Types of Accounting

Accounting is the systematic process of measuring the economic activity of a business to provide useful information to those who make economic decisions. Accounting information is used in many different situations. Bankers use accounting information when deciding whether or not to make a loan. Stockbrokers and other financial advisers base investment recommendations on accounting information, while government regulators use accounting information to determine if firms are complying with various laws and regulations. This section describes the three major types of accounting, which are summarized in Figure 1.1.

Figure 1.1 - The Three Major Types of Accounting

Managerial Accounting

Management need much more details up-to-date information in order to control the business and plan for the future. They need to be able to cost-out product 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 units or product line. management accounting is an integral part of management activity concerned with identifying, presenting and interpreting information used for :-

01 - formulating strategy

02 - planning and controlling activities

03 - decision making

04 - optimising the use of resources

Managers make numerous decisions. These include (1) whether to build a new plant, (2) how much to spend for advertising, research, and development, (3) whether to lease or buy equipment and facilities, (4) whether to manufacture or buy component parts for inventory production, or (5) whether to sell a certain product. Managerial accounting provides information for these decisions. This information is usually more detailed and more tailor-made to decision making than financial accounting information. It is also proprietary; that is, the information is not disclosed to parties outside the firm.

Sterling Collision Centers, Inc. provides a good illustration of managerial accounting at work. Although Sterling only has 18 shops, it hopes to put a major dent in the automotive body shop business through aggressive expansion and the introduction of innovative management techniques. One of its strategies is to use computers to better track repair times, which will provide both standards for different types of repair jobs as well as measures of how individual workers perform relative to the standards. By tying pay to performance, Sterling hopes to improve worker productivity. Knowledge of repair times will also help Sterling to determine estimated bids for its repair jobs. Managerial accountants play a major role in all these activities.

Although distinguishing between financial and managerial accounting is convenient, the distinction is somewhat blurred. For example, financial accounting provides information about the performance of a firm to outsiders. Because this information is essentially a performance report on management, managers are appropriately interested in and influenced by financial accounting information. Accordingly, the distinction between financial and managerial accounting depends on who is the primary user of the information