In order to determine the financial position of a small business
accounting and finance it is necessary to maintain a system
of accounting. Financial accounting records all the transactions
occurred during the year. To understand the significance of
accounting in the course of business events the following example
In our daily lives without realizing we do some accounting.
If you wish to go out with your friends for dinner, you suddenly
find your wallet empty. You then recall how you spent your money
for the last time. Then you remember that you purchased three
sets of management books for your MBA syllabus. But you are
not able to revise about the remaining portion of the money.
If you had systematically recorded the total expenditure incurred
last week then you would exactly know the amount spent. There
are many other advantages of keeping a regular record about
the outflow of cash in our routine life. You can keep control
over your spending habits. Perhaps if you had recorded the amount
spent after every purchase then you would have spent reasonably.
You would not face the problem of being cash trapped at an important
Accounting is a perfect method of recording the past financial
events with a view to interpret the resulting summary. Without
small business accounting and finance
it is not possible to know how to owe neither to your creditors
nor about your debtors. You will not be aware about the written
down value of the asset for the current year due to the accumulated
depreciation. The shareholders will not be paid dividend on
time and thus you lose investors. It is impossible to comply
with the legal formalities without any evidence of past financial
events. Without able to determine the financial position of
the business you cannot prosper in the future.
Accounting is an art of recording, classifying and summarizing
transactions that are of financial character. As the role of
accounting has changed over the years, today it is the process
of identifying, measuring, and communicating economic information.
Financial accounting facilitates the management in making economic
decisions. Today accounting is not only confined to financial
accounting but is spread into several branches like cost accounting,
The main objective of cost accounting it is to minimize the
cost of production and thereby increase profitability. The primary
function of management accounting is to provide financial information
to the management for decision-making.
The common strategy of all the three systems of small business accounting and finance
is to enhance the companys prospects. Accounting is the best
know language of the business that communicates the results
of the business. The management uses the accounting statements
to aid further decision. There are many types of analysis prepared
by them such as Ratio analysis, funds flow statements, cash
statements and comparative statements. Ratio analysis is a technique
of interpreting financial strengths and weaknesses. For eg:
when we divide current assets by current liabilities for the
current year, then it is known as the current ratio. It determines
the liquidity position of the business. It establishes mathematical
relationship between one ratio to another. Cash flow statements
indicate the total cash inflow due to the income gained and
total cash outflow due to expenditure incurred both capital
Inventory accounting is an important aspect of management accounting.
The supply of materials should be continuous and should not
interrupt the process of production. Neither the level of inventory
exceed the maximum level because it leads to blockage of working
capital, loss due to obsolescence or deterioration in quality
etc. when materials or the stock is issued to the production
department there are different methods for valuing materials
like LIFO, FIFO or average weighted method.
Financial statement is a compilation of data, which is logically
and consistently organized according to the accounting principles.
The aim of cost accounting is to control cost at
step of production process. In merchandise accounting system
it is easy to determine cost of sales but it is not easily ascertained
in cost accounting. But when cost sheet is prepared we get an
idea of cost per unit. In cost accounting total selling costs
are bifurcated into prime costs i.e. the cost of materials,
factory costs, administrative costs and selling costs.
Depending upon the nature of the small business accounting and finance,
the system of accounting also varies. For works like fabrication
where materials are supplied by the customers and job is undertaken
according to the specification of the customer, a job cost is
prepared. The costs are incurred for materials, wages and overheads.
In management accounting budgetary control is a tool for planning
and control. A statement of budget is prepared in advance of
different departments in order to predict the future financial
position. It is based on historical data. The management compares
the actual performance of the business with the predetermined
standard and if any deviations are found corrective actions
are taken. The management accounting is very useful in spotting
out the areas of inefficiency so that suitable actions can be
But there are few limitations of all the accounting systems.
If the financial data is not accurately provided to the management
then management accounting will not provide correct analysis.
While accounting there are many other subjects that need to
be considered like statistics, economics, taxation laws etc.
accounting will be perfect only if the accountant is aware of
all the related subjected.
The main functions of management accounting are as follows:
It is useful for establishing and administering tax policies.
It prepares reports for the government agencies as required
by the law. It protects the assets of the business by the methods
of internal controls, auditing and proper insurance coverage.
It determines to what extent the economic, social and government
affect the business.
The total cost can be defined as the resources consumed to accomplish
a specific objective and the profit is the difference between
the sales and expenses or expired cost. Broadly speaking, collecting,
assimilating, analyzing, and communicating the information to
the management to meet a specific objective is known as management
accounting. In simple words providing costing information to
management and assisting them in making decisions is known as
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