Financial and Management Accounting
Financial and management accounting are critical instruments for every enterprise, but they serve distinct and distinct functions. Accounting is used by businesses to assess past results, develop strategic operating strategies, and audit the company's current operations (Weygandt, Kimmel, & Kieso, 2015). As discussed below, financial and management accounting have diverse markets because they convey different signals.
What is the distinction between financial accounting and managerial accounting?
Accounting for Finance
Financial accounting is a subset of accounting that focuses on monitoring a company's financial activities as well as reviewing and summarizing its reports. Financial accounting involves the preparation of a company's financial statements for the consumption of the general public and other stakeholders such as banks, suppliers, financial agencies, and business owners for decision-making. Information from financial accounting is primarily put out for stakeholders to make informed decisions. Through the displayed financial accounts, the stakeholders can know whether or not they made viable financial decisions or whether it is time for them to invest in other companies. Both local and international accounting standards govern the financial accounting principles. The standard accounting framework used in any jurisdiction is the region's accepted accounting principles. The moral values and guiding principles that are acceptable and that accountants use when making financial statements are found in the financial accounting details (Warren, Reeve, & Duchac, 2013).
Managerial Accounting
As Weygandt, Kimmel, & Kieso (2015) illustrate, managerial accounting utilizes an organization's accounting information to make sound administrative decisions. Thus, managerial accounting is intended for the use of managers to educate themselves before they can endeavor in making sound decisions. A precise definition of managerial accounting is, therefore, the general provision of both accounting and non-accounting information of a company or organization to aid managers in their essential decision-making responsibility. Managerial accounting appeals to the areas of risk management, performance management, and strategic management. Risk administration underwrites a company's objective frameworks that focus on identifying, measuring, and reporting an organization's risks for the accomplishment of the association's purposes. Performance management develops decision-making roles in business and the management of the association's enactment. Strategic administration enhances the administration auditor as an only imperative companion in matters of administration development.
Similarity Between Financial Accounting and Managerial Accounting
One significant similarity between financial accounting and managerial accounting is that they all inform people who intend to make decisions that concern a company. Financial accounting tells stakeholders of a firm about the organization's economic climate and helps them in making decisions regarding whether or not to undertake an investment. In contrast, managerial accounting allows managers of a company make sound management decisions based on the organization's economic climate. The point of departure is the fact that financial accounting is meant for elements outside the organization such as investors while managerial accounting presents information for people working for the firm, and helps them make sound internal managerial decisions (Weygandt, Kimmel, & Kieso, 2015).
Example of How Financial Accounting Helps Stakeholders of a Company
An example of how the financial statement helps investors make the right decisions can be seen in the case of Coca-Cola. The company's common size income statement, which is part of its financial statement, is used to compare line items across different businesses in the same industry. By looking at the firm's income statement, each line item is divided by the year's sales, which provides percentage figures. Investors use the percentage to compare different companies in the same industry. Also, the analyzed income statement presents a net income number which resembles the profit margin. Besides, nothing is out of place for the firm's standard size income statement. Since the trends are the same in the income statement common is the same as in the common size, it shows that Coca-Cola is a healthy business with enough room for improvement as it also continues to thrive in its business environment.
Moreover, analysts can look at Coca-Cola's balance sheet to standardize the firm's income statement to facilitate a comparison of companies and industries. Coca-Cola's balance sheet does not present extraordinary line items. Most line items in the organization's balance sheet are relatively similar with a few exceptions. It can also be observed that other current assets had a significant rise over the past year, as this is a category that could experience volatility, similar to how some long-term liabilities have experienced a good change over the past years. The report also indicates that the firm's short-term debt increased over the last year. The substantial increase in short-term debt could be due to historically low-interest rates experienced by businesses in the U.S, so the company may have taken advantage of this scenario and decided to borrow more funds. Overall, by looking at the financial statements of Coca-Cola, the firm has a reasonable profit margin, and it would be wise for stakeholders to continue investing in the company.
Conclusion
Financial accounting is meant to look at the interests of the people outside the setting of the organization. These people are usually not involved with the daily management or running of the organization. Hence, financial reporting aims at providing stakeholders of a company with vital financial information to enable them to make informed decisions regarding the provision of resources needed for the management of the business. On the other hand, managerial accounting assists the management of a company when it comes to furthering the goals and vision of the organization.
References
Edmonds, T. P., Edmonds, C. D., Tsay, B. Y., & Olds, P. R. (2016). Fundamental managerial accounting concepts. New York, NY: McGraw-Hill Education.
Warren, C. S., Reeve, J. M., & Duchac, J. (2013). Financial & managerial accounting. Boston, MA: Cengage Learning.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. Hoboken, NJ: John Wiley & Sons.
