CHAPTER 1: MANAGEMENT ACCOUNTING

Introduction: Accounting may be broadly classified into two categories – accounting which is meant to serve all parties external to the operating responsibility of the firms and the accounting which is designed to serve internal parties who take care of the operational needs of the firm. The first category which is conventionally referred to as financial accounting, looks to the interest of those who have primarily a financial stake in the organization’s affairs – creditors, investors, employees etc. On the other hand the second category of accounting is primarily concerned with providing information relating to the conduct of the various aspects of a business like cost or profit associated with some portions of business operations to the internal parties viz., management. This category of accounting is called as Management accounting. In order to perform the primary task of decision making managers of business enterprises need information about the past, present and future in the functional areas of management such as personnel, finance, marketing and production. Right decision making has to be based on quantitative and qualitative information. The management thus constantly needs accounting information to base its decisions upon. Thus management accounting provides the information needed by management personnel.

Definition: The Institute of Chartered Accountants of England has defined management accounting as: “Any form of accounting which enables a business to be conducted more efficiently can be regarded as Management Accounting”. As per American Accounting Association, “Management Accounting includes the methods and concepts necessary for effective planning, for choosing among alternative business actions and for control through the evaluation and interpretation of performances. As per Institute of Chartered