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Types of accounting

This video explains the difference between management and financial accounting: the purpose and content of each.

Management accounts vs financial accounts

Depending on what purposes the statements are being produced for, the accounts can be referred to as being either management accounts or financial accounts.

In this step we will see the similarities and differences between the two types of accounts. You will gain more of an understanding as to what each are used for and how they relate to the financial statements that a business produces. Start by watching the video.

Management accounts

These are usually prepared on a monthly basis to present timely financial and statistical information to business managers. This aids managers to run the business more effectively when making day-to-day and short-term decisions.

Their purpose and use is therefore internal.

Financial accounts

These are prepared annually, mainly for the benefit of people outside the management of the business, such as:

  • the owners of the business (such as shareholders, who have appointed directors to run the business on their behalf)
  • HM Revenue and Customs, for tax purposes
  • banks, for lending purposes
  • customers, to see how reliable the business might be
  • suppliers, for credibility (especially if they selling to them on credit)
  • the government, for a variety of reasons such as employment statistics or to help make industrial policies.

Financial statements

The objective of financial accounting is to provide financial information about a business. This information is given in a set of financial statements (or accounts), which consists of two principal statements:

  • the statement of profit or loss
  • the statement of financial position.

The statement of profit or loss

This is a summary of the business’s transactions (income and expenses) for a given period. It will show what they have earned and what they have incurred, and therefore whether they have made a profit or loss in the period.

The statement of profit or loss is sometimes referred to as the profit or loss account.

The statement of financial position

This is a statement of the value of the assets and liabilities of the business at a given date. This date is the end of the period covered by the statement of profit or loss and is usually a year.

The statement of financial position is sometimes referred to as the balance sheet.

How these statements are used

These financial statements are the final product of the accounting system of a business and is where all of the double entry bookkeeping that you will study on this ExpertTrack course is leading. We will cover each financial statement in detail in the activities and courses to follow.

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Introduction to Accounting and the Accounting System

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