This article speaks about management accounting. It discusses the scope of management while it stresses the importance of management accounting in business organizations.
Management accounting is a modern tool to management to provide invaluable help in management functions of planning, decision-making, controlling, communicating and coordinating. It entails providing financial data and advice to a company for use in the organization while it aims at developing the business to the extent expected. Management accounting is an extension of financial accounting and extends to the operation of a system of cost accounting and financial management while it covers internal controls and management information system.
It is the process of preparing management reports and accounts which provide accurate and timely financial and statistical information which is required by managers to make day-to-day and short term decisions. Management accounting is fundamental in strategic planning as well, as the budgets need to be set within the context of long-term plans. Unlike financial accounting that provides annual reports and is mainly intended for external stakeholders, management accounting generates monthly or weekly reports for an organization and its department managers and the chief executive officer. Thus, management accounting is exclusively meant for internal management of a business concern at all levels.
As far as the scope of management accounting is concerned, it has a wide spread scope. Let us discuss about it in brief.
Management accountants are ideally placed to provide the information that meets the changing needs of management functions. And in order that the needs may be met in a way as wanted, they are required to develop and manage a variety of systems: Financial accounting system, cost accounting system, tax accounting and information system. This in succession helps them in reviewing the information which can facilitate management in planning as well as measuring the information which is related to the cost of acquiring or consuming resources by an organization.
Management accounting deals with the future and is futuristic in approach, while it focuses on forecasting and decision-making. The compilation and preservation of massive amounts of data which is used to plan, evaluate and control business operations and performance is one of the key activities that management accounting takes account of. It includes collecting a vast amount of information and details to provide information about a business entity’s past performance in such a way as to reflect trends which in turn leads to forecast future financial viability of a business entity.
Since managers need to use the provisions of accounting information in order to make better informed decisions as well as perform control functions in a way as needed within the organization, to the effect that these functions may be done effectively and efficiently, management accounting is used in measuring and controlling the organization’s performance, as the financial statements having been prepared under financial accounts serve as a basis on which decision making process is made in a way that produces the desired result.
Being aimed at communicating management plans to the various levels of organization and ensuring the coordination of various business segments, management accounting aids greatly in promoting communication of management plans. Not just this, it ensures coordination between various segments of the enterprise by defining the roles of individual segments in the attainment of plan as a whole. Thus, it assists management in directing the activities and motivating the employees.
Management accounting combines accounting, finance and management to provide better tools and techniques for evaluating the performance of the management, while it is aimed at improving the efficiency of business operations. One the one hand, it is concerned with maximizing the profitability of a business using budgetary control and capital budgeting, on the other hand, it is intended to develop a suitable internal audit system for internal controls. It can thus be rightly said that a management accountant is a valuable asset to an organization who provides significant economic and financial information that aids in immediate and future economic decision making process.
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Working capital is defined as being the capital of a business which is used in its day-to-day operations. It is the net of current assets minus current liabilities.