Finance and Accounting Data - Essay Example

Accounting was founded in 1492 when the Italian mathematician Luca Pacioli wrote a textbook chapter on the double entry system in an academic book (Barone, 2008). The profession mostly emphasized in financial accounting during its first five centuries of existence. Financial accounting deals with the preparation of information for external users such as lenders, governmental institutions, business partners, and shareholders. During the 20th century the capabilities of accountants began to be recognized by managers that utilized accountant as advisors. Managerial accounting was born out of the need of managers to have better information about their operations in order to make decisions. Managerial accounting is prepared for internal use of the managers. This paper compares and contrasts financial accounting and managerial accounting. The applications of financial accounting require accountants to follow the generally accepted accounting principles (GAAP). Public companies whose stocks are traded in the open markets must comply with SEC regulations. These public companies must prepared four financial statements. The four financial statements that must be prepared after completion of the accounting cycle are the income statement, balance sheet, statement of retained earnings, and the statement of cash flow (Weygandt & Kieso & Kimmel, 2002). The typical accounting cycle is one year, but most companies also release quarterly financial statements. The income statement shows the profitability of a company. The balance sheet shows the value of the company’s equity, assets, and liabilities at a certain point in time. The balance sheet shows how the cash of the company was used during the period. Financial accounting illustrates data based on what occurred in the past. The cost principle established that the data used in financial statements must be based on past historical events. Accountants cannot revalue things based on market values. In managerial accounting the users can utilize data based on past, present, and future events. The managers are also not limited by the rules described in the generally accepted accounting principles. Managerial accounting is a practice that must not be mandatorily applied by corporations. It is optional for managers to prepared managerial accounting reports. A general rule that must be followed by managers as far as using company resources for managerial accounting purposes is materiality. The benefits of producing the information cannot exceed its costs. Part of the work managerial accountants perform includes forecasting and projection of future events such as sales forecasts, budget forecast, project future expenses, and pro forma financial statements. Managers also use managerial forecast to evaluate the viability of a project. Managers expect the information to be presented in reports to have timeliness and relevance. Relevance ensures managerial resources are not wasted preparing information that is not needed and does not provide any value to the firm. The reason managerial accounting focuses a lot on the future is based on first of the four managerial functions which is planning. Financial accounting data or information is expected to be both objective and verifiable (Garrison & Noreen, 2003, p. 8). The financial statements of corporation are submitted to an independent auditor to ensure they are free of material errors and fraudulent activity. The preparation of financial accounting leaves an audit trail that allows accountants the ability to cross reference information whenever needed. The most common mechanism used in accounting to leave a trail is the receipt. The information in financial accounting follows standardized procedures and reports that are not able to provide precise details. On the other hand managerial accounting provides segment reports about departments, products, customers, and employees (Garrison, et al. 2003, p.7). Managers receive information that provides specific details about the profitability of different subsidiaries, departments, or products. The information prepared in managerial accounting is geared to help managers make better decisions. Since managerial accounting does not have to follow GAAP rules its users have tremendous flexibility in the way they prepare reports for the users of the information. Due to the time constraints managers preferred to receive a fair estimate prior to making a decision than to wait weeks or month for a precise answer. Managerial accounting adapts to the need of its users due to its flexibility. The preparation of financial accounting data follows a mechanic process known as the accounting cycle which culminates with the final copy of the financial statements to be released. The employees or accountants working for a company must work as a cohesive unit since they depend on the efforts of each other. In managerial accounting work a manager may ask for a customized report that can be prepared using estimated data. Due to the precision concerns, GAAP compliance, and the obligation of using data based on historical costs the reports prepared in financial accounting are limited. The reports users of financial information received from public corporation are standardized. This allows the users to easily compare the financial statement of two separate companies. Since financial statements formats are identical accountants can perform financial tools such as ratio analysis to evaluate the performance of a corporation. Managerial accounting deals with information for managers, thus the information tends to be confidential. The fact that managerial accounting does not emphasize precision makes it cheaper and faster to generate information. As the field of accounting evolved the people working in this profession became bigger assets whose input and contribution was more important for the managers of organization. Financial accounting was only able to provide managers with information regarding financial events that occurred in the past. The strict compliance with GAAP of financial accounting limited its use for managerial applications. One of the primary differences between financial accounting and managerial accounting is that the information provided by financial accounting is for external users of financial information, while managerial accounting is used by internal users mainly managers. There is also a discrepancy in the time emphasis of both practices. Financial accounting deals with past events and managerial accounting at times places emphasis on the future. As we move forward in the 21st century businesses are going to reap the benefits of the use of both financial and managerial accounting. References Barone, J. (2008). The Father of Accounting. The Trusted Professional, 11(3). Retrieved April 23, 2010 from http://www.nysscpa.org/trustedprof/208a/nassau.htm Garrison, R., Noreen, E. (2003). Managerial Accounting (10th ed.). Boston: McGraw-Hills Irwin. Weygandt, J., Kieso, D., Kimmel, P. (2002). Accounting Principles (6th ed.). New York: John Wiley & Sons. Read More