Question

1. Explain the differences between managerial and financial accounting, and give examples of the types of problems and issues examined by each of these areas of accounting.

2. Describe each of six steps of the accounting cycle.

3. What is the difference between a journal and a ledger? How are journals and ledgers incorporated into the accounting cycle?

Answer 1

(1)

Managerial accounting is more concerned with operational reports, which are only distributed within a company. Standards. Financial accounting must comply with various accounting standards, whereasmanagerial accounting does not have to comply with any standards when information is compiled for internal consumption.

• Aggregation.

Financial accounting reports on the results of an entire business. Managerial accounting almost always reports at a more detailed level, such as profits by product, product line, customer, and geographic region.

• Efficiency.

Financial accounting reports on the profitability (and therefore the efficiency) of a business, whereas managerial accounting reports on specifically what is causing problems and how to fix them.

• Proven information.

Financial accounting requires that records be kept with considerable precision, which is needed to prove that the financial statements are correct. Managerial accounting frequently deals with estimates, rather than proven and verifiable facts.

• Reporting focus.

Financial accounting is oriented toward the creation of financial statements, which are distributed both within and outside of a company. Managerial accounting is more concerned with operational reports, which are only distributed within a company.

• Standards.

Financial accounting must comply with various accounting standards, whereas managerial accounting does not have to comply with any standards when information is compiled for internal consumption.

Systems.

Financial accounting pays no attention to the overall system that a company has for generating a profit, only its outcome. Conversely, managerial accounting is interested in the location of bottleneck operations, and the various ways to enhance profits by resolving bottleneck issues.

• Time period.

Financial accounting is concerned with the financial results that a business has already achieved, so it has a historical orientation. Managerial accounting may address budgets and forecasts, and so can have a future orientation.

• Timing.

Financial accounting requires that financial statements be issued following the end of an accounting period. Managerial accounting may issue reports much more frequently, since the information it provides is of most relevance if managers can see it right away.

• Valuation.

Financial accounting addresses the proper valuation of assets and liabilities, and so is involved with impairments, revaluations, and so forth. Managerial accounting is not concerned with the value of these items, only their productivity.

(2)

Six Steps of Accounting Cycle are :

Step – 1 : Journalizing Transactions

Companies must record each business transaction in the book of original journal entry, a step referred to as journalizing. Through journalizing, each business transaction is recorded in two related but opposite accounts, with one account debited and the other account credited in the same transaction amount. Generally, journal entries are entered in the order of their transaction dates when transactions occurred

Step 2 Posting to Ledger

Account information recorded in the original journal book must be later transferred and posted to the general ledger. The general ledger has an account format that makes it easier to source account data for financial-statement compilation. A general ledger groups accounts based on the structures of the balance sheet and income statement. All transaction amounts found in the journal for each ledger account are totaled and then shown as the balance of that ledger account.

Step:3 Preparing Trial Balance

Preparing a trial balance is to have a list of the general ledger accounts with all the debit amounts shown in one column and all the credit amounts in another column. Each column is totaled and their sums are compared to each other to see if there is a balance or any inequality. The purpose of preparing a trial balance is to reveal any journalizing or posting errors from earlier recordings and correct them so that compiling financial statements may proceed.

Step 4 : Making Adjusting Entries

Companies may need to make certain adjusting entries on some business transactions that tend not to be recorded until the end of an accounting period. Such business transactions often include prepayments made by a company as prepaid expense or by customers as pre-sale revenue, as well as any accrued revenues or expenses that are simply not recorded during a period, such as accounts receivable or unpaid salaries. A prepayment adjusting entry appropriately adjusts the total balance of a prepayment to reflect the expense incurred or revenue earned for the current accounting period.

Step :5 Closing Temporary Entries

Temporary entries are those made to income statement accounts, namely various revenue and expense accounts, plus the dividend account. Any balance in the temporary accounts must be closed out at the end of an accounting period because revenue or expense accounts need to start with a zero balance for the next accounting period. Balances in temporary accounts are closed into the account of retained earnings, with revenues increasing retained earnings and expenses and dividends decreasing retained earnings.

Step : 6 Compiling Financial Statements

Financial statement compilation essentially is the transfer of ledger account balances to respective accounts in different financial statements -- including balance sheet, income statement, statement of cash flows and statement of shareholders' equity. Companies often use a worksheet to prepare financial statements. A worksheet often is in the form of different columns, and a basic worksheet may be comprised of an account column, a balance-sheet column and an income-statement column. The account column lists all the account names with account balances appropriately entered under either of the two statement columns, creating an initial version of the financial statements.

(3)

Difference between Journal & Ledger

Comparison Chart

BASIS FOR COMPARISON	JOURNAL	LEDGER
Meaning	The book in which all the transactions are recorded, as and when they arise is known as Journal.	The book which enables to transfer all the transactions into separate accounts is known as Ledger.
What is it?	It is a subsidiary book.	It is a principal book.
Also known as	Book of original entry.	Book of second entry.
Record	Chronological record	Analytical record
Process	The process of recording transactions into Journal is known as Journalizing.	The process of transferring entries from the journal to ledger is known as Posting.
How transactions are recorded?	Sequentially	Account-wise
Debit and Credit	Columns	Sides
Narration	Must	Not necessary.
Balancing	Need not to be balanced.	Must be balanced.

Incorporation of Journal & Ledger into Accounting Cycle

The ledger & Journal are rightly called the centerpiece of the accounting cycle. The accounting system and the firm's financial reports, after all, are "all about" the firm's accounts—their balances and transaction histories. The ledger is the authoritative source on this information, for all accounts. This section further describes the ledger's role in several steps of the accounting cycle.