There are two types of accounting in the field of business accounting. They are managerial accounting and financial accounting and they are similar in the fact that they both analyse and prepare financial information. However, certain factors in these areas are enormously different. The differences between these two fields will be discussed in this essay by looking at the users of the financial information, the types of information provided in each one of them, the frequency of reporting the information and the regulation required by law in each type.
The users groups in managerial accounting and financial accounting are different. Management accounting mainly provides information to be used inside an organization. Therefore, it is provided for internal users such as managers, directors and employees. On the other hand, financial accounting primarily aimed at external users of accounting data such as creditors, shareholders, investors and banks. Therefore it is used by people and parties outside an organization.
The second difference between management accounting and financial accounting is in the type of accounting data required in each kind. The type of information required by the external users in financial accounting differs from the type of information required by the internal users in management accounting.
External users compare financial information about the company which is expected to be objective and verifiable with general economic information. For example, they compare financial information about the industry in the way that the company works and operates. Also, they focus on board and general information which shows the overall performance of the organization as a whole. As a result, financial statements which include data about the profit and loss of a company, balance sheets, budgets and cash flow statements are provided in financial accounting. However, internal users review financial information about the company which is relevant to the problem they are facing such as financial statement information. Furthermore, they also review non- financial information which it is not completely objective or verifiable such as customer satisfaction levels. This type of information is extremely useful for managers in future planning and making decision. Therefore, internal users focus on detailed information which shows the performance of specific segment or department of the company.
The frequency of reporting the information in each kind of business accounting is based on the features of information provided in each type.
Financial accounting reports data only on historical financial transactions which have happened in the past. Therefore, the information is issued on a regular basis. It is often reported monthly, quarterly or at least annually. The reason behind this is that the information provided by financial accounting does not contain many estimates and it is used for credit decisions and investments. On the other hand, management accounting concentrates on past, present and the forecasting of future financial transactions. Therefore, management accounting reports are prepared on an as-needed basis in order to help managers in making decisions and controlling the company’s operations. They can be reported daily, weekly, monthly or annually. The time of reporting the information in management accounting is more important than the precision of the information. This is due to the fact that in decision making a good estimate in the present is better than a precise answer in the future.
The final aspect is the supervision by the government and the regulations that must be followed in the field of business accounting.
Since financial accounting information is provided for external users, it is controlled and supervised by some agencies and companies by the law in order to protect public interest and to help reduce fraud and misrepresentations. The Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the Public Company Accounting Oversight Board (PCAOB) are some examples of this kind of companies. These companies and agencies determine the quantity and the quality of the information that must be reported in financial accounting. Therefore, it is compulsory and it must be produced in accordance with specified format and guidelines by the law. The reason behind applying these particular format and guidelines in financial accounting is to easily distinguish the financial accounts of different organizations. In contrast, management accounting is not controlled or supervised by agencies or companies by the law because the information provided by management accounting is for the internal use only and it is not available to the public. Therefore, there is no public interest that needs to be protected. In addition, the managerial accounts are optional and not prepared in particular principals or format by the law. They are prepared in a format that is understandable and usable to the internal users within an organization.
...(download the rest of the essay above)