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Not only are accountants required to record and reflect an organization's business activities accurately but they should also place more emphasis on meeting the requirements of company management. Therefore, modern accounting is divided into two elements, financial accounting and management accounting. Both of them are based on accounting information which is recorded in accordance with business transactions. Financial accounting is the process that classifies, measures and records business transactions in order to prepare the financial statements after a specified period. However, management accounting is the process that identifies, collects and analyzes particular accounting information in order to help company managers to make decisions and plan and control the business. This essay will outline several common characteristics shared by financial and management accounting, and then describe their differences. Finally, there will be a discussion on how both financial and management accounting affect company management.
Financial and management accounting exist as the two elements of modern accounting share several key features in accounting practice. First and foremost, financial accounting provides information for internal users the same as management accounting does. Managers and shareholders are mainly internal users. Mangers are as company directors affect company management. They also discharge duties to assure business resources are protected and applied effectively and efficiently. Weetman (2006, p. 13) notes that managers are the direct participants in the business activities, so they are responsible for efficiency in using business resources. Shareholders are investors who use accounting information as evidence to decide whether to buy, hold or sell their shares. They are also interested in the organization's financial position and performance.
Furthermore, financial accounting is built on the basis of daily bookkeepers' records of business transactions. A particular source of information presented in financial statements is used in management accounting for its purpose in company management. Therefore, the same accounting information basis will be helpful with company management. Finally, they share two characteristics of accounting information, relevance and reliability. All the information collected for the purpose of financial and management accounting is required to be related to particular business activities. It is very important to collect relevant data for the preparation of financial statement. Likewise, managers will make decisions according to the relevant analysis in the accounting information. A recent study conducted by Garrison and Noreen (2003, p. 8) shows that both financial and management accounting are required to provide relevant accounting information for the management of companies. Reliability is another characteristic that accounting information should avoid significant frauds. Both financial and management accounting place a heavy emphasis on the accounting information. For instance, managers can directly read figures, such as profit and loss in financial statements. Therefore a true and fair view from financial accounting is required in management accounting. Management accountants also predict future events and make decisions base on reliable financial accounting information.
However, financial accounting also provides services to the external users, such as government, debtors, suppliers, customers and so on. Several characteristics of financial accounting are different from that of management accounting, which helps in providing information to both internal and external users. Firstly, it is important for the company to identify segments of the business. An overview of business activities is presented by financial accounting via multiple reports on a period basis. The main role of financial statements for company management is that mangers communicate the primary information of financial performance and position to their users. The financial statements can show how successful the company achieve core objective and express an impression with the company as a whole. In contrast, management accounting can provide reports for divisional departments. Sometimes mangers should consider the particular accounting information when they make future plans for different departments. Drury (2008, p. 19) suggests that the profitability of routine information can be divided in products, services, customers and distribution channels segments.
Secondly, financial statements are prepared follow by definite accounting principles and legal requirements which were built on the basis of accounting regulatory bodies, such as International Accounting Standards Board, Accounting Standards Board in the UK and Financial Accounting Standards Board in the USA. Managers must have some assurance that the financial statements are presented with a true and fair view following the principles for their users. However, there is no requirement for management accounting to report due to the legal obligations. Instead, management accounting mainly concerns with the help in decision making for company managers.
Thirdly, financial accounting reports are prepared with the past events in the companies, such as annual reports in each year. For an example, mangers always evaluate their historic corporate and managerial performance from the statement of financial performance. In contract, management accounting is concerned with future information as well as past information, such as budget. This is important consider how management accounting affects company management. Companies make budget plans at the beginning of the predicting financial year on the basis of the past reports review and future analysis. Budgeting helps companies' limited resource be used in pursuit of managerial goals.
Finally, management accounting provides reports regularly rather than on an annual basis, which is the way that financial accounting provides reports. Financial accountants classify and record with business transactions duly, and then prepare the financial statements at the end of financial year. However, managers always make decisions in the complicated and competitive business situation. Management accountants provide several accounting information quickly in order to help with management's planning and controlling the company rather than a regular time.
To sum up, financial and management accounting come out because of their different services purpose. Financial accounting is concerned with providing financial information to internal and external users. Management accounting aims to satisfy the management requirements of particular information. Although they have several same characteristics, financial accounting differs management accounting in some area. Consequently, they affect company management in several ways.
DRURY, C. (2008). Management and cost accounting. London: South-Western.
GARRISON, R. H. & NOREEN, E. W. (2003). Managerial accounting. Boston: McGraw-Hill/Irwin.
WEETMAN, P. (2006). Financial and management accounting. An introduction. Harlow: Financial Times Prentice Hall.