What is Accounting
Accounting serves the purpose of providing financial information relating a business. Such information is provided to people who have an interest in the organization, such as shareholders, managers, creditors, debenture holders, bankers, tax authorities and others. Broadly speaking, on the basis of type of accounting information and the purpose for which such information is used, below mentioned are the three different Types of Accounting:|
1. Financial Accounting (or General Accounting)
2. Cost Accounting and
3. Management Accounting.
Financial Accounting Definition
Financial Accounting mostly deals with recording business dealings in the records of financial statement for the purpose of giving final accounts. It is mentioned as the art of recording. Summarizing and classifying in a substantial manner and in terms of transactions, money and events, that are in quantity at least, of interpreting the results thereof and a financial character. The information provided by Financial Accounting Definition is actually summarized in the subsequent two statements at the end of the accounting period, generally one year.
1. Loss account and profit showing the loss or net profit during the period.
2. Balance Sheet showing the financial position of the firm at a point of time. The objective of financial accounting is to provide information to external parties such as shareholders, employees, potential investors, government agencies, etc.
Cost Accounting Standards
Cost accounting is a branch of accounting which specializes in providing information about the detailed cost of products or services being supplied by the undertaking. Compared with financial accounting, cost accounting is relatively a recent development. It has primarily developed to meet the needs of management. Profit and Loss Account and Balance Sheet are presented to management by the financial accountant.
However modern management requires much more thorough information than provided by financial statements. Cost accounting offers detailed cost information to numerous levels of management for effective performance of their functions. The information supplied by Cost Accounting Standards acts as a too1 of management for making optimum use of scarce resources and ultimately adds to the productivity of business.
The terms 'costing' and 'cost accounting' are often used interchangeably. The Chartered Institute of Management Accountants - (CIMA) of UK has defined costing as, "the techniques and processes of ascertaining cost". Thus, costing simply means cost finding by any process or technique. It consists of
principles and rules which are used for determining:
1. The cost of manufacturing a product; e.g., motor car, furniture, chemical, steel, paper, etc. and
2. The cost of providing a service; e.g., electricity, transport, education, etc.
Cost Accounting Standards are mainly for internal use i.e. management. It is not to be provided to external parties such as shareholders, creditors, potential investors, etc. Neither do they have any claim on this information, excepting government, to whom cost information may have to be submitted.
What is Management Accounting
The term 'management accounting' is the modern concept of accounts as a tool of management. It is a broad term and is concerned with all such accounting information that is useful to management. In simple words, the term management accounting is applied to the prevision of accounting information for management activities such as planning, controlling and decision making, etc.
So what is management accounting? According to the Institute of Chartered Accountants of England, “any form of accounting which enables a business to be conducted more efficiently” may be regarded as management accounting. Management accounting information can help managers identify problems, solve problems and evaluate performance.
The Chartered Institute of Management Accountants (CIMA) of UK has given a very authoritative and comprehensive definition as follows:
Management accounting is an essential part of an organization concerned with presenting, identifying and interpreting data used for:
1. Formulating strategy
2. Planning and controlling activities
4. Optimizing the use of resources
5. Disclosure to shareholders and others external to the entity
6. Disclosure to employees and
7. Safeguarding assets.