Financial and Management Accounting in Tandem - Coursework Example

Financial and Management Accounting In tandem Introduction ‘Financial Accountancy’ is basically connected with recording of historical transactions,events and happenings in order to produce reports reflecting profitability, state of affairs, liquidity, solvency, and stability. On the other hand ‘Management Accountancy’ is exploitation, interpretation, and analysis of data collected under financial accountancy coupled with other information in order to produce variety of reports generally required by the top management in order to take certain decisions with regard to strategic policies, control of affairs, forecasting, and analysis of performances. Since the sphere of actions of each of the types of accountancy is different from the other, its management, standardization, and functioning has to be separate from the other. Both types of accountancy have been institutionalized but only financial accountancy has been legally standardized and harmonized across organizations and industries. Management accountancy is not bound by any standardized norms but has a creative approach that is more situational. In this write up an analysis is made on each of the approaches of accountancy in order to find out the purposes they serve and whether their services provide assistance or hindrances to the users of financial statements and reports. Standardization is a mixed bag The ongoing standardization of financial accounting has the benefit of uniformity of in its practices. Shyam Sunder in his article ‘Uniform Financial Reporting Standards Reconsidering the Top Down Push’ has very effectively stated the reasons in favor of standardization as: “ They serve as a coordinating device, saving time and effort, just as the rules of road speed up traffic and reduce accidents; Public policy should be made through a well defined, transparent process with clear outcomes; and They make auditing easier and useful to auditors in their negotiations with clients.”1 But all is not well with financial accounting being organized following uniform standards and procedures. Every other day there are differences of opinion over standardization. Whereas the management accounting is not bound under a uniform sort of code of conduct. Management accountancy operated under a free arena where every intellectual is free to exploit its umpteen resources as per requirements. As Shyam Sunder in the said article has stated that “Accounting is the language of business. As with any other language, it derives the vibrancy from the changing dynamic of the meaning of the words. The value of Oxford English Dictionary arises from the encyclopedic collection of the various ways in which a word may be used, not in recommending or enforcing its opinion.”; and he goes on say that “no language, including accounting, can flourish under the protective umbrella of punitive authoritative regulations”.2 Managerial Accountancy cannot be standardized the way of financial accountancy The nature and functioning of managerial accountancy is quite different from financial accountancy. Financial accountancy is the presentation of historical facts of occurred transactions, events, and happenings. Transactions that have already taken place cannot be changed even if the financial accountants do not agree to the validity or competence of those transactions, events and happenings. Withdrawals made from a bank cannot be undone; only the same amount can be redeposit as a separate transaction. The transaction has to be shown as withdrawals only. Standardization and harmonization of presentation in the case of financial accountancy works as history cannot be changed; but it can be presented in a harmonized ways for its proper analysis. The role of management accountant starts after the historical transaction has been recorded. Management accountancy is a creative exercise. Two management accountants will draw two different conclusions while analyzing financial accountancy for future projections or for reestablishing the strategic policies of an entity. Accordingly when concept and approach of management accountancy is different from financial accountancy, it cannot be standardized in the way of financial accountancy. Juergen Daum in his write-up ‘The Missing Link’ has emphasized that “The Management Accounting cannot be standardized in the same way as financial accounting. In this context, standards refer to a common approach rather than fixed, mandatory rules.”3 Juregen Daum is right because Management accounting is such a creative exercise that no set of fixed rules can direct its creativity. Coordination between two approaches of accountancy is the need of the hour. Management accountancy and financial accountancy are two different approaches to deal with financial data on the basis of which they serve different purposes of shareholders, management and other seekers of information. Though financial accountancy is standardized to a great extent by the formulation of GAAP and other parameters, management accountancy need to rise to the occasion by working in tandem with the financial accountancy. Juregen Daum in the article ‘The Missing Link’ categorically asks for a forward movement of management accountancy. He states that “a new approach to management accounting is needed. One that supports decision making and financial accounting, just like management accounting and cost accounting did in old days.” For example financial accountancy provides profitability information through Income statements; but coupled with management accountancy an activity based profitability, Enhanced Business Reporting (EBR) and other detailed information can be provided for the shareholders to assess the actual worth of their holdings. John J.Ballow, Robert J. Thomas and others in the article ‘Getting a True Picture of Shareholder value’ have emphasized that GAAP (financial Accounting) coupled with a number of management accounting tools can provide invaluable information and disclosure about financial statements to the shareholders. The article states that “The proliferation of non- GAAP supplement disclosures – EBITDA is a good example—are also ways that companies are trying to improve disclosure”.4 The article further states that “EBR is not a replacement for GAAP but a complement to it.” That means both management accountancy and financial accountancy don’t cut each other territories but complement each other in improving the standard of disclosure. Conclusion Management accountancy, mainly because of its creativity style of operating, can manipulate the historical data provided by standardized financial accountancy to the benefit of shareholders and others. Management accountancy is in a way standardized as they exploit the financial accountancy data to create reports that help particular section of information seeker. Management Accountancy may not be getting standardized the way financial accountancy has achieved its status; but by using the two accountancy services in tandem, an invaluable standardized services can be provided to the users of financial statements. References 1Shyam Sunder, Uniform Financial Reporting Standards Reconsidering the Top- Down Push, The CPA Journal Online, April 2007 issue, http://www.nysscpa.org/cpajournal/2007/407/perspectives/p6.htm 2 ibid 3Juergen Daum, The Missing Link, http://www.iioe.eu/fileadmin/files/projects/imas_fde.pdf 4 John J. Ballow, Robert J. Thomas and others, “Getting a True Picture of Shareholder Value’, Outlook Journal, June 2005, http://www.accenture.com/Global/Research_and_Insights/Outlook/GettingValue.htm Read More