Unless you started reading this book in this chapter, you’re aware that previous chapters focus on the external financial statements reported by businesses. As you probably know, accounting involves more than preparing a company’s external financial statements, although this is certainly one of its most important functions.

Designing and operating accounting systems, complying with a myriad of tax laws, and preparing external financial reports are three bedrock accounting functions of every business. Also, the accounting staff in a business has another very important function—providing information to its managers for their decision-making, planning, and control. This fourth function of accounting is referred to as management accounting or managerial accounting (which we prefer).

Managerial Accounting

Managerial accounting is an internal function, which is carried out inside a business to help its managers make sound decisions, develop plans and budgets, and exercise control. In short, the purpose of managerial accounting is to help managers be good managers. Managerial accounting, more than anything else, should provide useful information needed by managers and help them make use of this information in the most effective manner.

The design of internal accounting reports to managers is dependent on the nature of the business and the organizational structure of the business. Suppose a business is divided into sales territories, for ...

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