Financial Accounting. may be defined as the science and art of criminal recording and classifying business transaction and preparing summary of the same 1 sense of transaction and preparing summaries of the same for determining profit or release and the financial posture of the business concern. The objective of is to discovery out the profitability and to provide selective info about the financial position of the concern. Its purpose is to provide information for others to the value of a company. It is concerned with record – keeping directed towards the preparation of Profit and Loss Invoice and Balance Sheet
Managerial Accounting is concerned with the supply of information which is useful to management in decision making for the efficient running of the business and in minimizing profit. It is the process of identifying, measuring, analyzing and communicating information of an organization’s goal.
Differences between Financial Accounting and Managerial Accounting
1. It is used internally.
1. It is used for external stakeholders.
2. The time horizon is for historical information.
Example: – Managers and Employees.
2. The time horizon is for future projections.
Example: – Shareholder’s, Creditor’s, lender’s, banks and government.
3. It keeps the track of all the financial information of the entity.
3. It record’s and report’s both the financial and non-financial information of an entity.
4. It is regulated by the law. It is standardized.
4. It is regulated and established by the entrepreneur. It is not standardized.
5. To record the financial performance in a period and the financial position at the end of that period.
5. To aid planning, controlling and decision making.
6. Efficiency of financial accounting is to report on the profitability.
6. They report on specifically what is causing problem and how to fix them.
7. Nature of information is mostly financial.
7. Nature of information is financial and non-financial.
The two principal statements of financial accounting are: –
1. Income Statement or Statement of Profit and Loss
It shows the net results of the business operations i.e. net profit or loss during an accounting period.
2. Statement of Financial Position or Balance Sheet
It shows the nature and amount of assets, liabilities and capital of a business and indicates the financial position of the business at a particular date.
Objectives of preparing a Financial Statements
(i) To present a true and fair view of the financial performance (i.e. profit/ loss) of the business.
(ii) To present a true and fair view of the financial position (i.e. Assets/Equity and Liabilities) of the business.
Characteristics of Financial Statements
(i) They are related to past periods and hence are historical documents.
(ii) They are expressed in terms of money.
(iii) They show profitability through statement of profit and loss and financial position through balance sheet.
Managerial Accounting is the process of identification, measurement, accumulation, psychoanalysis, preparedness, and communication lead to the managerial determination. It is for internal provision and controller responding to a) Customer’s for safe and shortcoming free Cartesian product and services. b) Creditor’s for repaying principal and interest. c) Employees for a safe and defect freeware and services
Calculations of Managerial Accounting
1)Accounting Equation Assets = Liability + Stakeholder’s Equity
Assets: They are the things which are owned by the company. They are many different types of Assets: Current Assets – Assets which are held in the form of cash, for their conversion into cash, for their consumption in the production of goods and services. Ex: – cash in hand, cash at bank etc.
Fixed Assets – Which are held for the purpose of providing goods and services and those which are not held for resale in the business.
Fixed assets are of two types: – Tangible Fixed Assets – Which can be seen and touch physically. Ex: – land, building, plant, and machinery etc. Intangible Fixed Assets- which cannot be seen and touched. Ex: – Goodwill, patent, trademark etc.
Liabilities: Refers to the financial obligations of an enterprise other than owner’s funds. Liabilities maybe current liability and long-term liability.
Current liabilities- Those liabilities which fall due for payment in a short period. (normally a period of not more than 12 months). For Ex: – Bills Payable, outstanding expenses etc. Long-term liabilities- Those liabilities which do not fall due for payment in a short period. (normally more than one year). Forex: – long-term loans and debentures.
2) Net Income Revenue – Expenses = Net Income Revenues – Amount charged for goods sold. Expenses – It is money spend on conducting business activities. Forex: salaries paid, rent etc.
3) Cost of Goods Sold Beginning inventory cost +Additional Inventory – Ending Inventory = Equals to Cost of goods sold
They are of 2 types: – Direct cost – Production or purchase of the product.
Indirect cost – Warehousing, equipment, labor etc.
4) Contribution Margin Total sales – Total variable cost = Total Contribution Margin Sales price – Variable cost per unit = Contribution Margin per unit.
Manager’s 3 responsibilities
1) Planning – Settings goal and objectives and how to achieve them. Ex: Generate more sales, reduce labor costs etc.
2) Directing – Overseeing company’s day to day operation’s. Ex: Using daily sales reports to adjust marketing strategies etc.
3) Controlling – Evaluating results of operations against plans and making adjustments as needed. Ex: Comparing budgeted sales with actual sales to take corrective actions. Objectives of Managerial Accounting
1. Helpful in planning and policy formation – forecasting, setting goals and making policies on the basis of information.
2. Helpful in decision making – making decisions on cost, price, profit, and saving.
3. Helpful in controlling – Costing and budgetary.
4. Motivating to the employee.
Purpose of Managerial Accounting
1. Costing out products, services, and other items.
2. Planning and controlling operations.
3. Evaluating the performances of individual manager’s and different operational units.