Financial And Management Accounting, The Fundamentals Of Management Accounting

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ACCOUNTING – UNIT 3
Explain the difference between financial and management accounting, the fundamentals of management accounting. Explain how costs are classified using examples.
Accounting is a systematic process or work that identifies, records, reports and analyses financial transactions and information of a business. It allows a company to analyse the financial performance of a business and reveals profit or loss for a certain period of time and the value of assets, liabilities and owners’ equity. Thus, its purpose is to provide information needed for decision making. However, there are two types of accounting. In this essay I am going to explain the differences between financial and management accounting including what fundamentals of accounting management are as well as the classification of various costs in accounting.
Financial accounting is specialised to track a company’s financial transactions which are recorded, summarised and presented in a financial report or statements such as balance sheets, income statements, statements of cash flows and statements of owner’s equity. These statements are annual basis and considered external as they are given to people or stakeholders outside of a company. The audience of financial accounting reports are stakeholders or owners, lenders, board of directors and financial institutions, which are known as the primary recipients. Financial accounting enables them to see how the company has performed in the past. Once a company’s stock is publicly traded, its financial statements will be spread and the information will reach secondary recipients. They are competitors, employees, labour organisations, customers and investment analysts.
The purpose of financial accounting is to provide e...

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...f product. Examples of this type of costs are wood, electricity for factory, production workers wages, and so on. The indirect cost is the cost that cannot be easily and conveniently traced to a unit of product. This includes manufacturing overhead, rent, admin staff wages and so on.
According to the behaviour, costs classify as fixed and variable. Fixed costs are the ones which remain constant or unaffected within a certain level of output or sales. Examples of fixed costs are rent, insurance, depreciation of building, managers’ salary etc., which remain constant even though a large number of units are produced. On the other hand, variable costs vary in direct proportion to the output. It can increase or decrease based on the production unit. Examples of variable cost are electricity for factory, materials used to manufacture a product, wages of workers and so on.

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