Business Accounting basics: management accounting and financial accounting
What is accounting and who are the users of accounting?
Accounting is financial information relating to a business. The users may be managers, lenders, suppliers, investment analysts, community representatives, government, employees and their representatives, competitors, customers and owners. In accounting, a distinction is often made between what is termed “management accounting” and what is termed “financial accounting”.
Management accounting is internal reporting to managers within organizations, which is concerned with the provision, financial and statistical information to managers to make decisions about the ways in which an organization’s resources should be allocated, and help them carry out their management and control functions.
By contrast, financial accounting is external reporting, which is concerned with the provision of information to users other than managers. Most organizations publish periodic financial statements which provide external groups with information about the results of past activities, for use in investment, raise capital, income tax and variety of other applications. However, it is also generating information for use internally, indicating expectations for future, in order to assist management in planning activities and allocating resources for forthcoming periods.
What are difference between financial accounting and management accounting?
According to Mclaney Atrill, there are six main areas of difference which can be summarized as Nature of the reports produced, Level of detail, Regulations, Reporting interval, time orientation and range and quality of information.
Nature of the reports produced. Financial accounting reports tend to be general purpose. The most of it are monetary nature. On the other hand, Management accounting reports are often specific- purpose reports, they are designed either with a particular decision in mind or for a particular manager, such as analysis of employee, sales volume and customer transactions. For few businesses, it has a financial nature.
Level of detail. Financial accounts concentrate on the ‘macro’ analysis of business rather than analysis the component parts of the business, they may be aggregated and no details. However, Management accounting reports often focus on specific area of business and provide managers with considerable details like 4Ps (Place, product, price, promotion).
Regulations. Financial accounting reports are produced by several different standards of content and format, which are imposed by company law, stock exchange and other rule makers. But there is no pre-determined format for management accounting. They can be designed to meet the needs of particular managers.
Reporting interval. Most financial accounting reports are produced on an annual basis, less likely to produce half-yearly or quarterly. Dissimilarly, management accounting will be prepared when required. It can be any period.
Time orientation. Financial accounting reports reflect the performance and position of the business for the past period. For few purposes, it is used for making judgments about future. However, management accounting reports often present a future perspective as well as past perspective on the performance of the business.
Range and quality of information. Financial accounting places greater emphasis on the use of objective and verifiable while management accounting may be less objective and verifiable.
Why is management accounting and financial accounting important for business?
Firstly, it is indispensable for managers to make decisions which concern whether to continue with certain business operations invest in particular projects and sell particular products. Secondly, the business has to provide financial information of a specific format for government to collect taxes. Otherwise, it will be responsible to the legal liability. What’s more, it is also an important basis for raising capital, seeking investor, combining business and entering new business.
(By Cong Zhou)