Financial Management and Accounting

admin 0

Accounting is generally considered to have two distinct branches, management and financial accounting. Management Accounting, which seeks to meet the needs of managers and Financial Accounting, which seeks to meet the accounting needs of all other users. The differences between the two types of accounting reflect the different user groups they target. Briefly, the main differences are as follows:

  • Nature of the reports prepared. Financial accounting reports tend to be general purpose. That is, they contain financial information that will be useful to a wide range of users and decisions rather than being specifically designed for the needs of a particular group or set of decisions. Management accounting reports, on the other hand, often have a specific purpose. They are designed with a particular decision in mind or for a particular manager.
  • Level of detail. Financial reports provide users with a broad overview of the performance and position of the business over a period. As a result, information is aggregated and details are often lost. However, management accounting reports often provide managers with considerable detail to help them with a particular operating decision.
  • Regulation. Financial reports, for many companies, are subject to accounting standards that attempt to ensure that they are produced with standard content and in a standard format. Legislators and accounting standard setters impose these standards. Since management accounting reports are for internal use only, there are no regulations from outside sources regarding the form and content of the reports. They can be designed to meet the needs of particular managers.
  • Report interval. For most companies, financial accounting reports are produced annually, although many large companies produce semi-annual reports and some produce quarterly reports. Management accounting reports can be produced as often as required by managers. In many companies, managers receive certain monthly, weekly, or even daily reports, allowing them to check progress frequently. In addition, special reports will be prepared when required (for example, to evaluate a proposal to purchase machinery).
  • time horizon. Financial reports reflect the performance and position of the business during the previous period. In essence, they look back. Management accounting reports, on the other hand, often provide information about future performance as well as past performance. However, it is an oversimplification to suggest that financial accounting reports never incorporate expectations about the future. Occasionally, companies will disclose projected information to other users in an attempt to raise capital or fight off unwanted takeover bids.
  • Variety and quality of information. Financial accounting reports focus on information that can be quantified in monetary terms. Management accounting also produces such reports, but it is also more likely to produce reports that contain information of a nonfinancial nature, such as measures of physical quantities of inventories (stocks) and production. Financial accounting places greater emphasis on the use of objective and verifiable evidence when preparing reports. Management accounting reports may use information that is less objective and verifiable, but they do provide managers with the information they need.

We can see from this that management accounting is less restricted than financial accounting. It can be based on a variety of sources and use information that has varying degrees of reliability. The only real test that should be applied in evaluating the value of the information produced to managers is whether or not it improves the quality of the decisions made.

The distinction between the two areas reflects, to some extent, differences in access to financial information. Managers have much more control over the form and content of the information they receive. Other users have to rely on what managers are willing to provide or what financial reporting standards say must be provided. Although the scope of financial accounting reports has increased over time, fears about loss of competitive advantage and users’ ignorance of the reliability of forecast data have led companies to resist providing other users with the detailed and extensive information that is available to managers.

Leave a Reply

Your email address will not be published. Required fields are marked *