Analysing the “process of identifying, measuring and communicatin...


Accounting is one of the oldest disciplines societies around the world have developed stretching to 4000BC. It has developed alongside business and economic progress to assist in decision making by businesses, town councils and non-profit organizations among other entities that require their finances to be managed and reported (Davey et al., 2000). The American Accounting Association (AAA) formed a committee in 1964 to define accounting as "the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information." in their publication, "A Statement of Basic Accounting Theory" (1966, p. 1). This definition has served as a backbone for the development of Generally Accepted Accounting Principles (GAAP) and the production of reliable accounting information. The equitable application of this statement towards both financial accounting and management accounting shall be reviewed and discussed in this essay.

For the purpose of analyzing whether or not the above statement applies equally to both financial and management accounting, the two branches of accounting must first be explained. Financial accounting is concerned with the overall financial wellbeing and performance of the company. The information in financial accounting is generally arranged into four reports; the statement of cash flows, the statement of financial position, the statement of changes in owner's equity and the balance. (Atrill et al, 2009, p.17) These reports contain information useful for external parties for many purposes, mainly but are not restricted to investment, taxation and crediting. In "A Statement of Basic Accounting Theory" (1966), AAA described management accounting to be:

Lady using a tablet
Lady using a tablet


Essay Writers

Lady Using Tablet

Get your grade
or your money back

using our Essay Writing Service!

Essay Writing Service

The application of appropriate techniques and concepts in processing the historical and projected economical data of an entity to assist management in establishing plans for reasonable economic objectives and in the making of rational decisions with a view towards achieving these objectives. (p.37)

It illustrates the use of financial information being analyzed for internal users of the company so that they may make plans and decisions to achieve their overall objective. While financial and management accounting both comprise of the same characteristics and information, the application is very different to one another.

The "process of identifying, measuring and communicating economic information" (AAA, 1966, p.1) is one that applies to both financial and management accounting, albeit with different purposes and regulations. As management reports are internal to the company and are made with specific departments in mind, the standards are not subject to the scrutiny of auditors. These reports may be made as frequently as is necessary and only include information relevant to department or decision it is made for (atrill et al., 2009, p.14). Financial reports, being for external parties, follow set rules and regulations such as GAAP or International Financial Reporting Standards (IFRS).

The users of financial and management accounting also differ. As discussed above, the users of financial accounting are broad and are not just restricted to the senior management of the business. Government will use the information to determine if the business can fulfil tax requirements. Banks would assess if it should lend the business money or if it is able to meet repayments. Investors and financial analysts would need to understand the performance of the company they invest in. Many other users of financial accounting information also exist external to the company, such as auditors, suppliers, customers and employees (Davey et al., 2000, p.20-21). However, Management accounting would only be used by the management of a company in order to make plans or decisions based on the information to ensure that the company is in line with achieving the objectives it desires.

A key characteristic of accounting information is that it must be relevant. This means that the information it contains must be able to "permit informed judgments and decisions by users of the information" (AAA, 1966.). Both financial and management accounting and their users require the information they receive to be able to influence the decisions that they make. For example, to calculate income tax the company is required to pay, the financial statements would show the government information pertaining to the income of the company. It would not show information like the breakeven quantity for the products the company produce as it holds no relevance to the government or any other external user of the report. However, as financial reports are prepared for a range of users with different needs, it is difficult to maintain a high standard of relevance for all users while meeting the other characteristics of understandability, reliability and comparability (AAA, 1966, p.27). This is not the case for management accounting. Relevance is of the utmost importance for internal reporting as these reports are used primarily for decision making purposes.

Lady using a tablet
Lady using a tablet


Writing Services

Lady Using Tablet

Always on Time

Marked to Standard

Order Now

To be able to identify and measure economic information of a company, the AAA explained that the "standard of quantifiability" is of importance to accounting (1966, p.11-12). Atrill improved upon the terming of this characteristic as comparability (2009, p.4). It is required of accounting information to be able to show a comparison of performance, be it for financial or management accounting. Financial analysts and prospective investors alike may compare the performance of the company from one period to another to assess how the company is progressing. For the management of the company, they would compare actual and budgets figures to aid in the controlling of different departments to achieve their plans and objectives. The difference between the two branches however, lies in the unit of measurement. Financial reports would tend to exclude information that is not measured in monetary terms, therefore excluding information that may be relevant. Management reports would contain more items that may be quantified such as units to produce.

The AAA also emphasized that the communication of the information is a key factor of accounting information (1966, p.1)). Atrill relates this point to the characteristic of understandability (2009). Indeed, it is important to be able to understand any information given in order to "permit informed judgements and decisions" (AAA, 1996, p.1). However, the understandability of information is a characteristic which is much more crucial to financial accounting. As stated in the previous paragraph, many users use financial reports of a company for different purposes. The information in these reports must be presented in a way that allows people outside of the company to be able to understand, given the fact that they do not know the internal workings of the firm in question. Internal reports do not stress upon understandability beyond the minimum standard as the management should have a better understanding of the company.

Despite the contrast of the importance in characteristics, the AAA statement to generally define both branches of accounting seems to hold true. While it is shown above that certain characteristics tend to affect one branch more than the other, it cannot be denied that information prepared in both financial and management accounting maintain a certain degree of these standards, sometimes expressing more of one standard than the rest.