Financial and Management Accounting - Essay Example

Financial and Management Accounting Part A: Financial Accounting According to Collins and Collins (2009), financial accounting is the field in accounting that deals with developing of financial statements. These statements which include preparing profit and loss accounts, balance sheets and sales journals among others are prepared for people who make financial decisions, who include bankers, stakeholders, employees, stakeholders and government agencies among others. Accountancy data are prepared for people who are not involved in day to day running of businesses and institutions. It is the summarization of the accounting records of an organization presented in quarterly and annual form. It helms in planning and decision making and is governed by strict international standards. Financial accounting plays crucial role in the business world today. It is through financial accounting that flow of money and resources in a business organization is monitored. This includes wages and salaries among others. Since financial accounting involves preparation of key documents like profit and loss account and balance sheet, it shows how transactions are done over a period of time. It also helps stakeholders and would be investors to make the right decision on investments. Financial accounting is governed by a number of legal requirements and principles. According to Collins and Collins (2009), the business entity principle must be observed. It states that each business establishment must be accounted separately and that personal issues should not be accounted together with the business issues. Cost principle should also be in place. It states that only costs as a result of business dealings should be included in the financial account. Objective principle, which stipulates that all information in the financial accounts should not be subjected to personal opinion, should also be observed. Finally, the going-concerned principle should also be observed. This is a legal requirement that states that business operation will go on as long as the business gains assets and discharges liabilities during its normal operations. Financial accounting has a lot of advantages. According to Daniel (2007), financial accounting helps many business establishments to comply with legal requirements which include tax returns among others. Financial statements, such as balance sheets, help the institution in communication in the organization. Financial accounting also helps in protecting business assets, since flow of money and assets is recorded periodically. Finally, it helps in appropriate decision making, especially to investors and stockholders on where to invest. However, financial accounting is faced with a number of demerits Daniel (2007). For example, financial accounting provides no control of cost on wages and overheads among other aspects. Financial accounting provides limited information to institutions, such as insurance companies. Financial accounting does not classify accounts and expenses. A balance sheet is a review of an institutions financial position at a particular date. It is based on the equation; A=L+O.E, where A is assets, L is liabilities and O.E are the owners’ equity (Ahmed, 2008). Assets are physical and intangible resources that are of positive value to the business institution. They include cash in bank; cash in hand and building and lands among others. Liabilities are transactions by the business organization that need settlement resulting to the use of assets. They include wages, bank over drafts and creditors among others. Finally, owners’ equity refers to the interest claimed by the owner after all liabilities are dealt with. An example is the paid in capital. A key feature of the balance sheet is that the amount on the debit side is always equal to the amount on the credit side. A profit and loss account is a statement used to show the net profit and loss incurred in an accounting period. It can be defined as a port that shows the expenses and revenues of a business institution for a period of time (Ahmed, 2008). The main aim of a profit and loss account is to determine whether a business organization, the company lost or made money during the specified period. One of its key features is that the balance arrived in the trading account is transferred to the profit and loss account. Another feature is that it considers all regular and irregular losses and expenses related to the business organization and is put in the debit side of the account. Other incomes, such as interests on securities and bank deposits, are included in the credit side of the account. Another key feature is that all expenses that cannot be incorporated in the trial balance are included in the debit side of the profit and loss account. Financial analysis is the evaluation of financial data in order to make smart decisions on financial issues and investment. This analysis is used to interpret financial statements. The major source of data for financial analyst is from financial statements. Ratios, such as current ratio, show the extent to which a business institution can liquidate assets quickly to cover their short term liabilities, such as creditors. Information to determine this is taken from financial statements, such as balance sheets. Managerial Accounting According to Stotlz and Viljoen (2007), managerial accounting is a field of accounting that deals with presentation of financial data to managers in order for them to plan well and make proper decisions for the prosperity of the business institution. For example, managerial accounting enables managers to differentiate and analyze different costs. Product cost is all the cost incurred in acquiring of products, while period costs are the costs that cannot be put in the production. It is generated by the formula: production cost=prime cost + FOH cost; where prime cost is the total expenses incurred in production and FOH is the factory over head costs (Stotlz and Viljoen, 2007). An example of production cost includes direct labor and acquisition of raw materials. An example of period costs includes commissions and advertisement expenses. Period costs are included in the income statement. Fixed costs are expenses incurred by a business institution that are not subjected to change irrespective of the business activity, while variable costs are the expenses incurred by a business establishment that are subjected to change, depending on the volume of production. An example of fixed cost is rent while that of variable cost is raw materials. Both of these costs generate total costs. There are various techniques used in calculating cost. One such technique is the Activity Based Costing method (ABC). This is where each activity in a business establishment is allocated cost according to the specific amount of resources consumed by each activity. It adds overheard costs to direct cost resulting to a more accurate figure (Wiedemann, 2009). Another method of calculating cost is the conventional costing method. This is where indirect costs like marketing and heating are allocated to the items produced. This method is not preferred because, two activities that use the same direct costs may have remarkably different overhead costs, which might result in losses. Cost is an essential factor, when it comes to decision making in a business organization. When determining the price to set on commodities offered, the cost of production is greatly considered. Production cost also helps in determining the amount of labor to be employed. It also helps in determining whether to use human labor or machine. The total cost in an organization also determines whether the business establishment will make a profit or loss. This results in management making decisions on what production to go with depending on the profitability of the activity. A budget is a term which is used to refer to a plan for incomes and expenses in a specified duration (Heckert, 2011). Budgets are a common feature not only in governments and business establishments, but also in our day to day activities. In order for a business organization to succeed, it is very important for it to have a good budget. There are many reasons why a budget is vital to a business establishment. One importance of a budget is that it helps in the planning function of management. For example, it helps in identifying the immediate needs of the coming period of time. A budget also helps the manager in controlling the business establishment by revealing areas of concern which need urgent attention (Heckert, 2011). For example, a budget can help a manager to know where there is a limited production hence allocating more labor in the next budget. A budget is also significant because it clearly shows where revenues come from and where expenses go. This helps the manager to know which business ventures bring in a lot of profit and which ones result in losses. The manager is then able to decide on which business ventures to cancel and which ones to allocate more resource to (Heckert, 2011). Another importance of a budget is that it assists management in performing its function of organizing human resource. Through budgeting, management is able to organize human resource in order to reach optimum production. A budget is also important as it allows for continuity, especially when there is change in management. A budget is important as it helps raise more money. This is because a good budget gives management trust from investors hence generating more funds. References Ahmed, N 2008. Financial Accounting, Atlanta, Atlantic Publishers. Collins, B., and Collins, W 2009. Financial Accounting and Reporting. New York, Mc-GrawHil. Heckert, B. J 2011. Business Budgeting and Control. New York, Biblio Bazaar. Stoltz, A., and Viljoen, M 2007. Financial Management. Bolton, Pearson. Wiedemann, L 2009. Financial Management Bolton, McGraw-Hill. Read More