Financial and Managerial Accounting

Financial and Managerial Accounting

According to the Illinois State Board of Education financial accounting is “the recording and reporting of activities and events affecting the money of an administrative unit and its program. Specifically, it is concerned (1) with determining what accounting records are to be maintained, how they will be maintained, and the procedures, methods, and forms to be used; (2) with recording, classifying, and summarizing activities or events; (3) with analyzing and interpreting recorded data; and (4) with preparing reports and statements which reflect conditions as of a given date, the results of operations for a specific period, and the evaluation of status and results of operation in terms of established objectives (2005).”

Cal Poly defines management accounting as “the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information used by management to plan, evaluate, and control within an organization and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies, and tax authorities (1994)."

Key differences between the two disciplines are defined in the following chart.

Management Accounting Financial Accounting

A management accounting system produces information that is used within an organization, by managers and employees A financial accounting system produces information that is used by parties external to the organization, such as shareholders, bank and creditors

Management accounting helps management to record, plan and control activities and aids the decision making process. Financial accounting provides a record of the performance of an organization over a defined period and the state of affairs at the end of that period.

There are no legal requirements for an organization to use management accounting. Limited companies must, by law prepare financial accounts.

Management accounting can focus on specific areas of an organisation’s activities. Information may aid a decision making rather than be an end product of a decision. Financial accounting concentrates on the organization as a whole, aggregating revenues and costs from different operation. Financial accounts are an end themselves.

Management accounting information may be monetary or alternatively non monetary. Most financial accounting information is of a monetary nature.

Management accounting provides both an historical record of the immediate past and a future planning tool Financial accounting presents an essentially historical picture of past operation.

No time span for producing financial statements Financial statements are required to be produced for the period of 12 months.

No strict rules govern the way in which management accounting operates. The management accounts and information are prepared in a format that is of use to managers Financial accounting must operate within a framework determined by law and IASs. In principle the financial accounts of different organizations can be easily compared.

Management accounting has no specified format. There are no specific statements which should be produced Financial accounts are supposed to be produced in accordance with a specified format by IAS or law.

Source: The Malawi College of Accounting

Financial accountants produce reports about a corporation’s performance that are mainly used by outside parties. These reports include the balance sheet, statement of cash flows and the income statement. These reports are prepared according to Generally Accepted Accounting Principles (GAAP). From these reports investors and creditors can make decisions about the health of the corporation and determine if they are interested in investing. Financial accounting reports are also used in daily business management to ensure the business is running smoothly. The statement of cash flows is the most important tool produced by financial accounting. In order to maximize cash flow a corporation must know when and where cash need occur and the best sources to meet those needs ( http://www.sba.gov). For a new corporation a cash flow projection is required to determine when these needs will arise. For established corporations trends of cash flow are important. Paying attention to the statement of cash flows allows a corporation to make adjustments to daily operations to ensure cash is available to meet operating expenses.

Managerial accountants produce reports that are mainly for decision making inside