Management and financial accounting are both branches of accounting which provide accounting information to the internal and external parties of an organisation. In other words, management accounting means providing accounting information to internal parties within the organisation such as owners, managers and even employees to help them to take better business decisions for the future and run the business well. However, financial accounting is concerned with preparing financial statements every year for external parties such as shareholders, creditors, regulatory authorities, bankers, competitors and customers so that they are able to assess the financial performance of the business.
Management accounting may offer more benefits to a business compared to yearly financial accounting. This is because management accounting firstly, does not need to abide by the Generally Accepted Accounting Principles (GAAP) to prepare the reports for the users of the managerial information. However, to prepare financial statements for the external users of the accounting information, that is, financial accounting needs to abide by the GAAP to remain consistent every time. For instance, a business should follow the accounting principle namely; money measurement when preparing the financial statements, that is, it should record only transactions that can be expressed in monetary terms. On the other hand, management accounting reports include non-monetary items as well such as the quantity of goods which help the managers to better understand the managerial information.
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Moreover, management accounting reports focus on every small parts or departments of the organisation which will help the managers to better control the cost and profitability of commodities and departments. On the other hand, financial accounting reports disclose only the financial performance of the business as a whole and not the performance of each department as well as the exact cause of each performance. For example, in management accounting reports, information of each department is provided like sales department which will show the sales trend, the cause of any change in the sales trend and so on. This will enable the managers to better understand the cause of each performance and to decide which actions should be taken to improve it. However, the yearly financial accounting talks about the business as a whole which can be used to assess the value of the business only and not to manage the business.
In addition to this, management accounting reports provide the internal users of the accounting information with the future as well as past information. In other words, the reports will show the estimates of a project which will enable the managers to take better decisions about the future of the company. In contrast to, financial accounting is concerned with the provision of past information, that is, facts based on numbers that already exist which will help only to assess the financial performance of the business and not to decide about the future.
Also, management accounting is more beneficial than financial accounting because there are no legal requirements to produce the managerial information to the accounting information users. In other words, management accounting can choose whether to produce information or not and if the advantages of using the managerial information is greater than the expenses of producing it, then the managerial information can be produced by the business. On the other hand, for financial accounting, there is a legal requirement to prepare financial statements annually whether the information is beneficial or not to the management.
Another benefit that management accounting can offer a business is that managerial information reports can be prepared everyday, every week or even every month. These reports will help the managers to take decisions quickly about the business or different departments. However for financial accounting, financial statements like comprehensive income statement and statement of financial position are all prepared in details every year and those financial statements that are less detailed, are prepared and published every six months. Hence, financial accounting allows the management to take decisions only annually and not quickly which can affect the business negatively to some extent.
Thus, it can be seen that management accounting offers more benefits than financial accounting which enables the management to take better decisions quickly so that the business will run very well. However, financial accounting is also beneficial to some extent such as when preparing financial statements; it has to abide by the Generally Accepted Accounting Principles. Finally, it can be concluded that although management accounting is more beneficial compared to financial accounting, both the branches of accounting are significant in their own ways.
Choose a public company you have read about or seen on the news and (i) identify their Mission Statement and explain how this is translated into their day to day decision making and strategy and (ii) suggest the type of management accounting that could be appropriate for such an organisation. (Maximum 750 words) 45% of Marks
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The State Bank of Mauritius (SBM), is one of the leading financial institution based in Mauritius. Settled down in 1973, SBM started to provide its services mainly inside Mauritius. It was first listed on the Stock Exchange of Mauritius (SEM) in 1995 and is now the second largest investor ever listed on SEM. At first, SBM started trading under the name of State Commercial Bank under the guidance of the Government of Mauritius.
Its Mission Statement is: "Value creation for all stakeholders by achieving consistent improvement in returns and continued enhancement in service levels."
A bank is always surrounded by challenges coming from within the country such as government policies and also from the outside such financial recessions or crisis. In such a case, the smooth running of any bank would get in turbulence. Also, counting the number of customers a bank has, it would a much hectic task to be able to handle, both for the management of the bank and for its employees. Following these critics, SBM has always been very keen on improving towards its customers by putting much emphasis on employee responsiveness on a day to day basis and also in a way creating space for more loyal customers.
For the better satisfaction of its employees and customers, SBM has also moved from the typical bureaucratic system to modern banking system through the setting up of Automatic teller Machines (ATM) to E-Banking system.
Following the wide range of customers, both locally and internationally, SBM not only focuses in providing a large base of savings, investment and financing products but it also offers a large selection of cards planned to suit needs of specific customer needs. Following the new market trends and also with the collaboration of SBM's diversification strategy, the firm is now looking to further develop its Small and Medium Enterprise business as well as Wealth Management & Private Banking services, by providing tailor-made financial planning solutions, investment advice and services to corporates, high net worth individuals and families, both locally and abroad.
In its quest of success, SBM is laying greater emphasis on international operations as well as non-banking activities. Following the opening of its first international branch in India in 1994, SBM has gone deep further into opening more international branches in Madagascar.
Being able to manage such a massive corporate and also looking after its smooth running both nationally and internationally is a major risky adventure especially while being in a very volatile financial environment.
Among the various management accounting that exists, the State Bank of Mauritius follows a risk management accounting policy. Risk management is the identifying, measuring, managing and the reporting of risks of the company.
It is the best suitable policy that SBM could follow as it would ensure a safe, strict and effective control. According to SBM's statement its risk management structure is independent from the business entity on order to avoid conflicts of interest, and is overseen by the Board of Directors.
Risks for SBM would mean the level of potential losses or profit foregone due to internal and external factors. Also, SBM distinguishes its risks from being those related to financial statements and risks involving strategic/business and legal requirements.
There are many aspects that can be found under the risk management policy of a bank.
One is the Credit risk management, where credit risk is the risk of loss resulting from the failure of a borrower or fails to honour its financial or contractual obligations to SBM as and when they are due on demand. Euro zone crisis, country crisis, sovereign risks are some of the different feature found under credit risk management.
Another aspect is the Market risk management where any problem arising in the market would cause disorder in the company. Some aspects of it are the interest rate risk, foreign exchange risk, liquidity risk.
There is also the operational risk management that is the risk of loss resulting from scarce or failed internal processes, people, systems or external events that is risks within the company.
Various measures are being adopted to control such risk such as internal auditing, risk assessments and key risks indicators for a better control of the management.
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Founded in 1973, SBM is the 2nd most influential bank in Mauritius and also forms part of Madagascar and India. With its massive incorporation, the State Bank of Mauritius promises to be a leading provider of premier financial services all over its branches through a dedicated and professional team
a) Printed Books
Drury Colin. (2009). Management Accounting for Business. (4th Edition). Place of Publication: Andover.
Weetman, Pauline. (2010). Management Accounting. (2nd Edition). Place of Publication: Harlow.
2. Online Articles
Mitchell Holt, Demand Media. (2012) 'Management Accounting vs. Financial Accounting'. Houston Chronicle. Available from: http://smallbusiness.chron.com/management-accounting-vs-financial-accounting-3987.html
Jennifer VanBaren, eHow Contributor. 'The Types of Management Accounting'. Available from: http://www.ehow.com/list_6738707_types-management-accounting.html