Many definitions of accounting exist, although a popular one is that formulated by the American Accounting Association: “the process of identifying, measuring and communicating economic information  to permit informed judgments and decisions by users of the information.”

It is important to note, however, that all the information  so provided does not have to be financial in nature,  and  qualitative  as well as quantitative  data might well help in the process of assisting management to make more informed decisions.

Managerial  (the  more  normal  United  Kingdom expression is management)  accounting is one of only several different facets of the accounting  discipline. The  normal  distinction  made  is between  financial accounting on the one hand and managerial accounting on the  other.  In this strict  dichotomy,  financial accounting is concerned  with the preparation largely of documents  that relate to past performance  (hence the income statement  [“profit and loss account”], statement   of  financial  position   [“balance  sheet”], and cash or funds flow statement).  Clearly, however, the  projection  of such documents  to a future  time period/date is also possible. In all developed nations it is mandatory  to produce  the specified documents on  a regular  basis  (annually  would  be  the  norm), although for internal control purposes it is likely that any organization  of a reasonable size would generate them  far more  frequently  than  this. But one of the most interesting  aspects of the financial accounts  is that the annual documents, at least in summary form, invariably must by law be made available to external constituencies  (“external” meaning other than the incumbent  management).  Thus owners and government (because of the corporate tax implications) have an inalienable right in this regard; and employees and their  representatives,  investment  analysts, the  local community,  etc., all might well be perceived also to have a vested interest  in corporate  performance  as evidenced by the statements  produced.

The structure and composition of the organization’s financial accounts  is constrained  by legislation, the requirements of both the object country’s accounting profession (perhaps  collectively representing  several bodies) and its stock exchange. In the United States, the Financial Accounting Standards Board has established Generally Accepted Accounting Principles (GAAPs) that  are deemed  to underpin  the preparation of a business’s financial statements.  The world is increasingly moving toward the adoption of International Financial Reporting Standards  because of the need to compare the performance  of businesses on a global scale, particularly given the move toward multiple stock exchange quotations for multinational corporations (MNCs).

The situation described above should be compared with that of managerial accounting,  which is largely concerned  with the provision of information  to people solely within the organization  in order  to assist their better decision making. Such information  is not intended  to be released to external constituencies— indeed, much of it is highly sensitive and the very last sort of thing one would want one’s competitors to get hold of. Such information relates to the costs and relative profitability of different products or product lines; the basis on which capital expenditure  decisions are made; budgets for both the impending (in detail) and subsequent  (in rather  less detail)  financial periods; and the identification of alternative uses for the company’s  resources,  including  such  things  as whether a product  or service should  be produced  internally or “bought in” from outside  (when the  economist’s concept of “opportunity cost” becomes an important consideration).  Unlike the organization’s financial accounting reports, its managerial accounting activities are unrestrained by GAAPs (since policing and enforcing them  would be impossible), although  one would nevertheless  hope  for some level of internal consistency in the provision of managerial accounting information.

However, it is important to recognize that the accounting  function  is not  restricted  merely to the two  sub disciplines  identified.  Thus a further  “arm” that can easily be identified is that of financial management, concerned  with the management  of all the cash resources available to the business. It therefore incorporates  the aspects of working capital management  (i.e., the  management  of accounts  payable [creditors]  and accounts  receivable [debtors]);  what should be done to take maximum  benefit from surplus cash resources; and, should  it be necessary to arrange  additional  financing, what form should this take (debt versus equity, for example), and if debt is to be raised, should this be domestically or internationally (when a lower annual interest cost might well eventually be outweighed by an adverse exchange rate movement in the interim).

Treasury accounting,  internal  auditing, the post completion  auditing  of capital projects,  and financial services accounting  are all additional  examples of the variety of the accounting function in the typical organization.

Origins And Development

It  is generally  accepted  that  the  origins  of today’s managerial accounting  (even if then termed  cost accounting) can be traced back to the Industrial Revolution, having its genesis in the United Kingdom in the  18th  century,  and  with  substantial  progress  in cost accounting  procedures  having accelerated  during World War I. However, as H. Thomas Johnson and Robert S. Kaplan argue, thereafter  progress ossified, such that over the 60-year period post 1925, there was little progress recorded in the managerial accounting domain.  This they attribute  to the requirement that information  relating  to  product  costs  was more  in order  to  feed the  organization’s (external)  financial accounting reports, with the separation of the ownership and management  of organizations (in the United Kingdom this followed immediately  upon  the  Joint Stock Act of 1844), than it had any regard to management’s desire for information  that would assist in its decision-making processes.

Thus, in order to assist in the generation  of financial statements  that  would summarize  the  financial position  of the company  (principally for the benefit of its owners and creditors), cost accounting emerged to meet the requirement to allocate costs between the cost of creating the goods that had been sold, on the one hand, and those costs that remained  embedded in unsold inventories,  on the other. So while simple procedures  developed to enable this apportionment to occur (i.e., an allocation of cost between the two competing objectives that was both simple and verifiable), the result was that the generation of sufficiently accurate information such as to enable the distinction to be made between profitable and unprofitable products and/or services simply did not occur.

Thankfully, since the work of Johnson and Kaplan (and probably largely because of it), the managerial accounting  “discipline” has moved  on  apace. Thus the  informational   deficiencies  that  had  erstwhile been in evidence have been largely addressed via an increasing number  of initiatives (of which activity based costing is but one of many), and while overriding standards  might still remain  to be applied (and it is probably beneficial that they should be held in abeyance at least in the short term), the movement for revamping the subdiscipline to increase its credibility in the global environment of the 21st century gathers momentum.

Bibliography:

  1. Ramji Balakrishnan, Konduru Sivaramakrishnan, and Geoffrey B. Sprinkle, Managerial Accounting (John Wiley & Sons, 2009);
  2. Colin Drury, Management and Cost Accounting (Thomson South-Western, 2008);
  3. Ray H. Garrison, Eric W. Noreen, and Peter C. Brewer, Managerial Accounting (McGraw-Hill Irwin, 2009);
  4. Ronald W. Hilton, Michael W. Maher, and Frank H. Selto, Cost Management: Strategies for  Business  Decisions  (McGraw-Hill   Irwin, 2008);
  5. Charles T. Horngren, Srikant M. Datar, and George Foster, Cost Accounting (Pearson Prentice  Hall, 2006);
  6. Thomas Johnson and  Robert  S. Kaplan, Relevance Lost: The Rise and  Fall of Management  Accounting (Harvard Business School Press, 2007);
  7. Jay Rich et al., Cornerstones of Financial and Managerial Accounting (South-Western, 2009);
  8. Emilia Shorecova and Maria Farkasova, “Social Information in Managerial Accounting and Managerial Information  System,” Agricultural Economics-Zemedelska Ekonomika (v.53/8, 2007).