Financial accounting focuses on providing information for people outside the firm like creditors and outside investors. Management accounting on the other hand focuses on giving internal decision makers information which aids them in making financial and operational strategies (Horngren, et al. 2002).
Accounting and business finance are closely interrelated. The business arena often refers to accounting as "the language of business" implying that a better understanding of the accounting language will aid making better financial decisions (Horngren et al. 2002). Thus, in general, accounting is a prerequisite in understanding the important concepts used in financial accounting.
Basic knowledge in accounting is imperative in understanding finance. As stated earlier, concepts which are commonly used in accounting appears in financial management. For instance, a company which needs to determine the profitability of an investment needs to be acquainted with the effects of different transactions on the income statement of the business organization. ...
Thus, decision makers need to be adept in speaking the language of business in order to be able to come up with financially efficient business decisions geared to help in attaining the financial goals of a firm.
In the early part of this paper, the classification of accounting according to users has been discussed. It should be noted that these two different fields of accounting has different relationships with business finance. Financial accounting which is more concerned with the reporting of historical financial information becomes a reflection of the how the financial aspect of business is managed, while managerial accounting is almost identical in function with business finance as it directed toward the future of the firm (Finance 2006).
The company's financial statements are the product of financial accounting. These documents clearly show how the business organization is performing in terms of income, capital structure, asset growth and other numerical information (Horngren et al. 2002). It should be noted that the company's financial performance is a direct result of how business finance is conducted by decision makers. The profit or loss in the financial statement, the growth in total assets, and how they resources are financed becomes an indication of how well a business organization is attaining its financial goals. Financial accounting is a yardstick revealing how business finance is achieving its goal of maximizing shareholder value. With this, financial accounting is very important in ascertaining the efficiency of financial decisions in a company. Business finance can be further modified or improved by looking at a firm's various financial statements.
Management accounting takes a step further by having a