Accounting Systems

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All accounting systems are designed to provide information to people who take decisions. Either way, it is desirable to classify accounting systems based in the primary user of the information. Investors (or potential investors), creditors, government agencies, tax authorities and others are outside the organization. Managers are within the organization. The classification of accounting systems in financial and cost (or managerial) systems capt this distinction between the people making decisions.

FINANCIAL ACCOUNTING

Information in financial accounting is designed for decision makers and who are not involved in the daily management of the company. These users are commonly outside the company. The information, at least for public companies, is public and typically available on the website of the companies. Managers at the company are seriously concerned at reports that generates the financial accounting, but anyway, the information is insufficient for making operational decisions of the company.
Individuals making decisions using information from the financial accounts are commonly interested in comparing other firms, for example, deciding whether to invest in the company Apple Computer or Microsoft. An important feature of financial accounting information is that it may be comparable between companies. This means that it is important that when an investor looks at, say, revenues from Apple Computers, these represent the same thing for Microsoft. As a result, financial accounting systems are characterized by a series of rules that define how transactions should be treated.

COST ACCOUNTING

Cost accounting information is designed for managers. Since managers are taking decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations. Instead, the important criterion is that the information must be relevant to decisions that managers operating in a particular environment of business including strategy make. Cost accounting information is commonly used in financial accounting information, but first we are concentrating in its use by managers to make decisions. The accountants who handle the cost accounting information and generate add value by providing good information to managers who are taking decisions. Among the better decisions, the better performance of your organization, regardless if it is a manufacturing company, a bank, a non-profit hospital, a government agency, a school club or even a business school. The cost-accounting system is the result of decisions made by managers of an organization and the environment in which they make them.

COST ACCOUNTING AND THE GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The main purpose of financial accounting is to provide investors (such as shareholders) or creditors (e.g. banks) information about the company and the performance of the administration. The financial information prepared for this purpose is governed by the Generally Accepted Accounting Principles (GAAP), which provide consistency in the accountancy data used for purposes of reporting from a company to another. This means that the information of cost accounting used to calculate the cost of goods sold, inventory valuation, accounting and other financial information used for external reports should be prepared in accordance with GAAP.
In contrast to the cost information for financial reporting to shareholders, the cost information for managerial use (that is, between the organization) need not to agree with the PGCA. The administration is free to set their own definitions for cost information. In fact, the accountancy data used for external reporting is most often inappropriate for making managerial decisions. For example, management decisions deal with the future, then the future estimated costs have more value in making decisions than historical cost or current that are reported externally. Unless otherwise provided contrary, we assume that the cost information is developed for internal use by managers and do not have to agree with the PGCA.
This does not mean that there is a "correct" or "incorrect" of accounting costs. This means that the best or correct accounting of costs is through the method that provides relevant information for decision makers so that he or she makes the best decision.

CLIENTS OF COST ACCOUNTING

    Of all the participants in a business to whom the administration must consider, the most important is the customer. Without customers, the organization loses its ability and reason to exist; customers provide the approach to the organization.
   The cost information itself is a product with its own customers. Customers are managers. At the level of production, where products are assembled or services are performed, the information is needed to control and improve operations. This information is provided and is frequently used to monitor the efficiency of the activities performed. For example, if the average rate of defects is 1% in a manufacturing process and the information of cost accounting system indicates a default rate of 2% on the previous day, employees of production must use this information to identify what is causing the defect rate to increase and correct the problem.
In an average level of management, where managers supervise the work and decisions of operation, cost information is used to identify problems by seeing if some aspects of the operation are different from what was expected. At the executive level, the financial information is used to assess the overall performance of the company. This information is strategic in nature and is typically provided monthly, by quarter, or annually. The cost accountants must work with users (or clients) of the cost accounting information to provide the best possible information for management purposes.
    The most serious problems with accounting systems occur when managers use accounting information that was developed for external reporting for decision-making. Decision-making requires information commonly different than that provided to shareholders in the financial statements. It is important that companies understand that the various uses of the accountancy data require different types of accounting information.

COST ACCOUNTING AND ETHICS

The design of costing systems is ultimately about the allowance of costs to various activities, products, projects and corporate units, and people. The manner in which this is done affects prices, reimbursement and payment. As some already know, based on events, the cost accounting systems design has the potential to be misused and fraud to customers, employees or shareholders. As user or preparer of the cost information, you need to be aware of what it implies how the information is used. And most important, you need to be aware of when the system has the potential to be abused.

ACCOUNTING FORUM