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Difference Between Financial Accounting and Managerial Accounting

Financial accounting is that field of accounting that treats money as a means of measuring economic performance instead of (as in cost accounting) as a factor of production. Financial accounting gathers and summarizes financial data to prepare financial reports such as balance sheet and income statement for a firm’s management, investors, lenders, suppliers and other stakeholders. (Business dictionary). Financial accounting is very mandatory that is it must be done. Several organizations like Securities and Exchange Commission (Sec) and the tax authorities prepare financial statements whereas managerial accounting is not compulsory. No organizations specify what is to be done. Managerial accounting is optional that means is the information required or useful?

Managerial accounting is the process of identifying, measuring, analyzing, interpreting and communicating information in the pursuit of a company’s business goals. This can also be said to be the process of preparing management accounts that provide accurate and timely key financial and statistical information required by managers to make day to day and short-term decisions (Mellissa bushman). However, certain aspects of these two fields are very different. Managerial accounting provides information for external users of accounting data such as investors and creditors. Also, managerial accounting provides information for internal users which include employees, managers and so on.

The internal users of managerial accounting need it to review financial information about a company’s financial statement. They also use non financial information about the company such as computer data and customer information. The internal users assess the performance of a particular sub-unit of a particular company. In conclusion, managerial accounting focuses on past and present information as well as forecasting future financial transactions. Financial accounting has external outsiders like the shareholders and the government. The summary which is usually annual is either written in the profit and loss account, balance sheet or the cash flow statement.

Accounting is called the language of business because all organizations set up accounting information system to communicate information to help people make better decisions. There are several types of accounting information users. Some of which are external and internal users.

The external users comprises of the lenders, shareholders and government while the internal users are managers, officers and internal auditors.

External users: this are users of accounting information are not directly involved in running the affairs of the organizations. Some of which are directors, lenders, customers, suppliers and so on. They have limited access to an organization’s information and their decisions depend on the information that is received.

Financial accounting is used to help external users by providing them with financial statements which are called general purpose financial statements.

Lenders:

These are individuals who loan money or other resources out either to any organizations, banks, mortgage or finance companies. This lenders look for information that would help them assess whether the organizations or companies would be able to pay back.

Shareholders (investors):

These are owners of a corporation. The accounting reports gotten are used in deciding whether to buy, hold or sell stock. The shareholders usually elect a board of directors to oversee their interest in the organization. Since the directors are responsible to the shareholders, their information needs to be similar.

External (independent) auditors:

This auditor examines the financial statements to verify that they are prepared according to General Accepted Accounting Principle (GAAP).

Labor unions:

They use the financial statements to judge the fairness of wages, assess job prospects and bargain for better wages.

Regulators:

These individuals often have legal authority over certain activities of organizations. For example, the IRS (internal revenue service) and other tax authorities require organizations to file accounting reports in computing taxes. Other regulators include utility boards which use the accounting information to set utility rates and securities regulators that require reports from companies that sell their stock to the public.

Suppliers:

They use the accounting information to judge the soundness of a customer before making sales on credit.

Customers:

They use the financial reports to assess the staying power of potential suppliers.

Internal information users:

These are users of accounting information that are directly involved in managing and operating an organization. The information that is received is used to help improve the efficiency and effectiveness of an organization.

Research and development manager:

They use this information to see projected cost revenues of any proposed changes in products and services.

Purchasing manager:

They need to know what, when and how much to purchase.

Human resource manager:

They need this information about employees, payroll, benefits and performance.

Production managers:

This information is needed in other to monitor cost and ensure quality.

Distribution managers:

This information is needed for timely, accurate and efficient delivery of products and services.

Service managers:

This information is required on the cost and benefits of looking after products and services.

Internal auditors:

They test and design their employees internal control- the internal control are procedures designed to protect company property, ensure reliable reports, promote efficiency and encourage adherence to company policies.

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