Financial and Managerial Accounting Comparison

Financial and Operational Accounting: A Comparison

Financial accounting is the branch of accounting focused solely on producing company financial statements that provide useful financial information to external users. Hovewer, the Institute of Management Accountants defines management accounting as accounting branch that provides financial and non-financial information relevant to managerial decision-making, planning of a company’s performance management system, and the management functions of planning, control, and control. Define. Guide and execute strategy. This paper attempts to compare and contrast financial and operational accounting.<\/p>

Differences between Business Accounting and Financial Accounting

The first difference concerns the primary users of the financial information provided. Financial accounting provides financial information to the external users of an entity. Hermanson, Edwards, & Maher (1998) identifies these external users into the following groups: owners and prospective users, creditors and lenders, employees and their unions, customers, government units, and the general public. Each of these users has their interests and seek for the financial accounting information provided in the financial statements. On the other hand, managerial accounting information is intended for an entity\u2019s internal users who are the managers with the aim of helping them make business decisions and manage operations.<\/p>

Practical Applications of Financial and Managerial Accounting

A practical example of the use of financial information is when a company wishes to go public, that is, wants to raise funds by selling its ordinary shares in a stock exchange such as the New York Stock Exchange. In this case, potential investors need information such as the revenue or sales and profits before making an investment decision. If the company has been making profits, an investor will decide that it is a sound investment and provide his funds by subscribing to the share offer. Other external users such as creditors would like to know whether a firm can pay its loans and such information is in the cash-flow statement which shows the ability to generate sufficient cash flows to meet its obligations. Employees would like to know whether the firm can pay its salaries and they consider the profits which are part of financial accounting information.<\/p>

Managerial accounting seeks to help managers in their day to day functions which are planning, directing, and controlling operations and assist in making various business decisions. A practical application where each company applies managerial accounting is in making product costing decisions. For instance, a company that makes refrigerators, it must determine the cost of one producing one refrigerator. Managers want to know the cost of the raw materials, labor, and overheads in making one or a batch of refrigerators and this enhances control over costs. Such decisions are meant only for the firm\u2019s internal users, and the information enables them to set an appropriate price.<\/p>

Key Differences in Reporting

The primary product of the financial accounting process are the financial statements which provide monetary information on the performance of the entire company (Weil, Schipper, & Francis, 2013), for instance, the sales, the profits, the total assets. Also, the preparation of these statements is at the end of an accounting period which is at the end of every year. On the other hand, managerial accounting produces internal reports as per the request of the management, that is, these management reports might be on a daily, weekly, or monthly basis (Maher, Stickney, & Weil, 2012). Also, they do not cover the entire company but focuses on the business segments such as product, region, or divisions as well as providing both monetary and non-monetary information. For instance, management might seek a report on the performance of an individual product in a particular region, and such aim of such information is to make internal decisions such as to eliminate an underperforming product category.<\/p>

Compliance and Relevance

The financial accounting must follow specified rules regarding the preparation, format, and the content of the financial statements. The financial accounting statements prepared for the external users must be by the accepted accounting principles (GAAP) (Kothari, Ramanna, & Skinner, 2010). The need for GAAP is to provide assurance to the external users that the statements have been prepared following some ground rules to enhance comparability and reduce any misinterpretations. For instance, GAAP requires that financial statements are prepared on the historical cost basis as well as specifying the content and format of each of the four statements. On the other hand, it is up to the discretion of the management to define the contents and the format of the reports, that is, managerial accounting reports are not required to adhere to GAAP.<\/p>

As pointed out earlier, managerial accounting provides information to help managers plan, control, and direct business operations and assist in decision making. Therefore, this means that such information must have a strong orientation towards the future because planning and decision making involves the future (Collier, 2015). Some of the information might be based on past information, but it is integrated to assist implementing the strategy and shape the company\u2019s future. On the other hand, financial accounting uses purely historical information meaning that it reports on past events. A summary of past transactions might not be very useful for making futuristic decisions and as a result, such information might not be very relevant for decision making.<\/p>

Importance and Requirements

Financial accounting is mandatory for every firm particularly for those the publicly listed companies. Also, the other businesses must prepare their financial statements because the tax authorities require them to determine their tax burden. Therefore, it is not possible for a firm to survive without financial accounting. However, managerial accounting is not mandatory for companies since it is for internal purposes. The meaning is that a business can continue its operations without preparing the management reports.<\/p>

Conclusion

In conclusion, there exist many differences between managerial and financial accounting. The main areas they differ in are the primary users, the objectives, the output or product of each, the underlying basis of preparation, and whether it required or not. However, both are necessary where financial accounting will provide information to the external users such as creditors, suppliers, and the government while managerial accounting will provide information to the management to assist in the daily operations and making strategic decisions.<\/p>

References

Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons

Hermanson, H. R., D. S., & Edwards, J. D., Maher, M.W. (1998). Accounting Principles: A Business Perspective. Chicago: Irwin

Kothari, S. P., Ramanna, K., & Skinner, D. J. (2010). Implications for GAAP from an analysis of positive research in accounting. Journal of Accounting and Economics, 50(2), 246-286

Maher, M. W., Stickney, C. P., & Weil, R. L. (2012). Managerial accounting: An introduction to concepts, methods and uses. Cengage Learning

Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning