What is Accounting?
As stated in the overview for this lesson, accounting is the process of identifying, measuring, and communicating economic information about an entity for the purpose of making decisions and informed judgments. Accounting information is used in all types of organizations (accountants frequently use the word entities instead of organizations). It is vital for the management process. Managers at all levels need to know how to use accounting information to identify problems, solve problems, and evaluate performance.
A Comparison of Financial Accounting and Managerial Accounting
Financial Accounting – refers to the process resulting in the preparation and reporting of financial statements for an entity. Some characteristics of financial accounting include:
- Externally Focused
- Must follow externally imposed rules
- Historical Orientation
- External evaluation of an entity as a whole
- Information about the entity as a whole
- More Self-Contained
- Bookkeeping procedures are a part of financial accounting and are used to accumulate the results of many of an entity’s activities. Please use Bullets when HTML developed
- A Certified Public Accountant (CPA) is a professional designation for someone who has passed a four-part comprehensive examination taken over a two-day period. They deal with financial statements of entities especially audits.
Managerial Accounting – concerned with the use of economic and financial information to plan and control many of the activities of the entity and to support the management decision-making process. Some characteristics of managerial accounting include:
- Internally Focused
- No Mandatory Rules
- Emphasis on the Future
- Internal evaluation of segments carrying strong behavioral ramifications
- Detailed Information
- Broad, Multi-Disciplinary
- Cost accounting relates to the determination and accumulation of product, process, or service costs. It is a subset of managerial accounting. Much of the same data used in financial accounting is used in managerial cost accounting. However, in financial accounting the data is used to look at the past whereas in managerial cost accounting, the data is used in a future-oriented way.
- A Certified Management Accountant (CMA) and/or Certified in Financial Management (CFM) are professional designations earned by a management/cost accountant by passing a four-part examination.
International Accounting Standards
- IASB – International Accounting Standards Board
- Accounting standards differ greatly among different countries.
- Individual country standard reflect local market needs and country regulation and taxation practices.
Ethics and the Accounting Profession
- Much of an accountant’s work involves providing information to support the informed judgments and decisions made by users of accounting information. Therefore, ethical behavior is greatly expected of an accountant. The American Institute of Certified Public Accountants (AICPA) and the Institute of Management Accountants (IMA) both have ethical codes pertaining to professional accountants.
- Integrity and objectivity are the two key elements of ethical behavior. Both the AICPA and IMA codes of conduct identify these two elements.