The Fundamental Differences between Management Accounting and Financial Accounting - Case Study Example

DIFFERENCES BETWEEN MANAGEMENT ACCOUNTING AND FIANNCIAL ACCOUNTING ………………………………………… College/ ………………………………... ………………………………… Introduction Accounting is an effective system of collecting, summarizing, analyzing and reporting information about a business organization in financial terms. The basic functional area within the accounting practice is dealing with information of both internal and external to a business. Accounting information has long been considered to be an effective decision-support tool in the business. Information which is provided by external parties of a business is normally termed as financial accounting information where as information provided by internal parties or used by them is termed as managerial accounting information. This research work identifies basic differences between management accounting and financial accounting and highlights its impacts on business. The fundamental differences between management accounting and financial accounting have been detailed in this work in terms of users of both the accounting systems, basic principles, structures, Legal status and requirement etc. Difference between Management accounting Financial Accounting Meanings Stolowy and Lebas (2006) defined financial accounting as the process of description of the various events that take place in the life of a firm. These events are essentially transactions between the firm and outside partners they are suppliers of resources and customers of the firm’s output. The description of each elemental transaction will be materialized by source documents containing both financial and non-financial elements to allow a valuation of that transaction. Lucey (2003) described that management accounting is primarily concerned with gathering of data from either internal, or external or both sources, analyzing, processing, interpreting and communicating the information for the use within the business organization so that management can plan future things more effectively, make accurate decisions and control operations. Both management and financial accounting are very basic two kinds of accounting information systems. Management accounting includes the development and interpretation of accounting information which is designed to help management in decision making and strategy formulation, where as financial accounting refers to the information that describes the financial resources, obligation and activities of the business organization (William and Haka, 2005). The management accounting and financial accounting differences can be broadly summarized in the dimensions of users to whom the accounting information is produced, structures of the information, principles and sources of both systems, report entity and time orientation etc. Users Management accounting is concerned with producing accounting information and providing it for all the internal users including managers for decision making, planning and controlling. Financial accounting is concerned with producing accounting information and reports like statements for the use of external parties a business including creditors, investors, government agencies, customers and banks (Heitger and Mowen, 2007). According to Khan (2007), the users of information produced by financial accounting other than management are faceless groups. It is because, in most cases, managers of many companies don’t personally know the shareholders and creditors of the company. But, users of the information being produced by management accounting are within the firm who are managers and those like employees or assistants who help managers in their functions. Structure Both in management accounting and financial accounting, information is produced and presented in different structures. Financial account is supposed to follow a single and unified structure for information processing as well as for presentation. Information presented in different organizations must be more or less in a uniform structure. Financial accounting’s end products are balance sheet, profit and loss account or income statement and cash flow statement. The balance sheet represents the financial position statement of the organization for a financial year. Profit and loss account shows the summary of transactions held in a specified period of time. The cash flow statement relates to both the inflow as well as outflow of the financial resources within a specific time (Khan, 2007). The management accounting provides the information that is highly useful for the management and therefore the methods, structures or ways of processing and presenting information can be different from business to business and management to management. The information produced by management accounting is for the use of management and hence it can be prepared according to the specific requirement of management. More specifically, there is no uniform structure for accounting information to be presented in management accounting. Sources of Principles and reporting standards Siegel and Shim (2003) emphasized that financial accounting is governed by Generally Accepted Accounting Principles (GAAP) in order to keep financial information and ways of presenting it uniform and also to protect concerned parties from being mislead. Management accounting is useful only to internal parties like managers and hence it is not subject to GAAP. GAAP provides rules and strict policies that are to be followed in preparing financial records. GAAP provides basic framework on how to prepare financial reports and other information as has been evolved over years. But, management account is mainly for the use of management and it always can be tailored to the specific requirement of the management. The financial regulatory bodies for financial reporting standards can be different like ASB in the UK and German Accounting Standard Committee in Germany. According to Stolowy and Lebas (2006), as there are differences in culture, traditions, taxation policy, sources of financing, accounting profession, accounting regulation etc, there are differences of form and contents between the published financial reporting standards of most countries. IASB and IFRS are well-known accounting standards that are accepted by many firms around the world. Need/ Legal requirement Public limited companies are legally required to prepare, produce and present annual financial accounts. It never matters whether the management of the firm regards this as useful for them or not. But, management accounting and any monetary spending is entirely optional for the organization. There is no statutory obligation to prepare management accounting and to make use of that information by the management (Drury, 2007). Report Entity Financial accounting relates to the entire organization because the major emphasis is on the complete transactions being held in the business though some businesses prepare financial accounts on segmented basis. But in management accounting, the business is more often divided to different responsibility centers like cost, profit and investment. Management accounting prepares accounting information on segmented basis (Khan, 2007) Time orientation Financial accounting presents accounting information through balance sheet, profit and loss account or income statement and cash flow statement. These are the outputs of financial accounting. These in turn represent information of transactions and deals that are held during the past. Financial accounting is generally called historical records because it records details of past transactions. Even though management accounting records past data of a firm, the major parts of its records are future information or future oriented as it includes variety of estimation and budgeting (Heitger and Mowen, 2007). Type of information Hietger and Mowen (2007) stated that financial accounting tends to produce objective and verifiable information as it there are restrictions imposed on financial accounting. Management accounting provides information of both financial and non-financial and they are much more subjective in nature. Conclusion As far as business is concerned, information is of vital use. It is highly useful for both internal and external authorities and parties of an organization. Information is used for planning, controlling and decision making by managers, creditors, investors, customers and so on. The management accounting is mainly concerned with providing information to the internal authorities like managers where as financial accounting is mainly to provide and present information to various outside parties like investors and customers. This piece of research work has outlined basic differences between management accounting and financial accounting in terms of users, structure, sources of principles, time orientation etc. References Drury C (2007), Management and Cost Accounting, 7th Illustrated Edition, Cengage Learning EMEA Stolowy H and Lebas M (2006), Financial accounting and reporting: a global perspective, Second Edition, Cengage Learning EMEA Lucey T (2003), Management Accounting, Fifth Edition, Cengage Learning EMEA Heitger D.L and Mowen M.M (2007), Fundamental Cornerstones of Managerial Accounting, Illustrated Edition, Cengage learning Khan M.Y (2007), Management accounting: text, problems and cases, 4th Edition, Tata McGraw-Hill, 2007 Siegel J.G and Shim J.K (2006), Accounting handbook, Illustrated 4th edition, Barrons Educational Series Williams J.R, Haka S.F and Bettner M.S (2005), Financial and Managerial Accounting, the basis for business decision, 13th edition, McGraw Hill, Irwin Read More