Accounting is the method of identifying, measuring and communicating economic information to permit informed judgment and decision making by the users of the information. It’s that part of information system of business enterprise which provides financial information concerning the business activities of an enterprise to diverse groups of people such as: shareholders, managers, creditors, tax authorities etc On the basis of purpose for which the information is required, accounting is divided in 2 parts:
i) Financial Accounting
ii) Management Accounting
Financial Accounting Financial accounting is mainly concerned with recording business transactions in the books of accounts for the purpose of presenting final reports to the management, shareholders, and tax authorities. The information supplied by financial accounts is summarized in the following statement at the end of given period generally one year:
- Profit and loss account (the income statement).
- Balance sheet.
- Cash flow statement.
- Statement of change in equity.
It’s that part of management that is concerned with identifying and presenting information for formulating strategies, planning and controlling activities, decision making on alternative decision, optimizing use of resources for interested parties and safeguarding assets of the business.
It’s that part of management that deal with ascertaining cost of product operation, process etc It’s the combination of accounting and costing technique in the accumulating analysis and control of cots and revenue.
Refers to the resource sacrificed so as to achieve a given objective
Difference between Financial Accounting & Cost Accounting
1. Users of the information – Financial accounting information is used by external parties as well as internally by managers. Cost Accounting information is used internally by managers.
2. Compliance with GAAP– Financial Accounting statements are prepared in compliance with GAAP (Generally Accepted Accounting Principles) whereas cost accounting statements do not need to comply with any principles.
3. Format– Financial Accounting statements are prepared in the format presented by the (IAS) International Accounting Standards whereas Cost Accounting statements are prepared in the format internally decided by the management.
4. Periodicity of Reporting– Financial Accounting reports are issued periodically e.g. annually, semi-annually etc. Cost Accounting reports can be prepared when the management requires them.
5. Audit Requirements– Financial Accounts should be audited by an external or independent party. Cost Accounts needs not be audited unless they contain vital information for the audit.
6. Legal Requirement– Financial Accounting reports are compulsory by law (under CAP 486). Cost Accounting reports are prepared when management require them.
7. Sources of Information– Data used to prepare financial statement is historical by nature i.e. based on past transactions. Cost Accounting uses historical, current and sometimes future data to prepare its statement.
8. Precision– Financial Accounting requires accurate information otherwise external parties will not have confidence in the content of the report. Cost Accounting may allow for approximation of certain information required.
9. Unit of Measurement– All information under Financial Accounting is in terms of money value. Cost Accounting applies any unit of measurement that is useful in a given situation e.g. Labour hours, output, machine hours etc