When deciding on a career, many people consider accounting. There are two different types of accounting information: management accounting and financial accounting. They both play an important role in the development of a robust environmental policy that will contribute to long-term organizational success. Management accounting provides information for managers inside an organization who direct and control the operation. Financial accounting provides information to stockholders, creditors and others who are outside the organization.
Financial accounting is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders. The fundamental need for financial accounting is to reduce principal-agent problem by measuring and monitoring agents' performance and reporting the results to interested users. Financial accounting is used primarily by those outside a company or organization. Financial reports are usually created for a set period of time, such as a fiscal year or period. Financial reports are historically factual and have predictive value to those who wish to make financial decisions or investments in a company.
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Financial accounting only deals with financial data and nothing else. It is regulated by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB).
Â Financial accounting is time consuming, the information may be delayed for a short period of time. The information in financial accounting provides precise data for external audiences to review. Financial accounting report covers the whole organization and not just one department. The definition for financial accounting is: "A major branch of accounting involving the collection, recording and extraction of financial information, and the summary of it in the form of a periodic profit and loss account, a balance sheet and a cash flow statement in accordance with legal, professional, and capital market requirements." (Glossary, 2004)
Managerial accounting is used primarily by those within a company or organization. Reports can be generated for any period of time such as daily, weekly or monthly. Reports are considered to be "future looking" and have forecasting value to those within the company.
There exist quite a lot of differences between them. The differing characteristics mainly include the format, the objective, the nature, the users of information, the types of information, regulatory oversight, and frequency of reporting.
1. The Format
There is no pre-determined format for management accounts. They can be as detailed or brief as management wish. However, the format of published financial accounts is determined by several different regulatory elements such as company law, accounting standards, stock exchange and etc.
2. The Focus
Management accounting can focus on specific areas of a business' activities. For example, they can provide insights into performance of products, separate business locations, departments/divisions and so on.
Financial accounts concentrate on the business as a whole rather than analyzing the component parts of the business. For example, sales are aggregated to provide a figure for total sales rather than publish a detailed analysis of sales by product, market etc.
3. The Nature
Management accounting usually covers a wide variety of non-financial information. For example, management accounting often includes analysis of employees(number, costs, productivity etc.), sales volumes(units sold etc.), customers transactions(e.g. number of calls received into a call centre). Management accounts largely focus on analyzing historical performance. However, they also usually include some forward-looking elements. e.g. a sales budget and cash-flow forecast. In the meanwhile, most financial accounting information is of a monetary nature and financial accounts present a historic perspective on the financial performance of the business.
Financial accounting rules are set by the users who agree among themselves on the regulations for GAPP. This is objectively verifiable, data which must meet audit criteria to be acceptable. It is therefore considered reliable.
Management accounting rules are set within the company to accomplish management objectives related to adding value to the company. This is data that could be soft, or estimates, and that must only improve the values of decisions more than the cost of information. Management accounting must only be relevant to management decisions.
4. Users of Information
Financial accounting and management accounting provide information to two different user groups. Financial accounting primarily provides information for external users of accounting data, such as investors and creditors. On the other hand, management accounting provides information for internal users of accounting data. Internal users include employees, managers, and executives of the company.
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Types of Information
The type of information required by the different user groups also differs. External users primarily rely on financial information about the company. They analyze this information in conjunction with general economic information, such as information about the industry in which the company operates. External users focus on broad information that reveals the overall performance of the company as a whole. In addition, financial accounting only reports information on financial transactions that have occurred in the past.
Internal users need to review financial information about the company, such as financial statement information. They also use non-financial information about the company, such as customer satisfaction levels and competitor data. Internal users focus on detailed information that reveals the performance of particular subunits of the company, such as divisions or departments. In addition, management accounting concentrates on past and present information, as well as the forecasting of future financial transactions.
6. Regulatory Oversight
In order to protect public interest, financial accounting is regulated by the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the Public Company Accounting Oversight Board (PCAOB). In contrast, management accounting is not regulated by any specific agencies. This is because the information provided by management accounting is intended for internal users only and is not available to the public. Therefore, since there is no public interest, there is no need to protect public interest regarding this information.
7.Frequency of Reporting
The focus of financial accounting is reporting on historical information. The information is reported periodically. It is often broken down into monthly, quarterly, and annual reporting periods. At a minimum, financial accounting information must be reported annually.
On the contrary, management accounting information is reported continually. Internal users need to evaluate past, present, and potential future information in order to make decisions. Therefore, these users continuously need information in order to make the appropriate decisions.
In a word, the key difference between managerial accounting and financial accounting is that managerial accounting is intended to help managers within the organization make decisions. In contrast, financial accounting is intended to provide information to parties outside the organization.
On the other hand, there are many similarities between management accounting and financial accounting. The similarities mainly consist of certification, historical data review, currency measurement, terminology, techniques etc.
Individuals who wish to pursue a career in the areas of management accounting and financial accounting must pass exams in order to be certified. The certifications are Certified Management Accounting and Certified Public Accounting. In order to take the exam for either of these positions, one must have at least an associate degree in a financial field. To find out the specifics about exams in your area, you should contact your local university or community college for a testing schedule.
2. Historical Data Review
Both managerial accounting and financial accounting review historical data in order to prepare reports. For a financial accountant, this is done to compare the flow of the business in ement gcurrent period to those in the past. For the managerial accountant, this is done to determine how the business is doing currently and allows her to come up with a forecast for the financial state of the business.
3. Currency Measurement
Managerial accounting and financial accounting both use currency as the common unit of measurement in the reports and formulas they prepare. These reports are then condensed to provide tangible information for the business owner or executive about the financial state of the business. These formulas and reports are also used to create budgets for the business.
The accounting terminology used in both financial accounting and managerial accounting is generally the same. For example, credits and debits are used to describe money going in and out of the business. Accounts receivable are the monies owed to the business from other businesses or individuals. Accounts payable are the amounts the business owes to others.
Many of the techniques for both types of accounting are the same. For example, throughput accounting is a common technique for determining the actual cost per unit of products made at a manufacturing plant versus the amount of money a customer pays per unit. This technique factors in all the costs of production, including executive salaries, employee pay, utilities and other factors.
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Both financial accounting (FA) and management accounting (MA) have recently developed towards increased forward-looking perspective. FA has transformed from historical cost accounting for stewardship purposes to fair value accounting for valuation purposes and decision making, and MA from short-term planning and control to strategic planning and control.
Based on the analytical model by Hemmer & Labro (2008), these trends are not separate from each other. They argue that the forward-looking perspective of FA leads to forward-looking MA and is the origin of need for the convergence of FA and MA. Drawing on Hemmer & Labro we build a theoretical framework for analyzing this convergence. On the basis of our analysis, we argue that recent development of information technology towards increasing integration is the main enabler of this convergence process. We argue further that the convergence is a much broader phenomenon than claimed by Hemmer and Labro.
Financial and Management accounting both play a big role in any organization. Financial delivers financial information to the external individuals where as management delivers financial information to the internal individuals such as managers. Lava Rocks has several variable costs that Â must be included in the financial reports as well as the management reports. Profits can be measured by margin rations and with the break-even analysis. I personally recommend utilizing both to determine where Lava Rocks currently stands financially and where it will be in the following years. In conclusion, Lava Rocks has a few options when it comes to measuring its profitability.