Financial and Management Accounts


Financial Accounts

A financial accounting system is designed to provide the owners or managers of an entity with information concerning its finances. Any business is at some time involved in transactions involving money. The accounting system is there to provide information concerning money.

Specifically, the accounting system provides two sets of financial information:

  1. the financial position of the entity at any point in time; and
  2. changes in the financial position over a period of time

The financial position of the entity states the wealth of the business, what it owns and what it owns to others. The accounting system keeps a record of how much money has been received by the business and how much of this money has been spent.

In order to collect this financial information a great deal of data has to be collected and processed by the accounting system.

The accounting system records all monetary transactions of a business, sorted and classified into various reports according to the needs of the users of the information.

There are three broad categories of accounting information:

  1. scorekeeping: this is recording of transactions per the source documents or bookkeeping in order to gather information on income and expenses - in order to be able to depend on the accounting information, it is important that the recording of the transactions should happen accurately and timeously
  2. highlighting or attention-directing: this is comparisons between actual figures and budgets and need a more advanced appraisal of the scorekeeping information.
  3. problem-solving: this is the true managerial information which the accounting system provide as a follow-up on the highlighted information and which assist with strategic decision making matters.

Management Accounts

There are various users of accounting information, i.e. internal within the organization and external parties outside the organization. Management accounting is concerned with the provision of information to people within the organization to help them make better decisions, whereas financial accounting is mostly concerned with the provision of information to external parties outside the organization.

Management accounting is concerned with the provision of financial information for purposes of decision-making with regard to the process of planning, organizing and controlling the business entity.

A number of key areas can be identified which are of particular concern to management accounting in all businesses:

  1. decisions are based on information - management accounting is particularly concerned with the collection information on costs and profits and its analysis into appropriate formats to assist decision-making;
  2. management accounting is concerned with techniques for allocating resources (money, machines and people);
  3. management must be certain that their decisions are being carried out, i.e. management needs to exercise control over the business.

Profit planning and Financial Controls

To achieve their desired levels of profit a business entity will engage in a profit planning process. Profit planning is accomplished through the preparation of a number of budgets, which, when brought together, form an integrated business plan called the "main budget". Information used to prepare budgets is focused on the future rather than the past.

Control encompasses the steps taken by management to ensure that all parts of the business function in a manner consistent with the policies and procedures of the business. An effective budgeting system will allow management to exercise control over the activities of the business in order to ensure that goals and objectives are met.

Risk Management and Governance

A risk is an uncertain event or condition that, if it occurs, has a positive or negative impact on the financial performance of a business.

The global risk environment includes:

The benefits of a proper risk management system and corporate governance are: