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