Accounting

Overview

The accounting system of a business records and summarises the financial performance/position of a business over/at a certain period of time. This information is crucial to various stakeholders of the business, who will analyse that information to make significant economic decisions. It is of vital importance that these stakeholders have good quality information to be able to make good quality decisions.

Financial and management accounting

Financial accounting

Financial accounting is concerned with the production of financial statements for external users. Financial statements report on the directors' stewardship of the funds entrusted to them by the shareholders.

Investors need to be able to choose which companies to invest in and compare their investments. In order to facilitate comparison, financial accounts are prepared using accepted accounting conventions and standards. International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs) help to reduce the differences in the way that companies draw up their financial statements in different countries.

The financial statements are public documents, and therefore they will not reveal details about, for example, individual products' profitability.

Management accounting

Management require much more detailed and up-to-date information in order to control the business and plan for the future. They need to be able to cost-out products and production methods, assess profitability and so on. In order to facilitate this, management accounts present information in any way which may be useful to management, for example by operating unit or product line.

Management accounting is an integral part of management activity concerned with identifying, presenting and interpreting information used for:

• formulating strategy
• planning and controlling activities
• decision making
• optimising the use of resources.

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