UNIT - I: INTRODUCTION TO ACCOUNTING: Meaning – Definition – Scope - Objectives of Accounting - GAAP - Accounting Concepts and conventions - Management Accounting Vs. Cost Accounting vs. Financial Accounting -Importance of Management Accounting.

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UNIT-I
INTRODUCTION TO ACCOUNTING
INTRODUCTION
Accounting has rightly been termed as the language of the business. The basic function
of a language is to serve as a means of communication Accounting also serves this function. It
communicates the results of business operations to various parties who have some stake in the
business viz., the proprietor, creditors, investors, Government and other agencies. Though
accounting is generally associated with business but it is not only business which makes use of
accounting. Persons like housewives, Government and other individuals also make use of a
accounting. For example, a housewife has to keep a record of the money received and spent by
her during a particular period. She can record her receipts of money on one page of her
"household diary" while payments for different items such as milk, food, clothing, house,
education etc. on some other page or pages of her diary in a chronological order. Such a record
will help her in knowing about:
(i) The sources from which she received cash and the purposes for which it was utilized.
(ii) Whether her receipts are more than her payments or vice-versa?
(iii) The balance of cash in hand or deficit, if any at the end of a period.
In case the housewife records her transactions regularly, she can collect valuable information
about the nature of her receipts and payments. For example, she can find out the total amount
spent by her during a period (say a year) on different items say milk, food, education,
entertainment, etc. Similarly she can find the sources of her receipts such as salary of her
husband, rent from property, cash gifts from her relatives, etc. Thus, at the end of a period (say
a year) she can see for herself about her financial position i.e., what she owns and what she
owes. This will help her in planning her future income and expenses (or making out a budget) to
a great extent.
The need for accounting is all the more great for a person who is running a business. He must
know: (i) what he owns?
(ii) What he owes?
(iii) Whether he has earned a profit or suffered a loss on account of running a business?
(iv) What is his financial position i.e. whether he will be in a position to meet all his
commitments in the near future or he is in the process of becoming a bankrupt?
ORIGIN AND GROWTH OF ACCOUNTING
Accounting is as old as money itself. However, the act of accounting was not as developed as it
is today because in the early stages of civilization, the number of transactions to be recorded
were so small that each businessman was able to record and check for himself all his
transactions. Accounting was practiced in India twenty three centuries ago as is clear from the
book named "Arthashastra" written by Kautilya, King Chandragupta's minister. These books not
only relate to politics and economics, but also explain the art of proper keeping of accounts.

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However, the modern system of accounting based on the principles of double entry system
owes it origin to Luco Pacioli who first published the principles of Double Entry System in 1494
at Venice in Italy. Thus, the art of accounting has been practiced for centuries but it is only in
the late thirties that the study of the subject 'accounting' has been taken up seriously.
Meaning of Accounting
Accounting, as an information system is the process of identifying, measuring and
communicating the economic information of an organization to its users who need the
information for decision making. It identifies transactions and events of a specific entity. A
transaction is an exchange in which each participant receives or sacrifices value (e.g. purchase
of raw material). An event (whether internal or external) is a happening of consequence to an
entity (e.g. use of raw material for production). An entity means an economic unit that
performs economic activities.
Definition of Accounting
American Institute of Certified Public Accountants (AICPA) which defines accounting as “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
results thereof”.
American Accounting Association (AAA) defined “Accounting is the process of identifying,
measuring and communicating economic information to permit informed judgments and
decisions by users of the information”.
DISTINCTION BETWEEN BOOK-KEEPING AND ACCOUNTING
Book-keeping is a part of accounting and is concerned with the recording of transactions which
is often routine and clerical in nature, whereas accounting performs other functions as well,
viz., measurement and communication, besides recording. An accountant is required to have a
much higher level of knowledge, conceptual understanding and analytical skill than is required
of the book-keeper.
An accountant designs the accounting system, supervises and checks the work of the book-
keeper prepares the reports based on the recorded data and interprets the reports. Nowadays,
he is required to take part in matters of management, control and planning of economic
resources.
NATURE OF ACCOUNTING
The various definitions and explanations of accounting has been propounded by different
accounting experts from time to time and the following aspects comprise the nature of
accounting:
(i) Accounting as a service activity
Accounting is a service activity. Its function is to provide quantitative information, primarily
financial in nature, about economic entities that is intended to be useful in making economic
decisions, in making reasoned choices among alternative courses of action. It means that
accounting collects financial information for the various users for taking decisions and tackling
business issues. Accounting in itself cannot create wealth though, if it produces information
which is useful to others, it may assist in wealth creation and maintenance.
(ii) Accounting as a profession

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Accounting is very much a profession. A profession is a career that involves the acquiring of a
specialized formal education before rendering any service. Accounting is a systematized body of
knowledge developed with the development of trade and business over the past century. The
accounting education is being imparted to the examinees by national and international
recognized the bodies like The Institute of Chartered Accountants of India (ICAI), New Delhi in
India and American Institute of Certified Public Accountants (AICPA) in USA etc. The candidate
must pass a vigorous examination in Accounting Theory, Accounting Practice, Auditing and
Business Law. The members of the professional bodies usually have their own associations or
organizations, where in they are required to be enrolled compulsorily as Associate member of
the Institute of Chartered Accountants (A.C.A.) and fellow of the Institute of Chartered
Accountants (F.C.A.). In a way, accountancy as a profession has attained the stature comparable
with that of lawyer, medicine or architecture.
(iii) Accounting as a social force
In early days, accounting was only to serve the interest of the owners. Under the changing
business environment the discipline of accounting and the accountant both have to watch and
protect the interests of other people who are directly or indirectly linked with the operation of
modern business. The society is composed of people as customer, shareholders, creditors and
investors. The accounting information/data is to be used to solve the problems of the public at
Large such as determination and controlling of prices. Therefore, safeguarding of public interest
can better be facilitated with the help of proper, adequate and reliable accounting information
and as a result of it the society at large is benefited.
(iv) Accounting as a language
Accounting is rightly referred the "language of business". It is one means of reporting and
communicating information about a business. As one has to learn a new language to converse
and communicate, so also accounting is to be learned and practiced to communicate business
events. A language and accounting have common features as regards rules and symbols. Both
are based and propounded on fundamental rules and symbols. In language these are known as
grammatical rules and in accounting, these are termed as accounting rules. The expression,
exhibition and presentation of accounting data such as a numerals and words and debits and
credit are accepted as symbols which are unique to the discipline of accounting.
(v) Accounting as science or art
Science is a systematized body of knowledge. It establishes a relationship of cause and effect in
the various related phenomenon. It is also based on some fundamental principles. Accounting
has its own principles e.g. the double entry system, which explains that every transaction has
two fold aspects i.e. debit and credit. It also lays down rules of journalizing. So we can say that
accounting is a science.
Art requires a perfect knowledge, interest and experience to do a work efficiently. Art also
teaches us how to do a work in the best possible way by making the best use of the available
resources. Accounting is an art as it also requires knowledge, interest and experience to
maintain the books of accounts in a systematic manner. Everybody cannot become a good
accountant. It can be concluded from the above discussion that accounting is an art as well as a
science.

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(vi) Accounting as an information system
Accounting discipline will be the most useful one in the acquisition of all the business
knowledge in the near future. You will realize that people will be constantly exposed to
accounting information in their everyday life. Accounting information serves both profit-seeking
business and non-profit organizations. The accounting system of a profit-seeking organization is
an information system designed to provide relevant financial information on the resources of a
business and the effect of their use. Information is relevant and valuable if the decision makers
can use it to evaluate the financial consequences of various alternatives.
Accounting generally does not generate the basic information (raw financial data), rather the
raw financial data result from the day to day transactions of the business.
As an information system, accounting links an information source or transmitter (generally the
accountant), a channel of communication (generally the financial statements) and a set of
receivers (external users).
Objective of Accounting
Objective of accounting may differ from business to business depending upon their specific
requirements. However, the following are the general objectives of accounting.
1. To keep systematic records: Accounting is done to keep a systematic record of financial
transactions. In the absence of accounting there would have been terrific burden on human
memory which in most cases would have been impossible to bear.
2. To protect business properties: Accounting provides protection to business properties from
unjustified and unwarranted use. This is possible on account of accounting supplying the
following information to the manager or the proprietor:
(i) The amount of the proprietor's funds invested in the business.
(ii) How much the business has to pay to others?
(iii) How much the business has to recover from others?
(iv) How much the business has in the form of (a) fixed assets, (b) cash in hand, (c) cash at bank,
(d) stock of raw materials, work-in-progress and finished goods?
Information about the above matters helps the proprietor in assuring that the funds of the
business are not necessarily kept idle or underutilized.
3. To ascertain the operational profit or loss: Accounting helps in ascertaining the net profit
earned or loss suffered on account of carrying the business. This is done by keeping a proper
record of revenues and expense of a particular period. The Profit and Loss Account is prepared
at the end of a period and if the amount of revenue for the period is more than the expenditure
incurred in earning that revenue, there is said to be a profit. In case the expenditure exceeds
the revenue, there is said to be a loss.
Profit and Loss Account will help the management, investors, creditors, etc. in knowing whether
the business has proved to be remunerative or not. In case it has not proved to be
remunerative or profitable, the cause of such a state of affairs will be investigated and
necessary remedial steps will be taken.
4. To ascertain the financial position of the business: The Profit and Loss Account gives the
amount of profit or loss made by the business during a particular period. However, it is not

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enough. The businessman must know about his financial position i.e. where he stands? What
he owes and what he owns? This objective is served by the Balance Sheet or Position
Statement. The Balance Sheet is a statement of assets and liabilities of the business on a
particular date. It serves as barometer for ascertaining the financial health of the business.
5. To facilitate rational decision making: Accounting these days has taken upon itself the task
of collection, analysis and reporting of information at the required points of time to the
required levels of authority in order to facilitate rational decision-making. The American
Accounting Association has also stressed this point while defining the term accounting when it
says that accounting is the process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of the information. Of
course, this is by no means an easy task. However, the accounting bodies all over the world and
particularly the International Accounting Standards Committee have been trying to grapple
with this problem and have achieved success in laying down some basic postulates on the basis
of which the accounting statements have to be prepared.
6. Information System: Accounting functions as an information system for collecting and
communicating economic information about the business enterprise. This information helps
the management in taking appropriate decisions. This function, as stated, is gaining
tremendous importance these days.
Importance of Accounting
i) Owners: The owners provide funds or capital for the organization. They possess curiosity in
knowing whether the business is being conducted on sound lines or not and whether the
capital is being employed properly or not. Owners, being businessmen, always keep an eye on
the returns from the investment. Comparing the accounts of various years helps in getting good
pieces of information.
ii) Management: The management of the business is greatly interested in knowing the position
of the firm. The accounts are the basis; the management can study the merits and demerits of
the business activity. Thus, the management is interested in financial accounting to find
whether the business carried on is profitable or not. The financial accounting is the “eyes and
ears of management and facilitates in drawing future course of action, further expansion etc.”
iii) Creditors: Creditors are the persons who supply goods on credit, or bankers or lenders of
money. It is usual that these groups are interested to know the financial soundness before
granting credit. The progress and prosperity of the firm, two which credits are extended, are
largely watched by creditors from the point of view of security and further credit. Profit and
Loss Account and Balance Sheet are nerve centers to know the soundness of the firm.
iv) Employees: Payment of bonus depends upon the size of profit earned by the firm. The more
important point is that the workers expect regular income for the bread. The demand for wage
rise, bonus, better working conditions etc. depend upon the profitability of the firm and in turn
depends upon financial position. For these reasons, this group is interested in accounting.
v) Investors: The prospective investors, who want to invest their money in a firm, of course
wish to see the progress and prosperity of the firm, before investing their amount, by going
through the financial statements of the firm. This is to safeguard the investment. For this, this

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group is eager to go through the accounting which enables them to know the safety of
investment.
vi) Government: Government keeps a close watch on the firms which yield good amount of
profits. The state and central Governments are interested in the financial statements to know
the earnings for the purpose of taxation. To compile national accounting is essential.
vii) Consumers: These groups are interested in getting the goods at reduced price. Therefore,
they wish to know the establishment of a proper accounting control, which in turn will reduce
to cost of production, in turn fewer prices to be paid by the consumers. Researchers are also
interested in accounting for interpretation.
viii) Research Scholars: Accounting information, being a mirror of the financial performance of
a business organization, is of immense value to the research scholar who wants to make a study
into the financial operations of a particular firm. To make a study into the financial operations
of a particular firm, the research scholar needs detailed accounting information relating to
purchases, sales, expenses, cost of materials used, current assets, current liabilities, fixed
assets, long-term liabilities and share-holders funds which is available in the accounting record
maintained by the firm.
ACCOUNTING PRINCIPLES
Accounting principles refer, to certain rules, procedures and conventions which represent a
consensus view by those indulging in good accounting practices and procedures. Canadian
Institute of Chartered Accountants defined accounting principle as “the body of doctrines
commonly associated with the theory and procedure of accounting, serving as an explanation
of current practices as a guide for the selection of conventions or procedures where
alternatives exist.
ACCOUNTING CONCEPTS AND CONVENTIONS
Accounting concepts:
The term ‘concept’ is used to denote accounting postulates, i.e., basic assumptions or
conditions upon the edifice of which the accounting super-structure is based. The following are
the common accounting concepts adopted by many business concerns.
1. Business Entity Concept 2. Money Measurement Concept
3. Going Concern Concept 4. Dual Aspect Concept
5. Periodicity Concept 6. Historical Cost Concept
7. Matching Concept 8. Realization Concept
i) Business Entity Concept: A business unit is an organization of persons established to
accomplish an economic goal. Business entity concept implies that the business unit is separate
and distinct from the persons who provide the required capital to it. This concept can be
expressed through an accounting equation, viz., Assets = Liabilities + Capital. The equation
clearly shows that the business itself owns the assets and in turn owes to various claimants.

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ii) Money Measurement Concept: In accounting all events and transactions are recode in terms
of money. Money is considered as a common denominator, by means of which various facts,
events and transactions about a business can be expressed in terms of numbers. In other
words, facts, events and transactions which cannot be expressed in monetary terms are not
recorded in accounting.
iii) Going Concern Concept: Under this concept, the transactions are recorded assuming that
the business will exist for a longer period of time, i.e., a business unit is considered to be a
going concern and not a liquidated one. Keeping this in view, the suppliers and other
companies enter into business transactions with the business unit. This assumption supports
the concept of valuing the assets at historical cost or replacement cost. This concept also
supports the treatment of prepaid expenses as assets, although they may be practically
unsalable.
iv) Dual Aspect Concept: According to this basic concept of accounting, every transaction has a
two-fold aspect, Viz., 1.giving certain benefits and 2. Receiving certain benefits. The basic
principle of double entry system is that every debit has a corresponding and equal amount of
credit. This is the underlying assumption of this concept.
V) Periodicity Concept: Under this concept, the life of the business is segmented into different
periods and accordingly the result of each period is ascertained. Though the business is
assumed to be continuing in future (as per going concern concept), the measurement of
income and studying the financial position of the business for a shorter and definite period will
help in taking corrective steps at the appropriate time. Each segmented period is called
“accounting period” and the same is normally a year. The businessman has to analyse and
evaluate the results ascertained periodically. At the end of an accounting period, an Income
Statement is prepared to ascertain the profit or loss made during that accounting period and
Balance Sheet is prepared which depicts the financial position of the business as on the last day
of that period. During the course of preparation of these statements capital revenue items are
to be necessarily distinguished.
vi) Historical Cost Concept: According to this concept, the transactions are recorded in the
books of account with the respective amounts involved. For example, if an asset is purchases, it
is entered in the accounting record at the price paid to acquire the same and that cost is
considered to be the base for all future accounting. It means that the asset is recorded at cost
at the time of purchase but it may be methodically reduced in its value by way of charging
depreciation. However, in the light of inflationary conditions, the application of this concept is
considered highly irrelevant for judging the financial position of the business.
vii) Matching Concept: The essence of the matching concept lies in the view that all costs which
are associated to a particular period should be compared with the revenues associated to the
same period to obtain the net income of the business. Under this concept, the accounting
period concept is relevant and it is this concept (matching concept) which necessitated the
provisions of different adjustments for recording outstanding expenses, prepaid expenses,
outstanding incomes, incomes received in advance, etc., during the course of preparing the
financial statements at the end of the accounting period.

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viii) Realization Concept: This concept assumes or recognizes revenue when a sale is made.
Sale is considered to be complete when the ownership and property are transferred from the
seller to the buyer and the consideration is paid in full. However, there are two exceptions to
this concept, viz.,
1. Hire purchase system where the ownership is transferred to the buyer when the last
installment is paid and
2. Contract accounts, in which the contractor is liable to pay only when the whole contract is
completed, the profit is calculated on the basis of work certified each year.
Accounting Conventions
The following conventions are to be followed to have a clear and meaningful information and
data in accounting:
1. Convention of Disclosure
This convention requires that accounting statements should be honestly prepared and all
significant information should be disclosed therein. That is, while making accountancy records,
care should be taken to disclose all material information. Here the emphasis is only on material
information and not on immaterial information.
The purpose of this convention is to communicate all material and relevant facts of financial
position and the results of operations, which have material interests to proprietor, creditors
and investors.
Sometimes, there may be time gap between the preparation of Balance Sheet and its
publication and if there are material events — bad debts, destruction of plant or machinery
etc., which occurred in the time gap, may also be known to users proprietors, creditors etc.
In short, full disclosure of all relevant facts in accounts is a necessity in order to make
accounting record useful. Therefore, full disclosure is a very healthy convention, and is
important.
2. Convention of Consistency:
Rules and practices of accounting should be continuously observed and applied. In order to
enable the management to draw conclusions about the operation of a company over a number
of years, it is essential that the practices and methods of accounting remain unchanged from
one period to another. Comparisons are possible only if a consistent policy of accounting is
followed.
If there are frequent changes in the treatment of accounts there is little or no scope for
reliability. Comparison of accounting period with that in the past is possible only when the
convention of consistency is adhered to.

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According to Anthony, “the consistency requires that once a company had decided on one
method, it will treat all subsequent events of the same character in the same fashion unless it
has a sound “reason to do otherwise.”
This convention increases accuracy and comparability of accounting information for prediction
or decision making. This convention does not prohibit changes. If there is any change, its effect
should be clearly stated in the financial statements.
3. Convention of Conservatism:
“Anticipate no profit and provide for all possible losses” is the essence of this convention.
Future is uncertain. Fluctuations and uncertainties are not uncommon. Conservatism refers to
the policy of choosing the procedure that leads to understatement as against overstatement of
resources and income.
The consequences of an error of understatement are likely to be less serious than that of an
error of overstatement. For example, closing stock is valued at cost or market price whichever
is lower. This is a convention of caution or playing safe and is adhered to while preparing
financial statements. Showing a position better than what it is, is not permitted. Moreover, it is
not proper to show a position substantially worse than what it is.
Following are the examples:
(a) The value of an asset should not be overestimated.
(b) The value of a liability should not be underestimated.
(c) The profit should not be overestimated.
(d) The loss should not be underestimated.
Such conservatism is generally accepted to present a true and fair value of business in the
financial statements.
4. Convention of Materiality:
American Accounting Association defines the term materiality as “An item should be regarded
as material if there is reason to believe that knowledge of it would influence the decision of
informed investor.” It refers to the relative importance of an item or event. Materiality of an
item depends on its amount and its nature.
Theoretically, all items, large or small, should be treated alike. Materiality convention implies
that the economic significance of an item will to some extent affect its accounting treatment.
Materiality in its essence is of relative significance. In the sense that some of the unimportant
items are either left out or included with other items.
For instance, acquisition of items like fountain pen, stapler, pin cushion, punching machine etc.,
can be treated as part of assets, when considering their durability and span of life. But, it is not

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necessary to maintain separate ledgers. Such low cost items can be treated as expense for the
period.
BRANCHES OF ACCOUNTING
FINANCIAL ACCOUNTING
MANAGEMENT ACCOUNTING
COST ACCOUNTING
Financial Accounting
Financial Accounting is an accounting system which is concerned with the preparation of
financial statement for the outside parties like creditors, shareholders, investors, suppliers,
lenders, customers, etc. It is the purest form of accounting in which proper record keeping and
reporting of financial data are done, to provide relevant and material information to its users.
Financial Accounting is based on various assumptions, principles and convention like going
concern, materiality, matching, realization, conservatism, consistency, accrual, historical cost,
etc. The financial statement consists of a Balance Sheet, Income Statement and Cash flow
statement which are prepared as per the guidelines provided by the relevant statute.
Normally, the statements based on the financial accounting are prepared for one accounting
year, to enable the user to make comparisons regarding the financial position, profitability and
performance of the company in a specific period. Not only external parties but internal
management also gets information for forecasting, planning, and decision making.
Management Accounting
Management Accounting, also known as Managerial Accounting is the accounting for managers
which helps the management of the organization to formulate policies and forecasting,
planning and controlling the day to day business operations of the organization. Both the
quantitative and qualitative information are captured and analyzed by the management
accounting.
The functional area of management accounting is not limited to providing financial or cost
information only. Instead, it extracts the relevant and material information from financial and
cost accounting to assist the management in budgeting, setting goals, decision making, etc. The
accounting can be done as per the requirement of the management, i.e. weekly, monthly,
quarterly, etc. and there is no format set on the basis of which it is to be reported.
Cost Accounting

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Cost accounting is that branch of accounting which aims at generating information to control
operations with a view to maximizing profits and efficiency of the company that is why it is also
termed control accounting. Conversely, management accounting is the type of accounting
which assist management in planning and decision-making and thus known as decision
accounting.
The two accounting system plays a significant role, as the users are the internal management of
the organization. While cost accounting has a quantitative approach, i.e. it records data which is
related to money, management accounting gives emphasis on both quantitative and qualitative
data. Now, let’s understand the difference between cost accounting and management
accounting, with the help of given article.
Comparison between Financial Accounting and Management Accounting
Basis for
Comparison
Financial Accounting Management Accounting
Meaning
Financial Accounting is an accounting
system that focuses on the
preparation of financial statement of
an organization to provide the
financial information to the interested
parties.
The accounting system which provides
relevant information to the managers to
make policies, plans and strategies for
running the business effectively is known
as Management Accounting.
Is is
compulsory?
Yes No
Information Monetary information only.
Monetary and non-monetary
information.
Objective
To provide financial information to
outsiders.
To assist the management in planning
and decision making process by
providing detailed information on
various matters.
Format Specified Not specified
Time Frame
Financial Statements are prepared at
the end of the accounting period
which is usually one year.
The reports are prepared as per the need
and requirements of the organization.
User Internal and external parties Only internal management.
Reports Summarized Reports about the Complete and Detailed reports regarding

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Basis for
Comparison
Financial Accounting Management Accounting
financial position of the organization various information.
Publishing
and auditing
Required to be published and audited
by statutory auditors
Neither published nor audited by
statutory auditors.
Similarities
 Used by the Internal Management.
 Evaluation of Performance.
 Branch of Accounting.
 Presents the position of the entity.
Conclusion
Financial Accounting and Management Accounting are of great significance, in fact, they help
the organization in various ways. As financial accounting is helpful in the proper record keeping
of innumerous transactions and comparison of the performance of two periods of an entity or
between the two entities, while the management accounting is helpful in analyzing the
performance, making a strategy, taking an effective judgment and preparation of policies for
the future.
Comparison between Cost Accounting and Management Accounting
Basis of
Comparison
Cost Accounting Management Accounting
Meaning
The recording, classifying and
summarizing of cost data of an
organization is known as cost
accounting.
The accounting in which the both
financial and non-financial information
are provided to managers is known as
Management Accounting.
Information Type Quantitative. Quantitative and Qualitative.
Objective
Ascertainment of cost of
production.
Providing information to managers to set
goals and forecast strategies.
Scope Concerned with ascertainment,
allocation, distribution and
Impart and effect aspect of costs.

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Basis of
Comparison
Cost Accounting Management Accounting
accounting aspects of cost.
Specific
Procedure
Yes No
Recording Records past and present data
It gives more stress on the analysis of
future projections.
Planning Short range planning Short range and long range planning
Interdependency
Can be installed without
management accounting.
Cannot be installed without cost
accounting.
Similarities
 Branch of Accounting
 Helpful in decision-making
 Prepared for a particular period.
 Not reported at the end of the financial year.
Conclusion
Both the cost accounting and management accounting are a part of accounting. They are
helpful in for ensuring the smooth and efficient running of the business. On the basis of the
information provided by the two entities various analysis are conducted. Cost accounting aims
at reducing extra expenditure, eliminating unnecessary costs and controlling various costs. On
the other hand management accounting aims at the planning of policies, strategy formulation
setting goals, etc.
Comparison between Cost Accounting and Financial Accounting
Basis for
Comparison
Cost Accounting Financial Accounting
Meaning
Cost Accounting is an accounting
system, through which an
organization keeps the track of
Financial Accounting is an accounting
system that captures the records of
financial information about the business

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Basis for
Comparison
Cost Accounting Financial Accounting
various costs incurred in the
business in production activities.
to show the correct financial position of
the company at a particular date.
Information
type
Records the information related to
material, labor and overhead, which
are used in the production process.
Records the information which is in
monetary terms.
Which type of
cost is used for
recording?
Both historical and pre-determined
cost
Only historical cost.
Users
Information provided by the cost
accounting is used only by the
internal management of the
organization like employees,
directors, managers, supervisors etc.
Users of information provided by the
financial accounting are internal and
external parties like creditors,
shareholders, customers etc.
Valuation of
Stock
At cost
Cost or Net Realizable Value, whichever
is less.
Mandatory
No, except for manufacturing firms it
is mandatory.
Yes for all firms.
Time of
Reporting
Details provided by cost accounting
are frequently prepared and
reported to the management.
Financial statements are reported at the
end of the accounting period, which is
normally 1 year.
Profit Analysis
Generally, the profit is analyzed for a
particular product, job, batch or
process.
Income, expenditure and profit are
analyzed together for a particular period
of the whole entity.
Purpose Reducing and controlling costs.
Keeping complete record of the financial
transactions.
Forecasting
Forecasting is possible through
budgeting techniques.
Forecasting is not at all possible.

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Conclusion
So, above are the most important differences between the Cost Accounting and Financial
Accounting. The information provided by the Cost Accounting is helpful in the decision making
of the managers to control costs, but it lacks comparability. The information provided by the
financial accounting is capable of making comparisons, but future forecasting cannot be done
through this information. That is why they both go side by side, in fact, cost accounting data is
helpful for financial accounting.
Importance of Management Accounting
In complex business, it is imperative to perform systematic management planning. Delegation
of authority and decentralization of decision-making process has become important to conduct
business. The functions of management are no longer private. A system of information is
required to assist the management to investigate, evaluate and verify the functioning of each
division or unit for decision-making to accomplish the goals of the business. Management
Accounting has great importance to fulfill the needs of the management. Management
Accounting measures and reports appropriate information to the management and facilitates in
accomplishing corporate objectives. It is significant that the information given to the
management should be pertinent and issue based to facilitate the management to focus on the
real issue to reach at a specific conclusion. Management accounting on the basis of the
information available decide its goal and tries to realize the way through which it can reach the
objective.
Need of management accounting: Management accounting is required to recognize the
financial situation of the business, it reports to those inside the organization for planning,
directing, motivating, and controlling and performance evaluation. It gives special emphasis on
decision affecting the future. It is needed to prepare plan.
Scope of Management Accounting
Management accounting is related with management of accounting information in resourceful
way for the administration. Its scope is immense and includes all aspects of business
operations. The following areas can accurately be recognized as falling within the compass of
management accounting.
Financial Accounting: Management accounting is strongly associated with the rescheduling of
the information provided by financial accounting. Therefore, management cannot get full
control and synchronization of operations without a correctly designed financial accounting
system. Cost Accounting: Standard costing, marginal costing, opportunity cost analysis,
differential costing and other cost methods play a constructive role in operation and control of
the business undertaking.

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Revaluation Accounting: This is related with fact that capital is maintained together in actual
terms and profit is calculated with this fact in mind.
Budgetary Control: This includes framing of budgets, comparison of actual performance with
the budgeted performance, computation of variances, finding of their causes.
Inventory Control: It consists of control over inventory from the time it is acquired till its final
disposal.
Statistical Methods: These procedures include Graphs, charts, pictorial presentation, index
numbers and other statistical methods make the information more inspiring and
understandable.
Interim Reporting: This includes groundwork of monthly, quarterly, half-yearly income
statements and the related reports, cash flow and funds flow statements, scrap reports.
Taxation: This comprises of computation of income according to the tax laws, filing of returns
and making tax payments.
Office Services: This includes upholding of appropriate data processing and other office
management services, reporting on best use of mechanical and electronic devices.
Internal Audit: This includes development of a suitable internal audit system for internal
control.
The primary objective of Management Accounting is to exploit profits or reduce losses. This is
performed through the presentation of statements in such a way that the management can
make remedial policy or take good decision. The way in which the Management Accountant
satisfies the various needs of management is explained below:
Storehouse of Reliable Data: Management wants consistent data for Planning, Forecasting and
Decision-making. Management accounting collects the data from different sources and stores
the information for appropriate use, as and when required. Although the main source of data is
financial statements, Management Accounting is not limited to utilize financial data only. While
preparing a sales budget, the management accountant uses the past data of the products sold
from the financial records and makes projections based on the customer surveys, population
figures and other consistent information to assess the sales budget. Management accounting
uses qualitative information, dissimilar to financial accounting to prepare its reports, collect and
alter the data for the specific purpose.
Modification and Presentation of Data: Whenever Data is collected from financial statements
and other sources, it is not readily reasonable to the management. The data is tailored and
presented to the management in manner that it is constructive to the management. If sales
data is required, it can be categorized according to product, geographical area, season-wise,
type of consumers and time taken by them to make payments. Likewise, if production figures
are required, these can be grouped according to product, quality, and time taken for
mechanized process. Management Accountant changes the data in accordance with the needs
of the management for particular issue to be resolved.
Communication and Coordination: Targets are conversed to the different branches for their
accomplishment. Coordination among the different departments is necessary to get huge
success. The targets and performances of different departments are well communicated to the
concerned departments to boost the efficiency of the various sections and enhance

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productivity of organization. Variance analysis is a significant device to focus on serious matters
to control and accomplish the desired outcomes.
Financial Analysis and Interpretation: Management accounting is needed in strategic decision
making. High level managerial executives do not have good technical knowledge. Such as, there
are various alternatives to produce. Management Accountant provides relevant facts and
figures about different policies and appraises them in financial terms.
Control: In any organization, it is a good practice to develop a system of monitoring the
performance of all divisions and departments so that differences from the desired path can be
visible without interruption and corrective action can be taken. This process is called control.
The intent of this function ‘control’ is to make possible achievement of the goals in competent
manner. To perform this function, management accounting gives significant information in a
systematic and efficient manner. However, the role of accountant is misinterpreted. Many
consider the accountant as a controller of their performance. The main function of control is
effectual communication and assists the managers to accomplish their goals in effectual way.