Financial Accounting

Accounting is the process of collecting, classifying, analyzing, organizing, and reporting financial information. The accounting function is central to any business and, above all, a key measure of a company’s progress, profitability, and profitability. The primary purpose of this feature is to provide financial information to internal and external stakeholders of the enterprise. Such data is essential for decision-making by various stakeholders (Johnston, Wilson, Keers, Medlen & Walters, 2017, p. 12). Accounting is broadly divided into management accounting and financial accounting. Financial Accounting deals with the preparation and reporting of company financial information to external stakeholders such as the shareholders, government, financial institutions, and suppliers, among others. It is an important measure of financial health to external stakeholders. On the other hand, management accounting deals with the preparation of internal financial reports of a company to be used by internal stakeholders for planning and decision making. Users of management accounts include the management and employees.

Similarity between financial and management accounting

Both of them deal with measuring, accumulation, recording and classifying of financial information. The reports produced by both systems are financial statements that are used for decision making by various stakeholders. The financial statements in both systems deal with revenues, expenses, cash flows, assets, and liabilities. They also have the same units of measurement which is monetary units. For instance, the US financial statements use dollars as their units of measurement.

Differences between financial and management accounting

Financial accounting is a requirement by law, and it is compulsory for all companies to provide periodic financial accounting reports. The Securities Exchange Commission (SEC) is mandated to ensure that all US companies comply with this law. On the other hand, management accounting is discretionary upon the organization (Weetman, 2016, p. 43). It only provides internal reports relevant to various operational and managerial functions. For instance, cost statements help the management to decide on the most viable products to produce.

The information contained in cash flow statement, balance sheet, owners’ equity among other books of accounts is used by the management to make the crucial business decision. The information can be used to calculate the financial ratios that show the business trend, therefore, guiding the decision-making process.

The accounting function is no doubt at the core of the running of companies. The success of any firm is highly correlated to the effectiveness of the accounting function. Accounting information ensures the continued survival of a business creating efficiency. Accountants are the ‘eyes’ of the company, and they have the responsibility to ensure that they produce high-quality financial information.

References

Johnston, R., Wilson, C., Keers, B., Medlen, A., & Walters, B. (2017). Financial management.

Weetman, P. (2016). Financial and management accounting. Harlow: Pearson.