The accounting needs of your business will vary according to its size, type and sector.

As the business owner, it's your responsibility to make sure your business keeps accurate records and accounts. There are two types of accounting information - financial accounts and management accounts. Financial accounts describe the performance of your business and have to be filed at Companies House. Management accounts are aimed at helping you to plan your business and make decisions about key areas such as sales, margins and stock. This guide explains the basics of both types of accounts and what they should include. It outlines your financial accounting obligations and details how management accounting can help you run your business more effectively.

Uses of management accounting

Management accounts will enable you to:

compare your accounts with original budgets or forecasts manage your resources better identify trends in your business highlight variations in your income or spending which may require attention

They should be used for the following: Record keeping

recording business transactions measuring results of financial changes projecting financial effects of future transactions preparing internal reports in a user-friendly format

Planning and control

collecting cash controlling stocks controlling expenses co-ordination and monitoring of strategy/performance monitoring gross margins

Decision making

using cost information for pricing, capital investment and marketing evaluating market and product profitability evaluating the financial effect of strategies and plan

The Role of Management Accounting in the Organization The purpose of management accounting in the organization is to support competitive decision making by collecting, processing, and communicating information that helps management plan, control, and evaluate business processes and company strategy. The interesting thing about management accounting is that it is rare to find an individual within a company with the title of management accountant. Often many individuals function as accountants within the organization, but these individuals typically operate as financial accountants, costs accountants, tax accountants, or internal auditors. However, the ability to develop and use good management accounting (which covers a lot more ground than the product costing done by cost accountants) is actually an important ability for many individuals, including finance professionals, operational and marketing managers, top-level executives, and information technologists. Generally, in a very large company, each division has a top accountant called the controller, and much of the management accounting that is done in these divisions comes under the leadership of the controller. On the other hand, the controller usually reports to the vice president of finance for the division who, in turn, reports to the divisions president and/or overall chief financial officer (CFO). All of these individuals are responsible for the flow of good accounting information that supports the planning, control, and evaluation work that takes place within the organization. NETWORK Dont make the mistake of believing that the career path of an accountant is limited to auditing and tax work. Spend some time at the AICPA Accounting career web site at http://www.aicpa.org/nolimits/index.htm. What are the basic career paths that an accountant can follow? Be sure to review some of the work that an accounting professional might pursue within each of these career paths. You may also want to spend time at http://www.accounting.com/ to see what actual jobs are currently available to accountants. As should be clear by now, the process of management accounting is the process of creating and using cost, quality, and time-based information to make effective decisions within the organization. Many people in the organization play a role in this process. The internal audit department has the responsibility of ensuring that controls are followed and operations are efficient. Financial accounting, while providing information to outsiders (such as creditors, investors, and government agencies), must also provide relevant financial reports to decision makers within the organization. Systems professionals have the responsibility to process information so that it is available to management in formats useful for decision making. Tax department experts make sure that the organization complies with the tax laws and pays no more than its legally obligated tax liability, but these people also participate in good planning, control, and evaluation of processes and decisions that will affect future tax expense exposure. Finally, cost accounting obviously plays a key role in tracking and reporting relevant product and service costs. Overall, the controller works to bring together all this information as an integral part of the planning, controlling, evaluating, and decision-making activities that take place throughout the organization. FYI Individuals interested in developing and demonstrating a professional competency in management accounting can obtain a professional certificate that is much like the CPA certification. The Certificate in Management Accounting (CMA) is sponsored by the Institute of Management Accountants (IMA), a national organization of professional management accountants. Five areas of study are emphasized on the CMA exam: (1) economics and finance, (2) organizational behavior, (3) public reporting, (4) periodic reporting for internal and external purposes, and (5) decision analysis, including modeling and information systems. Technology and the Management Accountant As you have read this introductory chapter to management accounting, you have likely noticed that the goals of management accounting information provided to the management and executive teams inside the organization are

quite different from the financial accounting information provided to groups outside the organization, such as investors, creditors, and regulators. You may even ask how information and performance measures regarding quality and time can be provided by a typical general ledger system that is limited to debits and credits of dollar amounts. This is a good question! For most of the twentieth century, management accountants have been able to successfully produce management accounting information using the general ledger system of financial accounting. This marriage of management accounting and financial accounting information systems worked as long as the goal of management accounting was strictly to track cost information. Now, however, the emergence of JIT, coupled with increased competition in a worldwide market, has forced most organizations to compete on issues of quality and timeliness, as well as cost. The problem is that it is very difficult to use a debit/credit system to track organizational performance regarding quality and time. Thankfully, computerized information systems, specifically database systems, have progressed to a point where it is economically feasible for organizations to track just about any kind of information. Now the real challenge for current and future management accountants is to organize the immense amount of data that can be provided to support decision making without creating information overload in managers and executives. In this process, management accountants should understand how to use the most current technology. Typically, developing knowledge and skills in computer technologies will require additional courses of study for the future business professional. The goal of the remainder of this book is to provide you with a framework for developing cost, quality, and time-based information that supports the management process. This framework must then be used with top-notch technology in order to provide information that truly adds competitive value to organizations! Looking Forward in the Management Accounting Profession Business professionals involved in management accounting have come a long way since the early days of management accounting in the 1800s. Today, management accounting professionals play a key role in many organizations. The nature of their work continues to expand as new industries develop and computer technology grows in importance in the gathering and use of information by decision makers. For example, youve spent the bulk of this chapter being introduced to management accounting in the context of DuPont, a manufacturing business. However, businesses focused on service rather than manufacturing (e.g., law firms, banks, hospitals, transportation, hotels) are far and away the dominant industries in the U.S. economy. Further, merchandising companies (retailers and wholesalers) combine to be as strong an economic force as the manufacturing industry. And as youre certainly aware, the explosion of the Internet has established a new aspect in our economyecommerce. At this point, e-commerce is generally a growing delivery platform for many service and merchandising companies, rather than a separate industry. You need to be aware of these trends as you work through this textbook. We will spend a lot of time applying concepts and tools of management accounting to nonmanufacturing settings. As we close this chapter, we want to leave you with two lingering, but important, questions. First, can a service or merchandising company effectively perform C-V-P analysis, product costing, and segment analysis? Or are these techniques useful only for manufacturing companies? Second, does the arrival of e-commerce in service, merchandising, or manufacturing organizations change your response to the first question? That is, as companies shift more and more of their operations (such as sales of software, financial services, and groceries) into the virtual environment of the Internet, does e-commerce affect the use of any management accounting techniques that you are studying in this textbook? Think about these questions. We plan to spend a lot of time in the next several chapters exploring some possible answers with you. FYI By 2004, e-commerce activities across the world will be enormous, amounting to $6.8 trillion, or 8.6% of the global sales of all goods and services. Interestingly, while the United States accounted for 75% of worldwide e-commerce sales in 2000, that share is expected to drop to a little less than 50% by 2004. Source: Global eCommerce Approaches Hypergrowth, Forrester Research, Inc., April 18, 2000 TO SUMMARIZE Management accounting plays a key role in organizations today. The top accountant in most organizations is the controller. All accounting functions report to this individual, including the cost accountants, the financial and tax accountants, the internal auditors, and systems support personnel. Though much management accounting originates within these positions, all decision makers in the organization must understand how to create and use good management accounting information. Management accounting is also being significantly affected by dramatic improvements in computer technology. Todays technology

allows management to track performance information that goes beyond the cost-based information of historic general ledger systems. Good management accounting involves a responsibility to manage a wide variety of critical information. Hence, those involved need to anticipate and be prepared to deal with various ethical dilemmas. And finally, though weve used DuPont as the example company in this chapter, you need to understand that management accounting is not just for manufacturing companies. Service and merchandising industries represent a much larger portion of the U.S. economy than does the manufacturing industry. Further, the advent of the Internet and e-commerce is bringing dramatic changes to many companies and industries. This textbook will explore management accounting in all types of business. As you work through the remainder of this textbook, you should consider how each new concept you learn could be applied in multiple types of business settings.

According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is "the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities"(CIMA Official Terminology). The Institute of Management Accountants (IMA)[2] recently updated its definition as follows: "management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems,and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organizations strategy". The American Institute of Certified Public Accountants(AICPA) states that management accounting as practice extends to the following three areas:

Strategic ManagementAdvancing the role of the management accountant as a strategic partner in the organization. Performance ManagementDeveloping the practice of business decision-making and managing the performance of the organization. Risk ManagementContributing to frameworks and practices for identifying, measuring, managing and reporting risks to the achievement of the objectives of the organization.

Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions. In contrast to financial accountancy information, management accounting information is:

primarily forward-looking, instead of historical; model based with a degree of abstraction to support decision making generically, instead of case based;

designed and intended for use by managers within the organization, instead of being intended for use by shareholders, creditors, and public regulators; usually confidential and used by management, instead of publicly reported; computed by reference to the needs of managers, often using management information systems, instead of by reference to general financial accounting standards.

Discuss accounting as the language of business and the role of accounting information in making economic decisions. Accounting is the means by which information about an enterprise is communicated and, thus, is sometimes called the language of business. Many different users have need for accounting information in order to make important decisions. These users include investors, creditors, management, governmental agencies, labor unions, and others. Because the primary role of accounting information is to provide useful information for decision-making purposes, it is sometimes referred to as a means to an end, with the end being the decision that is helped by the availability of accounting information.