Management Accounting is used for the internal purpose of the company. It has a very important role in an organization since it helps the organization to make decisions and obtain expected results by the use of reports and information. Financial accounting uses GAAP set formats and statutory requirements during preparation and is used by external stakeholders. The paper compares managerial and financial accounting and highlights a real-life example of how managerial accounting helps managers to improve operational and financial performance.
Similarities and Differences
In terms of purpose, the aim of financial accounting is the reporting of the financial results and position of the business to external as well as internal users like investors, creditors, management, and employees, among others (Noreen, Brewer, & Garrison, 2013). However, management accounting aims to generate information that is used by the internal management of the firm.
Financial accounting is historical in nature as it records and analyzes the transaction when these had occurred. In this case, financial accounting contains monetary information. However, management accounting utilizes the data extracted from financial accounting in future planning. Essentially, management accounting is not concerned with the value of these items, only their items. Notably, it records both monetary as well as non-monetary information. Therefore, management accounting clearly depicts the value of the company’s investments, unlike financial accounting.
In terms of standardizations, financial accounting uses the “generally accepted principles” or international financial reporting standards to cater to the common need of the outside user. The form and content of management accounting information differ according to the needs and purpose of the management of the respective firm. As per the GAAP, the need to maintain financial statements and their audit is mandatory as per the law of land. On the other hand, management accounting is not fixed and varies depending on management expectations (Langfield-Smith et al., 2017). Financial reporting reports the results of the entire business and as such, one can know the profitability or efficiency of the business. Management accounting examines the financial results on a deeper level ensuring that it is fixed appropriately.
In regard to time period, financial accounting is historical in nature since it uses past data for comparison purposes. Accordingly, the reports need to be issued immediately the accounting period ends. However, management accounting is different as the reports tend to be issued frequently as there is no time limit as a requirement. Financial accounting results are reported quarterly and annually. However, in management accounting, the frequency for reporting is monthly or weekly.
The issues in the company are investigated using management accounting and as such, this type of accounting helps to reveal the problems in the company. However, financial accounting does not consider the procedure used for making a profit as it focuses on finding the outcome and not the means for the generation of the result (Weygandt, Kimmel, & Kieso, 2015). As for management accounting, it may address budgets and forecasts which in effect influence the future orientation of a business
For any decision making management requires information and management accounting information system is entrusted with providing the managers with the required data. Since decision have to be made at all levels of management, operational level, tactic level and strategic level, therefore they all require information. The type of data they need is based on the type of decision they are to make. For example, top-level management makes decisions on policies, mergers, and acquisitions, for instance whereas operational level needs to take actions on the basis of day to day operations of the entity (Kaplan, & Atkinson, 2015). Therefore the information required by top-level management will differ from that required by operational level.
Management accounting information system is management-oriented and is designed to fulfill the information needs of the managers. Data is collected from various working levels and organized into useful formats. The system provides an overall view for a given period of time at a single place. Management accounting system provides various tools and techniques so that information needs at all levels of management are met. It provides an in-depth analysis of all the data and results of the past. For example, there is a constant fall in the sales revenue of the company year on year and the top management ought to evaluate various alternatives available in order to resolve the issue. After examining different options the top management decides to implement an online sales policy. Now a few questions need to be answered. How much extra cost is to be incurred by the company? How huge is the online marketplace for the product of the company? What increase in sales can be achieved? Are the increased benefits greater than the increased costs? For answering all these questions the management requires information both internal and external. On the other hand, the operational level is concerned with the daily operations of the organization (Miller-Nobles, T. L., Mattison, B. L., & Matsumura, E. M.,2016). The management needs information on various issues related to these online sales, and the reason behind these issues. Therefore, the information on management accounting will help the management to operate effectively and efficiently.
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The above discussion made comparisons of managerial accounting and financial accounting in different aspects. Further, the above discussion highlighted a real-life example of how managerial accounting empowers managers to improve operational and financial performance. The real-life example shows how a manager can implement the management accounting policy to simplify the decision-making process. Such policies help managers to make a detailed analysis of what are the various kinds of resources required at the different level of production. Therefore, the management should use the analysis above to determine where there has been an adverse variance of resource utilization and the reason behind it to improve decision-making.