Table of Contents
2.0 Explain the key differences between management accounts and financial accounts.
Definition of management accounts.
Definition of financial accounts.
Differences between management and financial accounts.
3.0 The usefulness to the users of financial information.
Keiso (2014) stated that accounting is a process of recording financial transactions of a business organization. Every business organization needs to follow the rules of management accounts and financial accounts for recording all economic transactions of the business and watching the financial position of the business (Vidya Shethy, 2017). This paper demonstrates the definition of management accounts and financial accounts as well as their key dissimilarities in the real field. Then this paper also describes the necessity of financial information to the users of financial information.
2.0 Explain the key differences between management accounts and financial accounts
Definition of management accounts
According to Batty (2016), Managerial accounting is defined as the process of finding, determining, analyzing, describing and communicating information to the users for achieving the ultimate target of the business transactions. By using management accounting information, managers manage the financial transactions and take decisions for increasing the performance of the business. It includes key performance indicators, Profit & loss statements, cash flow statements and balance sheets (Rajesh Karmakar, 2017). This accounting assists in daily functions of business and helps in planning, coordinating, staffing, directing as well as controlling.
Definition of financial accounts
According to Anthony (2018), financial accounting is connected with only the financial issues and transactions of a business organization. It collects financial data of the business to prepare financial statements available to spread to users. The proceeds of financial accounting include recording, summarizing, and reporting financial information after a certain year’s consistency (Vidya Shethy, 2017). It includes income statements and balance sheets and it is a special branch of accounting.
Differences between management and financial accounts
Managerial accounts and financial accounts are not the same. There are some key differences presented below:
Objective: Rajesh Karmakar (2017) stated that the prime objective of management accounting is helping especially the management functions. It provides information to the internal users, especially to managers. On the contrary, the prime objective of financial accounting is to prepare financial statements and provides information to external stakeholders including shareholders, creditors and governments. Therefore, the Management account is called an internal reporting method and the financial account is called an external reporting method.
Subject Matter: Vidya Shethy (2017) stated that Management account collects data and concerns with the various departments, products, inventory systems of a business organization. On the contrary, financial accounting collects data and concerns the profitability of the business organization.
Nature of Data: Management accounting is used future data to forecast the future position of the business (Vidya Shethy, 2017). On the contrary, financial accounting is used historical financial data to identify the current financial position of the business.
Period of Reporting: Batty (2016) stated that Management accounting requires less time to provide reports than financial accounting. Financial accounting normally presents the report after the end of the year.
Precision: Management accounting requires less emphasis on precision because it provides information to the internal users. But, financial accounting requires greater emphasis on precision because it provides information to external users (Anthony, 2018).
Compulsion: management accounting is not compulsory for every business firm but financial accounting is compulsory for every kind of business firm (Vidya Shethy, 2017).
Flexibility: Vidya Shethy (2017) stated that management accounting is more flexible than financial accounting. On the contrary, financial accounting has some rigid rules and a lack of flexibility.
3.0The usefulness to the users of financial information
Accounting information is used by different stakeholders of the business. Some are the internal users and some are the external users. They include owners, investors, management, suppliers, lenders, employees, customers, government, and the general public (AccountingVerse, 2019). Batty (2016) stated that management accounting and financial accounting provide adequate financial information to both the internal and external users that help them to understand the financial position of the business and take accurate decisions. The other usefulness of management and financial accounting are described below:
Help in Planning: Management accounting provides information to the internal users and financial accounting provides information to external users at which the users can understand the financial position of the business and take the accurate plans and alternative courses of action for the business firm (Samuel, 2014).
Useful in Organizing: By management and financial accounting, the internal users can prepare the budgets and cost structure of the business organization (Samuel, 2014). After that, internal users organize the business in such a way that is fruitful for external stakeholders.
Useful in Motivating: By management and financial accounting, internal users can determine the business position and employees’ performance (Samuel, 2014). After that, the managers motivate the employees to increase the performance level that is also fruitful for both internal and external users of accounting.
Useful in Coordinating: With the help of management and financial accounting, the users can prepare Master Budget for the business organization and implement the budget for the wellbeing of both internal and external users of accounting (Samuel, 2014).
Useful in Controlling: With the help of management and financial accounting, the Standards of performance are set by the internal managers and controlling the overall activities of the business (Samuel, 2014).
Useful in Communicating: Keiso (2014) stated that Management and financial accounting requires lots of data and good communication with the various departments to ensure effective management and financial performance. In the case of making decisions, management needs information that is available in the financial statements.
Useful in interpreting Financial Information: Both the internal and external users need to know the financial position of the business to make decisions for future activities. In this circumstance, financial accounting helps users to know the financial position of the business by which they can make accurate decisions to connect with the organization and maximize their returns (Samuel, 2014).
In summary, accounting is seriously needed for every business organization. Management and financial accounting have some differences on the basis of their objectives, functions, subject matter, reporting system data using and nature. However, both are seriously required for both internal and external users for determining the performance level and financial position of the business and make better policies and procedures for maximizing the profits of the business.