What is accounting?
Accounting is the organization and summary of financial data for a business. It includes financial data analysis and company financial audits. It seems to be a profession that deals only with addition and subtraction, but in fact, there are various areas of accounting in many industrial fields (Girardin, 2022).
Every business needs accounting and it is like financial reporting because of analyzing and communicating business financial information. It may also include reporting material financial information to external parties. For example, a tax accountant verifies that a company meets tax requirements and has accurate information with the Internal Revenue Service (IRS) (Girardin, 2022).
Financial Accounting and Management Accounting
- Financial Accounting
Financial accounting’s purpose is to prepare financial statements and track, record, and report financial transactions. It must use standardized guidance in Generally Accepted Accounting Principles (GAAP) regulations. Company A uses similar reporting methods as B because the Financial Accounting Standards Board (FASB) established these rules and designed them to promote consistency in the reporting process. Financial accounting pinpoints business performance through period-specific financial statements. The company provides completed reports to external stakeholders such as investors and financial institutions. Two methods use double-entry accounting to record financial transactions accurately. While small companies frequently use cash accounting, all large and publicly traded companies must use accrual share accounting (Girsch, 2022).
- Management Accounting
Management accounting provide the information needed to make important decisions for management. The information is shared with the interested persons in the organization. However, financial accounting is devised to inform shareholders, investors, and financial institutions of business performance over a while. Management accounting also creates future-oriented and more efficient ways of operating while providing management with the tools and resources to establish sound policies and procedures (Girsch, 2022).
– Strategic management
– Performance management
– Crisis management
All three types of management accounting can be used simultaneously depending on the situation, or management can use only one or two methods depending on the information (Girsch, 2022).
Purpose of financial accounting
Financial accounting’s purpose is to clarify the profit and loss of a business and to provide a view of the business fairly, which aims to protect the interests of the various internal and external stakeholders related to the business (Thakur, 2020).
- Compliance with legal requirements
- Protection of interests of various stakeholders
- Helps measure business profits and losses
- Presentation of historical records
- Focus on external business transactions
- Regular reporting and wide availability
- Other accounting basics
- Achieving multi-stakeholder goals
- Financial transactions only
- Reliability and Relevance
- Easy to understand
Purpose of management accounting
- Planning
Planning is the core of management accounting for developing companies. It includes leveraging the financial data to plan for future requirements. The objectives invlove designing effective strategies that increase competitiveness and profitability (Husnain, 2020).
- Monitoring
This type of accounting is concerned with ensuring strategies. Ensures effective acquisition and use of resources to achieve organizational goals. Confirming milestone achievement and improving product quality are part of this monitoring process (Husnain, 2020).
- Oversight
A management accountant serves as a point of contact between employees and the top management of the business, helping answer questions and resolve issues. Guiding and motivating employees is also one of her employee responsibilities. The monitoring and directing functions of management accounting are tied together. Monitoring ensure everything is in place (Husnain, 2020).
- Analysis
The management accounting’s objective is to analyze information to identify problem areas or deficiencies and develop ways to correct them. Ultimately, data analytics sets the table for great opportunities (Husnain, 2020).
- Reports
Now it boils down to creating comprehensive reports to communicate goals, plans, and other recommendations. These reports contain analysis of specific issues with clear conclusions. It also includes suggestions for maximizing efficiency and solutions to organizations’ problems (Husnain, 2020).
Differences between Financial Accounting and Management Accounting
Financial accounting and management accounting are quite different. All this type of accounting deals with numbers, whereas management accounting is strictly internal. On the other hand, financial accounting mainly focuses on collecting accounting information for preparing financial statements. While economic accounting systems target external decision-makers such as investors, regulators, and creditors, management accounting systems target internal decision-makers such as managers (Strydom, 2022).
References
Girardin, M. (2022). What Is Accounting? [online] Forage. Available at: https://www.theforage.com/blog/careers/accounting [Accessed 11 January 2023].
Girsch, M. (2022). The 8 Types of Accounting You Should Know. [online] The Motley Fool. Available at: https://www.fool.com/the-ascent/small-business/accounting/articles/types-of-accounting/ [Accessed 11 January 2023].
Gordon, J. (2022). International Accounting Standards Board – Explained. [online] The Business Professor, LLC. Available at: https://thebusinessprofessor.com/en_US/accounting-taxation-and-reporting-managerial-amp-financial-accounting-amp-reporting/international-accounting-standards-board-definition [Accessed 11 January 2023].
Husnain, A. (2020). Purposes and Uses of Management Accounting – Accounting & Taxation. [online] Business Finance Articles. Available at: https://businessfinancearticles.org/purposes-and-uses-of-management-accounting [Accessed 11 January 2023].
Strydom, L. (2022). Financial Accounting vs. Managerial Accounting: What’s the Difference? [online] The Balance. Available at: https://www.thebalancemoney.com/financial-accounting-vs-managerial-accounting-5201154 [Accessed 11 January 2023].
Thakur, M. (2020). Objectives of Financial Accounting. [online] WallStreetMojo. Available at: https://www.wallstreetmojo.com/objectives-of-financial-accounting/ [Accessed 11 January 2023].
