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Accounting dates to ancient civilizations. For many years people have been engaging in trade and also coordinated systems of government, practices of record-keeping, accounting, and accounting tools have been in use. It prevails to enable people to be informed about their financial judgments. It is concerned with accumulating and assessing financial data and then transmitting this data to those preparing conclusions. (Wood, 2015)
This essay details the resemblances and differences between management accounting and financial accounting.
Accounting is the process of identifying, measuring, and communicating financial information about an entity to permit informed judgments and decisions by users of the information (Weetman, n.d.).
Accounting arranges and condenses monetary data so that policymakers can utilize it. This data is illustrated in statements called financial statements. Accountants examine, record, measure, gather, formulate statements and elucidate economic data. The series of steps included in originally recording data and transforming it into financial statements is called the accounting system. (Peter Atrill, 2005)
The fundamental goal of accounting is to enable decision-making. The users of accounting information come under two categories- internal users and external users.
Financial accounting is the field of accounting that attends to external decision-makers, such as stockholders, suppliers, banks, and government agencies. It is concerned with how accountants use bookkeeping data. the objective of financial accounting is to make sure the results of business undertakings during a specific period and to state the financial position as of a date at the end of the period. (Roger H. Hermanson, 2006)
Management accounting is a branch of accounting that generates information for managers within an organization. It is the process of identifying, measuring, accumulating, analyzing, preparing, interpreting and communicating information that helps managers fulfill organizational objectives. (Stratton, 2008). It concentrates on internal users and on making forecasts for segments of a company. The data illustrated to internal stakeholders are in more detail, it is given more frequently and in various forms based on how the information is to be used.
Financial accounting and management accounting are the two main types of accounting. However, they differ from each other in various aspects. They are detailed below.
Financial accounting reports are for general purposes. It is prepared to keep in mind, various users. All the external users such as shareholders, creditors, banks, tax authorities, etc. use these reports. The existence of so many different groups creates difficulty in producing accounting information for all. Hence, financial accounting concentrates on generating information for owners and creditors. Management accounting, on the other hand, focuses on the internal organization. It primarily prepares reports to assist managers with decision-making which in turn will help in improved performance of the business. (Peter Atrill, 2005)
Financial accounting reports give a broad outline of the financial status of the enterprise. It doesnt give detailed information. Management accounting gives detailed reports which are necessary for decision-making. Financial accounting gives broad information for the entire organization whereas, management accounting gives extensive data for the various segments of the organization. (Horngren, 2004)
Companies must comply with certain accounting regulations to make their information reliable and comparable. Adhering to Generally Accepted Accounting Principles (GAAP) helps gain external stakeholders trust and it shows that the companys information is relevant. A vital distinction between financial accounting and managerial accounting is that managerial accounting reports are not directly restricted by GAAP. Management accounting doesnt have to comply with GAAPs as it is solely for internal use. It isnt even necessary to prepare management accounting reports if the company doesnt want to do so. (Stratton, 2008)
Financial accounting deals with past information. It is all about what happened in the past. It shows the financial position and performance of an enterprise for a fixed period. It is essentially backward-looking in nature. Management accounting, on the other hand, is futuristic. It is prepared for decision-making in the future. These reports are prepared to keep in mind the needs of the management to take effective and efficient decisions which in turn will boost the profitability of the organization. Therefore, financial accounting relates to the past while management accounting emphasizes the future. (Wood, 2015)
Financial accounting reports are essentially monetary. All other aspects, for instance, the quality of staff, are ignored. On the contrary, management accounting considers even non-monetary aspects. These reports contain both monetary as well as nonfinancial information. (Peter Atrill, 2005)
Financial accounting reports are prepared regularly. It is usually prepared annually for an enterprise. It is required that companies prepare financial statements regularly. On the other hand, management accounting reports could be prepared as and when required. They are generated according to the managements discretion and needs. There are no strict rules relating to these reports as they are prepared for the internal use of the enterprise. (Peter Atrill, 2005)
Financial accounting requires that the reports produced are objective, precise and verifiable. Precision is an important aspect of this field of accounting. As it shows the financial performance and position of the business, which in turn helps in decision-making, the data should be accurate and relevant. For management accounting, the data should only be relevant enough for making certain decisions. It is more subjective as it relies on estimates. Even though they are less objective, they still provide managers with the information they need. (Crosson, 2011)
Financial accounting is mandatory for an enterprise. It has been made compulsory for every organization to prepare financial statements to show the business performance as well as for tax computation. Management accounting, on the other hand, is optional. It is for the company to decide whether they have to do management accounting. The data generated in the process of management accounting are private and confidential, which is used only to assist the decision-makers of the company.
Financial accounting is more rigid as compared to management accounting. The preparation of financial statements requires the company to follow certain fixed rules and standards to make the data relevant, verifiable and comparable. This doesnt allow for much creativity. On the other hand, management accounting allows for innovation. As it is done by internal management and as it is used only by managers, it is much more flexible than financial accounting. (Peter Atrill, 2005)
Both financial accounting and management accounting is extremely important to an enterprise. The basic difference between the two of them is that the former is used by those external to the organization whereas the latter is used by the internal organization. Management accounting is less constrained as compared to financial accounting. It is more flexible. Managers have more control over the information prepared. Other users can only use the data that has already been prepared. But the two forms of accounting are similar in various aspects. (Peter Atrill, 2005)
Both forms of accounting exist to give necessary information to the users. Therefore, both practices generate financial statements. Both forms of accounting require professional expertise and experience. Both types of accounting often require the accountant to undergo formal training at a university. Both practices require that the data be presented efficiently. The data should be timely, relevant, comparable, and verifiable. Management accounting reports dont have to be as precise and objective as financial statements, but they still have to be relevant. (Anon., 2017)
Internal controls are essential in both forms of accounting. The management accountant assists managers in developing and executing internal controls, and a financial accountant scrutinizes internal controls while an audit, making sure that the internal controls are effective. (Anon., 2017)
For both types of accountants, accounting information system knowledge is crucial. The management accountant needs to use an accounting information system to illustrate information to managers, while the financial accountant employs the system to audit financial data to ensure it is accurate. Several companies stopped employing paper records. Hence, both forms of accountants should be aware of how an accounting information system works. (Anon., 2017)
Management accounting is extremely important for planning the organization. Formulating plans is one of the most crucial tasks performed by an enterprise as it is based on these plans that all other activities are performed. Financial accounting helps in controlling. The financial statements prepared show how effective planning was and serves as the basis for controlling. It helps in taking corrective measures to help the organization reach a better position.
Financial accounting emphasizes external services, but internal services are also contained. Management accounting and financial accounting have decided to follow the common prerequisites of contemporary enterprise accounting, which implies the users of accounting information deliver suitable data, to attain organizational goals and meet the obligations outside the company. So, the fundamental purpose of financial accounting and management accounting are the same.
Both financial accounting and management accounting are faced with self-improvement and development. They need to deal with the needs of contemporary management according to the organization and enactment of accounting management. These two forms of accounting are two sides of a coin and coexist in every organization.
References
- Anon., 2017. Similarities Between Management Accounting & Financial Accounting. [Online] Available at: https://bizfluent.com/list-7154178-similiarities-management-accounting-financial-accounting-.html
- Anon., 2019. History of Accounting From Ancient Times to Today. [Online] Available at: https://www.thoughtco.com/history-of-accounting-1991228
- Anon., n.d. [Online] Available at: http://www.ddegjust.ac.in/studymaterial/mba/cp-104.pdf
- Anon., n.d. Managerial Accounting. [Online] Available at: https://saylordotorg.github.io/text_managerial-accounting/
- Crosson, S. V., 2011. Managerial Accounting. Mason: Cengage Learning.
- Horngren, S. E., 2004. Introduction to Financial Accounting. Delhi: Pearson Education.
- Larry M. Walther, C. J. S., 2010. Basics of Accounting & Information Processing. s.l.:Ventus Publishing.
- Peter Atrill, E. M., 2005. Management Accounting for Decision Makers. Edinburgh: Prentice Halls.
- Roger H. Hermanson, J. D. E. S. D. I., 2006. Managerial Accounting. 8th ed. s.l.:Freeload Press.
- Stratton, D. B. J. S., 2008. Introduction to Management Accounting. New Jersey: Pearson Education.
- Weetman, P., n.d. Financial Accounting: An Introduction. s.l.: Pearson Education.
- Wood, F., 2015. Frank Wood’s Business Accounting 1. Harlow: Pearson Education.
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