managerial and Financial Accounting

Accounting is the method of gathering, categorizing, analyzing, organizing, and reporting financial data. Accounting is central to any enterprise and serves as a significant indicator of a company's growth, performance, and viability, among other things. The primary role of this function is to provide financial statements to a company's internal and external stakeholders. This type of detail is critical in decision-making by different stakeholders. Accounting is divided into two categories: executive accounting and financial accounting. Financial accounting deals with the preparation and reporting of a company’s financial information to external stakeholders such as the shareholders, government, financial institutions, and suppliers, among others(Britton & Waterston, 2013). It is an important measure of financial health to external stakeholders. On the other hand, management accounting deals with the preparation of internal financial reports of a company to be used by internal stakeholders for planning and decision making. Users of management accounts include the management and employees.

Similarity between financial and management accounting

Financial and management accounting serve different purposes in a company. However, both of them have key similarities. Both of them deal with measuring, accumulation, recording and classifying of financial information.The reports produced by both systems are financial statements that are used for decision making by various stakeholders. The financial statements in both systems deal with revenues, expenses, cash flows, assets, and liabilities. They also have the same units of measurement which is monetary units(Gazely & Lambert, 2006). For instance, the US financial statements use dollars as their units of measurement.

The same people prepare both management accounts and financial accounts. They are both prepared by the company’s management who have access to such information on a daily basis. The only difference is that the management prepares management accounts more frequently and on a continuous basis. Theyprepare financial accounts on an annual basis, as at the end of the financial year (Lal, 2009).

Also, both of these accounting systems apply similar accounting principles and concepts in their preparation. For instance, the principles of measuring of cost and profits are applied in the same way in both financial and management accounting.

Differences between financial and management accounting

Financial accounting is a requirement by law, and it is compulsory for all companies to provide periodic financial accounting reports. The Securities Exchange Commission (SEC) is mandated to ensure that all US companies comply with this law. On the other hand, management accounting is discretionary upon the company(Scott, 2015). It only provides internal reports relevant to various operational and managerial functions. For instance, cost statements help the management to decide on the most viable products to produce.

The methods of preparation of financial and management accounting reports also differ. Financial accounting follows standard procedures referred to as Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). GAAP and IFRSoutline the methodology and the reports that must be prepared(Britton & Waterston, 2013). This helps to bring uniformity in the formats of financial reports for different companies making it easier for comparisons. Management accounting does not follow standard procedures and vary from one company to another in terms of the format and the reports.

The periods required for financial and management accounting reports are different. Financial required reports are done annually, and they represent the financial activity at the end of the financial year. All companies must adhere to this according to the US Corporate Law. In comparison, management accounting reports do not have defined timelines for doing them. They are mostly done out of particular needs of management(Gazely & Lambert, 2006). They can be done daily, weekly, monthly, or whichever period the management deems fit.

Usage of financial and management accounting reports is also different. Financial reports are usually made public and are majorly used by external stakeholders, to evaluate the progress of a company and future direction. For instance, the shareholders use this information to decide on whether to invest more in the company's shares or sell their shareholding. In contrast, management accounting reports are usually confidential, and their usage is limited to internal stakeholders(Lal, 2009). For instance, these reports assist the management in forecasting, planning, organizing, and controlling. They increase efficiency in management functions.

The scope covered by financial and management accounting reports differ. Financial accounting information covers the entire company, and its reports are usually a summary of consolidated revenues and costs. Management accounting covers a much narrower scope as it deals with specific divisions, products or processes. A company may have several divisions, products or processes, and thus it will have different management accounts for each of them. This helps to measure the efficiency of specific divisions, products or processes(Scott, 2015).

These systems cover different periods in their reports. Financial accounting statements typically concentrate on historical data. It reports on the financial activities of the previous financial year as at the year end. This helps stakeholders to monitor and evaluate the progress that the company has already made(Scott, 2015). On the other hand, management accounting information concentrates on future events. These include forecasts, projections, and budgets for various business operations. This information is useful for the management to estimate the outcomes of various courses of actions taken in the present.

Finally, these two systems differ in requirements for auditing. Once the management has prepared the financial accounting reports, it is required by law that the reports be independently reviewed and verified by independent external auditors. This helps to ensure that the reports provide a true and fair view of the company’s financial status. Management accounting reports are usually confidential and exclusively used internally(Lal, 2009). They do not require any review, verification, and monitoring from a legal standpoint.

Conclusion

The accounting function is no doubt at the core of the running of companies. The success of any company is highly correlated to the effectiveness of the accounting function. Accounting information ensures the continued survival of a company creating efficiency. Accountants are the ‘eyes' of the company, and they have the responsibility to ensure that they produce high-quality financial information. Financial accounting helps in enhancing transparency and accountability by the management to other stakeholders(Lal, 2009). The close monitoring and independent auditing of financial statements help to instill confidence in their accuracy. Management accounting reports are not a requirement by law, but their importance cannot be downplayed. These reports ensure that management makes high quality and effective decisions. Management financial reports create the foundation of decision making, which separates appropriate decisions from blind decisions.

References

Britton, A., & Waterston, C. (2013). Financial accounting. Harlow: Financial Times Prentice Hall.

Gazely, A., & Lambert, M. (2006). Management accounting. London [u.a.]: SAGE.

Lal, J. (2009). Accounting for management. Mumbai: Himalaya Pub. House.

Scott, W. (2015). Financial accounting theory. Toronto: Pearson.