Financial Accounting and Its Comparison with Management Accounting
Financial Accounting
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. In other words we can say 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. It encompasses the entire system of monitoring and control of money as it flows in and out of the firm as assets and liabilities, and revenues and expenses. It involves the recording and summarization of business transactions and events. The financial statements include the balance sheet, income statement, and statement of changes in financial position. These statements, including related footnotes, President’s letter, management’s discussion of operations, etc., appear in the annual report.
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 accountancy is used to prepare accounting information for people outside the organization or not involved in the day to day running of the company. Managerial accounting provides accounting information to help managers make decisions to manage the business.
In short, Financial Accounting is the process of summarizing financial data taken from an organization’s accounting records and publishing in the form of annual (or more frequent) reports for the benefit of people outside the organization.
Financial accountancy is governed by both local and international accounting standards.
DISTINCTION BETWEEN MANAGEMENT ACCOUNTING & FINANCIAL ACCOUNTING
| Management accounting |
Financial accounting
|
| A management accounting system produces information that is used within an organization, by managers and employees |
A financial accounting system produces information that is used by parties external to the organization, such as shareholders, bank and creditors.
|
| Management accounting helps management to record, plan and control activities and aids the decision making process. |
Financial accounting provides a record of the performance of an organization over a defined period and the state of affairs at the end of that period.
|
| There are no legal requirements for an organization to use management accounting. |
Limited companies must, by law prepare financial accounts.
|
| Management accounting can focus on specific areas of an organisation’s activities. Information may aid a decision making rather than be an end product of a decision. |
Financial accounting concentrates on the organization as a whole, aggregating revenues and costs from different operation. Financial accounts are an end themselves.
|
| Management accounting information may be monetary or alternatively non monetary. |
Most financial accounting information is of a monetary nature.
|
| Management accounting provides both an historical record of the immediate past and a future planning tool |
Financial accounting presents an essentially historical picture of past operation.
|
| No time span for producing Financial statements |
Financial statements are required to be
produced for the period of 12 months. |
| No strict rules govern the way in which management accounting operates. The management accounts and information are prepared in a format that is of use to managers |
Financial accounting must operate within a framework determined by law
and IASs. In principle the financial accounts of different organizations can be easily compared. |
| Management accounting has no specified format. There are no specific statements which should be produced. |
Financial accounts are supposed to be produced in accordance with a specified format by IAS or law.
|
Popularity: 1% [?]
