Accounting plays a very important role in every company’s operations. It needs to maintain profits and losses of a company along with regulation of daily operations within the company. According to Warren, Reeve & Duchac (2012), business is identified to carry out two types of accounting activities through management and financial accounting. Management accounting is responsible for internal decisions within a company. Decision makers are usually focused on how to maintain and raise profits along with liquidity of a company. They are also engaged in management of a company, new ways of investing and financial activities. Administration always requires information about a business entity. It helps them understand what the company has done in the past and what strategy should they choose for better results in the future (Needles, Powers & Crosson, 2011). Financial accounting helps create reports and present them to executive managers of a company, who are usually called external decision makers. These reports, which are called financial statements, help them evaluate company’s decisions and understand whether its goals have been met or not. Financial statements show levels of profitability and liquidity of a company. Internal and external decision makers use these statements for evaluation of company’s operations. No company can normally exist without financial statements as they play a central role in accounting (Needles, Powers & Crosson, 2011).
Difference between Financial and Management Accounting
Financial accounting information is calculated at fixed intervals. Monthly, quarterly, and yearly calculations are usually used in financial statements. Income statement, retained earnings statement, balance sheet, and statement of cash flows are forms of company’s financial statements. Financial statements have to be prepared in accordance with generally accepted accounting principles. It is one of the reasons why all calculations must be precise. These principles are shortly called GAAP. The aforementioned statements are prepared for company’s shareholders, creditors, government agencies, and the general public. Managers of a company use financial statements in their daily operations and in planning future strategies for a company. Managers classify manufacturing and other costs, evaluate those costs, compare actual with expected results, and measure revenues and costs of products.
Data, which are derived from financial statements, are presented to top management. It helps a company use these data in daily and future operations, which makes management accounting complementary to financial accounting. However, the following interdependence does not make these two operations similar to each other. They are different in their subject matter, nature of used data, periodicity and accuracy, in their obligations, legal formalities, and evaluation of monetary transactions (Warren, Reeve & Duchac, 2012).
Management accounting is responsible for internal report system, while financial accounting is responsible for external report system. It makes the main object of management accounting help the administration plan and make decisions for internal use. Financial accounting gives information about profits and losses of a company along with its financial situation to external users.
Financial accounting reflects a general situation of a business in its financial statements along with history of every transaction. Management accounting, on the other hand, shows detailed information about company’s paying ability along with capacity of products, inventory and others, uses statistical data from past activities for future planning.
Statement of Comprehensive Income, a report about profits and losses along with Balance Sheet and other financial statements are usually prepared at the end of the year in financial accounting. Management accounting, in contrast, requires information during smaller periods to be able to use it in daily operations.
Financial accounting requires data accuracy and is mandatory for each business because it must be sent to the Securities and Exchange Commission (SEC) along with the tax authorities. Management accounting requires its timeliness as it will be used in future decision-making operations, is not necessary and has no legal pressure.
Management accounting system uses monetary analysis and research such as different technical innovations, labor relations, and other operations. It is required for future decision-making process. Financial accounting records money transactions only (Warren, Reeve & Duchac, 2012).
Accounting plays a very important part in assisting decision makers who are engaged in measuring, data reduction, and communication of information within business entities. Accounting is usually divided into management and financial accounting. These two types of accounting complement one other. However, they have lots of differences between them, and they can be distinguished by principal users of the information that they provide.
Management accounting records detailed information about profitability and capacity of products and other operations within a company and presents it to internal users for planning of future operations. It uses monetary analysis and research of labor relations along with other operations, requires timeliness of information, has no legal pressure, and is not mandatory. Information is analyzed during smaller periods of time for daily and future operations. It usually uses statistical data for future planning.
In contrast, financial accounting provides information about profits and losses of a company along with its financial situation to external users, reflects a general situation of a business in its financial statements, and tracks all transactions made in the past. Financial reports are usually prepared at the end of the year and require data accuracy, as well as they are mandatory for each business and record money transactions only.