Comparison of Financial and Management Accounting - Research Proposal Example

Introduction: Accounting has become an integral part of almost every business. In the business world, it is one principle which every stakeholder ranging from employees to decision makers must have some knowledge of. It is applied in all job specialties and everyone must know about basic accounting procedures when dealing with any type of business. Accounting has also become essential as it keeps a track of financial activities of business entities and thus helps the management or the owners to determine the profitability of their enterprise or, in case of losses, determines the reasons for the losses. Many important derivations are made from the accounting statements such as Balance sheet, cash flow statement and the income statement using the different ratios which describe various aspects of a business. When companies became large enough and the concept of public limited companies came into existence, the accounting and book keeping became a legal requirement for businesses in order to protect the interests of shareholders or other stakeholders. From investment point of view, the financial performance of companies are judged from the company accounts and on those basis the company is evaluated which helps the investors to decide if the company is capable enough to invest in it. With time, the field of accounting also expanded and so different branches of accounting came into being. Every branch of accounting serves a different purpose and is useful in different situations for different stakeholders. There are distinctly two different accounting procedures widely used in the corporate world: financial accounting and managerial or management accounting. Where financial accounting serves the needs of outside stakeholders such as government, suppliers, investors etc, management accounting is solely for internal users such as the management of the company. The accounting procedures: Accounting is a very vast field and it became more diversified as with time management became separated from ownership of any business entity such as in case of limited companies. As both the management and owners have different interests in the company, they both use different accounting procedures to evaluate a company, therefore there are two different sets of accounting used by companies. The two different accounting methods include financial accounting and managerial accounting. Management accounting: Management accounting is primarily used by insiders such as the management team and the workforce of the company for decision making and evaluation. The information derived from management accounting is entirely for the management in order to aid them in making informed decisions. It is future oriented and involves forecasting of the future performance of the company. The information gathered from management accounting practices is not published as its entire purpose is to serve the management of the company.According to the Chartered Institute of Management Accountants, management accounting is defined as “the process which involves identification, measurement, accumulation, analysis, preparation, interpretation and communication of information for the management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources” (CIMA, 2010). Management accounting as a practice extends to the following three areas: Strategic management: management accounting advances the role of the management as a strategic business partner of an organization. Performance management: It aids the management in decision making and helps the management in managing the performance of the organization in an appropriate manner. Risk management: It helps the management in identification, measurement, management and reporting of risks to the achievement of objectives of the organization. Financial accounting Another branch of accounting “Financial accounting” is concerned with the preparation of statements for the decision makers which include the stockholders, banks, suppliers, creditors, government agencies etc. financial accounting fulfills the needs of external stakeholders in the organization who are not involved in the daily operations of the company. The information in financial accounting is based on historic performance and tells the external stakeholders how the company did over a period of time. It is basically a summary of financial data of an organization which is published so that external stakeholders can analyze the performance of the company over the specified time period (usually one year). The financial data made in financial accounting is base on Generally Accepted Accounting Principles which serve the following purposes: Produce general purpose financial statements. Provide information for the management for decision making, planning and evaluating performance of the company. Meet the legal requirements. The Generally Accepted Accounting Principles are a set of rules and regulations which every company must follow in order to ensure that the financial information which they reveal to the external stakeholders is authentic and complete. The differences between management accounting and financial accounting can be summarized as follows: Management accouting Financial accounting Strong Future orientation Based on historical performance Comprises of confidential information Information is published for the external stakeholders Doesnot follow a set standard Based on GAAP Not a legal requirement Public limited companies must produce financial statements by law External auditing not required Compulsory external auditing Although there are no set laws which the management of the company must follow in management accounting. The reason for this is that the information from management accounting is entirely for the internal management. However, as the information revealed from financial management must be published for external stakeholders, there are some standard rules which every company must follow before publishing their financial data. These standard rules are known as Generally Accepted Accounting Principles (GAAP). These rules are made and are mandatory by law that public limited companies must follow them in order to protect the interests and rights of external stakeholders whose main concern is dividends from the company. The principles included in GAAP are as follows: Principle of regularity: All the financial data published by the companies must be in conformity with the enforced rules and laws. Principle of consistency: A company must follow a fixed method of accounting treatment for similar items. Principle of sincerity: According to this principle,the accounting should be a reflection of good faith the actually financial status of the company.. Principle of the permanence of methods: This principle allows the comparison of the financial information published by the company. Principle of non-compensation: This principle states that the company must show full details of the financial information without hiding anything. Principle of prudence: this principle states that the company must be shown as it is and must not be shown better than its actually financial condition. Principle of continuity: all the financial information should be made with the assumption that the company is a going concern i.e it would continue operations in the next upcoming years. Principle of periodicity: This principle states that each accounting entry should be allocated to a given period, andmust be divided accordingly if it covers several periods. Principle of Full Disclosure/Materiality: All information and values pertaining to the financial position of a business must be disclosed in the records. Principle of Utmost Good Faith: according to this principle, all the information related to the firm should be disclosed to the insurer before the insurance policy is taken. References Helmkamp, John. (1990). Managerial accounting. John Wiley & Sons Inc. Financial reporting and concepts. (201). principlesofaccounting.com, Retrieved from http://www.principlesofaccounting.com/chapter%2015.htm Introduction to managerial accounting (cost or management accounting). (2009). Accounting For Management, Retrieved from http://www.accountingformanagement.com/ CIMA,.(2010).Management accounting definition. http://www.cimaglobal.com/Managementaccounting.htm Financial accounting vs managerial accounting - difference between financial and managerial accounting. (2010). Accounting For Management, Retrieved from http://www.accountingformanagement.com/financial_accounting_vs_managerial_accounting.htm Bromwich, M. (1998). Managerial accounting definition and scope-from a managerial view. Management Accounting Williams, Jan R. (2002). Accounting for decision making. Financial and Managerial Accounting: The Basis for Business Decisions, 12/e, Retrieved from http://highered.mcgraw-hill.com/sites/0072396881/student_view0/chapter1/chapter_summary.html Read More