. The main focus of social accounting is mainly on issues which can develop a correlation in between society and organization. In maximum aspects, social accounting is not focusing on financial data but sometimes it needs financial data for making a report. The purpose of social accounting is to be liable to a large number of stakeholders.
With the help of these reasons social accounting may be described as,
“Social accounting is the voluntary process concerned with assessing and communicating organizational activities and impacts on social, ethical, and environmental issues relevant to stakeholders”. – Crane and Matten Material on Social Accounting.
With the help of social accounting, it is clearly understood that organizations or companies manipulate their outer environment during their performance and should consequently account for these belongings as part of their standard accounting practices.
The intelligence of the accounting is nearly closed to the economic concept of externality. It offers a substitute explanation of important economic bodies. It has a perspective to disclose the apprehension between the following economic profit and chase of environmental and social objectives.
Definition of Social Accounting:
The following definition below is:
“The social impacts of organization underlie some real social issues – such as obesity, ill- health and community regeneration. The profound effects organizations have on society are becoming increasingly obvious. From the point of view of stakeholders, social accounting is, therefore, a critical part of delivering accountability and transparency. From the organization’s point of view, social accounting can help to identify and manage social risk”
“Social Accounting is the application of double entry bookkeeping to social economic analysis.” —Kohler.
“The measurement and reporting, internal and external, of information concerning the impact of an entity and its activities on society.” —Ralph Estes.
“Social accounting as the means by which the effects of social programmes are attempted to be expressed in some type of quantitative terms. —Leonard Spacer.
“Social Accounting is the expansion of the existing boundaries of the accounting beyond the normal economic consequences” —Salivary.
The Scope of Social Accounting:
Social Accounting allows a co-operative or social enterprise to build on its existing monitoring, documentation and reporting systems to develop a process whereby it can account fully for its social, environmental and economic impacts, report on its performance and draw up an action plan to improve on that performance.
Through the social accounting process, an organization can understand its impact on the surrounding community and on its beneficiaries and build accountability by engaging with its key stakeholders. In this way, it can prove its value and improve its performance.
Basically, social accounting involves clarifying what a co-operative or social enterprise does, what it is trying to achieve and who it is working with. Then, on the basis of this, it collects quantitative and qualitative information and data which relates to its overall objectives and underlying values.
This usually lasts one year and runs concurrently with the financial year. At the end of the social accounting year, the organization brings all the information together in the form of social accounts that are independently audited and after revisions the social accounts form a Social Report.
Qualities of Social Accounting:
If the social accounting is good then all the views and accounts of all main stakeholders will be reflected. In good social accounting, the communication is mainly two-way communications with the main stakeholders. Good social accounting compares different period’s data with other organizations and makes relation with external standards.
In good social accounting, all the various areas of organizations are shown. In good social accounting changes is also happened due to changing of stakeholders expectations. Actually good social accounting has a tendency to make over the good aspects of stakeholders. A good social accounting always makes correlations in between system and procedures to control and estimate the effective institutionalization carefully.
With the help of good social accounting, all stakeholders can get a brief description of all the accounts and reports. They can get all these reports on the basis of their needs. In all characteristics of good social accounting one of the most important characteristics of social accounting is to support continuous improvement. That means good social accounting always encourages an organization to develop and increase its improvement continuously and it also helps an organization to enlarge its area of assessment.
Features of Social Accounting:
The following feature below is:
An expression of a company’s social responsibilities.
Related to the use of social resources.
Emphasize the relationship between the firm and society.
Determines the desirability of the firm in society.
Application of accounting on social sciences, and.
Emphasizes social costs as well as social benefits.
The technology of an economic system imposes a structure on its society which not only determines its economic activities but also influences its social relationship and well being. Therefore a measure limited to economic consequences is inadequate as an appraisal of the cause and effect relationships of the total system, it neglects the social effects.
Social Accounting, also known as Social Responsibility Accounting, Socio-Economic Accounting, Social Reporting, and Social Audit, aims to measure and inform the general public about the social welfare activities undertaken by the enterprise and their effects on the society.
As per F.F. Perry’s Dictionary of banking, social accounting is the reporting of the cost incurred in employing with anti-pollution, safety and health and other societal beneficial requirements and, more generally the impact of the business entity on the endeavor to project society its amenities and the environment.
Need or Benefits of Social Accounting:
The important benefits of social accounting are as follows:
A firm fulfills its social obligations and informs its members, the government and the general public to enables everybody to form the correct opinion.
It counters the adverse publicity or criticism leveled by hostile media and voluntary social organizations.
It assists management in formulating appropriate policies and programmes.
Through social accounting, the firm proves that it is not socially unethical in view of moral cultures and environmental degradation.
It acts as evidence of social commitment.
It improves employee motivation.
Social accounting is necessary from the viewpoint of public interest groups, social organizations investors and government.
It improves the image of the firm.
Through social accounting, the management gets feedback on its policies aimed at the welfare of the society.
It helps in marketing through greater customer support, and.
It improves the confidence of shareholders of the firm.
“In modern times, accounting efforts have been extended to the assessment of the state of society and of the social programmes not for the satisfaction of any individual or group but for the application of evaluative procedures in the allocation of resources towards the better social well being as a whole.”
Social accounting is concerned with the study and analysis of the accounting practice of those activities of an organization. The concept of socialistic pattern of society, civil rights movements, environmental protection, and ecological conservation groups, increasing awareness of society towards corporate social contribution, etc. Have contributed towards the growing importance of Social accounting.
Global Standards of Social Accounting:
There are main three standards which are established or prepared for making the social and environmental report.
These are:
1) Global Reporting Initiative (GRI).
2) SA8000, and.
3) AA1000S.
Global reporting initiative is actually famous as GRI. It was started in the year 1997. It was tying up with the United Nations Environment Programme (UNEP) to work on social accounting for various organizations. The main aim of GRI was to prepare the report about all the steps which are related to economic, social and environmental sides of an organization. In one word the main motto of GRI was to make a sustainable report of organizations. GRI reaches success in the making of sustainable reports.
SA8000 is a social accountability standard. It was also established in the year 1997. It covers a number of key labor rights. Working time; strained work; unfairness etc are some examples of key labor rights. With the help of these key labor rights SA8000 could make a report and all the examination, making facilities can be authorized as SA8000 compliant. SA8000 was developed through consultation with a large number of stakeholders including workers, employers, NGOs, and unions. In the year 2006, it had authorized approximately 900 facilities in 50 countries.
In the year 2002, there were other standard AA1000S established. This was the first attempt to give a logical and healthy source for assuring a public report. It was making reports with the help of the principles of accountability and stakeholder engagement. The standard was specially intended to be reliable with the GRI sustainable reports.
Reasons for taking over Social Accounting by Organizations.
The principle of social accounting for accountability is intended to sustain the search of society’s aim. These objectives can be defined in the term of social and environmental desirability and sustainability. The society is seen profit in various ways with the help of the implementations of the social and environmental approach to accounting.
Such as, it honors stakeholders’ rights of information, it balances corporate power with corporate responsibility; it increases transparency of corporate activity; it identifies social and environmental costs of economic successes. To sustain and make easy the success of an organization’s own idea, social accounting is considered mostly for the standard of management control.
Because this is concerned with self-reporting in a systematic way which is considerable. But all the individual reports are frequently referred and those are known as societal audits. After implementing this kind of social accounting the organizations also benefited in various aspects. It increases information for making a decision, it is the more exact product, it is enhancing illustration supervision as well as public relations.
It is identifying social responsibilities, and also it is identifying market development opportunities. For these given reasons everyone can understand. That after taking over the social accounting the corporate world or the organizations can reach a profitable condition. So anyone can suggest to a corporation to take over an improved social accounting.
Understand Essay of Social Accounting in Accounting. Image credit from #Pixabay.
What is a Fixed Asset? A fixed asset is a long-term part of a property that a company possesses and utilizes in the generation of its revenue and is not anticipated that would be devoured or consumed into cash in coming next one year. They are typically bought to generate income. They are also known as Capital Assets and Property, Plant and Equipment. These assets are normally not meant to sell or are not easily convertible into cash and therefore are categorized under non-current assets in the balance sheet. The assets accounts will then be overstated and depreciation programs for such missing unite of equipment will presumably continue. So, what discusses is: Understand Fixed Assets Accounting in Financial Management.
The Concept of Financial Management is to explain Fixed Assets Accounting for the Business.
Consequently, net income will be misstated because of the omission of losses on retirement of plant assets and because of erroneous depreciation charges. Unless internal controls over plant and equipment are carefully designed many units of equipment are likely to be broken, discarded or stolen without any entry being made in the accounting records for their disposal.
One important control device which guards against failure to record the retirement of assets is the use of controlling accounts and subsidiary ledgers for plant and equipment. The general ledger ordinarily contains a serpent assets account and related depreciation accounts for each major classification of plant assets, such as land, buildings, office equipment and deal very equipment.
For example,
The general ledger will contain the account office equipment and also the related accounts depreciation expense: office equipment and accumulated deportation: office equipment, the general ledger account, office equipment, contains entries for a variety of items: typewriters, filing cabinets, dictaphones, desks, etc..
It is not possible in this one general account to maintain adequate information concerning the cost of each item, its estimated useful life, book value, insured value, and another date which may be needed by management as a basis for decisions on such issues a replacement, insurance, and taxation.
A subsidiary ledger should, therefore, be established for office equipment, and for each of the other general ledger accounts which represent many separate units of plant property. The subsidiary ledger in a manual accounting system may consist of a hard life, with a separate card of each unit of property, such as a typewriter or desk.
Each card shows the name of the asset, identification number, and such as details as the date of acquisition, cost, useful life, depreciation, accumulated depreciation, insurance coverage, repair, and gain or loss on disposal. Every acquisition of office equipment is entered in the controlling account and also on a card in the subsidiary ledger.
Similarly, every disposal of an item of office equipment is entered in both be controlling account and the subsidiary ledger. Each card in a subsidiary ledger for plant and equipment shows an identification number which should also appear in the form of the metal tag attached to the asset itself. Consequently, a physical inventory of plant and equipment can be taken and will prove whether all units of equipment shown by the records are actually on hand and being used in operations.
Fixed Assets entry on Accounting Book:
The following are examples of fixed asset accounting:
Land: Includes the purchased cost of land, and may also include the cost of land improvements.
Buildings: Includes all facilities owned by the entity.
Furniture and fixtures: Includes tables, chairs, filing cabinets, cubicle walls, and so forth.
Machinery: Typically refers to production machinery.
Vehicles: Can include company cars, trucks, and more specialized moving equipment, such as forklifts.
Computer equipment: Includes all types of computer equipment, such as servers, desktop computers, and laptops.
Computer software: Usually only includes the most expensive types of software; all others are charged to expense as incurred.
Construction in progress: This is an accumulation account in which are recorded the costs of construction. Once an asset is completed, the balance is moved to the relevant fixed asset account.
Intangible assets: Includes all nontangible assets, such as the costs of patents, radio licenses, and copyrights.
Leasehold improvements: Includes the costs incurred to renovate leased space.
Office equipment: Includes copiers and similar administrative equipment, but not computers.
Some Fixed Assets is explaining for better Understand:
The following assets are explained below are:
Land.
Buildings.
Vehicles, and.
Plant and Equipment.
Land:
Land used in the operation of a business should be recorded separately from land acquired as an investment or speculation. Procedures in accounting for the two types of land differ considerably.
Land held for business use appears on the balance sheet as a part of plant and equipment, and expenses associated with it are operating expense, whereas land acquired as an investment is classified with other investment assets, and applicable expense sometimes is capitalized, they are treated as non-operating or financial expenses.
Land acquired for use in the operation of a business should always be recorded separately from the building that may be located thereon. The principal reason for this is that the buildings are subject to depreciation, which must be treated as an operating cost, while it is not customary to take into consideration any depreciation on land in ascertaining the operating costs of a business.
In cases where an auditor finds land and building recorded in a single real estate account, he should recommend segregation of the land and buildings with a specific value on each. This will facilitate the computation of depreciation of building apart from the land.
Land is,
In a sense, the most permanent asset of a business, the auditor should ascertain that the land account is charged with (1) the original cost, (2) the expenses incident to the purchase, such as a cost of investigating the title, recording the deed, commissions paid, and any other expenses that represent an addition to the purchase price and (3) the cost of subsequent improvements that increase the value of the land, such as draining, grading, building approaches, assessments for sewers, and great improvements.
Not infrequently. Assessments for improvements charged off as current operating expenses. Such costs, however, should be charged to the land account. When land is sold. The land account should be credited with the cost price, while the difference between the cost and the selling price should be recorded separately as a loss or again. Under this procedure, the balance of the land account will always represent the original cost plus the cost of improvements of the land owned.
Buildings:
Buildings may be acquired through the purchase of real estate in which case separate values should be placed upon the buildings and land, the basis of the valuation being cost. In the preparation of annual should be valued at cost plus addition and improvements less the depreciation.
For balance sheet purposes, the buildings are generally listed at cost with the allowance for depreciation being deducted. The difference is extended as the book value of the buildings. Occasionally the question arises whether the accounts for buildings, as well as land and other types of plant and equipment should be marked up from the basis of cost to a higher current value determined by an appraisal.
In the audit of the buildings account the auditor should prepare working papers in which different buildings are segregated. These working papers should show the book values at the beginning of the period under audit the cost of additions or deductions during the period.
These beginning and ending balance should be checked with the amount of the building and ending balance on the balance sheet as both dates and should be in agreement with the account on the books.
If the subsidiary building ledger is maintained it should be compared with the controlling account in the general ledger to see that they agree all additions and deductions during the period should be carefully examined to be sure that they have been properly accounted for, due care being used to distinguish between capital and revenue expenditure.
Vehicles:
Every organization that has vehicles must have a vehicle politics. This will write down the policy on a range of cases such as:
Insurance.
Depreciation.
Repair and Maintenance.
Purchasing, disposal, and replacement.
Private usage of it by staff.
What needs to be done when an accident happens.
Driver training and qualifications, and.
Carrying the passengers.
The costs of replacement and repair must be good in the budget procedure. For every vehicle, there must be a record of journeys so that the operating costs per Km can be evaluated and private use closely monitored. Buying fuel for cash is risky, and it might be safer to establish an account with a reputable fuel company and pay every month by check instead.
Plant and Equipment:
Transactions that change the amount of investment in the plant and equipment of a business have a tendency to occur infrequently and to involve relatively large amount Current assets, on the other hand, are in the more or less fluid state, undergoing smaller changes constantly.
Although a company’s methods of internal accounting control generally apply to all transactions, whether they relate to current assets or to plant and equipment. the auditing procedures differ for the two groups.
In auditing current assets at the balance sheet date, the auditor is concerned with the balance on hand. changes that occurred during the year are not substantiated in detail except in audits designed as complete audits, With plant and equipment, the auditor is concerned with all changes that took place during the audit period regardless of the type of audit that is being performed ALL of any substantial amount that either increase or decrease the value of such assets must be examined.
Finally, Other advantages afforded by a plant and equipment ledger are the ready availability of information for the periodic computation of depreciation, and for entries to record the disposal of individual items of property. A better basis is also available for supporting the date in the tax return, for obtaining proper insurance coverage, and for supporting claims for losses sustained on the insured property.
In well-managed companies, it is standard practice to control expenditures for plant and equipment by preparing a budget of all planned acquisitions for at least a year in advance. A first essential to the preparation of such a budget is a detailed record showing the assets presently owned, their cost, age, and remaining useful life.
Understand Fixed Assets Accounting in Financial Management. Image credit from #Pixabay.
Financial accounting Importance, Nature, and Limitations; It is a system that collects information, processes, and reports about changes in the performance, financial status, and financial status of an entity. A person’s ability to track the financial transactions of a person’s business, during which, he knows as financial accounting skills as a result of his operation. Do you study to learn: If Yes? Then read the lot. Let’s Study Financial Accounting Importance, Nature, and Limitations.
Every Company Current year or the end of the year want to know the financial status of the business. Financial Accounting Importance, Nature, and Limitations.
It is done by recording, summarizing, and presenting all such financial figures in the form of financial reports or statements using standardized guidelines. Such financial statements generally include balance sheets, income details, and cash flow details; which summarize a company’s performance over time. Financial accounting skills generally do not include the ability to report the value of a company but can provide enough information for the evaluation of others.
Definition of Financial Accounting:
Financial Accounting concerns with providing information to external users. It refers to the preparation of general-purpose reports for use by persons outside a business enterprise, such as shareholders (existing and potential), creditors, financial analysts, labor unions, government authorities, and the like. Financial accounting is oriented towards the preparation of financial statements which summarise the results of operations for selected periods of time and show the financial position of the business at particular dates.
Every entity, whether for-profit or not-for-profit; aims at creating maximum value for its stakeholders. The goal of maximum value addition best achieves; when there is a mechanism to monitor the management and the board of directors. Financial accounting helps in such monitoring by providing relevant, reliable, and timely information to the stakeholders.
Inputs to a financial accounting system include business transactions that are supported by source documents, such as invoices, board resolutions, management memos, etc. These inputs are processed using generally accepted accounting principles (GAAP). The processed information is reported through standardized financial statements.
Importance of Financial Accounting:
Financial accounting is integral to companies of all sizes because it helps in the following importance below are: They are three important points.
Communication of information externally.
Communicate information internally, and.
Comparison through analysis.
First Point:
This point explains Communication on information externally. The statements and reports generated by financial accounting use to communicate information about the overall health and well-being of the company to external parties. Such external users may include suppliers, banks, and leasing companies, etc. who are not part of the company but require all this information to analyze the progress of the company and compare it with their expectations.
Second Point:
This point explains Communicate on information internally. A company’s finance team or its employees who are interested in stock-based compensation etc. constitute the internal users of the information generated by financial accounting practices. The reports generated with the help of financial accounting skills are helpful for this purpose as well.
Last Point:
This point explains Comparison through analysis. Since financial accounting requires the use of standardized guidelines, the financial statements generated by all companies are comparable, providing a standard method of analysis.
Scope and Nature of Financial Accounting:
The following points are important to understand the scope and nature of financial accounting:
Contents:
The end product of the financial accounting process is the financial statements that communicate useful information to decision-makers. The financial statements reflect a combination of recorded facts, accounting conventions, and personal judgments of the preparers. There are three primary financial statements for a profit-making entity in India, viz., the Income Statement (statement of revenues, expenses, and profit), and the Balance Sheet (like the statement of assets, liabilities, and owner’s equity) and cash flow statement. The accounting information generated by financial accounting is quantitative, formal, structured, numerical, and past-oriented material.
Accounting System:
The accounting system includes the various techniques and procedures used by the accountant (preparer) in measuring, describing, and communicating financial data to users. Journals, ledgers, and other accounting techniques used in processing financial accounting information depend upon the concept of the double-entry system. This technique includes generally accepted accounting principles (GAAP). The standard of generally accepted accounting principles includes not only broad guidelines of general application but also detailed practices and procedures.
Measurement Unit:
Financial accounting primarily concerns with the measurement of economic resources and obligations and changes in them. Financial accounting measures in terms of monetary units of a society in which it operates. For example, the common denominator or yardstick used for accounting measurement is the rupee in India and the dollar in the U.S.A. The assumption is that the rupee or the dollar is a useful measuring unit.
Users of Financial Accounting Information:
Financial accounting information intends primarily to serve external users. Some users have a direct interest in the reported information. Examples of such users are owners, creditors, potential owners, suppliers, management, tax authorities, employees, customers. Some users need financial accounting information to help those who have a direct interest in a business enterprise.
Examples of such users are financial analysts and advisers, stock exchanges, financial press and reporting agencies, trade associations, labor unions. These user groups having direct/indirect interests have different objectives and diverse informational needs. The emphasis in financial accounting has been on general-purpose information which, obviously, is not intended to satisfy any specialized needs of individual users or specific user groups.
Users or Role in Financial Accounting:
The most basic motives or objectives of financial accounting is the preparation of general-purpose financial statements; which are financial statements meant for use by stakeholders external to the entity; who do not have any other means of getting such information, i.e. people other than the management. These stakeholders include:
Investors need the information to estimate the intrinsic value of the entity and to decide whether to buy, hold, or sell the entity’s shares. Equity research analysts use financial statements to conduct their research on earnings expectations and price targets.
Working as Employee groups:
Employees and their representative groups interest in information about the solvency and profitability of their employers to decide about their careers, assess their bargaining power and set a target wage for themselves.
Lead as Lenders:
Lender’s interest in the information enables them to determine whether their loans and the interest earned on them will pay when due.
Suppliers and other trade creditors:
Suppliers and other creditors interest in the information that enables them to determine whether amounts owing to them will pay when due and whether the demand from the company is going to increase, decrease, or stay constant.
One of the Customers:
Customers want to know whether their supplier is going to continue as an entity; especially when they have a long-term involvement with that supplier. For example, Apple interests in the long-term viability of Intel because Apple uses Intel processors in its computers and if Intel ceases operations at once; Apple will suffer difficulties in meeting its own demand and will lose revenue.
His also Governments and their agencies:
Governments and their agency’s interest in financial accounting information for a range of purposes. For example, the tax collecting authorities, such as IRS in the USA, interest in calculating the taxable income of the tax-paying entities and finding their tax payable. Antitrust authorities, such as the Federal Trade Commission, interest in finding out whether an entity engages in monopolization.
The governments themselves interest in the efficient allocation of resources; and, they need financial accounting information of different sectors and industries to decide on federal and state budget allocation, etc. The bureaus of statistics are interested in calculating national income, employment, and other measures.
Also Public:
The public interests in an entity’s contribution to the communities in which it operates; its corporate social responsibility updates; its environmental track record, etc.
Limitations of Financial Accounting:
Financial accounting is significant for management as it helps them to direct and control the firm activities. It also helps business management in determining appropriate managerial policies in different areas, such as production, sales, administration, and finance.
Financial accounting suffers from the following limitations which have been responsible for the emergence of cost and management accounting:
Financial accounting does not provide detailed cost information for different departments, processes, products, jobs in the production divisions. Management may need information about different products, sales territories; and, sales activities which are also not available in financial accounting.
Financial accounting does not set up a proper system of controlling materials and supplies. Undoubtedly, if material and supplies do not control in a manufacturing concern; they will lead to losses on account of misappropriation, misutilization, scrap, defectives, etc.
The recording and accounting for wages and labor are not done for different jobs, processes, products, departments. This creates problems in analyzing the costs associated with different activities.
It is difficult to know the behavior of costs in financial accounting as expenses not classify as direct; and, indirect and therefore cannot classify as controllable and uncontrollable. Cost management which is the most important objective of all business enterprises; cannot achieve with the aid of financial accounting alone.
Financial accounting does not possess an adequate system of standards to evaluate the performance of departments and employees working in departments. Standards need to develop for materials, labor, and overheads so that a firm can compare the work of workers, supervisors, and executives with what should have been done in an allotted period of time.
Other limitations:
Financial accounting contains historical cost information that accumulates at the end of the accounting period. The historical cost is not reliable for predicting future earnings, solvency, or overall managerial effectiveness. Historical cost information is relevant but not adequate for all purposes.
Financial accounting does not provide information to analyze the losses due to various factors; such as idle plant and equipment, seasonal fluctuations in the volume of business, etc. It does not help management in taking important decisions about the expansion of business, dropping of a product, alternative methods of production, improvement in product, etc.
Also, Financial accounting does not provide the necessary cost data to determine the price of the product being manufactured or the service being rendered to the consumers.
Despite the above limitations, financial accounting has utility and is an important and conceptually rich area. Because of growing business complexities and advances in knowledge of human behavior and decision processes; the scope and methods of financial accounting are changing. Financial accounting theory and practice will probably broaden and improve considerably in the future.
Financial Accounting Importance, Nature, and Limitations.
Meaning of Financial Accounting: Financial accounting is an area of accounting that focuses on providing useful information to external users. Accounting, in your heart, is actually a set of very simple concepts and principles. Once you understand the basics of accounting, you will be able to understand any business or accounting concept. Accounting in general deals, identifying business activities, like sales to customers, recording these activities, like journalism, and transmitting these activities with people outside the organization with financial activities. Do you study to learn: If Yes? Then read the lot. What is Financial Accounting? Meaning and Definition.
Explains – What is Financial Accounting? Meaning and Definition.
Financial accounting is a special branch of accounting that keeps track of the financial transactions of a company. Using the standardized guidelines, transactions have been recording in financial statements such as financial reports or income details or balance sheets, briefly presenting. Financial accounting, however, is a subdivision of the general area of accounting that focuses on gathering and compiling data to present external users in a usable form. So what does that mean? In fact, the main purpose of financial accounting is to provide usefully; financial information outside those people or organizations that often call external users.
Definition of Financial Accounting:
Financial Accounting is concerned with providing information to external users. It refers to the preparation of general-purpose reports for use by persons outside a business enterprise, such as shareholders (existing and potential), creditors, financial analysts, labor unions, government authorities, and the like. Financial accounting is oriented towards the preparation of financial statements; which summarise the results of operations for selecting periods of time and show the financial position of the business at particular dates.
As well as the definition of Accounting.
According to R.N Anthony:
“Nearly every business enterprise has the accounting system. It is a means of collecting, summarizing, analyzing and reporting in monetary terms, information’s about business.”
According to Smith and Ashburne:
“Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions, and events, which are, in part at least, of a financial character and interpreting the result thereof.”
The ability of an individual to keep track of the financial transactions of a business; resulting from its operation over a period of time, is knowing as his financial accounting skills. This is done by recording, summarizing, and presenting all such financial data in the form of financial reports or statements, using standardizes guidelines.
Such financial statements usually include the balance sheet, income statement, and cash flow statement; which summarize the performance of a company’s operations over a period of time. Financial accounting skills usually do not encompass the ability to report the value of a company; but, to be able to provide sufficient information for others to assess it themselves.
Management Accounting Meaning: The accounting information is presented to prepare the policies adopted by the management accounting management and to help in day-to-day activities. Do you study to learn: If Yes? Then read the lot. What is Management Accounting? Meaning and Definition.
Explains – What is Management Accounting? Meaning and Definition.
Management accounting is also called managerial accounting or cost accounting. The process of analyzing business costs and operations to prepare internal financial reports, records, and accounts to assist in the decision-making process of the manager in achieving business goals. Management accounting (also known as managerial or cost accounting) is different from financial accounting. In which it prepares reports for the company’s internal stakeholders in opposition to the external stakeholders. After we discuss management accounting meaning also take look at their definitions below.
Definition of Management Accounting:
The following definition is below;
According to R. N. Anthony:
“Management Accounting is concerned with accounting information that is useful to management.”
The ICMA (Institute of Cost and Management Accountants), London, has defined Management Accounting as:
“The application of professional knowledge and skill in the preparation of accounting information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertakings.”
The ICAEW (Institute of Chartered Accountants of England and Wales) defines Management Accounting as:
“Any form of accounting, which enables a business to conducte more efficiently, can regard as Management Accounting.”
According to the American Accounting Association (AAA):
“It includes the methods and concepts necessary for effective planning for choosing among alternative business actions and for control through the evaluation and interpretation of performances.”
The opinion of Haynes and Massie:
“The application of appropriate techniques and concepts in processing the historical and projected economic data of an entity to assist management in establishing a plan for reasonable economic objectives and in making of rational decisions with a view towards achieving these objectives.”
And the last definition best define by J. Batty:
“Management Accountancy is the term uses to describe the accounting methods, systems, and techniques which, with special knowledge and ability, assist management in its task of maximizing profit or minimizing losses.”
What is Management Accounting? Meaning and Definition
What is Management Accounting? Management accountants (also called managerial accountants) look at The events that happen in and around a business while considering the needs of the business. Management Accounting of Role, Process, and Disadvantages. From this, data and estimates emerge. Cost accounting is the process of translating these estimates and data into knowledge that will ultimately be used to guide decision-making. “Management Accountancy is the term used to describe the accounting methods, systems, and techniques which, with special knowledge and ability, assist management in its task of maximizing profit or minimizing losses.”
What do you know about Management Accounting of Role, Process, and also Disadvantages? Here are let’s study each Explanation.
Management Accounting provides all assistance to the management in all of its functions. By providing the accounting information in the required form and at the required time, it enables management to perform its functions effectively. It makes available the relevant information after modifying the same in suitably for effective planning and decision-making.
The standard of performance enables management to fix responsibilities and know the weak spots in the enterprise without much difficulty. Coordination among departmental managers is essential to avoid conflicts of interest between them to achieve the company’s overall objective as planning.
Effective coordination could achieve through departmental budgets and reports, which form an integral part of management accounting. Organizing is another important function of management. A sound organization entails the delegation of authority and fixing of responsibilities without much difficulty. This can be achieved by establishing cost centers, and profit centers.
Management accounting assists considerably in establishing such centers, as also in establishing a sound system of internal control and internal audit for these centers. Communication is yet another function of management, which involves the transmission of data, information, results, etc., to both outsiders and insiders. While the decisions of the top management to be communicated to the middle and lower-level management, the results and requirements of the lower level should be reported to the top-level management.
Also, the results have to report to the shareholders, creditors, prospective investors, etc., who wish to know about the company’s financial position and progress. Hence, a suitable reporting system is essential for effective communication of relevant facts. They help the management in this regard. From these points, it is clear that management accounting is useful to management in every field of activity and hence, forms a part of management.
Process of management accounting:
Management accounting process takes measures and reports specific information and economic action within the organization. This data helps the managers in planning, performance rating, and maintaining operational status.
1] Performance Score:
It is impossible to complete any task with no effort. Thus, the next step of the Management accountant is to provide data on the inputs of employees from different departments. This data helps in analyzing the input rate and the resultant profit. Moreover, it helps in rewarding the deserving candidate.
2] Maintaining operational status:
Planning and input rating are followed by operational status. Here, the management accountant keeps a record of the functions that take place in the company. For example, it keeps a track of the work in progress and the stage of completion at which the product is in. Further, it also helps in calculating and analyzing the cost of production altogether. It also contributes to identifying the pace decreasing obstacles and helps the managers in tackling those errors. The management system provides data for financial accounting as well.
3] Planning need:
Planning refers to questions like what, where and when. Management accountants provide necessary information regarding what product to produce and at what time. Secondly, it determines the availability of required raw materials and labor. Thus, planning is the first step of the management accountant.
Disadvantages of management accounting:
Advantages always bring along certain disadvantages too. Although the management accounting system has various advantages no one can ignore the disadvantages. It is dependent on cost accounting and financial accounts and therefore the accuracy of it is also dependent on how accurate that data is, hence it is one of the limitations as far as its usability is concerned.
It is affected by the bias of top management and therefore it is likely that they may tweak it in such a way to benefit themselves rather than shareholders. Since it does not follow accounting principles, it cannot be compared with other company’s and hence proper evaluation of the management may not be possible based on management accountancy.
Let us peep into the disadvantages of management accounting:
1] Biased interpretation:
Personal interpretation matters a lot when it comes to decision making. The preparation of these reports by the management office is based on the capability of interpretation and understanding. Prejudices and biased knowledge of the subject make it impossible for the company to come to an accurate decision. Thus, it becomes impossible to get effective results at the end of the day.
2] Based on manually maintained records:
Its system requires information related to financial and cost accounting. The records prepared by the management accounting officers are based on the maintained records. Thus, the efficiency of the records presented relies upon the accuracy of the records that are maintained.
3] Scope for improvement:
Similarly, the management accounting system is a recent invention. Along with the advantages, it also has limitations. Due to its complex nature, it requires a lot of intelligent interpretation. Therefore, it is safe to say that the system still needs to evolve.
4] Impracticable:
Its system is a recent innovation. It works on the availability of old records, present records, and the previously acquired results. Thus, it does not work while facing problems apart from financial help. Therefore, it is impracticable for the overall performance of business organizations.
5] Deficiency of various vital skills of management accountant:
The job description of a management accountant includes subjects like financial accounting, cost accounting, economics, and statistics. Further, he or she should have an insight into a bit of psychology and sociology. Lack of knowledge regarding these subjects may affect the outcome of management accounting. Thus, for better working of management accounting, the accountant needs to have a clear knowledge of the required subjects.
6] It’s own limitations:
A management accounting system is merely a tool that facilitates the management accountant in advising on decision-making. However, the implementation of the actions that are advised depends upon the follow-up action of the management. Thus, management accounting is limited to giving suggestions.
7] Preferences depend upon intuition and experience:
They work upon a set scientific concept. However, following scientific guidelines becomes too much of a hassle. Moreover, scientific decision-making is a complex technique of management accounting. Thus, the preference is given to intuition and experience at all times. It comparatively becomes easier to make decisions.
8] Participation and efforts matter:
A management accounting system is a tool that provides the solution. However, the way of applying that solution also matters. Thus, for better results giving full efforts and participation in the task requires. To attain overall success all the employees from different levels need to give their full inputs.
9] Cannot recommend a particular action:
Various alternatives for problem-solving are presenting before the management. These alternatives can be effective or non-effective. The management accountant’s function is to select any one of the alternatives or toss out all of the given measures. Thus, management can only suggest a certain action; however, it cannot guarantee its effectiveness.
10] Home scope or limited knowledge:
It is a wide concept that is to take into consideration before appointing an accountant. It requires skills and knowledge to look into the matters of monetary and non-monetary transactions of the company. Lack of these skills can hamper the overall report and data. Moreover, this data can be unreliable due to the inefficiencies of the accountant.
11] The score of adopting changes:
People say that old habits die-hard. Similarly, changes are hard to adapt. Thus, when a management accounting system is newly installing in an old setting organization, it depends on the capabilities of the employee to adapt to the sudden change. So installing a management accounting system cannot promise instant success.
12] Not a unique choice for small-scale organizations:
Its system is a very costly tool. As a result, it is not at all ideal for small-scale industries or organizations. Due to the high cost, it is not suitable for low budget businesses. Also, the utility of this system is restricting to large-scale and complex organizations.
The management accounting system is an improved technique. This is a modern tool for the development of the organization completely. The job description of the management accountant is no limit to the financial sector; Instead, it has extensive coverage on the whole business.
Management Accounting of Role, Process, and Disadvantages! Image Credit from #Pixabay.
The meaning of management accounting is Presentation of accounting information is to assist in the management of management accounting policy creation and to help in the day-to-day operation of an undertaking. Management Accounting of Functions, Advantages, and Limitations. Thus, it is related to the use of aggregated accounting data with the help of financial accounting andcost accounting with the objective of planning, planning, controlling and decision making by the management. Management accounting link management with accounting is the subject of management accounting as any accounting information required to make managerial decisions. In the Hindi language: प्रबंधन लेखांकन का कार्य, लाभ, और सीमाएं।
Better Explanation of Management Accounting of Functions, Advantages, and Limitations. With Meaning and Definition.
Management Accountancy is a composite mix together in all aspects of complete, financial accounting, cost accountancy, and financial management. This crystal becomes clear that management presents accounting management accounting information in the form of processed data collected from financial accounting, cost accounting so that it can be very useful in the management part to make appropriate decisions in management, Scientific methods, when necessary.
Meaning of Management Accounting:
Management Accounting is the presentation of accounting information in order to formulate the policies to be adopted by the management and assist its day-to-day activities. In other words, it helps the management to perform all its functions including planning, organizing, staffing, directing and controlling.
Definitions of Management Accounting:
In the words of J. Batty:
“Management Accountancy is the term used to describe the accounting methods, systems, and techniques which, with special knowledge and ability, assist management in its task of maximizing profit or minimizing losses.”
According to R. N. Anthony:
“Management Accounting is concerned with accounting information that is useful to management.”
According to ICWA of India:
“Management accounting is a system of collection and presentation of relevant economic information relating to an enterprise for planning, controlling and decision-making.”
According to CIMA London:
“Management accounting is the provision of information required by management for such purposes as the formulation of policies, planning and controlling the activities of the enterprise, decision-making on the alternative courses of action, disclosure to those external to the entity (shareholders and others), disclosure to employees and safeguarding of assets.”
According to the American Accounting Association:
Management Accounting is “The application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives and in the making of rational decisions with a view towards these objectives”.
From the above it is clear that management accounting uses all techniques of financial accounting, cost accounting and statistics to collect and process data for making it available to management so that it can take decisions in a scientific manner.
The Objects or Functions of Management Accounting:
The primary object of Management Accounting is to present the accounting information to the management. The Following objects are:
Planning:
Management Accounting assists the management in planning as well as to formulate policies by making forecasts about the production, the selling, the inflow and outflow of cash, etc., i.e., in planning a very wide range of activities of the business. Not only that, but it may also forecast how much may be needed for alternative courses of action or the expected rate of return therefrom and, at the same time, decide upon the program of activities to be undertaken.
Organizing:
By preparing budgets and ascertaining specific cost center, it delivers the resources to each center and delegates the respective responsibilities to ensure their proper utilization. As a result, an inter-relationship grows among different parts of the enterprise.
Motivating:
By setting goals, planning the best and economical courses of action and also by measuring the performances of the employees, it tries to increase their efficiency and, ultimately, motivate the organization as a whole.
Coordinate:
It helps the management in coordinating the activities of the enterprise, firstly, by preparing the functional budgets, then coordinating the whole activity by integrating all functional budgets into one which goes by the name of “Master Budget”. In this way, it helps the management by coordinating the different parts of the enterprise. Besides, overall coordination is not at all possible without “Budgetary Control”.
Control:
The actual work done can be compared with ‘Standards’ to enable the management to control the performances effectively.
Communicate:
It helps the management in communicating the financial information about the enterprise. For taking decisions as well as for evaluating business performances, management needs information. Now, this information is available with the help of reports and statements which form an integral part of Management Accounting.
Interpret Financial Information:
It is not possible for all concerned to understand clearly the different treatments of accounting until and unless the users have acquired a piece of sufficient knowledge about the subject since accounting is a highly technical subject.
And, for the same reason, management may not understand the implications of the accounting information in its raw form. But this problem does not arise in the case of Management Accounting as it presents the required information in an intelligible and non-technical way. This leads the management to interpret financial data, evaluate alternative courses of action and to take correct decisions.
Miscellaneous:
While evaluating the efficiency and effectiveness of different policies.
Locating uneconomic as well as the inefficient place of business activities, and.
Solving business problems, e.g., to expand the existing business unit or not, etc.
Advanced Advantages of Management Accounting:
Management accounting has various advantages. Through an effective management accounting system, it is possible to enhance the overall performance of the company. Let us have a look at the advantages of management accounting.
Advanced technique and features:
The reasons because of which the management system seems reliable are the special tools and technique. To form an accurate and valid report special techniques like budget controlling, marginal costing, control accounting, etc are used. Use of the technique may differ according to the issue at hand. However, this technique makes it easier to make decisions in favor of the company.
Cost transparency:
In the corporate world, the majority of the costs come from the Information Technology (IT). The work of management accounting in the firm is to work with the IT department closely. This action ensures budget actions and provides cost transparency to the company.
Flexibility and freedom:
Management accounting systems of a flexible nature. These reports do not require to be made yearly, monthly, or weekly. Therefore, the accountant gets enough time to prepare a perfect report.
Marginal costing:
Marginal costing is possible with the aid of the management accountant. It fixes the selling price of the products created in the organization. Further, it also suggests several ways to use scarce materials and resources. It also recommends actions based on a fixed cost, contribution, and other extras.
The efficiency of the company:
Companies opt for Management accounting as it increases the efficiency of the company in performing operations. It contributes to striving for better performance by evaluating and comparing. Management accounting makes it easier to achieve various results. This indirectly motivates employees to strive for better performance. As a result, they receive rewards in the form of promotions. Thus, management accounting indirectly increases the efficiency of the company as a whole.
The bar of Profitability:
Management accounting includes budgetary control and capital budgeting. The use of this method makes it easier for the company to cut short the extra expenditure for performing vital operations. This indirectly increases the bars of profits for the company, as the company is able to reduce its pricing on the products.
Simplifies the decision making in Financial Statements:
Managerial decisions and other activities of management require a simplified report of the financial statement of the company. For this action, the management accountant creates a detailed technical report with simpler interpretations. Here, he represents the key facts of the financial statements. This enables the managing officers to take up appropriate decisions for the betterment of the company.
Enables the fluctuation of business monetary fund:
One of the essential factors in business is the monetary fund. Management accounting enables control over the fluctuation of this monetary fund. Management accounting studies the flow of the funds in detail. Moreover, it helps in maintaining the emergency fund in case of any urgency. Further, it also helps in eliminating any source within the company that misuses the fund. After all, emergency preparation should always be kept aside before setting up any business.
Assist in goal completion:
The objective of the report presented by the management accountant is to assist in achieving a long-term goal. It becomes possible to achieve the goal due to the detailed information of the management accountant, which highlights the strong and weak points of the company. In addition, this information helps to identify the weakness and takes measures to overcome them.
Future prediction from the past result:
Every new system that evolves for the corporate world has a single motive. It is to attain success in the competitive market. With similar intent, management accounting system also strives for betterment in performance. Thus, with the help of given data of the past (of the company), it provides a chance to prepare for better future results.
Although management accounting does not promise perfect decisions, they do increase the chances of taking effective and efficient decisions.
Key Advantages of Management Accounting:
The following advantages maybe derive from Management Accounting:
The business activities are managing better by the application of both budgeting and planning.
No doubt it helps to increase the efficiency of the business.
Measures the actual performance in comparison with the budgets.
Also helps to improve the relationship between management and labor.
It helps the management to chalk-out future plans of action on the basis of past results.
Helps the management in such a way that the latter can maximize the rate of return on capital employed.
Advanced Limitations of Management Accounting:
The origin of management accounting can trace to overcome the limitations of financial accounting and cost accounting. Financial accounting is very useful to the different categories of persons but it suffers from the following limitations:
Historical Nature:
Financial accounting is of historical nature. It does not provide the necessary information to the management for planning, control, and decision-making. It does not tell how to increase the profit and maximize the return on the capital employed.
Technical Subject:
Financial accounting is highly technical in nature. Financial accounts can be prepared and interpreted only by those persons who possess adequate knowledge of accounting concepts and conventions and are well conversant to the practice of accounting.
Recording of Actual Cost:
In financial accounting assets and properties are recorded at their cost. No effect of changes in their value is recorded in the books after its acquisition. Thus, it has nothing to do with their realizable or replaceable value.
Incomplete Knowledge of Costs:
In financial accounting data relating to cost is not available according to different products or jobs or processes in order to judge the profitability of each. Information regarding wastages and losses is also not available from the financial accounts. It is also difficult to fix the prices of the products without the availability of a detailed analysis of costs which is not available in financial accounts.
No-Provision for Cost Control:
Costs cannot control through financial accounting as there is no provision for corrective action because of expenses being record after their incurrence. No technique to check the reasonableness of any expenditure or no system for fixing definite responsibility on any authority for wastage or excessive expenditure is available in financial accounting.
No-Evaluation of Business Policies and Plans:
There is no device in financial accounting by which the actual progress can measure against the targets in order to evaluate the business policies and plans, to know the reasons for deviations and how to correct them if need be.
Not Helpful in Decision-Making:
As the data available is of historical nature, financial accounting is not of much help to the management in selecting a profitable alternative. There are many situations where management is requiring to take decisions but the information provided by financial accounting is not adequate.
Though cost accounting came into existence to remove the limitations of financial accounting its scope as compared to management accounting is limited as it deals primarily with the cost data. In actual practice, cost accountants are doing the jobs of management accountants. Further, most of the techniques of management accounting are also being used by the cost accountants.
That is why; management accounting is treating as the extension of cost accounting. But for our purpose of the study we treat the management accounting more broad as compared to cost accounting as management accounting, includes many more aspects of the study besides the cost accounting. Thus, the science of accounting is not in a finished state. It is in the process of evolution. The role of accounting has changed after the Second World War.
Now, it is not a mere recording of business transactions in the books of original entry, then classifying them into the ledger and finally summarizing them by preparing the profit and loss account and balance sheet as is done in financial accounting or calculation and control of cost as is done in cost accounting.
Rather accounting helps in forecasting, planning and controlling the business events and taking managerial decisions. Keeping this in view a new branch of accounting known as Management Accounting has been developing to cope with the limitations of financial accounting and cost accounting. In the Hindi language: प्रबंधन लेखांकन का कार्य, लाभ, और सीमाएं।
Management Accounting of Functions, Advantages, and Limitations. Image Credit from #Pixabay.
Explore the importance of accounting principles. Learn about their meaning, definition, and features, and understand how they guide the efforts of accountants and auditors. To search for the goals of the accounting profession and for expanding knowledge in this field, A logical and useful set of principles and procedures are to develop. Explained each one point, Accounting Principles points in Meaning Definition and Features. We know that while driving our vehicles, follow standard traffic rules.
Accounting Principles Understand in these points Meaning, Definition, and Features.
Without adhering traffic rules, there would be much chaos on the road. Similarly, some principles apply to the account. Thus, the accounting profession cannot reach its goals in the absence of a set of rule to guide the efforts of accountants and auditors. The rules and principles of accounting are commonly referring to as the conceptual framework of accounting.
Meaning of Accounting Principles:
They are a man make. Unlike the principles of Physics, Chemistry and other natural sciences; accounting principles were not deduced from basic axioms, nor their validity is verifiable through observations or experiments. These principles are drawn from the practical practice of accounting.
Definition of Accounting Principles:
They have been defining by the Canadian Institute of Chartered Accountants as,
“The body of doctrines commonly associated with the theory and procedure of accounting serving as an explanation of current practices and as a guide for the selection of conventions or procedures where alternatives exist. Rules governing the formation of accounting axioms and the principles derived from them have arisen from common experience, historical precedent statements by individuals and professional bodies and regulations of Governmental agencies.”
According to Hendriksen (1997), Accounting theory may define as logical reasoning in the form of a set of broad principles that;
Provide a general frame of reference by which accounting practice can evaluate, and.
Guide the development of new practices and procedures.
The theory may also use to explain existing practices to obtain a better understanding of them. But the most important goal of accounting theory should be to provide a coherent set of logical principles that form the general frame of reference for the evaluation and development of sound accounting practices.
No list of universally accepted principles can prepare but still, certain principles are drawn which are acceptable by most of the accountants.
According to the Terminology Committee of AICPA,
“The word principles are used to mean a general law or rule adopted or preferred as a guide to action; a settled ground or basis of conduct or practice.”
A.W. Johnson describes as,
“Broadly speaking, these principles are the assumptions and rules of accounting, the methods, and procedures of accounting and the application of these rules, methods, and procedures to the actual practice of accounting.”
Definition and Explanation:
Accounting is the language of business through which economic information is communicating to all the parties concerned. In order to make this language easily understandable all over the world, it is necessary to frame or make certain uniform standards which are accepting universally. These standards are termed “Accounting Principles”.
They may define as those rules of action or conduct which are adopting by the accountants universally while recording accounting transactions. It is a body of doctrines commonly associated with the theory and procedures of accounting. They are serving as an explanation of current practices and as a guide for the selection of conventions or procedures where alternatives exist.
The American Institute of Certified Public Accountants (AICPA) has advocated the use of the word” Principle” in the sense in which it means “rule of action”. It discusses the generally accepted accounting principles as follows: Financial statements are the product of a process in which a large volume of data about aspects of the economic activities of an enterprise are accumulating, analyze and report.
This process should carry out in conformity with generally accepted accounting principles. These principles represent the most current consensus about how accounting information should record, what information should disclose, how it should disclose, and which financial statement should prepare. Thus, generally accepted principles and standards provide a common financial language to enable informed users to read and interpret financial statements. Thus, we may define Accounting Principles as those rules of action or conduct which are adopting by the accountants universally while recording accounting transactions.
Features of Accounting Principles:
They are synthetic. It is acceptable because they are believing to be useful. The general acceptance of an accounting principle usually depends on how well it meets the following three basic norms:
Usefulness.
Objectiveness and.
Feasibility.
A principle is useful to the extent that it results in meaningful or relevant information to those who need to know about a certain business. In other words, an accounting rule, which does not increase the utility of the records to its readers, is not acceptable as an accounting principle. A principle is objective to the extent. That the information is not influencing by the personal bias or Judgement of those who furnished it. Accounting principle says to be objective when it solidly supports by facts. Objectivity means reliability which also means that the accuracy of the information reported can verify.
Accounting principles should be such as are practicable. A principle is feasible when it can implement without undue difficulty or cost. Although these three features are generally finding in accounting principles. An optimum balance of three is struck in some cases for adopting a particular rule as an accounting principle. For example, the principle of making the provision for doubtful debts find on feasibility and usefulness though it is less objective. This is because of the fact that such provisions are not supporting by any outside evidence.
Essential Features of Accounting Principles:
They are acceptable if they satisfy the following norms:
Relevance or Usefulness:
A principle will be relevant only if it satisfies the needs of those who use it. The accounting principle should be able to provide useful information to its users otherwise it will not serve the purpose. Also, know this What do you think of Data Warehousing?
Objectivity:
A principle will say to be objective if it bases on facts and figures. There should not be a scope for personal bias. If a principle can influence the personal bias and whims of users. It will not be an objective principle and its usefulness will limit. The cost principle will be more useful than the value principle. Because the value will base on market prices and personal judgment will differ in finding out value.
Feasibility:
The accounting principles should be practicable. The principles should be easy to use otherwise their utility will limit. While showing fixed assets in the balance sheet, it will be more feasible to take cost less depreciation. If the assets are shown on market value or replacement cost basis. Then, it will involve difficulties and different persons will take different values because market prices go on changing every time.
The features mentioned above should be present in accounting principles. But in some cases, the optimum balance of these features is struck for adopting. A particular rule as the accounting principle. Sometimes one feature may have to sacrifice for the other so that it may adopt as the principle. Explains and defineEntrepreneurial Marketing and SME.
We may show fixed assets at replacement cost. Because it is practicable and actual cost principle may not be able to give correct results. As the rise in price index will make it less useful. Similarly, the principle of making provision for doubtful debts founds on the feasibility and usefulness basis though it is less objective. Such provisions are not supporting by any outside evidence and there is always a fear of personal bias.
Financial accounting is a specialized branch of accounting that keeps track of a company’s financial transactions. Define with Explain it each one Concept of Financial Accounting Discuss the topic, Financial Accounting – Meaning, Definition, Nature, Scope, and Disadvantages of Limitations. Using standardized guidelines, the transactions record, summarize, and present in a financial report or financial statements such as an income statement or a balance sheet. Companies issue financial statements on a routine schedule. The statements are considered external because they are given to people outside of the company, with the primary recipients being owners/stockholders, as well as certain lenders. It also learns Accountability in Financial Management.
Learn, Explain Financial Accounting: Meaning, Nature, Scope, and Disadvantages.
If a corporation’s stock is publicly traded, however, its financial statements [Hindi] (and other financial reporting) tend to widely circulate, and information will likely reach secondary recipients such as competitors, customers, employees, labor organizations, and investment analysts. It’s important to point out that the purpose of financial accounting is not to report the value of a company. Rather, its purpose is to provide enough information for others to assess the value of a company for themselves.
Because external financial statements are used by a variety of people in a variety of ways, financial accounting has common rules known as accounting standards and as generally accepted accounting principles (GAAP). In the U.S., the Financial Accounting Standards Board (FASB) is an organization that develops accounting standards and principles. Corporations whose stock publicly trade must also comply with the reporting requirements of the Securities and Exchange Commission (SEC), an agency of the U.S. government. The similarity between Financial and Management Accounting.
Meaning of Financial Accounting:
Accounting is the process of recording, classifying, summarizing, analyzing, and interpreting the financial transactions of the business for the benefit of management and those parties who are interested in business such as shareholders, creditors, bankers, customers, employees, and government. Thus, it concerns with financial reporting and decision-making aspects of the business.
The American Institute of Certified Public Accountants Committee on Terminology proposed in 1941 that accounting may be defined as,
“The art of recording, classifying and summarizing in a significant manner and in terms of money, transactions, and events which are, in part at least, of a financial character and interpreting the results thereof.”
Financial Accounting:
The term ‘Accounting’ unless otherwise specifically stated always refers to ‘Financial Accounting’. It is commonly carrying on in the general offices of a business. It concerns with revenues, expenses, assets, and liabilities of a business house. Also, they have the two-fold objective, viz,
To ascertain the profitability of the business, and
To know the financial position of the concern.
Nature and Scope of Financial Accounting:
Financial accounting is a useful tool to manage and to external users such as shareholders, potential owners, creditors, customers, employees, and government. It provides information regarding the results of its operations and the financial status of the business.
The following are the functional areas of financial accounting:-
1] Dealing with financial transactions:
Accounting as a process deals only with those transactions which are measurable in terms of money. Anything which cannot be expressed in monetary terms does not form part of financial accounting however significant it is.
2] Recording of information:
Accounting is the art of recording financial transactions of a business concern. There is a limitation on human memory. It is not possible to remember all transactions of the business. Therefore, the information is recorded in a set of books called Journal and other subsidiary books and it is useful for management in its decision-making process.
3] Classification of Data:
The recorded data arrange in a manner to group the transactions of similar nature at one place so that full information of these items may collect under different heads. This is done in the book called ‘Ledger’. For example, we may have accounts called ‘Salaries’, ‘Rent’, ‘Interest’, Advertisement’, etc. To verify the arithmetical accuracy of such accounts, the trial balance prepare.
4] Making Summaries:
The classified information of the trial balance uses to prepare a profit and loss account and balance sheet in a manner useful to the users of accounting information. As well as, the final accounts prepare to find out the operational efficiency and financial strength of the business.
5] Analyzing:
It is the process of establishing the relationship between the items of the profit and loss account and the balance sheet. Also, the purpose is to identify the financial strength and weaknesses of the business. It also provides a basis for interpretation.
6] Interpreting financial information:
It is concerned with explaining the meaning and significance of the relationships established by the analysis. It should be useful to the users, to enable them to take correct decisions.
7] Communicating the results:
The profitability and financial position of the business as interpreted above communicate to the interest parties at regular intervals to assist them to make their conclusions.
Disadvantages or Limitations of Financial Accounting:
The concerns with the preparation of final accounts. Also, the business has become so complex that mere final accounts are not sufficient for meeting financial needs. It is like a post-mortem report. At the most, it can reveal what has happened so far, but it cannot exercise any control over the past happenings.
The disadvantages of financial accounting are as follows:-
It records only quantitative information.
Records only the historical cost. The impact of future uncertainties has no place in financial accounting.
It does not take into account price level changes.
It provides information about the whole concern. Product-wise, process-wise, department-wise, or information of any other line of activity cannot obtain separately from financial accounting.
Cost figures do not know in advance. Therefore, it is not possible to fix the price in advance. It does not provide information to increase or reduce the selling price.
As there is no technique for comparing the actual performance with that of the budgeted targets, it is not possible to evaluate the performance of the business.
It does not tell about the optimum or otherwise of the quantum of profit made and does not provide the ways and means to increase the profits.
In other words;
In case of loss, whether loss can reduce or convert into profit using cost control and cost reduction? It does not answer this question.
Does it not reveal which departments are performing well? Which ones are incurring losses and how much is the loss in each case?
It does not provide the cost of products manufactured
There are no means provided by financial accounting to reduce the wastage.
Can the expenses reduce which results in the reduction of product cost and if so, to what extent and how? No answer to these questions.
It is not helpful to the management in taking strategic decisions like a replacement of assets, an introduction of new products, discontinuation of an existing line, expansion of capacity, etc.
It provides ample scope for manipulation like overvaluation or undervaluation. This possibility of manipulation reduces reliability.
It’s technical. A person not conversant with accounting has little utility of the financial accounts.
