Learning Objective 1 wants you to be able to distinguish between Financial Accounting and Cost Accounting.
Real quick, what is accounting? Well in simple terms, accounting is just recording economic transactions and turning that into useful information. Every time you ring something up on a cash register? That transaction goes right to a computer where a manager will review what it is people are buying. Or a more extreme example, imagine the next time you walk into a Whole Foods that there's this balding middle aged guy following you around everywhere as you walk around the store. As you get ready to leave, he writes down in his notepad all the items in your shopping cart, hands you a bill, and puts his copy of your shopping list into a manila envelope with all of your personal information he's been recording about you for the last 3 years. What he will do with all of your personal information you don't know, but again this follows the simple process of recording the transaction and turning it into information to be used at a later date.
A minor tangent the chapter takes and one that shows up in many of my classes; a quick explanation of ERP systems. Enterprise Resource Planning systems are large single databases that collects data from multiple facets of an organization and puts all of it in one place. Parts of this data can then be fed into different applications to support the company's business based on whatever the manager in question needs at that time. These systems are incredibly useful to accountants, since nobody understands what accountants are talking about anyway and generally will need a computer to dumb down whatever transactional data the accountant is trying to explain to them. Whether or not this will be on the test, who knows.
Back to accounting. If accounting is just recording transaction data and turning it into useful information, two probably really good questions to ask are how is data being recorded, and who is going to use that information? In fact, in answering these questions, we will be able to achieve Learning Objective 1.
Financial Accounting is perhaps the easier to define of the two. Financial Accounting needs to follow a strict set of rules based on Generally Accepted Accounting Principles (GAAP). What exactly GAAP is is a long story but just know that if you don't follow them, a lot of people are going to be mad at you. Who are these people? Well, the public, the banks, investors, the federal government, basically the point of Financial Accounting is to accurately present your Financials to people outside of the company, hence the strict emphasis on the rules to keep information clear and legible for anybody on the outside looking in.
Managerial Accounting on the other hand is far less easy to define than its financial counterpart. The goal of Managerial Accounting is to provide useful financial (and non financial) information to managers to help fulfill the goal of the organization (usually this just means make money). Because of this, there aren't nearly as many rules to Managerial Accounting; if the managers can understand the information you give them and the information helps managers make money, it flies.
There's another key difference that can be inferred from these different goals. Financial Accounting wants to report accurately of what the company is, and thus tends to be past oriented (often reporting last year's performance up to today), while managerial accounting is a tool for where the company is going, and is future orientated. While long term plans do exist in managerial accounting, it's far more common for managerial accounting to plan up to the next year or so.
There's also the unloved step-child in the room that is Cost Accounting. Its role is to measure and analyze costs that the company incurs and use that data to make smart decisions with the company's limited resources. However, most accountants simply consider this as part of the job of Managerial Accounting, and just like unloved step-children, people tend not to even register its even there.
Before wrapping up, there is one last concept called Cost Management. There is no exact definition for this term, however the general idea is the analyzation of costs in a way that maximizes value to customers and/or achieves the company's goals. This does not strictly mean cost reduction; it also means analyzing when it's smart to take on additional costs to add to the product or service, hopefully manifesting in greater revenues and profits down the line. One thing to note is that cost management is a different idea from accounting in that "Information from accounting systems helps managers to manage costs, but the information and the accounting systems themselves are not cost management." (Page 3).
Anyway to summarize, or more specifically to answer Learning Objective 1, how is financial accounting different from managerial accounting? While both systems seek to record transactional data into usable information, how they record this data and who they present the information to are their key differences. Namely, Financial Accounting seeks to provide a clear and accurate picture of the company to outsiders, whereas Managerial Accounting is a tool to help managers plan out and strategize their next moves. This leaves the former past orientated and the latter future orientated. Cost Accounting has also been absorbed into Managerial Accounting for the most part. Nobody will miss it though.
Datar, Srikant M.. Horngren's Cost Accounting (ch. 1). Pearson Education. Kindle Edition
No comments:
Post a Comment