Professionals believe accounting gives necessary information that businesses require for making financially viable business decisions. Businesses follow the practice of preparing two kinds of accounting reports: financial and management. Both are equally necessary. Here, we’ll talk about management accounting versus financial accounting and the role of each of these.
Management accounting is required for managing companies’ operations. These come handy to managers while making significant financial decisions. Account personnel make these statements and forward these directly to executive and managers of the company. Such statements give detailed information in numbers and forecasts concerning various departments of company, its products, clients and workers and how these could influence company’s operations.
Accounting personnel also prepare reports of financial accounting. Such reports are directly forwarded to those outside the company like shareholders, lenders and tax consultants. These reports contain statistical data, achievements and mistakes made in the past. These documents provide factual information but don’t give any projections or forecasts. That’s one major difference when you compare management accounting versus financial accounting.
Though financial and management accounting reports are prepared for use of two different categories of executives, they carry unique benefits for each.
Management accounting statements try making an educated guess of what could happen in future. Managers find such information helpful in deciding their future moves instead of focusing on what’s already taken place because financial status keeps changing with time.
Accounting reports are vital for assessing the performance of companies and thus of interest to stakeholders and tax consultants. These reports provide data that can be interpreted to check the financial health of companies.
As financial accounting reports are meant for use of outsiders to the company, these must conform to GAAP, generally accepted accounting principles. That calls for preparing such reports as per already existing rules to ensure their consistency and accuracy.
For instance, GAAP stipulates that the price of land should be evaluated as per its historical cost but if the company is considering purchasing land, the management would need to see its present price and how or what factors could affect its future price.
Financial accounting as well management accounting both play important role in the functioning of the company. Though significantly different in certain ways, both are equally important.
Since managers are more concerned about future of business, management accounting certainly helps formulating future plans and finances to facilitate business growth on taking clues of what is likely to happen in future.
Investors, creditors and tax advisors are more interested in financial accounting that provides useful information about company’s past and present affairs. Investors can evaluate the performance of company over a definite time period while tax professionals get accurate information about company’s tax liabilities.
It was only towards the end of 1800s that management accounting was first introduced. Initially, it was designed to provide essentially needed information for managing production of goods like textiles and steels. Since there were no shareholders or unsecured debts at that time, the need for accurate and widespread reports was not realized.
In the early part of 1900s, accounting needs changed due availability of credit and regulation of taxes by the governments. It became necessary for companies to provide financial information to outsiders who were keen on getting informed of the financial affairs and health of the company.