The Relationship between Financial and Managerial Accounting - Research Paper Example

Introduction Economic development and rapid pace improvements in technology have augmented the scale of business operations. In an equally increased social awareness context, management functions have been complicated and given rise of specialized branches of accounting namely cost accounting, financial accounting and management accounting. This paper explores the relationship between financial accounting and management accounting by developing insights into factors resembling the two and differentiating the two. Financial accounting As defined, financial accounting is the process of identifying, measuring, recording, classifying, summarizing, analyzing, interpreting and communicating the financial transactions and events. The objective of this stream of accounting is to keep and maintain systematic records to ascertain financial performance and position and communicate it to the interested entities (Tulsian 14). Managerial accounting Management accounting, on the other hand, is the application of accounting techniques to provide information to facilitate the levels of management in planning and controlling business activities and decision making. Management accounting is not restricted to cost accounting but includes dividend decisions, capital structure and expenditure decisions as well (Tulsian 14). Figure 1: Relation between different branches of accounting Similarities between the two Apart from stark and numerous differences, there are certain similarities also between the two branches of accounting. Those similarities are listed below (EHow n.d): Use of data The data which is utilized by both the branches of accounting is the historical data of previous years. While financial accounting makes use of past data to compare the financial performance of the business with the current situation, management accounting uses historical data to provide a forecast of the future plans based on those reports. Measuring currency Currency forms the basic unit of measurement for both the managerial and financial accounting. With the help of a single unit of measurement, both managerial and financial accountant produce tangible results for internal and external stakeholders of the business. Techniques Some accounting and measurement techniques are common to both the branches of accounting. For instance, throughput accounting is a measurement technique used to measure the per unit cost of producing a product and also the per unit expenditure made by a customer. Terminology Terminology used by the two accounting branches is the same. For example, debit and credit terms are used by both the branches and connote the same meaning. Similarly, accounts receivable and payable also signify similar meaning in both the accounting branches. Interests The interests and coverage domain of both the branches overlap as they deal with the economic events of a business. As for example, determining the total cost of production comes under the purview of financial accounting while determining the cost of each unit and parts is the part of management accounting. Thus, both the branches aim at quantifying the economic activities of a business so that they can be communicated to the related parties and stakeholders (Weygandt, Kimmel & Kieso 5). Differences between the two There are more differences between financial and managerial accounting than similarities. Detailed description of the differences between the two is: User groups The user groups who refer to the two accounting branches differ. For financial accounting, relevant user group comprises of external users like creditors, investors, government and stakeholders while for management accounting, it is the internal users including officers, employees, managers and executives of the business itself. Information presented Financial accounting reports pertain to external users. As such, they refer to these reports for gaining insights into history, financial performance and general economic detail of the company. Assessment of transactions conducted by the company in the past are also looked after at by the external users. On the contrary, management accounting makes use of reports to determine non-financial information and trends to help them in the decision making process. They monitor and analyze the satisfaction levels of customers and competitors details along with individual department information to draft future policies and plans based on past records and data. Purpose of accounting The information presented by the two accounting branches defines their purpose. Financial accounting statements are used by investors and governments to decide upon their investing priority. Companies which reveals better financial stability and good returns for its investors through its financial statements is preferred over others. Likewise, managerial accounting reports are used by managers, executives and officers of the business to analyze the past performance and using that data to aid them in specific decision making. Frequency and types of reports Financial accounting reports historical data on annual, monthly or quarterly basis while management accounting reports data on a continuous basis to provide dynamic environment to the decision making process. As such, the internal users keep on reporting relevant information and analyze it continually to come up with appropriate decisions. Regulation Management accounting is meant for the internal users of the business and has no vested public interest because of which management accounting is not governed by any law or regulation. On the contrary, financial statements are meant for public scrutiny and information provision and thus are regulated by various acts and provisions namely FASB (Financial Accounting Standards Board), GAAP (Generally Accepted Accounting Principles), SEC (Securities and Exchange Commission), et cetera (Associated Content 2007). Mandate Supplying financial statements to general public is mandatory to every business and organization which makes financial accounting an indispensable part of every business. However, management accounting is meant for internal users of a business and as such, it is not mandatory for a business. There is no specification as to what, how and to which extent it should be done and there are no governing laws as well (Accounting for Management 2009). A summarized view of the differences between financial and management accounting is provided in the table below: Financial Management Historical Records past financial transactions; covers the previous year’s trading; Looks backwards to analyze performance. Recent past and future Performance reports containing financial information on recent past, and projection for future For Outsiders Financial statements, prepared mainly for shareholders, suppliers, the bank, the Inland Revenue, Registrar of Companies. For Insiders Available only to managers, directors, and owners; they may sometimes be made available to lenders such as banks Outsiders make the Rules The Companies Act specifies the accounting information that must be prepared; The Inland Revenue sets down requirements; the accountancy professional bodies publish standards for accounting practice. The GAAPs Insiders make the rules The content of reports and the principles used can be suited to the activities of the business & the requirements of its manager A ‘True and fair’ view Financial accounting is required to present a ‘true and fair’ view of the financial affairs of the business A Useful Report The main requirement of management accounting is to produce information that will enable the business to conduct its activities more effectively. Timing Generally there is little urgency to produce financial accounts for outsiders; financial statements are often produced and made available only once a year Timing Management accounting information is prepared as frequently as circumstances demand; speed is often vital as information may go out-of-date very quickly. Works Cited “Financial Accounting vs. Managerial Accounting: Difference between financial and managerial accounting. Accounting for Management. 2009. 8 December 2010 < http://www.accountingformanagement.com/financial_accounting_vs_managerial_accounting.htm >. “Similarities of financial and management accounting. Ehow. 8 December 2010 < http://www.ehow.com/about_4853367_similarities-financial-managerial-accounting.html>. “The differences between financial accounting and management accounting. Associated Content. 7 May 2007. 8 December 2010 < http://www.associatedcontent.com/article/233154/the_differences_between_financial_accounting_pg2.html?cat=3>. Tulsian, P.C. Tulsian’s Accountancy. 7th Ed. New Delhi: Ratna Sagar Pvt. Ltd, 2008 Weygandt, Jerry. J, Kimmel, Paul. D & Kieso, Donald. E. Managerial Accounting: Tools for Business Decision Making. 5th Ed. John Wiley & Sons, 2010 Read More