Accounting for Managers

Section: A
Introduction

Section: A
 ACCOUNTING
Accounting is the art of recording, classifying and
summarizing in a significant manner and in
terms of money transactions and events which
are, in part at least, of a financial character, and
interpreting the result thereof.
According to the American Accounting Association (AAA)-
“Accounting is the process of identifying, measuring, and
communicating economic information to permit
informed judgments and decisions by users of the
information.”
Characteristics of Accounting Information

• Relevance
• Comparability
• Reliability
• Objectivity
 Maintaining
records of the
business
Calculating
Compliance
profit and
of rules
loss

Managerial Depicting
decision financial
making position
Objectives

Providing
Helpful for financial
Controlling information
to users

Facilitating
Stewardship
planning and
of funds
forecasting
 Objectives of Accounting
• Maintaining records of the business: Implies that
accounting enables an organization to maintain systematic
records of all the financial transactions, such as purchase
and sale of goods, cash receipts and cash payments.

• Calculating profit and loss: Implies that with the help of

accounting, net results of the business operations are
determined for a particular duration.

• Depicting financial position: Refers to one of the important

objectives of accounting. A proper record of all assets and
liabilities helps to determine the value of the organization’s
assets, and the amount that organization owes to others.
 Continued
• Providing financial information to users: Implies that the
accounting information is communicated to the
proprietors and other interested users.
• Facilitating planning and forecasting: Implies that the
accounting information helps the management to evaluate
the viability of the proposed operations, which in turn,
helps them to plan and forecast the future business
operations. Assisting top management in planning and
budgeting
• Stewardship: Verification that the funds allocated to the
managers were used for the intended purpose
 Continued
•Helpful for Controlling: Identifying the key result areas
and exercising control over the organizational activities
like time management through labour variance analysis.
•Managerial decision making: Assisting managers in
business decision making like decision regarding buy or
manufacturing the product.
•Compliance reporting: Ensuring compliance with laws
and submission of the required reports on time
 Nature of Accounting
 Accounting may be regarded as a science in its being
able to use scientific and analytical techniques for
solving managerial problems
 Accounting may be regarded as an information system
for providing information needed by the stakeholders
 Accounting may be regarded as a service function in
being able to serve the society through social accounting
 Accounting may be regarded as a language of the
business because the preparers and interpreters of the
financial informations should understand the common
language of accounting
 Accounting as an Information System
The accounting information can be useful in the following ways:
• Provides information to managers for decisions making.
• Provides information to stakeholders who rely on financial
statements for their decisions.
• Provides information for judging managerial efficiency to use
the resources effectively for attaining the business goals and
objectives.
• Provides accurate and interpretive information for budgeting,
forecasting and performance evaluation.
• Provides historical information to the management to reveal
past events
 Stakeholders
Internal Stakeholder External Stakeholders
– Owners – Government and its
– Management Authorities
– Investors and Potential
– Employees Investors
– Banks/Lenders and Financial
Institutions
– Suppliers/Creditors
– NGOs/ Industry associations
– Researchers
– Society
 Book-keeping Vs. Accounting
Book-keeping Accounting
• It records monetary • It analyses, classifies and
transactions in the books summarizes the transactions
• It is confined to entering of in the form of information
transaction values in the • It tests the authenticity of
books each transaction entered in
• It is a task oriented function the books
• It is a result oriented function
• It is the basic step of
• It is a process which
accounting
generates information
 Functions of Accounting
• Keeping systematic records: Accounting Involves the recording of
information in the form of a profit and loss account, and balance sheet
at the end of the financial year. Information provided in this manner
serves as a historical record for an organization. It can be useful for
various purposes, such as evaluating performance, comparing the
present performance of the organization with the past performance.
• Acting as a source of information: It involves collection and
communication of financial information about an enterprise to the
interested parties. It facilitates dissemination of the accounting
information among the different group of users to help them in taking
various decisions.
 Continued
• Meeting legal requirements: Act as one of the important
functions of accounting. The accounting system of an
organization should fulfill the requirements of law. Under the
provisions of law, a business has to file various statements, such
as income tax returns, and returns for sales tax purposes.
• Medium of communication: Accounting also serves this
function by communicating the results of business operations
to the stakeholders of the business. It involves maintaining and
processing the financial information required by a business
entity for its management and reporting purposes.
 Continued
• Protecting properties of the business: Implies that an accountant
design a system of accounting to protect the properties of an
organization, such as tools and machinery, from unjustified and
unwarranted use.

• Other Functions:
– Interpret the financial information
– Capital expenditure control
– Business decision making
– Balance debt and equity of the company
– Means to ensure stakeholders’ interests
– Social accounting
– Ensure tax and other statutory compliance
 Limitations of Accounting
• Historical information
• Recording of Only Financial information: Accounting does
not reveal non monetary information like customer
satisfaction, market competition, market share, etc.
• Inadequate Cost information: Accounting does not provide
cost information to gauge the product or department-wise
profitability
• Personal judgment: Financial information is clouded by
personal judgment of the preparers like provisions,
valuations, etc.