Financial or general accounting, which sometimes is called administrative accounting, is the accounting for assets, liabilities, and ownership interest, as well as for revenues and expenses.
One end toward which financial accounting is directed is the preparation of financial statements—the balance sheet, the income statement, perhaps a state-ment of retained earnings, and, more recently, a funds statement or a cash flow statement. These are prepared in general terms suitable for presentation to owners (stockholders), creditors, and the general public. They are also of interest to management, although management needs more detailed and more frequent information that can only be obtained from special reports. Some special reports may be prepared by the general accountants; others may be prepared by accountants in specialized areas such as cost or taxes.
Cost accounting deals with the recording, classifying, summarizing, allocating, analyzing, and reporting of costs in a meaningful manner. The systems and procedures of cost accounting must be coordinated closely with the financial accounting systems and procedures. In many \vays cost accounting is an extension or refinement of financial accounting. Matters dealt with in general terms in financial accounting are analyzed in detail in cost accounting so that cost determination, identification, and control can be improved. Some cost systems are not “tied in” with the financial accounting system; however, to be most effective they should be so handled.
It is sometimes said that an effective financial accounting system is a prerequisite to a good cost system. However, there is some interdependence between these systems in that financial accounting often relies on cost accounting for certain important data. The total amount of costs must be the same whether costs are reported as financial accounting data or as cost accounting data. Usually the detailed and analytical information presented by the cost accounting department is given only in summary form by the financial accounting department. Financial accounting deals with totals. Cost accounting analyzes costs by nature of the components, such as direct material, direct labor, and overhead, or on the basis of cost accumulation by territory, salesman, nature of sale, branch, department, cost center, or unit.
In contrast to financial accounting, which is designed primarily to meet the needs of groups outside the particular firm, cost accounting is designed primarily to meet the needs of groups inside the firm—that is, management. The pri-mary functions of cost accounting are to provide bases for inventory valuations, budgets, and special cost investigations, and for cost analysis, cost comparisons, cost planning, and cost control.
Sometimes referred to as management accounting, managerial accounting is a term used to encompass that broad functional aspect of accounting designed to aid management in making wise decisions. Managerial accounting cuts across such areas as cost accounting, budgeting, internal auditing, and financial accounting to provide the various levels of management with pertinent data. An important ‘ function of management accounting is to provide frequent, repetitive reports dealing with performance and efficiency. Such reports are often expressed in quantities as well as in dollars. Managerial accounting is a broader concept than cost accounting. It not only reports costs but also uses them—as well as data from various economic and statistical sources—to assist management in planning possible alternate courses of action.
Auditing deals with the independ-ent examination of original business documents to establish their authenticity and accuracy, as well as the independent review of accounting systems and procedures required to pass judg-ment on the fairness of the records or statements.
When an audit is conducted by a professional public accountant—a third party—it is said to be an external audit. Such an audit is made primarily for the benefit of stockholders, creditors, and the general public. When an audit is conducted by employees of the firm, it is said to be an internal audit. To be of value, such an audit must be conducted as an independent staff function. internal audits are done primarily to assist management.
Both the external and internal auditors are interested in the accuracy of documents. The external auditor primarily is interested in oper-ating procedures only to the extent neeessary to be assured of the fairness of the statement on which an opinion is to be issued. However, the internal auditor is interested in determining how closely company polices have been followed. The internal auditor should be alert to detect weak-nesses in the system and should suggest possible improvements when he discovers such weak-nesses.
Historically, auditing was the main function of public accountants, and it stili is. But in recent times other areas—such as systems work, tax work, and, most recently, management services—are claiming greater portions of the public accountant’s time and efforts.
The design and installation of systems was a separate area of accounting at one time. Now it is a part of management services in many large firms. Systems work involves the designing and installation of accounting forms, including journals and ledgers and a chart of accounts, as well as methods of internal check and control. An indication of the type, form, and frequency of reports is also a part of the complete system design.
Taxes are compulsory assessments lev-ied by the government against the income or wealth, real or personal, of a person or business for the beneflt of the government. Taxes should not be confused with license charges or other similar assessments for special privileges or benefits. Taxes take many different forms, but by far the most important and complex is the tax on income. It is in this area that the tax accountant is most important.
An income tax is self-assessed—that is, the taxpayer (or someone on his behalf) establishes the tax base, applies the proper rate or rates, and determines the amount of tax. income determination is an accounting problem, and even though the calculation of “accounting” income and “taxable” income are not always the same, it is well to start with “accounting” income and make the neeessary adjustments to this conventional income figüre in arriving at the “taxable’i income.
Budgeting involves a plan of operations. For general purposes, a brief but useful defînition is that a budget is a plan of action, a “blueprint.” For accounting purposes, a budget is a formalized written plan setting forth, in financial terms, the projected activities of the firm for a definite period of time. Historically, a budget was a document prepared in financial terms for a governmental unit or ageney in which anticipated revenues were matehed against anticipated expenditures of a given fiscal period.
The term “budget” may refer to the complete or over-all plan for the entity, in effect a master budget, or it may refer to subsidiary or partial budgets such as for sales or for materials. In the final analysis the various subsidiary budgets and the master budget may be expressed in common terms—money. However, for some purposes, the budgets also may be expressed in other terms. For example, an operating foreman is more con-cerned about the quantity of material consumed and the number of hours of labor used than in the costs incurred, because he is responsible for quantities and time used rather than prices and rates paid. The foreman would like a budget prepared in such a way as to show budgeted quantities of material and time. Budgeting involves three funetions: planning, coordinating, and controlling. To obtain the greatest benefit, ali three must be used. By defînition, a plan need not be in writing; however, for the sake of elarity and analysis, as well as permanence, it is essential to reduce the budget to written form.
The management services area, also referred to by such terms as administrative services and specialized services, is probably the fastest growing among the many activities carried on by public accountants. Most large accounting firms now have a separate de-partment specializing in managerial activities, just as they have an audit department and a tax department.
Although public accounting was well established in the United States at a much earlier date, it was not until after World War I that public accountants were encouraged to offer management Consulting services. It is a logical development, however, for no other outsider would be as intimately acquainted with a firm’s problems as its accountants. After World War II the management services departments developed at a rapid rate. This was due in large measure to greater pressures on business because of the inereased size and complexity of the business op-eration, the “profit squeeze” and, especially, the advent of the electronic computer.
The management services department of a large public accounting firm should have on its staff many different kinds of specialists, such as industrial engineers, electrical engineers, indus-trial psychologists, and mathematicians. In many cases these men are not certified public accountants.
An important and glamorous activity of such a department is operations research (“OR”), or management science. This is a generic term and as such involves the operations of the firm as a whole. OR involves the determination of the best possible uses of labor, material, and plant. Usually OR programs are conducted by the use of models, especially mathematical models. Linear programming may also be used. Many complex mathematical problems can be solved effîciently only by use of electronic computers. Thus the need arises for programmers, mathematicians, and engineers.