Analysis of Financial Accounting and Management Accounting - Research Paper Example

? …………………………………………………………………………..xxxxx ……………………………………………………………………….xxxx …………………………………………………………………………..xxxx ………………………………………………………………………xxxx @2012 Cost and management accounting Accounting has three major branches which include cost accounting, management accounting and financial accounting. These branches play different roles, but have the same aim of meeting the objectives of accounting. It is also important to note that three branches are much different from each other regardless of the fact that they are all branches of accounting (Gupta 2008). However, this paper analyzes only two branches of accounting namely financial accounting and management accounting. This report aims at analyzing these two branches in details by looking at each branch separately in regard to accounting. The paper also looks at the differences between the two branches of accounting basing on various factors. Financial accounting It is a branch of accounting that deals with finding and giving information on the profitability of a business. It aims at compiling financial statements of an organization and preparing them so that they show the financial position of a business. This branch is concerned with preparing these statements at the end of every financial year by analyzing revenues, assets, liabilities and other aspects of accounting (Drury 2007). It is the branch that handles the process of accounting and recording in the organization. It determines whether the business has made losses of profits in a certain financial year by preparing relevant financial statements. Managers use financial statements to determine the economic solidness of the company. This branch determines the financial position of an organization at a particular time for the purpose of other people like creditors, managers and shareholders of the business. Financial accounting entails providing information to external parties like suppliers and creditors to enable them make decisions (Ahmed 2008). Financial accounting provides managers with information on the company’s financial position, and this helps him to determine the performance of the company finances. With this information, the manager will be in a position to make financial decisions about the company like how to improve on the performance and to devise relevant strategies to improve on the performance of the company. A review of the balance sheet of the company helps managers to determine the cash levels of the company hence making the right decisions. The profitability trends obtained from the financial accounts is a critical tool for managerial decisions as it helps the managers to engage in those transactions which tally with the profit potential of the company (Ahmed 2008). Professionals under this branch have to get credibility from various authorities to ensure that they are fit to prepare financial statements and provide information to the relevant parties. For instance, in the United States of America the body that provides such credibility is the American Institute of Certified Public accountants. This body ensures that professionals who carry out the objectives of financial accounting meet the requirements and that they prepare the statements according to the framework (Gupta 2008). Therefore, financial accounting helps managers to determine whether the financial accounts have been prepared in accordance to the set regulations and to make decisions concerning payment of taxes. Financial accounting reduces the common problem of principal agent in an organization. It reduces agency problem by measuring the performance of agents and reporting to concerned parties so that this problem is reduced. It deals with summarizing data from the financial statements that it prepares. It then publishes these statements in annual reports for the external parties like creditors. Financial accounting has an accounting equation that it uses in calculations to help in preparing the statements (Eisen 2007). The equation is Assets = Liabilities + Owner’s Equity. Examples of statements that financial accounting is responsible for preparing include the Trial balance, Statement of financial position and the profit and loss statement. IFRS and SSAP are among bodies that give the formats that these statements should have. With financial accounting, managers are enabled to prepare and publish annual reports which are released to the public. This branch has certain objectives that it has to meet regarding accounting. For instance, it has the objective of ascertaining financial position of an organization by analyzing its wealth in terms of its assets, capital or liabilities. This branch also has the objective of ensuring proper control of assets in the business (Ahmed 2008). It has the responsibility of providing requisite information and proper management of funds in the business. Principles and assumptions also act as guidelines for financial accounting. It is from ascertaining the financial position of a company that managers and other users of financial accounting will be able to make sound financial decisions. It is quite evident that managers use balance sheet, income statement and cash flow statements in making solid decisions about their company. Management accounting This branch has the objective of supplying relevant information to the managers to enable them make effective decisions concerning the business. It provides this information to the various management levels in the business for effective decision making. It is the branch that ensures effective controls by enhancing them through the information it supplies to the management (Steffan 2008). The management is then able to make decisions basing on the information that financial accounting provides. It reproduces the financial accounts to enable the management understand them so that they are able to make decisions. This branch is also known as accounting for management. It provides information to managers in the organization rather than other parties outside the organization. Management accounting entails advising managers on various matters concerning the financial issues of the organization. For instance, they advise them on the financial impacts of projects in the business. This branch has the responsibility of formulating business strategies and carrying out internal audits of the organization (Drury 2007). Financial control and monitoring of the spending habits of the business is the responsibility of this branch of accounting. The professionals under this branch have the role of ensuring the integrity in their work. Management accountants explain the implications of the competitive landscape of a business to the managers so that they are able to apply certain policies to the organization. It aims at formulating and implementing strategies that the organization sets regarding financial reports. Management accounting has several tasks that it carries out in an organization. It provides some services to the organization like carrying out rate and volume analysis and price modelling. Management accountants also have the responsibility of analyzing profitability of products in the organization (Reddy 2004). This branch also has the obligation of carrying out cost analysis so that managers are able to make decisions given the information. Professionals in management accounting need certain qualifications set by bodies. Certain bodies set standards for management accountants. An example of such a body is the chartered Institute of Management (CIMA) and Institute of Management Accountants (IMA). Management accounting uses methodologies to analyze financial statements and provide this information to mangers in the organization for effective decision making. One of such methodologies is the Activity-based costing that analyzes costs and other factors that managers consider in their decision making process. Information that this branch of accounting presents to managers should be future information rather than historical information. This is because this information is used by managers to make decisions regarding future of the business (Gupta 2008). The information is necessary for mangers to make decisions for the internal use of the business. This branch of accounting only dispatches information to internal users of the organization. Only managers get information from this branch, and they get information that is relevant for their decision making process. The model for this information is on the basis of support rather than on a case basis. Management accounting also entails analyzing the financial statements of a business and providing confidential information to the internal users only. They compute this information to make it easy for use by the managers of the organization (Steffan 2008). The computing of such information is through the management information systems. This is a system that aids in the analysis of the information and helps managers to make effective decisions on the basis of information provided by this branch. It acts as a reference for mangers under this branch to effectively make decisions in the business. Management accounting uses the accounting information from financial accounting to make decisions in the business. This means that there is a relationship between the two branches of accounting. This relationship comes about because one of the branches prepares financial statements so that the other branch analyzes the statements to provide information to the other branch (Eisen 2007). There is an interrelationship between the two branches because they are under accounting, therefore, work together in achieving the overall objectives of accounting. However, the two branches of accounting are quite distinct as they have different objectives, formats and other basis from which their differences are based on. The paper also analyzes these differences in details. Differences between financial accounting and management accounting Financial accounting aims at providing information to outside parties or rather to the external environment while management accounting aims at providing information to internal users in the business (Ahmed 2008). Financial accounting gives information to such users like shareholders or creditors who use this information to determine whether the business is making profits or losses (Reddy 2004). Management accounting provides information to internal users like managers who use this information to make such decisions that relate to them in the business. This means that management accounting deals with confidential information while financial accounting handles information that the public should know. Financial accounting prepares financial statements like trial balance and statement of financial statement. Management accounting prepares reports like feasibility studies. Statements that financial accounting prepare have to follow a certain format while those reports that management accounting makes do not have any standards to follow. They use scientific and statistical methods to arrive at these reports rather than using formats given by accounting bodies like IFRS. Management accounting prepares reports and analysis such as the budget and comparative analysis with the aim of arriving at particular monetary values that they use for decision making. This is unlike in financial accounting makes financial statements to establish the financial state of the business for decision making by the external users (Eisen 2007). This is because it concentrates on profitability or the liquidity of the business. Financial accounting is a requirement of the law while management accounting is not such a requirement. Therefore, there are formats that financial accounting has to follow while management accounting has no such formats for its reports (Gupta 2008). Reports for management accounting can be prepared at any time of the year like daily, weekly or monthly. This is unlike financial statements which have to be prepared at the end of each financial year and not just any time of the year. Management accounting highly focuses on the business future while financial accounting focuses on history or the past of the business (Steffan 2008). Preparing financial statements are the duty and role of the finance department of any organization while reports of management accounting are the responsibility of all mangers and not any specific department (Reddy 2004). This is because management accounting entails making decisions concerning the business, which is involving co-ordination of all departments in the organization. Financial accounting provides information that has its basis on the monetary values while management accounting provides information on either monetary or non monetary values. The objectives of the two branches of accounting differ in that management accounting aims at providing information to the managers for evaluation, planning and control purposes. Unlike financial accounting whose objectives are to disclose information regarding the financial state at the year end and gives the results about the business. The accounting process that financial accounting follows is different from that of management accounting. Financial accounting follows a full and complete process in recording, classifying and carrying out a summary to make it easy for analysis and the interpretation of such information. This is unlike in management accounting which does not use any process, rather carries out an analysis from the statements and cost ledgers. References 1. Ahmed,N, 2008. Financial accounting: a simplified approach: Atlantic Publishers & Dist: Pg. 890-990. 2. Banjerjee, B, 2005. Financial policy and management accounting 7th Ed: PHI Learning Pvt Ltd: Pg. 567-789. 3. Bhimani, A & Bromwich, M, 2009. Management accounting: retrospect and prospect: Elsevier: Pg. 34-67. 4. Drury, C, 2007. Management and cost accounting: Cengage Learning EMEA: Pg. 67-770. 5. Eisen, P, J, 2007. Business review series: accounting 5th Ed: Barron’s Educational Series: Pg. 345-356. 6. Gupta, A, 2008. Financial accounting for management: an analytical perspective: Pearson Education India: Pg. 56-79. 7. Opperman, 2009. Accounting standards: 13th edition: Juta and Company Ltd: Pg. 456-678. 8. Rajasekaran, V, 2011. Financial accounting: Pearson Education India: Pg. 456-789. 9. Reddy, R. J, 2004. Management accounting: APH Publishing: Pg. 56-145. 10. Steffan, B, 2008. Essential management accounting: how to maximise profit and boost financial performance: Kogan Page Publishers: Pg. 35-124. Read More