What is Accounting?

What is Accounting?

Accounting is often called the language of business. It communicates the financial performance and position of an organisation to those who make key economic decisions. A sound accounting system is essential not just for record-keeping but also for effective planning, control, and decision-making.

Key Takeaways 💡

Accounting provides essential financial information for both internal and external stakeholders.

Financial accounting focuses on reporting to external users through published financial statements.

Management accounting supports internal decision-making, control, and planning.

International Accounting Standards (IASs) and IFRS promote consistency and comparability globally.

Introduction

The accounting system of a business records, classifies, summarises, and interprets financial transactions to show how a business has performed over time. This process provides useful information to various stakeholders — such as investors, management, government, and creditors — who rely on this information to make important economic decisions.

In Ghana, companies prepare their financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the Institute of Chartered Accountants (Ghana). This ensures consistency, comparability, and transparency in financial reporting.

Branches of Accounting

There are two key branches of accounting used in modern organisations — Financial Accounting and Management Accounting. Both play distinct but complementary roles in providing financial information for effective decision-making.

Financial Accounting

Financial accounting is concerned with the preparation of financial statements — such as the statement of financial position, statement of profit or loss, and statement of cash flows — primarily for external users. These include shareholders, investors, regulators, and creditors.

The key purpose is to report on the directors’ stewardship of the resources entrusted to them by shareholders. Financial accounting provides an overview of a company’s profitability, liquidity, and financial position over a specific period.

External Users: Investors, shareholders, government agencies, lenders, and the public.

Time Frame: Covers a past accounting period, usually one financial year.

Nature of Information: Historical, objective, and subject to audit.

Standards Used: International Financial Reporting Standards (IFRS) and International Accounting Standards (IASs).

For instance, a listed Ghanaian company such as MTN Ghana prepares its annual report in accordance with IFRS to enable global investors to compare its performance with similar companies in other countries.

Importance of Financial Accounting

Provides a true and fair view of the financial position of an organisation.

Facilitates comparison of performance between companies.

Assists in attracting investors and securing loans.

Ensures compliance with laws and regulations.

Supports transparency and accountability in corporate governance.

Limitations of Financial Accounting

It focuses on past performance rather than future plans.

It does not provide detailed information about specific products or departments.

Reports are often prepared annually, making them less useful for real-time decisions.

Management Accounting

Management accounting, on the other hand, is designed to serve internal users — mainly management. It provides detailed, frequent, and forward-looking information to help managers plan, control, and make strategic decisions for the business.

Unlike financial accounting, there are no strict rules or standards governing the format of management accounts. Information can be presented in any form that helps management in decision-making, budgeting, and performance evaluation.

Internal Users: Managers and department heads.

Time Frame: Focuses on current and future projections.

Nature of Information: Detailed, flexible, and often confidential.

Reports Produced: Budgets, variance analysis, cost reports, and performance dashboards.

Functions of Management Accounting

Formulating Strategy: Assists management in setting objectives and evaluating long-term plans.

Planning and Control: Provides budgets and variance reports for effective performance monitoring.

Decision Making: Helps choose between alternatives using cost-benefit and break-even analyses.

Optimising Resources: Ensures the best use of materials, labour, and capital for efficiency.

Real-Life Ghanaian Case Study 🇬🇭

Consider Cocoa Processing Company Limited (CPC Ghana). The company uses financial accounting to prepare annual IFRS-compliant financial statements, showing revenue from cocoa butter, powder, and liquor exports. These statements are audited and published for shareholders and investors.

Internally, CPC’s management team uses management accounting reports to analyse production costs, track efficiency, and plan export pricing strategies. For instance, by using variance analysis and cost-volume-profit techniques, management can determine whether increasing cocoa butter exports to Europe is more profitable than producing chocolate bars for the domestic market.

This dual use of accounting — financial for reporting and management for strategy — helps CPC Ghana remain competitive both locally and internationally.

Comparison Between Financial and Management Accounting

Feature	Financial Accounting	Management Accounting
Users	External stakeholders	Internal management
Focus	Past performance	Future planning and control
Regulation	IFRS/IAS governed	No fixed standards
Nature of Information	Objective, historical	Subjective, detailed
Frequency	Usually annual or quarterly	Daily, weekly, or monthly
Confidentiality	Public information	Restricted to management

Exam-Style Questions

Question	Answer
1. Distinguish between financial accounting and management accounting.	Financial accounting is external, historical, and regulated; management accounting is internal, forward-looking, and flexible.
2. State three functions of management accounting.	Planning and control, decision making, and optimising the use of resources.
3. Why are financial statements important to investors?	They assess profitability, financial position, and performance to make informed investment decisions.
4. Mention two limitations of financial accounting.	Historical focus and lack of detailed operational information.

Internal Links

Understanding Financial Statements

Introduction to the IFRS Framework

Cost Accounting Basics

Users of Financial Statements and Their Needs

Outbound Links

Institute of Chartered Accountants (Ghana)

International Financial Reporting Standards (IFRS)

Association of Chartered Certified Accountants (ACCA)

Meta Description (Yoast SEO): Learn the difference between financial and management accounting, their roles, functions, and Ghanaian applications. Includes a case study of Cocoa Processing Company Ghana and exam-style questions.

Excerpt: This detailed post explains the two major branches of accounting — financial and management — using Ghanaian examples and real-life case studies to help students and professionals understand their practical relevance.