Management accounting gives financial and non-financial facts to the inside customers and the administration (decision makers). Such data is to help management function their features of planning, controlling and directing. On the other hand, economic accounting prepares and gives economic statements and provide economic and economic facts to the exterior customers of an entity. The variations of these two are involving the users of information, products, hints for preparation, type and frequency of reports, and the kind of information used.
The foremost customers of monetary accounting data are the exterior stakeholders such as the shareholders, doable investors, creditors, and the authorities (Weygandt, Kimmel, & Kieso, 2013). These one of a kind users have exclusive desires which are comfy by the information. On the other hand, the primary users of management accounting information are the internal users within the organization, such as the management. Managers use the information to plan, control, and direct with the aim of improving financial and operational performance.
The final products of financial accounting are the four financial statements which show in monetary terms the financial condition, performance, and position of the entire entity (Weil, Schipper, & Francis, 2013), for instance, the revenue, net profit, assets and liabilities, and the cash-flows the company. On the other hand, management reports are the final product of managerial accounting, and they cover operational issues such as costs, efficiency in production, pricing, and performance.
The financial statements are prepared for a pre-determined period; either quarterly, semi-annually, or annually (a requirement for every company). Also, these financial statements are general purpose; show the performance and position of the entire business. For instance, if an entity has subsidiaries, it will prepare consolidated financial statements that show the overall financial performance of the group. On the other hand, the management reports are when requested by the management, and it can be either on a daily, weekly, or even monthly basis. Also, Weil et al. (2013) point out that these reports do not cover the entire organization but on operating segments classified by either region, product, or divisions. The information might be financial (monetary), or non-financial, such as customer satisfaction and they are for a particular purpose for an individual decision such as product pricing (Weygandt et al., 2013).
Financial accounting follows specific guidelines and rules on the format and content financial statements. Companies must follow the guidelines of the generally accepted accounting principles (GAAP). The need for GAAP is to provide uniformity as well assure the external users that the financial information in the statements is reliable. Also, there are bodies such as the Securities and Exchange Commission and the Financial Accounting and Standards Boards that seek to enforce the application of the guidelines and standards (Henderson & O’Brien, 2017). On the other hand, there are no specific rules that govern management accounting. The management carries out a cost-benefit analysis and decides on the format and content of the internal management reports.
Management accounting information helps managers in planning, controlling, and decision making. As a result, such information must focus on the future to be relevant to managers for making decisions for the future. More importantly, the relevance of management accounting information is vital since it must have the capability of making a difference in a decision. On the other hand, financial accounting information is mainly historical. The financial statements contain information on past data and past events, and this might limit the ability to predict the future.
Management accounting is not a mandatory for every firm while an entity cannot survive without financial accounting. The tax authorities require that every form of business prepares its financial statements and these are useful in determining the appropriate tax burden. However, management accounting is not a must; the operations can continue without the preparation of internal management reports.
Example of the use of financial and managerial accounting
An example of the use of financial accounting information is when a company seeks to raise capital by selling its ordinary shares in the stock exchange. Such a firm is expected to present its financial statements to the public. Potential investors will look at the revenues, profits, cash-flows, and assets to evaluate the company’s financial position and decide whether to buy the company’s shares. Another example is where a firm also seeks to raise capital by issuing a bond. The creditors need information on the net profit and the cash-flows to evaluate the ability of the company to pay interest on the bond and the initial principal amount. Shareholders need information on the profits to assess the ability of the firm in paying dividends from its earnings. Also, they need useful information to predict the future financial performance and determine whether they should increase their investment. For instance, if they expect that profits will rise, they will invest further funds.
A practical application of management accounting is to provide managers with information on running the daily operations. For instance, a company makes furniture, and it must determine the cost of producing one piece. Such a decision requires information on the cost of the materials and labor and this is crucial in determining the price. Also, this helps the management in planning by setting sales and cost targets. A weekly management report will provide information on the actual sales versus the target sales, and the managers will investigate the causes for the variance (Warren, Reeve, & Duchac, 2016). Therefore, management account information must help the manager’s plan, direct, and control business operations.
In conclusion, there are many differences between management and financial accounting. These differences are in the users, the purpose, guidelines as well as the frequency of preparation. However, a company requires both; financial accounting to provide useful information to its external stakeholders for economic decision making and managerial accounting for the management and other internal users for making improvements in the operational and financial performance.
Henderson, D., & O’Brien, P. C. (2017). The standard-setters’ toolkit: can principles prevail over bright lines?. Review of Accounting Studies, 22(2), 644-676
Warren, C. S., Reeve, J. M., & Duchac, J. (2016). Financial & managerial accounting. Cengage Learning
Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2013). Managerial accounting: Tools for business decision making. John Wiley & Sons