financial accounting vs managerial accounting

financial accounting vs managerial accounting

Comparative Analysis of Financial Accounting and Managerial Accounting

1. Introduction to Accounting

The basis for the comparative analysis is through the theoretical constructs of the two branches before the Okay trials of the AICPA that eventually culminated in the introduction of revised new introductions of addendum that still maintained the previous treatments. The authors feel that what policy needs in a standard setting direction is backward integration of the two branches, without losing the widely recognized usage of management accountant’s output by a disparate group of users.

This study tries to expose the fact that as there are distinct similarities between these two accounting types and among their users, there are more important differences than similarities as alleged by the accounting theory. The authors suggest that these two accounting types have different targets in reporting performance measurements, with an intrinsically huge gap in the approach adopted by their different types of users.

The purpose of this essay is to bring back to focus the differences between financial and managerial accounting as emphasized by accounting theorists in the past, with more emphasis on the differences between the users of both types of accounting. While the accountants have contributed to the proliferation of the merger of these two different branches by their continuously shifting roles of the three functional heads of accounting: the users of these accounts, the financial statement widths, and the accountancy reporting.

2. Key Differences Between Financial and Managerial Accounting

Decisions of these users are governed by the capital provided for the business being used to finance the company. The key functions of the accounting system absolutely reflect the differences of primary user groups of financial accounting, which are users outside the business enterprise. Managerial accounting is concerned with identifying, measuring, analyzing, and interpreting the broad spectrum of information used by managers to be more successful in achieving organizational goals. Managerial accounting is a set of methods and techniques used to identify, measure, analyze, interpret, and communicate the information used by an organization for the pursuit of its goals. Therefore, managerial accounting is concerned with providing information for use in planning, directing, control, and, most importantly, economical decision making. The primary audiences for managerial accounting information are people inside the business enterprise. The primary product of managerial accounting is special-purpose financial information, which is required to meet managers’ specific needs.

Accounting systems measure the economic performance of society. Financial accounting measures and records business transactions. People outside the business enterprise use financial accounting statements. The primary audiences for financial accounting are the users of the data outside the business enterprise. The primary product of financial accounting is the general-purpose financial statements, which have the major purpose of providing an overall summary of the economic health of the company. Users of these statements include investors, vendors, creditors, governmental bodies, and bankers.

3. Roles and Objectives of Financial Accounting

The information general-purpose financial statements must provide to satisfy this objective includes the company’s economic resources, claims or obligations, and the changes that have occurred during a particular time period. The parties who have a direct financial interest in the corporation and rely on this financial information include investors, creditors, and others. Others who rely on the external financial reports include labor unions, management, and regulatory authorities. As a result, these financial statements are intended to satisfy the wide variety of needs of many interested parties. Financial accounting is governed by both generally accepted accounting principles (GAAP) and company law.

Accounting is concerned with providing both external and internal parties, such as investors and managers, with the information they need to help them make decisions. When we discuss accounting, we first distinguish between what are referred to as financial accounting and managerial accounting. Financial accounting focuses on the financial information needs of those outside the business, such as banks, investors, and government oversight agencies. As a result, the financial accounting audience is often called outsiders. The primary objective of general-purpose financial accounting is to provide useful information for decision-making purposes, specifically for both those who have a direct financial interest in the reporting entity and those who are in a position to judge the stewardship of management.

4. Roles and Objectives of Managerial Accounting

Management accounting provides financial and nonmonetary information, claims a measure of relevance. Financial accounting focuses on producing financial information for external users. Management accounting can produce its information using less time, with greater frequency, at various levels of detail, with more timeliness, less aggregation and other reporting constraints and less formality in its presentation. Yet, management accounting information needs to meet the same quality characteristic that financial accounting information should meet, namely, relevance and reliability (and other qualitative information characteristics like being comparable and comparable within an industry).

Managerial accounting serves the management and decision-making needs of a business entity. Both a corporation that is primarily a for-profit business and a not-for-profit entity have managerial or management accounting needs to aid in planning, organization, activity and outcome decision making, goal measuring, and performance appraising. Management accounting aids the management functions associated with a planning function (both short and long-run activities of the enterprise and the choice of priorities), an operating activity (organizing resources which are human, physical, and/or financial to complete a task in the most cost-effective manner, or people work to achieve a specific objective), and a control activity (monitoring and taking corrective action). It also includes other critically important management assistance activities.

5. Importance and Applications in Business Decision-Making

Managerial accounting is associated with providing relevant management information to internal users of an enterprise. It aids the internal users in the decision-making process associated with production, marketing, and financing. Managerial accounting is future-oriented; therefore, management has considerable flexibility as to the form and content of reports. In general, financial accounting information provides the basic data. Managerial accounting is the process of accumulating information and making refinements to the basic data to permit its effective use by managers in fulfilling their planning, evaluation, and control responsibilities. However, unlike financial accounting, managerial accounting need not obey Generally Accepted Accounting Principles (GAAP) when there is no potential for its use by external parties such as creditors, stockholders, or government regulatory agencies.

The function of financial accounting is to provide and communicate relevant economic information to external users. As such, the financial accounting information is general-purpose in nature. That is, it is assumed to be useful for a broad group of users including owners, creditors, and other external users. Financial accounting should attain certain qualities, such as relevance and reliability, which aid in the decision-making process of external users.

The primary objective of accounting is to provide information useful for making business and economic decisions. Such information helps users determine the economic impact of past events, provide a basis for predicting future events, and provide a basis for deciding whether to commit resources. Information about past transactions is especially necessary to determine the total amount of assets and claims of outsiders to those assets, to appraise the liquidity and solvency of an enterprise, to evaluate management performance, to estimate common stock and bond values, to plan for tax needs, and to provide an appropriate basis for paying the interest and dividends associated with the securities. Much of the information that accountants provide to decision makers concerns an enterprise’s financial position or results of operations. The information relates to financial accounting and managerial accounting.