Methods and techniques of financial and managerial accounting
In financial accounting, the accrual method and the cash method or a combination of the two is used. In accrual accounting, transactions are recorded in the books when they occur and the revenue is recognized. In cash accounting, transactions are recorded only upon the receipt or payment of cash.
In financial accounting, International Financial Reporting Standards are followed for preparing a companyâ€™s financial statements as given by the Accounting Standard Board. It is mandatory to follow all the standards for preparing financial statements in financial accounting because it is used by external users such as investors, creditors, and the government. The income statement, balance sheet, cash flow statement, and profit and loss statement are the results of financial accounting.
In managerial accounting, the data can be modified as per the requirement of information by managers for decision-making. Some techniques used in managerial accounting are as follows:
Margin analysis: Margin analysis is the technique used in management accounting to determine the incremental gain from the increased production. In other words, marginal costing is calculated to assess the impact on cost of a product if the production is increased by one additional unit.
Product costing and inventory valuation: Product costing refers to the process where an accountant computes the total cost incurred in producing a single unit in an organization.
Constraint analysis: Constraint analysis involves identification of the bottleneck that may hinder the smooth production process in an organization. A management accountant determines constraints associated with the production line so that the information can be communicated to management. The management further takes necessary actions to remove these constraints to the make the production function efficient.
Capital budgeting: Capital budgeting is the process where management decides about the fixed asset investment. Net present value and internal rate of return are the important capital budgeting techniques used by the management accountant to assist management in making new capital investment decisions.
Forecasting and trend analysis: The main concern of trend analysis is to know the variances that may occur from the forecasted sales or the budgeted sales. This helps a manager take corrective actions and know the trend and patterns of product cost.
Cash flow analysis: The cash flow analysis is a technique performed to know the impact of cash on business decisions.