Financial and Managerial Accounting, Essay Example

Introduction

Accounting is a term used to describe events, such as recording transactions, storing financial records, performing internal auditing, analysis, and reporting of financial information to the management and finally giving advice on taxes. It deals with control of financial information to show profit or loss over a specified period.  Accounting breaks down into other categories such as financial accounting and managerial accounting among others.

Financial accounting is the process of analyzing, classifying and recording of economic data and communicating to the management which uses the information in making critical decisions regarding the business or the corporate. Financial statements are used as the reporting system to the administration (Gitman, Juchau & Flanagan, 2015). The financial statements are developed according to the imposed standards by the public about the national professional organizations, company acts for various nations and the international accounting standards board.

Managerial accounting is a category of accounting that provides particular purpose statements, and it reports to management and other persons in the organization. Information generated by this type of accounting is for internal uses and is not restricted to standards or legal requirements. Management accounting is future-oriented. Therefore, it is proactive, unlike financial accounting, which is historical and relies on past information to report to external users. It is required to make decisions that affect the organization (Gitman, Juchau & Flanagan, 2015). Managerial accounting helps help managers improve financial and operational performance in that managers use information provided to formulate policies, plan and control activities of the organization, decide on alternative courses of action. Information from management accounting is vital to people and managers in the organization as it helps them carry out management functions of planning, controlling, organizing, evaluating performance and making financial decisions like making or buying production equipment. Managerial accounting allows managers to improve operational and financial performance by using the information in budget preparation and making a comparison with actual results of operations. Managers will also be sensitive to costs associated with their decisions and courses of action. Financial accounting helps external stakeholders make informed decisions by obtaining information on how efficiently the management is performing its steward function, i.e., how profitably the administration runs the business and how much they can afford to withdraw for their use.

Differences between Financial and Managerial Accounting

Type of Information

Management accounting tends to be more detailed in its reporting and provision of information in that it involves both quantitative and qualitative information that is relevant to managerial decision making. However, financial accounting tends to provide summarized information based on quantitative information only and does not go into details on qualitative data. Reports in financial accounting are more summarized as opposed to being detailed. Financial accounting is based on concepts of monetary value in nature, that is no qualitative information is used in commercial accounting (Theriou, 2015). On the other hand, managerial accounting incorporates both monetary and non-monetary aspects of accounting. It includes qualitative elements such as a loss of efficiency, and by so doing it helps managers to make significant operational and financial decisions.

The Accuracy of the Information

Managerial accounting provides information regarding cash rounding of estimates of figures for future date hence not entirely probable regarding the accuracy of information.  On the contrast, the accuracy of financial accounting is likely because information is provided based on figures that are already realized (Weygandt et al., 2015). Financial accounting is an end in itself because it revolves around legal requirements of preparation and auditing of financial statements. However, managerial accounting is a means to itself because its records are prepared so that they can be used to arrive at the end- to make decisions.

Legality

It is not a legal requirement that management accountants must prepare financial statements as per the law. On the other hand, it is legal and a demand by the rule that Company Acts require a business to prepare financial statements and reports and present them to the public who use the stories to make decisions about the company.

Regarding Form

Management accounting does not provide for any standard format of preparing management accounts. It follows any size as long as the information is well presented to internal users and management of an organization to enhance decision-making. On the other hand financial accounting prescribes a format for preparing published financial statements and accounts following a standard size as guided by Generally Accepted Accounting Principles (GAAPs) and International Financial Reporting Standards (IFRS).In financial accounting, there are concepts which accountants must adhere to in preparing financial statements (Weygandt, Kimmel & Kieso, 2015). The accountants are guided by uniform concepts and standards of reporting, which is not the case in managerial accounting.

On the Scope of Coverage

Management accounting tends to focus on segments in an organization like a department and provides information specifically geared towards that specific segment to the management to make decisions on improving the operational and financial efficiency of the section (Theriou, 2015). On the contrast, financial accounting looks at the organization as a whole and reports on the entire operational performance of the organization to users and interested parties and management of the organization.

In comparing both financial and managerial accounting, the two are similar regarding the provision of information that is relevant to shareholders and managers to make informed decisions.

References

Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.

Theriou, N. G. (2015). Strategic Management Process and the Importance of Structured Formality, Financial and Non-Financial Information. European Research Studies, 18(2), 3.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.